April 21, 1998

 To:Strategic Policies and Priorities Committee

 From:City Clerk

 Subject:1998 Operating and Capital Budget for the Water and Water Pollution Control Programs and Harmonization of Water and Sewer Rates

 Recommendations:

 The Budget Committee on April 20, 1998, recommended to the Strategic Policies and Priorities Committee, and Council, the adoption of the 1998 Capital and Operating Budgets for the Water and the Water Pollution Control Programs, including the following:

 (1)the transfer of $18.6 million of expenditures from the mill rate to the water rate;

 (2)expenditure reductions and fee adjustments totalling $14.9 million, excluding the early payment discount or late payment penalty as applicable;

 (3)a general water rate increase of 2% or $3.7 million effective July 1, 1998 applicable to all water users; and

 (4)the deferral of water rate harmonization to January 1, 1999, to be considered as part of a report on the harmonization of all fees and service levels in the new City.

   The Budget Committee reports having requested the Chief Financial Officer and Treasurer to submit a report to the Budget Committee in the fall of 1998 on a recommended phase-in for the harmonization of all user fees and service levels across the entire City commencing in 1999.

 Background:

 The Budget Committee on April 20, 1998, had before it the following:

 (a)letter of transmittal (April 9, 1998) from the Scarborough Community Council regarding the 1998 Operating and Capital Budget for the water and water pollution control programs and harmonization of water and sewer rates;

 (b)report (April 17, 1998) from the Chief Financial Officer and Treasurer regarding a follow-up report to the Scarborough Community Council meeting of April 9, 1998; and

 (c)report (April 20, 1998) from the Interim Lead Economic Development regarding the impact of the harmonization of water and sewer on business in the community of Scarborough.

 City Clerk

 Barbara Liddiard/rc/cp

Item No. 2

Attachment

 Sent to:Chief Financial Officer and Treasurer

 c.Chief Administrative Officer

Interim Contact, Scarborough Community Council

Mr. M. Thorne, Interim Functional Lead, Water/Sewer

Mr. M. A. Price, Interim Functional Lead, Waste Management

Ms. B. Librecz, Interim Functional Lead, Economic Development

(Letter of transmittal dated April 9, 1998 addressed to the

Budget Committee from the

Scarborough Community Council)

 Recommendations:

 The Scarborough Community Council, on April 9, 1998, directed that the Budget Committee be advised that Scarborough Community Council supports:

 (1)that the rates in Toronto, East York and York remain at a constant level for this year versus last year, and that the additional revenue be used to accelerate the meter program;

 and recommends:

 (2)that the water harmonization fees in Scarborough be deferred until harmonization of all fees and service levels in the City is reviewed and reported to Committees and Council;

 (3)that the Chief Financial Officer and Treasurer be requested to report to Budget Committee with the following additional information:

 (a)the status of the various Reserve Funds maintained by the former municipalities and the Utility Commissions with regard to this issue;

 (b)the impact of deferral on the harmonization of rates on the overall budget and the alternatives for funding;

 (c)the viability of harmonizing water and sewer rates over a variety of time periods with the residents in areas experiencing increases receiving some form of compensation from utility reserve funds to offset the increases;

 (4)that the Interim Lead, Economic Development, be requested to report to Budget Committee on the impact of the harmonization of rates on businesses;

 (5)that the Chief Administrative Officer be requested to report on a public information programme;

 (6)that Council consider the following issues when setting the water and sewer rates for the City of Toronto:

 (a)the age of the district infrastructure for sewer and water systems;

 (b)the condition rating of the district systems;

 (c)the maintenance needs of the total system; and

 (d)the rate of maintenance spending by district; and

(i)direct staff to report back later in 1998 on the method of harmonizing the maintenance standards and spending levels per district; and

 (ii)in the interim, maintain as much as possible, the current levels of expenditure per district, until Council has made a decision on service level harmonization for infrastructure maintenance; and

 (7)that any harmonization of water and sewer rates be subject to the implementation of a property tax credit/discount mechanism for the former City of Scarborough ratepayers, sufficient to reflect the quantum dollar shift from tax-supported sewer/water infrastructure costs in Scarborough.

Background:

 The Scarborough Community Council had before it a communication (April 6, 1998) from the City Clerk, referring a copy of the report (April 3, 1998) from the Chief Financial Officer and Treasurer, dealing with:

 (1)the 1998 Operating and Capital Budget for the Water and Water Pollution Control Programs, including recommendations on rates;

 (2)User Service Fees, Water Rebate Programs and Sewer Service Rebate Programs; and

 (3)the Harmonization of Water Rates;

 and advising that Budget Committee, on April 3, 1998, recommended that:

 (1)the implementation and impact of the harmonization of water and sewer rates on the former City of Scarborough be deferred to the meeting of the Budget Committee scheduled for April 20, 1998; and

 (2)Scarborough Community Council be requested to hold an emergency meeting before April 20, 1998, to discuss this issue and to provide a report to the April 20, 1998, meeting of the Budget Committee.

  Interim Contact,

Scarborough Community Council.

 (Report dated Apirl 17, 1998 addressed to the

Budget Committee from the

Chief Financial Officer and Treasurer)

 Purpose:

 This report is a follow-up to the emergency meeting of the Scarborough Community Council held on April 9, 1998 at the request of the Budget Committee.

Recommendation:

 That this report be received for information.

  Background:

 On April 3, 1998, Budget Committee considered a report on the >1998 Operating and Capital Budget for Water and Water Pollution Control, and Harmonization of Water and Sewer Rates=. The Budget Committee recommended that the Scarborough Community Council hold an emergency meeting to discuss a number of related issues.

 Subsequently, the Scarborough Community Council met on April 9, 1998 to review the staff report. The minutes from that meeting are part of the agenda and the amendments from the April 3, 1998 Budget Committee meeting are attached to this report (see Attachment A). Following is a report that addresses some of the questions raised by the Scarborough Community Council.

  Issue (Item 3(a) )

 AThe status of the various Reserve Fund maintained by the former municipalities and the Utility Commissions with regard to this issue@ .

  Comment

 Fund balances as at January 1, 1998 relating to water and sewer reserves are as follows:

 Former Municipality($ million)

 Metro 144.4

Toronto 17.3

North York 7.6

Scarborough 4.3

Etobicoke 4.7

York 0.5

East York 3.8

 TOTAL 182.6

 The 1998 Capital and Operating Budget has minimal impact on these Reserve Fund balances as additions to and withdrawals from the reserves reduce the above balances by only $1.6 million. Appendix A provides more detail on the reserve funds.

 Issue - (Item 3(b) )

 AThe impact of deferral on harmonization of the rates on the overall budget and the alternatives for funding@

  Comment

 The Water Rate harmonization proposal before Council is revenue neutral. Revenue gains from users whose rates are increasing offset the revenue loss from users whose rate are decreasing. Deferring the start of water rate harmonization by 1, 2, 3 year or longer will not change the total revenue received as long as water usage patterns remain similar to the current pattern; it only changes the rate of increases and decreases as shown in the following tables.

 Table 1

Water Rates by Municipality - Two-Year Phase-in

1. First year rates to take effect July 1, 1998.

2. Fully harmonized rates to take effect July 1, 1999

3. 250 cubic metres is used annually by average residential water user

 Table 2

Annual Increases for Scarborough if

Phase-In Extended Beyond 2 Years

  Immediate Phase In

There would be an immediate increase of 20.3% for most Scarborough water users and decreases of 7.1% for East York water users. The water users in other municipalities will experience smaller changes as indicated in Table 1.

 Phase-In Period - 2 Years

Under this option, they range from a decrease of 2.9% to an increase of 8.1% in year one and a decrease of 4.6% to an increase of 10.2% in year two. This mitigates the impact of the changes while not drawing out the process of harmonization over an extended period of time.

 Phase-In Period - 3 Years

This further smooths out impacts as changes range from decreases of more than 2.3% in East York to increases of 6.4% annually for Scarborough.

 Longer Phase In Period - e.g. 8 years

A longer the phase in period would lead to a further smoothing out of any impact on the water users and relatively smaller total dollar changes. Scarborough customers under this option would experience an increase of 2.4% annually.

 Issue - (Items 4 and 5)

• that the water rates for Toronto, York and East York not be decreased

 The staff report to the April 3, 1998 Budget Committee recommended a two-year phase in for all municipalities. Scarborough, North York and Etobicoke rates would go up, while Toronto, East York and York would experience a decrease. Deferring the decreases for Toronto, East York and York until the third year, while increasing rates for Scarborough, East York and York to the proposed harmonized rate of $.9416/cu. metre over a two-year period, would result in revenue gains as shown below in Table 3:

 Table 3

Revenue Impact of Maintaining Current Rates

in Toronto, East York and York

($ Million)

 CUMULATIVE SAVINGS

($million)

 Year 1 4.5

Year 2 15.8

Year 3 27.1

 These additional revenues may be used to pay for the conversion of flat rate to metered conversion for accounts for approximately 88,000 customers in the old City of Toronto. Deferral of decreases over three years would pay for a complete conversion to metered accounts over a three year period, based on an average cost of $300 per conversion.

 It should also be noted that going to fully metered accounts will increase operating costs for administration, meter reading and billing. Also, the revenue received from these customers may decrease as water usage will go down. These factors may place added pressures on the water rates in the future.

  Issue (Item 3(c) )

 Athe viability of harmonizing the water and sewer rates over a variety of time periods with the residents in areas experiencing increases receiving some form of compensation from utility reserve funds to offset the increases@

  Comment

 Another way to mitigate the effect of harmonization on Scarborough water users would be to harmonize rates for the former municipalities of Toronto, East York, York, North York and Etobicoke over a two-year period and to extend harmonization for Scarborough over a three year, four year, or longer period. As shown in Table 4 this would reduce the annual rates of increase for Scarborough, but would cost $6.0 million if the Scarborough phase-in were extended to 3 years, $13.0 million if extended to 4 years and $41.0 million if extended to 8 years.

 Table 4

Cost of Deferring Scarborough=s Harmonization

While Phasing In Other Municipalities

to $.9416/cu. metre Over Two Years

 CONCLUSION

 On the assumption that Toronto should move to a harmonized water rate for all areas within its new boundary, the issue before Council is how to minimize the impact of the phase-in on those municipalities that would experience an increase. As shown in Table 1, Scarborough would require the largest increase, at 20.3%, followed by Etobicoke at 6.5% and North York at 1.8%. A number of options have been put forward to mitigate these impacts. These range from extending the phase-in period for all municipalities; extending the phase-in period for Scarborough only; freezing the rates for Toronto, York and East York for two years, while phasing-in increases for the three municipalities whose rates go up, over two years. If the latter option were adopted, the additional revenues generated would be used to pay for major system upgrades, including the conversion of all existing flat rate accounts to metered ones.

 Contact Name:

 Nick Kristoffy, 392-7051

 (Report dated April 20, 1998, addressed to the

Budget Committee from the

Interim Functional Lead, Economic Development)

 Purpose:

 The purpose of the report is to demonstrate the impact of the proposed harmonization of water and sewer rates on business located in the community of Scarborough. The companies most affected by the proposed harmonization of water rates are those that rely on significant supplies of water for production purposes as compared to those that use water for domestic purposes only.

 Source of Funds:

 No funds required.

 Recommendations:

 For information of Finance Committee.

 Council Reference/Background/History:

 Scarborough Community Council requested the Interim Lead, Economic Development to report to Budget Committee on the impact of the harmonization of water rates on businesses in Scarborough.

Comments:

 The harmonization of water rates across the new Toronto will have the most severe impact on Scarborough businesses as compared to businesses elsewhere in Toronto. The proposed rate of $ .9416 per m3 is a 20% increase from the current Scarborough rate of $ .7826 per m3. As the table below demonstrates Scarborough, Etobicoke, and North York will have an increase with Toronto, East York and York experiencing a decrease.

  Water Rate Harmonization Comparison

  The seven largest industrial water users in Scarborough are shown in the accompanying table which are impacted significantly by water and sewer rate harmonization. Proposed rate increases, including rebates, at full implementation, ranges from $45,179 for the smallest water user to $260,263 for the largest water user based on estimates provided by City of Toronto Finance Department staff.

 Each company has been contacted by staff to determine the impact of the proposed new rates on their Scarborough operations. In all cases, increases in the cost of water would have a significant negative impact on operations and impact future expansion considerations.

 It may be extreme to state categorically that new investment in plant and equipment will be directed elsewhere but it is not irrational to expect that incremental increases in taxes and fees will impact negatively upon each company=s profitability. It should be noted that at least one company affected by the potential rate increase moved to Scarborough because of the then favourable water rates.

 The accompanying chart, showing the seven companies in the community of Scarborough most affected by the rate changes, demonstrates their importance to the City of Toronto in terms of assessment and employment. The chart also states the amount of the dollar increase and summarizes each of the companies= concerns relating to future investment.

        Largest Users of Water in the District of Scarborough.

  Some of the companies identified in the chart have forwarded by fax their concerns. Copies are attached.

 The average increase for the top fifty industrial water users is $30,000 per annum excluding the seven largest which receive volume discounts. The majority of business in Scarborough that do not require water as a input to their operations are less adversely affected. However, like property taxation and increasing water and sewer costs are for the most part an uncontrollable cost and directly impact the bottom-line profitability.

 Conclusions:

 Scarborough-area companies have already paid for the infrastructure improvements through adjustments to water rates and general tax levies in previous years. It appears that these same companies would be subject to a form of double taxation should the proposed rate structure be implemented.

 Some of the firms contacted suggested that a lengthier phase-in period for Scarborough-area companies be considered and that the annual increase in rates be limited to the Consumer Price Index until such time as the rates throughout the City become harmonized.

Contact Names:

 F. Bruce Graham

Manager Business Development

Scarborough Office

Phone: 396-7066, Fax: 396-4241

E-mail: graham@city.scarborough.on.ca

 D. Ronald Rea

Business Development Advisor

Scarborough Office

Phone: 396-5141, Fax: 396-4241

E-mail: rea@city.scarborough.on.ca