HomeMy WebLinkAboutFIN-09-012 - 2009 Water & Sewer Budgets / RatesJ
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REPORT
Report To: Mayor Carl Zehr and Members of Council
Date of Meeting: January 26, 2009
Submitted By: Dan Chapman, General Manager of Financial Services
Prepared By: Roger LeBrun, Manager of Financial Planning
John Sonser, Senior Financial Analyst
Ward~s~ Involved: All
Date of Report: January 19, 2009
Report No.: FIN-09-012
Subject: 2009 Water and Sewer Budgets and Rates
RECOMMENDATION:
That the following 2009 budgets for municipal water and sanitary sewer enterprises be approved:
Revenues Ex enses Surplus~Deficit}
Water Utility $ 31,470,007 $ 31,167,007 $ 303,000
Sanitary Sewer Utility $ 33,561,656 $ 33,791,199 $ X229,543}
And that, effective March 1, 2009, the water rate be increased to $1.4285 per cubic metre and the
sanitary sewer rate be increased to $1.5737 per cubic metre.
BACKGROUND:
On January 12, 2009, Council deferred the approval of Water and Sewer budgets and rates to
January 26, 2009 to allow staff time to evaluate options to reduce the rates. Copies of the
Water and Sewer operating budgets are included in appendices A & B respectively. Similar to
other area municipalities, water rates are proposed to increase by 9.9% and sewer rates by
14.9% in 2009 for an average increase of 12.5°/0 over 2008 rates. These proposed rates and
budgets remain unchanged from the information presented to Council on January 12, 2009.
REPORT:
The City of Kitchener is responsible for delivering water to customers' property and taking sewer
flow from properties to be treated. The Regional Municipality of Waterloo supplies the water
and treats the sewage. The City's responsibility includes operating expenditures (delivery,
maintenance and service) as well as capital expenditures (infrastructure rehabilitation and
replacement).
The City's costs are driven by growth and affected by inflation, regulatory requirements,
infrastructure rehabilitation and the increase in charges by suppliers, primarily the Region of
Waterloo. These costs translate into the rates charged to customers. The impact of these
factors is projected to be $6.81 per month in 2009 for the average household, itemized as
follows:
Monthly Increase Breakdown
Regional Rate Increases 3.45
Capital Program 2.01
Operations 0.41
Deficit Reduction 0.94
6.81
0 tions:
There are five options that were considered in order to potentially reduce the proposed water
and sewer rate increases. They are as follows:
1. Reduction in rate increase with no alterations to operating or capital components
2. Reduce operating costs
3. Reduce/defer a portion of the capital program
4. Utilize debt to finance a portion of 2009 capital program
5. Utilize Provincial grant funding to finance a portion of 2009 capital program
Each option is reviewed in detail below.
1. Reduction in rate increase:
For illustrative purposes, reducing the combined rate by 1 % in 2009 would result in a combined
decrease of $494,000 to the water and sewer surplus in 2009. The impact over 10 years is a
$4,426,000 reduction to the water surplus and $4,309,000 to the sewer surplus. To avoid a
permanent deficit, rates would have to be increased beyond current projections in subsequent
years to make up the shortfall.
The Municipal Act requires municipalities to provide for a balanced budget. While the City
internally financed the costs of the ramp-up of the capital program upon the implementation of
the program in 2004, it was envisioned at that time to be a short-term measure with the
shortfalls due to the capital spending increases fully recovered by 2011 for water and 2010 for
sewer. In light of the requirements of the Municipal Act for a balanced budget, staff would
advise against a rate reduction not supported by spending reductions.
2. Reduce Operating Costs
Staff have investigated the potential to reduce operating expenses in water and sewer
enterprises to effect a rate reduction and have determined that this is not feasible at the present
time. The budgets are currently very lean in both enterprises and it is anticipated that there will
be new legislative requirements that will put additional pressures on these budgets. Kitchener
Utilities operates in a highly regulated environment where operational tests and Ministry of
Environment requirements involving the distribution of water are mandatory and are not
discretionary. The budgets are set to meet the regulatory requirements only.
2
The current projections for 2008 have been reviewed in detail, however there are still several
outstanding year-end accruals that have not yet been posted in SAP so these figures remain as
estimates only. These statements will be provided to Council at the end of Q1 2009.
3. Reduceldefer a portion of the capital program:
The City could effect a rate reduction by reducing capital expenditures in 2009, either through
the accelerated infrastructure program or other capital projects.
If a reduction were made to the accelerated infrastructure program, it would result in a further
decrease relative to the annual target, which has already been adjusted down from the 8.67 km
originally envisioned to the 5.3 km revised target included in the 2009 budget, making it even
more difficult to achieve the replacement target of nothing older than 80 years by 2032. As it
currently stands, the 10 year capital forecast requires $102M of additional funding for the water
and sewer components of the accelerated infrastructure program in order to fund the program to
the target level of infrastructure replacement by 2018. Appendix C provides details on the
proposed versus actual replacements that have taken place in the first five years of the
program.
A reduction to other capital projects would necessitate foregoing the projects entirely or
postponing the projects to other years. The difficulty would be in deciding what projects get
dropped or delayed. Appendix D contains a list of the "other capital" projects currently identified
in the 10 year capital forecast.
Under a scenario where $1 M of capital projects are deferred to a subsequent year, it would add
additional pressure on rate increases in subsequent years. By doing so, the combined rate
increase would reduce from 12.5% to 10.6% in 2009, however the current rate increase for
2010 would increase from 10.7% to 14.2% in order to accommodate the deferral, assuming it is
for one year.
4. Utilize debt to finance a portion of 2009 capital program
The City could finance a portion of the 2009 capital program in water and sewer through debt.
For illustrative purposes, if $1 M worth of debt was used to fund a portion of the capital program
in 2009, the combined rate increase was decrease from 12.5% down to 10.6% in 2009, however
the 2010 rate would increase from 10.7% to 12.9%, a portion of which would be required to
service the debt charges of $130k per year for 10 years. Staff recommends against additional
debt financing as the City is projected to reach the upper limit of what is considered to be a
"moderate" total debt load per capita when EDIF issues its last debenture in 2013 and deferring
the cost of infrastructure replacement using debt funding will have the impact of shifting the
burden to a future period, quite similar to the financial impact of a deferral of the actual
infrastructure replacements.
5. Utilize Provincial grant funding for 2009:
The City could draw from grant monies recently received, which would necessitate realigning
priorities that have already been brought forward for the use of the $9.8M Provincial grant.
Similar to option #4, utilizing $1 M of grant funding for this option would see the 2009 combined
rate increase drop from 12.5% to 10.6% however 2010 would increase from 10.7% to 12.5%.
Staff recommend against this option as this would only temporarily reduce the 2009 rate
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increase and would necessitate an incremental increase in 2010 in order to restore the base
budgets for the capital and operating budgets going forward. In addition, it is inconsistent with
the notion of Federal and Provincial grant funding being used to support additional infrastructure
works and new employment.
Area municipality proposed or approved rates:
For comparison, the following tables outline proposed or approved water and sewer rates
across the Region of Waterloo.
Water Rates:
Municipality Water
Rate Proposed/Approved
waterloo 12.50% Approved
Cambridge 11.95% Proposed
waterloo Region 9.90% Approved
Kitchener 9.90% Proposed
Wilmot 9.90% Proposed
Woolwich 9.30% Proposed
Avera e 10.58%
Sewer Rates:
Municipality Sewer
Rate Proposed/Approved
Waterloo 17.65% Approved
Waterloo Region 14.90% Approved
Kitchener 14.90% Proposed
Wilmot 14.90% Proposed
Woolwich 13.50% Proposed
Cambridge 12.20% Proposed
Avera e 14.68%
FINANCIAL IMPLICATIONS:
As discussed above.
CONCLUSION:
The most feasible opportunity to reduce the proposed water or sewer rates would be through a
reduction in the capital program. As outlined in the report, the accelerated infrastructure
program is currently significantly under funded in order to reach the targets originally
established in the model. In order to fund this program at the 8.67 kmlyear level, rates would
need to increase by approximately 26% in 2009. Further, this would not address the existing
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shortfall of over 25 km that has arisen in the first five years of the program. Therefore, staff are
not recommending any reduction to the capital program. Further, the proposed rates are
generally consistent with those being proposed or already approved by other area
municipalities. As a result, staff recommend that water rates increase by 9.9% and sewer rates
by 14.9% in 2009 for an average increase of 12.5% over 2008 rates.
John Sonser, CMA
Senior Financial Analyst
Dan Chapman, CA MPA
General Manager of Financial Services
& City Treasurer
Roger LeBrun, CMA
Manager of Financial Planning
Note: The figures in Appendices A and B have been amended subsequent to the presentation
material that was distributed for the January 12, 2009 FCSC meeting. Aline has been added in
the forecasts under the capital section identified as "Unfunded Capital Infrastructure)". This line
indicates the amount of capital funding which would be required to match increases in the tax-
supported component of the accelerated infrastructure program should the tax-supported
contribution increase or grant/stimulus funding become available. The increased infrastructure
investment would add an average of 2.87 km per year in 2011, 2012 and 2013 to the program,
reducing the annual shortfall of 3.37 km relative to the original target of 8.67 km per year.
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