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HomeMy WebLinkAboutFIN-07-002 - 2007 Water & Sewer Budget & Rates ) db KITCHENER Financial Services ~ Report To: Date of Meeting: Submitted By: Prepared By: Ward(s) Involved: Date of Report: Report No.: Subject: Councillor Berry Vrbanovic, Chair, and Members of the Finance and Corporate Services Committee January 29,2007 Pauline Houston, General Manager of Financial Services & Treasurer Rob Browning, General Manager of Development & Technical Services / Fire Chief Dan Chapman, Director of Financial Planning & Reporting (2347) Dave Mansell, Director of Engineering (2410) Dwayne Quinn, Director of Utilities (2538) All January 22,2007 FIN-07-002 RECOMMENDATION: 2007 Water and Sewer Budgets and Rates That the Full Time Equivalent (FTE) complement for the Engineering Services Division of the Development and Technical Services Department be increased by three (3) in order that one additional Engineer, one additional Technologist and one additional Administrative Program Assistant be hired to facilitate the Corporate Infrastructure Replacement Program; and, That staff be directed to review and update the accelerated infrastructure model along with the associated water and sewer rate projections in 2007 to provide information for the 2008 budget and rate-setting discussions; and further, That the following recommendations be deferred to the February 28, 2007 Council meeting pending confirmation of Regional Water and Sewer rate increases: "That the municipal enterprise budgets for the Waterworks and Sanitary Surcharge utilities be approved as follows for 2007 ($OOO's): Revenues Waterworks $27,058 Sanitary Surcharge $25,860 and further, Expenses $27,059 $25,857 Surplus/(Deficit) ($1 ) $3; That effective March 1, 2007, the water rate be set at $1.1827 per cubic metre and the sewer rate be set at $1.1920 per cubic metre." BACKGROUND: The adoption of water and sewer budgets generally forms part of the City's budget day approvals. Due to the scheduling of final budget day on April 16, 2007, the process has been advanced this year to try to ensure that rates are implemented on March 1, 2007 consistent with normal practice. Staff proposes that the recommendations be split so that the staffing portion may be implemented in time to benefit the 2007 construction season and the rate recommendations may be implemented following consideration of the Regional rates at the Committee level. The Region is expected to introduce its rate proposal at a meeting of the Budget Committee on February 7,2007. REPORT: In 2004, Council approved the Accelerated Infrastructure Replacement program. This program was designed to ensure that the on-going need for infrastructure replacement was addressed in line with Sustainable Water and Sewer Systems Act, 2002. The ramping up of the City's replacement capability has put Kitchener in a much more sustainable position and has been instructive in what needs to be done at this time. In parallel, other municipalities are grappling with their requirements including the Region of Waterloo. At this juncture, staff is making the above recommendations to address limitations in the program that are known at this time. When the budget projections for the Waterworks and Sanitary Surcharge utilities were initially developed during this budget cycle, they were based on existing City and Regional rate forecasts in place from 2006. These forecasts assumed City rate increases of 4.0% for water and 5.9% for sewer, inclusive of Regional rate increases of 5.4% for water and 6.4% for sewer over the next five-year period. In order to avoid incurring a deficit in either utility in 2007, the triple-funded program was adjusted by reducing the capital transfer for water by $548,000 and for sewer by $813,000. Staff proposed that the budgets be balanced in 2007 in view of the existing deficit balances in both utilities, as well as the fact that the date for anticipated recovery to a surplus position was later than originally contemplated in the accelerated infrastructure program model. It was felt that balancing the budget was prudent until such time as the accelerated infrastructure model could be reviewed and updated. A number of factors have influenced the deficit position in the Waterworks and Sanitary Surcharge utilities subsequent to the implementation of the accelerated program, including: · Regional rate increases have exceeded initial projections; · Growth in consumption has been lower than anticipated; and · Non-infrastructure capital costs have been higher than anticipated In addition, the Province is in the process of developing regulations under Bill 175 (Sustainable Water and Sewer Systems Act) that will have implications for rate setting and cost recovery for utilities. To remain responsive to all of these factors, staff recommends that the City undertake a review of the accelerated infrastructure model and associated rate forecast in 2008. Staff has been awaiting regulations under the Sustainable Water and Sewer Systems Act before undertaking this review, but significant Regional rate increases would necessitate action in parallel with the development of regulations. Recent indications from Regional staff are that the Region will be considering multiple options for wholesale rate increases on February 7, 2007. It would seem that the preferred alternative at a staff level is for increases of 9.9% for water and 19.9% for sewer. At these rates and, if the City maintains the rates outlined under the existing City rate forecast, the Waterworks and Sanitary Surcharge utilities would incur deficits of $531,000 and $854,000 respectively in 2007. Rate Ootions In view of the significant impact of the proposed increase to Regional wholesale water and sewer rates on the City's budget, three approaches to rate-setting for 2007 are provided for Council's consideration (assumes Regional rate increases of 9.9% for water and 19.9% for sewer). #1 - Maintain existing City rate ro"ection for 2007 #2 -Increase City rates in 2007 to balance the utility budgets** #3 - Defer additional capital works to balance the utility budgets ** recommended alternative 7.99% $ nil $1.4 million 4.63% $ nil $2.7 million These options are described in more detail below. Option 1 - Maintain existing City rate projection for 2007 (Appendix A) As discussed above, using the current City rate projections, the Waterworks and Sanitary utilities show a combined projected operating deficit of $1.4 million in 2007 and accumulated deficit at the end of 2007 in the amount of $10.8 million. In the initial accelerated infrastructure program model, it was projected that the combined operating surplus in 2007 would be $1.6 million resulting in a combined accumulated deficit of $5.9 million at the end of the year. The benefit of maintaining the existing City rate projection until a detailed analysis of the accelerated model can be completed is that it may reduce the rate shock associated with potentially significant rate increases once the model has been updated. Conversely, an increase in the accumulated deficit exposes the City to increased risk as the City's ability to reduce the deficit in a timely fashion through reasonable rate increases becomes impaired as the deficit grows. Under this approach, the rates charged would be $1.1549 for water and $1.1460 for sewer, for a net increase of 4.63% in the rate. This equates to an additional $2.12 per month for the average residential ratepayer. Option 2 - Increase City rates in 2007 to balance the utility budgets (Appendix B) Despite the need to update the accelerated infrastructure model and associated rate projection in 2007, staff recommends that rates be increased sufficient to balance the operating budgets for the two utilities in 2007. In effect, this will ensure that the impact of the significant 2007 increase in the Region's rate is not deferred to 2008, resulting in a double impact on City ratepayers in a subsequent year. This would have the effect of maintaining the operating deficits at the 2006 year-end level until such time as the model and rate strategy can be updated on a comprehensive basis. In effect, the City's utility deficit position would not worsen in 2007 and the capital program would not be compromised. Under this approach, the rates charged would be $1.1827 for water and $1.1920 for sewer, resulting in a net increase of 7.99% in the rate. This equates to an additional $3.66 per month for the average residential ratepayer. In the view of staff, increases in excess of the rate of inflation will become required over the next several years as a result of the substantial increase in Regional rates, which account for 53% of water operating costs and 44% of sanitary operating costs. Option 3 - Defer additional capital works to balance the utility budgets Should Council decide that an operating deficit is unacceptable within either utility, and yet a rate increase in excess of the existing projection is undesirable at this time, an option remains to reduce capital transfers sufficient to balance the utility budgets. While this only defers a potential rate increase, it provides sufficient time for staff to review the accelerated infrastructure model and update the rate projection as part of the 2008 budget process. Staff has not identified specific projects for deferral at this time, but the total value of works to be deferred would be $531,000 for water and $854,000 for sewer in addition to the works already deferred. The deferral of capital works may further limit the City's ability to achieve the targets identified under the accelerated infrastructure model. Reaional Budaet Meetinas Staff recommends that the ratification of rates be delayed until a clear indication with respect to 2007 Regional rates has been received. The Region will be considering water and sewer rates at the following meetings: Budget Committee - February 7,2007 Council- February 28,2007 (proposed final approval date) Budget Day - March 21, 2007 (if deferred on February 28) If staff is unable to confirm the Region's approach with respect to rates following the February 7, 2007 meeting, it may necessitate a deferral of the approval of City rates until after February 28 or March 21, which could have the impact of delaying the rate increase until April 1 or May 1. This would have a material impact on the City's rate revenue for 2007. Proiect Manaaement Staffina At the outset of reviewing the Sustainable Water and Sewer Systems Act, market research was done with Kitchener citizens regarding their perspective on sustainable investment in water and wastewater. The consensus response was that, while nobody liked rate increases, the responsible thing to do was to replace on an on-going basis and not leave the problem for future generations. Given that the legislation was passed and regulations were pending, staff recommended implementation of the Accelerated Infrastructure Replacement Program in 2004. The goal of the program was to ensure that in 30 years, the age of water or wastewater infrastructure was no greater than 80. The resulting projects include funding from water, wastewater and tax base and became known as the "Triple Funded Projects". Over the past several years the City has engaged citizens to determine the highest priorities for capital investment. Infrastructure improvements have consistently been identified as being of utmost importance. Council has demonstrated its support for this program by approving 10- Year Capital Budgets that reflects an endorsement of the plan and the associated life cycle targets. Since 2004, Engineering Services has attempted to accommodate project management of this program with existing staffing levels. Unfortunately, due to the complexity and volume of work, staff has been unable to advance the program as originally envisioned. In addition, projects that are delayed or split into two parts are carried over from year to year thereby compounding project staffing problems. The following graph shows the Capital Budget Program from 2003 to 2016. The existing staffing level has been superimposed to demonstrate the resources provided to meet the program goals. Based on this information, Council is requested to approve the hiring of an additional Engineer and Technologist within the Infrastructure Section along with an additional Program Assistant to provide a staffing level commensurate with the project administration requirements of the accelerated infrastructure program. The cost for these three positions will be approximately $210,000 which would be funded through the budgets for existing capital projects by decreasing existing consultant costs and will have no impact on the operating budget. FINANCIAL IMPLICATIONS: The proposed combined proposed increase in water and sewer rates of 7.99% will result in an increase in monthly charges of $3.66 for the average residential ratepayer. These rate increases are due in large part to substantial increases in Regional rates and will result in balanced budgets for the two utilities in 2007. In addition, it is proposed that staffing in the Engineering infrastructure section be increased by three FTE's to provide for the requirements of the accelerated infrastructure program. The cost for these three positions will be approximately $210,000 which would be funded through the budgets for existing capital projects with no impact on the operating budget. COMMUNICATIONS: Notice of this public meeting was published in the record on January 5,2007. ATTACHMENTS: · Appendix A - Projections at existing rates, with operating deficit · Appendix B - Projections at breakeven rates Note: A one-year projection has been provided due to the uncertainty related to City rates and Regional rates beyond 2007. It is proposed that the five-year projections would be updated following the review of the accelerated infrastructure program in 2007. Pauline Houston General Manager of Financial Services & City Treasurer Rob Browning General Manager of Development & Technical Services / Fire Chief Dan Chapman Director of Financial Planning & Reporting Dave Mansell Director of Engineering Dwayne Quinn Director of Utilities CITY OF KITCHENER SAN IT ARY UTI L1TY STATEMENT OF REVENUE AND EXPENSES Appendix A FIN-07-002-2 - Water Sewer Rates App A.xls 07 Sewer 1/25/2007 CITY OF KITCHENER WATER UTILITY STATEMENT OF REVENUE AND EXPENSES FIN-07-002-2 - Water Sewer Rates App A.xls 07 Water Appendix A 1/25/2007 CITY OF KITCHENER SAN IT ARY UTI L1TY STATEMENT OF REVENUE AND EXPENSES Appendix B FIN-07-002-3 - Water Sewer Rates App B.xls 07 Sewer 1/25/2007 CITY OF KITCHENER WATER UTILITY STATEMENT OF REVENUE AND EXPENSES FIN-07-002-3 - Water Sewer Rates App B.xls 07 Water Appendix B 1/25/2007