TOWNSHIP OF ESQUIMALT STAFF REPORT
MEETING DATE: November 18, 2024 Report No. FIN-24-020
TO: Committee of the Whole
FROM: Ian Irvine, Director of Financial Services
SUBJECT: Infrastructure Asset Management and Long Term Financial Sustainability Analysis
RECOMMENDATION:
Recommendation
That the Committee of the Whole recommends to Council that:
(a) the annual capital reserve fund contributions within the financial plan, starting in 2025, be increased to an amount higher than the existing 1.00%;
(b) annual non-market change revenue be used to increase capital reserve fund contributions; and
(c) these changes be incorporated into the policies and objectives document as an attachment to the annual financial plan bylaw.
Body
EXECUTIVE SUMMARY:
Following a December 2023 staff report to Council, staff engaged an external consultant to better understand and assess the Township’s long term capital assets and funding levels. Based on the findings and recommendations within the analysis, staff have prepared this report to seek direction regarding the Township’s capital infrastructure program and the desired approach to achieve the necessary level of sustainable funding.
Based on the analysis provided in this report, the Township’s current capital program is not enough to maintain infrastructure sustainably; without an increase in funding and an increase in the rate of repair/replacement of Esquimalt’s infrastructure assets, the Township will not be able to sustain services at current levels.
BACKGROUND:
At the December 18, 2023, Council meeting staff presented information (see Attachment 1) regarding the Township’s asset management approach and current funding levels. Following discussion, Council endorsed the presented approach, which included the approval of asset assessments and plans, a 1% cumulative annual increase to the reserve contributions to assist with bridging the funding gap, and direction to staff to provide a report regarding non-market change and how it can be used to offset infrastructure and asset management costs.
Subsequently, the Township engaged an external consultant to assist with the preparation of a long-term financial planning analysis to supplement the December 2023 staff report. The agreed scope of work consisted of: (i) an estimation of replacement costs by asset class, (ii) an analysis of current vs sustainable funding, (iii) the quantification of the annual funding gap, (iv) identification of appropriate funding levels, and (v) policy recommendations, if any. Based on discussions with Township staff and a review of requested data, a Financial Sustainability Analysis document was created and is attached to this staff report as Attachment 2.
ANALYSIS:
The Financial Sustainability Analysis involved the review of Township documentation and data to assess the current long term financial planning landscape. The deliverable was a summary document with key findings and recommendations. The analysis closely mirrors the information provided to Council within the December 2023 staff report however, it also provides a more fulsome estimate of the overall funding gap and the level of sustainable funding required. Some of the key findings include:
- Total depreciable assets (excluding fleet, equipment, land) are valued at $584M
- The average infrastructure consumption rate (across all assets) is 64% which represents a $372M valuation.
- While the Township has approximately $10M in current reserves that can be used for infrastructure replacement, it is estimated that assets valued at almost $36M are overdue for replacement
- The target to fund sustainable service delivery is calculated at $9.3M however only $3.8M is being contributed, which is resulting in a $5.5M annual infrastructure funding gap
- While most of the Township’s key policies related to asset management either meet or exceed the expected standards, improvement opportunities exist.
In addition to recommending policy amendments and codifications related to capital cost escalation, debt servicing and non-market change, the report provides alternatives for bridging the infrastructure gap and achieving sustainable funding levels. These options require annual compounded contributions to capital reserves. While one of the options represents the current level of funding (1%), the report estimates the duration of these contributions as well as an estimate of the related annual taxpayer impact. The other two options presented in the analysis accelerate the level of funding and reduce the time frame for achieving sustainable funding with minimal incremental increases to the annual tax amount. The following is a summary of the presented options:
Council approved a cumulative 1% per year increase in the 2024-2028 Financial Plan. Given that the infrastructure consumption rate across all assets is 64%, staff are recommending a savings program accelerated faster than the current 1%/17-year schedule.
Non-Market Change
Non-market change revenue results from taxation on properties that are included on the assessment roll but did not exist in the prior year. In other words, it is increased revenue due to rising property values and development growth. Since this revenue is tied to growth within the municipality, the best practice is to set this increased revenue aside into infrastructure reserves for future spending on growth-related projects. During budget deliberations each year, staff seek Council direction regarding the desired utilization of this additional revenue. Since 2020, the Township has collected approximately $364,000 per year and has consistently used this amount to mitigate municipal tax increases rather than increasing capital reserve contributions that are earmarked for projects that address community growth and infrastructure renewal.
Other municipalities are divided with some utilizing a similar approach while others fund new services or increase their capital reserve contributions. Staff are recommending that, starting in 2025, the Township shift its approach and transfer the non-market revenue to a capital asset reserve. This treatment could continue until sustainable funding levels are achieved after which the practice could be reassessed. This contribution would not be compounded annually however the implementation would result in a slight increase for taxpayers for each year this approach is in place.
Asset Management Update
Staff are continuously gathering data for all Township long-term infrastructure assets. To assist with these efforts, Council has approved multiple asset management projects within the financial plan. These projects, intended to gather details regarding long term infrastructure inventory values and conditions, are at different stages of completion. The following table lists those projects and their status.
OPTIONS:
To improve the financial situation regarding the Township’s long-term capital infrastructure and sustainable funding, there are two separate components to consider.
Sustainable Funding Levels
Starting with the 2024 financial plan, Council directed staff to include a 1% tax increase for the purpose of increasing capital reserve fund contributions. Without any additional direction, a 1% increase will again be included in the 2025 financial plan. While these contributions assist with bridging the infrastructure gap, there is more that could be done.
Option 1
Staff recommends that the Committee of the Whole make a recommendation to Council that: the annual capital reserve fund contributions within the financial plan, starting in 2025, be increased to an amount higher than the existing 1.00%; This would demonstrate Council’s commitment to sustainable service delivery and long term infrastructure funding. By increasing the percentage of annual infrastructure funding, the Township would bridge sustainable service gap in an accelerated manner that would result in a small incremental annual increase for the taxpayer.
Option 2
Another option would be for the Committee to recommend that the current capital asset funding contribution level of 1% be maintained in the future financial plans. This would still work towards bridging the funding gap but would see it achieved over a longer time frame. This approach would see an annual increase for the taxpayer; however, the amount would be slightly less than the other scenarios. If the Committee wishes to select this approach, staff are requesting that the Committee recommend to Council that staff draft the 2025 financial plan with a 1% increase in capital reserves.
Option 3
An additional option could have the Committee recommend that Council direct staff to cease the 1% annual capital asset funding increase that was approved in 2024. This would significantly impact the Township’s long term infrastructure plan but would result in a slightly reduced tax increase in 2025 and future years. If the Committee wishes to select this approach, staff are requesting that the Committee recommend to Council direct staff to draft the 2025 financial plan with the removal of the 1% capital funding increase that was approved in 2024.
Non-Market Change
Option 1
Non-market change revenue is generated from new assessment value growth within the Township. For amounts received by the Township, Council has historically directed staff to use these amounts to mitigate property tax increases however, using this as a source of revenue to fund capital asset infrastructure would more closely align with the reason the revenue is generated. Based on this rationale, staff are requesting that the Committee recommend to Council that non-market change revenue received, starting in 2025, be used to increase capital reserve fund contributions. This change to existing practices would allow the Township to increase funding for long term infrastructure and accelerate the timeline of achieving sustainable funding levels.
Option 2
Another option would be for the Committee to recommend that Council direct staff to continue its current practice of utilizing non-market change revenue for the purpose of mitigating property tax increases. Rather than increasing capital asset reserves for future infrastructure needs, this approach would continue to provide a benefit to existing taxpayers rather than aligning the revenue with new growth. If the Committee wishes to select this option, staff are requesting that the Committee recommend to Council that staff be directed to utilize any non-market change revenue to mitigate the 2025 property taxes.
COUNCIL PRIORITY:
Good Governance and Operational Excellence
COMMUNICATIONS/ENGAGEMENT:
There are no communications or engagement requirements with this report.
TIMELINES & NEXT STEPS:
Upon approval by Council, any decisions regarding capital reserve contributions and non-market change will be incorporated into the 2025-2029 financial plan documentation.
REPORT REVIEWED BY:
1. Sarah Holloway, Deputy Corporate Officer, Reviewed
2. Dan Horan, Chief Administrative Officer, Concurrence
LIST OF ATTACHMENTS:
1. Asset Management and Long Term Financial Plan, Staff Report ADM-23-038
2. Financial Sustainability Analysis, FIT Consulting