Long Term Financial Plan 2022-2031

1. Introduction

In2017,theCityofKawarthaLakesadopteda10-YearFinancialPlanforthe2018-2027 period.Primarilydesignedtoimplementthe2017AssetManagementPlan,the10-Year FinancialPlanwastheCity’sfirstsuchplananditprovidedthestartingpointfortheCity’s newlychartedpathtowardlong-termfinancialsustainability.Halfwayintothe2018-2027 planninghorizon,however,itisclearthattheCity’sfinancesandassetportfolioareless robustthantheywereplannedtobeby2022.Withunplannedcapitalprojectshavingbeen morethanoffsetbyunplannedcapitalgrants,thisresultedfromunanticipatedoperating budgetincreasesandaneedtomaintainaffordabletaxincreases.

Theeffectsofthesedeviationsfromplanhavebeennothingshortofconsequential.The conditionoftheCity’sassetmanagementreserve(formerlythecapitalreserve),whichwas toimprovedramaticallyunderthe10-YearFinancialPlanintermsofitsbalanceandthe annualcontributionthereto,hasinfactdeterioratedconsiderably.Giventhe substitutabilitybetweenreservesanddebt,itstandstoreasonthattheCity’sdebtisnow higherthanitwouldhaveotherwisebeen Inshort,theCity’sfinancialcapacitytomaintain itsvastassetportfolioandwidearrayofserviceshasdeclinedratherthanimproved.Hence theneedforthisdocument–theLong-TermFinancial2022-2031(LTFP)–toredirectthe Cityontoapathwaytolong-termfinancialsustainability.

Capturingboththetax-supportedandwater-wastewatersidesoftheCity’sbusiness,the LTFPcomprisesthefollowingcomponents:(i)RevenueStrategy,(ii)PeopleStrategy,(iii) ReserveStrategy,(iv)DebtStrategy,(v)CapitalForecast,(vi)OperatingForecast,and(vii) TheFinancialGap VersionsorelementsofthesecomponentswerepresentedtoCouncil during2021andearly2022whiletheLTFPwasunderdevelopment,andsomeofthem wereadoptedbyCouncilasplanningguidestoprovidemuchneededdirectionforthat development.

Takingasgivenestablishedmunicipalservicelevelsandvariousfinancialconstraints,the fourabove-notedstrategiesinformthecapitalandoperatingforecasts.Withtheseforecasts developed,thefinalsectionoftheLTFPprovidesaguidingframeworkinwhichtoclosethe gaprepresentingtheamountbywhichforecastedfinancialrequirementsexceedforecasted financialcapacityoverthe2022-2031planninghorizonandtobettersecuretheCity’s long-termfinancialsustainability.

2. Revenue Strategy

ThissectionoutlinesarevenuestrategydesignedtoimprovetheCity’sfinancialcapacity andself-reliancewithoutcompromisingoperatingrequirementsorratepayeraffordability. Thestrategyisorganizedaroundadedicatedcapitallevyandkeyrevenueassumptions

Dedicated Capital Levy

The10-YearFinancialPlanof2017islargelygearedtowardimplementingtheAsset ManagementPlanandbuildinguptheCity’sfinancialcapacitytomeetthecapitalneeds arisingfromestablishedservicelevels.Thecornerstoneofthatplanisastrategyfor bringingthecontributiontoandbalanceoftheassetmanagementreserve(formerlythe capitalreserve)uptosustainablelevelsby2027.Asmentioned,however,theCity’s financialrealitydifferedfromtheplanduetounanticipatedcapitalandoperating expendituresandreducedtaxincreases

TheeffectofthesedeviationsfromplanhasbeentoimpairtheCity’sabilitytogrowthe assetmanagementreserve.Indeed,ratherthanhavingincreased,thecontributiontothe assetmanagementreservehasinfactdeclined,givenitwasapproximately$13.1Min2017 andwasonly$9.1Min2021.Accountingforcapitalcostinflation,thisrepresentsalossof nearly50%inannualizedfinancialcapacityoftheassetmanagementreserve.Thatloss severelycompromisestheCity’sabilitytomeetbasicassetreplacementandrehabilitation needs,muchlessthoserelatedtoexpansion,Council-directedserviceupgradesornewly legislatedobligations.

HistoricallytheCityhasmanagedthisproblemmainlybydeferringcapitalprojects,thus enlargingthebacklogofcapitalneedsandmerelydelayingtheharddecisionsthat inevitablymustbemade.Aswasdemonstratedduring2022budgetdeliberations,thetaxsupportedcapitalbacklogexceeds$16M.Obviously,ifestablishedservicelevelsareto prevail,thencontinueddeferralofcapitalneedsisentirelyunsustainable.Theexistenceof acapitalbacklogisnosurprisegiventheCity’sservicesarepresentlysupportedbyan approximately$4Bassetportfolio,whichbyallaccountsisunsustainableiftaxanduserfee increasesaretoremainaffordableoverthelongrun.

Anindicatorofassetportfoliounsustainabilityisthedifferencebetweenrequiredand actualratesofannualcapitalrenewalasashareofassetportfoliovalue

Thelong-run averagerequiredrateisabout1.37%,accordingtotheAssetManagementPlan,whereas theactualratebudgetedfor2022isabout0.90%onceone-time(i.e.unsustainable) relianceonreserves,grantsandotherfinancingisremovedtoreflectunderlyingfinancial capacity.ThatsuggeststheCity’ sexistingfinancialcapacitycanconsistentlysupportonly about0.90%/1.37%=66%ofcapitalrenewalrequirementsannually.Atsuchalowrateof capitalrenewal,thecapitalbacklogwillcontinuegrowingandtheassetportfolio’sabilityto supportestablishedservicelevelswillcontinuetodeteriorate.Thischallengerelates primarilytothetax-supportedsideoftheCity’sbusinesssincefinancialcapacityonthe water-wastewatersideislargelysufficienttomeetrelatedcapitalrenewalneeds.

Whiletheaforementionedrealitiesimplycontinuanceoftheneedtorationalizeand consolidateassets,especiallyunderutilizedfacilities,theyalsopointtotheneedforamore sustainableapproachtofinanciallysupportingtax-supportedcapitalrenewal Accordingly, andasdirectedbyCouncil,theLTFPincludesadedicatedcapitallevythatwill:(i)provide theassetmanagementreservewithasegregatedrevenuestreamandreducepressureon theCity’sdebtload;(ii)bedesignedtobuildupthecontributiontoandbalanceoftheasset

managementreservetomoresustainablelevelsandthenmaintainthoselevels;and(iii)be separatelyidentifiedontaxbillstopromotetransparencyandthusreassuretaxpayersthat therevenuetherebyraisedisdedicatedtotax-supportedcapitalpurposes.

Giventhatdirection,astrategyforsmoothlyclosingtheassetmanagementreserve contributiongapby2031wouldrequirethe2021contributionof$9.1M/yeartobe increasedannuallybyabout13%/yearonaverageovertheplanninghorizon.By2031,that isexpectedtoenabletheCitytoeliminateplannedrelianceondebtfortax-supported baselinecapitalneeds,buildtheassetmanagementreservecontributionuptotheroughly $35M/yearrequired,andbeginbuildingtheassetmanagementreserve’suncommitted balancetoprovideforflexibilityandcontingencyinfuture.Takingforecastedgeneraltax levyincreasesandassessmentgrowthasgiven,thatstrategytranslatesintotaxincreases ofabout1.5%/yearcumulativelyovertheplanninghorizon.Fortunately,thededicated capitallevyhasalreadybeeninstitutedbyCouncil,whichincreasedthecontributiontothe assetmanagementreservefrom$9.1Min2021to$11.0Min2022.TheLTFPbuildsonthat essentialcommitment

Key Revenue Assumptions

Withconsiderationforratepayeraffordability,thefollowingkeyrevenueassumptionshave beenincorporatedintotheLTFP:

 AnnualgrantsotherthantheOntarioMunicipalPartnershipFundaremaintainedat 2022levelsintheabsenceofprojectionsprovidedbygrantors.

 AstheOntarioMunicipalPartnershipFundwas,priortotheCOVID-19pandemic, thefocusofseveralannouncementsindicatingareductiontothisgrantis forthcoming,itisassumedtodeclineby5%/yearovertheplanninghorizon.

 One-timecapitalgrantsarereliedupononlyiftheyhavebeensecuredbytheCity.

 Generaltaxandwater-wastewateruserfeeincreasesaresetto3%/year,whichis understoodtobethemaximumCouncilispreparedtolevy,whileotheruserfee increasesaresetto2%/year.

 Taxlevyrevenueescalationderivingfrompropertyassessmentgrowthisprojected tobe1.25%/year.

 Startingatavalueof$9.1Min2021,thededicatedcapitallevyincreasesannuallyby 1.5%ofthepreviousyear’stotaltaxlevy(theincreasefor2022is$1.9M)

 Interestincomeisconservativelymaintainedat2022budgetedlevels.

 Developmentchargesrevenueisassumedtobe$5M/year.

Exceedancesofthemaximumgeneraltaxincreasearetrackedinordertomeasurethe extenttowhichforecastedfinancialrequirementsexceedforecastedfinancialcapacity.

3. People Strategy

Sinceremunerationtypicallyrepresentsabouthalfoftotaloperatingexpendituresinthe municipalsector,itisprudentthattheLTFPaccountforpressuresassociatedwith onboardingnewpositions.Thisisthecaseeventhoughremunerationasashareoftotal operatingexpenditures(netofexternaltransfers)attheCityhashistoricallybeenlessthan 50%andindeedlessthanthatobservedincomparatormunicipalities.Thissectionoutlines apeoplestrategyprovidingguidanceonadditionstothestaffcomplimentneededto addressvariouspressuressuchasthosearisingfromserviceenhancements,legislation changesandgrowth.Thefollowingkeypeopleassumptionshavebeenincorporatedinto theLTFP:

 Duetodifficultyinforecastingspecificneedsfornewpositions,anescalation allowanceof$400K/year(indexedtoinflation)iscarriedinthetax-supported operatingexpenditureforecasttoaccountforpressuresarisingfromnewpositions

 Approvalsofnewpositionswillbeinformedbybusinesscasesdemonstratingthe meritofsuchpositions,whichwouldincludeconsiderationofwhetherandtowhat extentnewoperatingpressurescanbemetthroughalternativemeanssuchas reorganization,outsourcingortechnology.

 Legislationchangesandgrowthwillberegularlymonitoredtopromoteadvance identificationofnewpositionneedsandtoensuretheadequacyandpropertiming ofnewpositions.

 NewpositionswillcontinuetobesubjecttoCouncilapprovalthroughtheannual budgetprocess.

Theseassumptionswillbemodifiedasnecessarytoreflectnewinformationandevolving markettrends

4. Reserve Strategy

Giventheindispensabilityofreservestomunicipalities,itiscrucialthattheLTFPaddresses theCity’ssituationregardingreserves.Thissectionoutlinesareservestrategydesignedto informaforthcomingreservepolicywhichwillguidethereorganization,usageand managementoftheCity’sreservesaheadofthenextiterationoftheLTFP

Reserves and Reserve Funds

ReservesandreservefundsaredifferentlydefinedintheMunicipalAct.Generally speaking,areservefund(e.g.developmentchargesreservefund,parklandreservefund

etc.)isasetofmonieswhoseusageisrestrictedbylaworalegalagreement.Reservefunds mustbeusedonlyfortheirdesignatedpurposesandtheinterestincometheygenerate mustbeallocatedtothem.Bycontrast,areserve(e.g.assetmanagementreserve, contingencyreserveetc.)isasetofmonieswhoseusageisnotrestrictedbylaworalegal agreement.Councilretainsfulldiscretionovertheusageofreserves,includingtheabilityto reallocatereservemoniestopurposesforwhichtheywerenotoriginallydesignated. Interestincomegeneratedbyreservesisallocatedtothemonlyifsoexplicitlydirectedby Council;otherwise,suchinterestincomeflowstooperatingbudgets.Foreaseofreading andreferencinghereinafter,theterm“reserves”isusedgenericallytorefertoboth reservesandreservefunds.

Reservesareinstrumentalforensuringappropriateandadequatemoniesaresetasidefor meetinglong-termobjectives(e.g.assetreplacement,taxratestabilizationetc.),irregular anticipatedoperatingexpenditures(e.g.municipalelections,studiesetc.)andunforeseen needs(e.g.unplannedcapitalprojects,unanticipatedchangesinlegislationetc.).Inthat sense,reservesfunctionsimilarlytohouseholds’savingsaccountsandarethereforevitalto theliquidityofmunicipalities.Asoundreservepolicywillgoalongwaytopositioningthe Citytoimproveitsfinancialcapacity,stability,transparencyandaccountability.Staff envisionsuchapolicy:

 Consolidating,dissolving,creatingandrenamingreservestomeetexistingand anticipatedneeds.

 Identifyingthepurpose,parametersandcategorizationofeachreserve.

 Establishingarationalizedstructureforthecategorizationofreserves.

 Settingoutgeneralexpectationsandguidelinesrelatingtoreserves.

Whereapplicable,reserveparameterswouldrelatetocontributionsourcesandlevels, maximum,minimumandtargetedbalances,andfinancialstabilityandliquidity requirements.Aspartofthe2021surplusdisposition,staffplanstomake recommendationstoCouncilregardingreservesandthenbringforwardareservepolicyat thefollowingmeetingofCouncil

Reorganization of Reserves

TheCitypresentlycarriesatotalof59reservesdistributedacrossthefollowingbroad categories:

 Infrastructure

 RateStabilization

 Contingency

 EconomicDevelopment

 WorkingCapital

 DevelopmentCharges

 FormerMunicipalityFunds

 LegacyCommunityHydro-ElectricSystemTransfers(CHEST)Funds

Overtime,theCity’ssystemofreserveshasbecomeunnecessarilyextensiveand complicated,makingmanagementofthatsystemonerousandimpedingeffortstoensure reserve-relateddecisionsandactivitiesaretransparentandstraightforwardtoCouncil, staffandthepublic.Extensiveopportunityexiststonotonlyreducethenumberreserves butalsotorationalizethestructureofreservecategoriesandthemannerinwhichreserves areclassifiedthereunder Acentralaimoftheforthcomingreservepolicywillbeto facilitatesuchreform.

Key Reserve Assumptions

ThefollowingkeyreserveassumptionshavebeenincorporatedintotheLTFP:

 Thecontributiontothepublicworksfleetreserve,whichsupportsreplacementof allnon-firevehicles,willcontinuebeingfundedentirelybyinternalrentalfees chargedtodepartmentsbasedonlifecyclefleetcostsindexedtoinflation.

 Thecontributiontothefirefleetreserve,whichsupportsreplacementofallfire vehicles,willbeincreasedfrom$1.1Min2022to$2.35Min2023,andinflationindexedthereafter,toreflectthefindingsoftheFireModernizationReview completedinearly2022

 Thecontributiontotheassetmanagementreserve,whichistheprimaryfunding sourceforallnon-fleettax-supportedcapitalneeds,willcontinuebuildingupover theplanninghorizonbasedonthededicatedcapitallevyuntilsuchtimeitreachesa sustainablelevel(projectedtobe$35M/yearby2031).

 Thecontributiontothecapitalcontingencyreserve,whichsupportscapitalproject overagesandunanticipatedcapitalprojects,issetto$500K/yearindexedto inflation.

 Thecontributiontothegeneralcontingencyreserve,whichsupportscoverageof unanticipatedoperatingcosts,issetto$500K/yearforgeneralpurposesand $480K/yearforinsurance,eachindexedtoinflation.

 Thecontributiontowater-wastewaterreserves,whicharetheprimaryfunding sourcesforallwater-wastewatercapitalneeds,issetto$3.9M/yearandindexedto inflation.

 Regularcontributionswillcontinueforlesssignificantreservessuchasthedoctor recruitmentreserve,FenelonFallsPowerlinksreserve,Norlanddamreserveand electionsreserve.

 Designatedproceeds,surplusesanddeficitswillcontinueflowingtotheirrespective reservessuchasthewintercontrolreserve,propertydevelopmentreserve,federal andprovincialgastaxreserves,developmentchargesandparklandreserves, aggregatesreserve,capitalcontingencyreserve,workingcapitalreserve,waterand wastewaterreserves,andfleetreserves.

 Allotherreserveswillgenerallyfunctionastheyhavehistorically.

 Capitalprojectdeferralsandoperatingcostcontainmentmeasureswilloccuras neededtoensuretheintegrityofreserves.

Theseassumptionswillbemodifiedasnecessarytoalignwiththeforthcomingreserve policy

5. Debt Strategy

Withfewexceptionsandsubjecttovariousrestrictions,theMunicipalActpermits municipalitiestoissuedebtonlyforcapitalprojects.Thecoreandindispensablefunctionof debtistosmoothlumpycapitalexpendituresandsupportliquidityrequirementsover time Thissectionoutlinesadebtstrategydesignedtoinformaforthcomingdebtpolicy whichwillguidetheusage,distributionandmanagementoftheCity’sdebtaheadofthe nextiterationoftheLTFP.

Guiding Principles Regarding Debt

TheapproachtodebttakenintheLTFPisguidedbythefollowinggeneralprinciples:

 Withinandoutsideofthemunicipalsector,andunderappropriatecircumstances, debtisacommonandwidelyacceptablemethodbywhichtofinancecapitalprojects soastosmoothlumpycapitalexpendituresandsupportliquidityrequirements.

 Debtshouldbeissuedonlyforcapitalprojectsmeetingoneormoreofthefollowing criteria:

o Resultinassetsorbettermentstheretowithexpectedusefullivesofatleast 20years;

o Itisappropriatetoallocatethecapitalcostsovertimebetweencurrentand futurebeneficiariesortootherwisesmooththecapitalcostsovertime;

o Resultinassetsgenerativeofnewrevenueswhichcouldbepartlyorentirely dedicatedtocorrespondingdebtservicingcosts;or

o Areassociatedwithcapitalcostsexceeding$5M.

 Ideallytheassetmanagementreservewouldbestrengthenedgraduallysoasto effectivelyeliminateplannedrelianceondebtforbaselinecapitalneeds,thus reservingdebtprimarilyforexpansionarycapitalneedsastheyarerelatively volatile.

 ToensuretheyautomaticallykeeppacewithinflationandtheCity’sabilityand willingnesstoservicedebtovertime,debtlimitsshouldbedefinedintermsofdebt servicingratios(debtservicingcostsasashareofown-purposerevenues)rather thanfixeddollaramounts.

 TheCityshouldobserveamaximumdebtservicingratioof10%distributedas follows:

o 7.5percentagepointsarereservedforcapitalprojectsotherthanthose relatingtohousing.

o 2.5percentagepointsarereservedforhousingcapitalprojectsprovidedthat housingrevenuetherebygeneratedissufficienttomeettherelateddebt servicingcosts.

 Basedona10%limitonthedebtservicingratio,theCityshouldconsumenomore than12.5percentagepoints(or50%)ofits25%annualrepaymentlimit(debt servicingcostsasashareofown-sourcerevenues)asdeterminedbytheMunicipal Act.

 Councilshouldbethoroughlyinformedsuchthatthemeritandimplicationsofeach issuanceofdebtareconsideredbeforethedebtiscommittedtobyCouncil.

 TheCity’sdebtoutlookshouldbereportedtoCouncilannuallybytheCity Treasurer.

Thesegeneralprincipleswillbemodifiedasnecessarytoalignwiththeforthcomingdebt policy.

Key Debt Assumptions

ThefollowingkeydebtassumptionshavebeenincorporatedintotheLTFP:

 Theguidingprinciplesregardingdebtoutlinedintheprevioussubsectionwillbe observed.

 Newlyissueddebtisintheformofdebentureattermsof10,20or30years, dependingonthenatureofcapitalprojectsinvolved,andsubjecttoanannual interestrateof3%.

 DebtissuedforthepurposesoffinancingtheNorthwestTrunkSanitarySeweror debitsinthedevelopmentchargesreservedoesnotformpartofthedebtservicing ratioorannualrepaymentlimit,providedthereissufficientdevelopmentcharges revenuetocoverprincipleandinterestpaymentsneededtofinancedebitsinthe developmentchargesreserve.Likewise,revenuederivedfromcapitalcharges, developmentchargesorgrantsdoesnotformpartofthedebtservicingratioor annualrepaymentlimit.

 Withreservesandcapitalgrantslargelydesignatedforbaselinecapitalneeds, expansionarycapitalprojectsaregenerallyfinancedbydebttotheextenttheircosts arenotrecoverablebydevelopmentchargesorgrants.

 Majoreligiblecapitalexpendituresthatcannotbefinancedbyothermeansare financedbydebt.

Exceedancesofthedebtservicingratiolimitaretrackedinordertomeasuretheextentto whichforecastedfinancialrequirementsexceedforecastedfinancialcapacity

6. Capital Forecast

Basedonestablishedservicelevels,servicemasterplans,theAssetManagementPlan,the DevelopmentCharges(DC)BackgroundStudy,theWater-WastewaterRateStudy,prior budgetsandothersourcesofdirectionprovidedbyCouncilorlegislation,staffhas developeda10-yearcapitalforecastattachedheretoasAppendicesAandBfortaxsupportedandwater-wastewatersidesoftheCity’sbusiness,respectively.Theforecasthas alreadybeenendorsedbyCouncilforplanningpurposes,buthasbeenupdatedupon incorporationintotheLTFPtoreflectadopted2022capitalbudgets,recentchangesin legislation,newlyidentifiedcapitalneedsandenhancedfundingfromvariouscapital grants.RegardingcapitalprojectsidentifiedintheDCBackgroundStudy,itshouldbenoted thatthecapitalforecasthereinincludesonlythosesufficientlysignificantandpresently expectedtooccurduring2022-2031.

Tax-Supported Capital Forecast

Thetax-supportedcapitalforecastiscontainedinAppendixAandisbasedonstrategies outlinedinprevioussectionsasmaybeapplicable Forecastedcapitalexpendituresare dividedintofourtypes:baseline,expansionary,externalandspecialprojects.Baseline capitalexpendituresarethoseneededsimplytokeeptheCity’sexistingassetportfolioina stateofgoodrepairandthusinaconditionfacilitativeofestablishedservicelevels.Almost allsuchexpendituresaredirectedtowardreplacementorrehabilitationofexistingassets. BasedprincipallyontheAssetManagementPlanandpriorcapitalbudgets,thebaseline capitalforecastispresentedinTableA1ofAppendixAwhereinitisorganizedbycapital programtoreflectprevailingcapitalbudgetstructures.

Expansionarycapitalexpendituresarealmostexclusivelygrowth-related,althoughsome arisefromlegislationorupgradesinservicelevels(e.g.newservices).Basedprincipallyon servicemasterplansandtheDCBackgroundStudy,theexpansionarycapitalforecastis presentedinTableA2ofAppendixA.ItshouldbenotedthatthereplacementofVictoria ManorhasbeenremovedfromtheforecastgiventheCityisnolongerlegislatedtoreplace thatfacilityby2025.AlthoughreplacementormajorredevelopmentofVictoriaManoris inevitable,thatneedisnowanticipatedtoarisewellbeyondthe2022-2031planning horizon.TobetterinformfutureiterationsoftheLTFPofthatneed,itwouldbeprudentof theCitytodevelopintheneartermanassociatedfinancialstrategy,perhapsthrougha facilitymasterplanspecifictoVictoriaManor.

ExternalcapitalexpendituresarethoserelatingtotheKawarthaLakesPoliceService (KLPS)orKawarthaLakes-HaliburtonHousingCorporation(KLHHC).Thesearepresented inTableA3ofAppendixA.Presently,KLPSandKLHHCcapitalprojectsareonlyimplicitly includedintax-supportedoperatingbudgetsorareotherwisenottransparentlyrevealed toCouncil.DuetoanoverhauloftheCity’sbudgetingprocessduring2021-2022and continualeffortstoenhancetransparencyandaccountability,itisanticipatedthatsuch projectswillnowbeincludedintax-supportedcapitalbudgetsasof2023.

Introducedfor2020,aspecialprojectsbudgetisnowincludedintheCity’stax-supported budgetcomplimenttoaccommodateoperatingprojects,suchasstudiesandother infrequentinitiatives,betterbudgetedandmanagedinthesamemannerascapitalprojects. Whilespecialprojectsaretechnicallyoperatinginnature,thespecialprojectsbudgethas, sinceitsinception,beenpresentedalongsidethecapitalbudgetbecausespecialprojects arebestmanagedasthoughtheyarecapitalinnature.Basedprincipallyonservicemaster plans,theDCBackgroundStudy,previousbudgetsandlegislation,thespecialprojects forecastispresentedinTableA4ofAppendixA.

AppendixAconcludeswithTablesA5andA6whichare,respectively,thecapital expenditureforecastsummaryandthecorrespondingcapitalfinancingforecast.Totaltaxsupportedcapitalexpenditureisforecastedtobe$924Moverthe2022-2031planning horizon,whichbalanceswiththefinancingforecast.TableA6showshowplannedreliance ondebtforbaselinecapitalneedsisphasedoutby2031duetothededicatedcapitallevy,a strategyessentialforeffectivemanagementoftheCity’slong-termdebtload.

AkeyfeatureofTableA6isthatcapitalexpendituresthatcannotbemetbyothermeans arenotionallyfinancedbydebenturewiththeunderstandingthatcapitalprojectdeferrals andoperatingcostcontainmentmeasureswilloccurthroughtheannualbudgetingprocess toensureobservanceofthemaximumdebtservicingratioinpractice.AsindicatedinTable A6,totaldebtissuanceovertheplanninghorizonsumsto$325M.Ofthisamount,24%is relatedtobaselinecapital,21%isrelatedtoexpansionarycapitaland55%isrelatedto housingcapital OwingtotheVictoriaManorreplacementdeferralandenhancedcapital grants,thisrepresentsamarkedreductionindebtreliancecomparedtotheversionofthe capitalforecastpreviouslyadoptedbyCouncil.

Water-Wastewater Capital Forecast

Thewater-wastewatercapitalforecastiscontainedinAppendixBandisbasedon strategiesoutlinedinprevioussectionsasmaybeapplicable.Theexpenditurepartofthe forecastdifferentiatesbetweenbaselineandexpansionarycapitalneeds.AppendixB containsonlyonetable,namelyTableB1,whichpresentsthewater-wastewatercapital forecastatafairlyhighlevel.Forgreaterdetail,thereaderisreferredtotheWaterWastewaterRateStudyandDCBackgroundStudy.

AsindicatedbyTableB1,capitalexpenditureisforecastedtobe$146Moverthe20222031planninghorizon,whichbalanceswiththefinancingforecast.Totaldebtissuance overtheplanninghorizonamountsto$56.5M.Providedthatutilityrateincreasescontinue at3%/year,itisexpectedthatrelianceondebtwilltaperoffsoonafter2031sincethe capitalneedsforecastisaggressiveintermsofstaffandprojectmanagementcapacity whilethereservecontributionforecastisconservative.Withwater-wastewaterservices beingrelativelycapitalintensive,however,theyareexpectedtorelyondebtthroughout theplanninghorizonandpotentiallyindefinitely.

Aswiththetax-supportedcapitalforecast,water-wastewatercapitalexpendituresthat cannotbemetbyothermeansarenotionallyfinancedbydebenturewiththe understandingthatcapitalprojectdeferralsandoperatingcostcontainmentmeasureswill occurthroughtheannualbudgetingprocesstoensureobservanceofthemaximumdebt servicingratioinpractice.Givenheavyregulationofthewater-wastewatersector, however,thatconstraintmaynotbebindingshouldamajorchallengearisewithregulatory compliance.Owingtoenhancedcapitalgrants,thecapitalforecastisimprovedcomparedto theversionadoptedin2021aspartoftheWater-WastewaterRateStudy.

7. Operating Forecast

Basedonestablishedservicelevels,theWater-WastewaterRateStudy,priorbudgetsand othersourcesofdirectionprovidedbyCouncilorlegislation,staffhasdevelopeda10-year operatingforecastfortax-supportedandwater-wastewatersidesoftheCity’sbusiness attachedheretoasAppendixC Theoperatingforecastisdisplayedatasummaryleveland itreflectstheforegoingstrategiesandcapitalforecast.Itisalsoreflectiveofassumed generalratesofcostescalationarisingfrominflationandgrowthpressures.Inflationisset atarateof2%/yearunlesscontractualarrangementsdictateotherwise.Tax-supported andwater-wastewateroperatingforecastsarepresentedinTablesC1andC2,respectively, ofAppendixC.

Asstatedabove,thetax-supportedoperatingforecastmakesallowancesfornewstaffand reductionsat5%/yearintheOntarioMunicipalPartnershipFundgrant.Italsoassumes that,beyondexistingtaxlevysupport,theKawarthaLakesHaliburtonHousingCorporation willbeself-sustainingovertheplanninghorizonandthereforewillnotrequireany additionaltaxlevysupport.Thisassumptionisinkeepingwiththedebtstrategyprovision

requiringthatnewhousingdebtservicingcostsbeentirelyoffsetbyincreasedrental revenues.

Whileeveryefforthasbeenmadetoreflectallreasonableandrelevantanticipationsinthe operatingforecast,itisimpossibletoanticipateandcaptureeverypotentialfinancial scenario.Assuch,itisimportanttonotekeypotentialscenariosnotreflectedinthe operatingforecast,namelyoperatingcostincreasesstemmingfromanyofthefollowing causes:(i)unplannedchangesinservicelevels(e.g.newlegislation),(ii)unplanned changesincapitalexpendituresorfinancing(e.g.dramaticriseininflationorinterest rates)or(iii)otherunplannedevents(e.g.discontinuanceofanannualgrant).

8. The Financial Gap

Perhapsthemostsalientimplicationofthecapitalandoperatingforecastsisthat forecastedfinancialrequirementsexceedforecastedfinancialcapacityonceconstraints relatingtoreserves,debtandratepayeraffordabilityaremadetobind.Inthissection,the LTFPconcludesbyoutliningstrategiesforclosingoratleastmitigatingthatfinancialgap andbyidentifyingpotentialadditionalmeasuresaimedatbuildingagreateramountof contingencyintotheLTFP.ThosestrategiesandmeasuresaredesignedtoenabletheCity tobetterhedgeagainstuncertaintyandbettersecureitslong-termfinancialsustainability.

Exposure of the Financial Gap

Inorderthatitbeaddressed,thefinancialgapimplicitinthecapitalandoperating forecastsmustbeexposed.Whenrequirementsexceedcapacityinamunicipalfinancial forecast,theexcesspressurecouldinprinciplebechanneledthroughanynumberof indicatorsintheforecastsuchastaxlevies,userfees,reservesandordebt.Ideally, however,thenumberofsuchindictorsshouldbelimitedsoastofocustheexposureof exceedances.Giventheneedtobuildthecapitalandwater-wastewaterreservesandgiven theforecastedsufficiencyinwater-wastewateruserfeerevenues,itmakessensethat generaltaxleviesanddebtbethedesignatedindicatorsofthefinancialgap.Thesewould bemeasuredbyexceedancesingeneraltaxincreasesandthedebtservicingratiowith respecttothelimitshereinprescribedforthem.

Thegeneraltaxincreasesanddebtservicingratiointheforecastare,therefore,permitted tonotionallyexceedtheirrespectivelimits(3%forgeneraltaxincreasesand10%forthe debtservicingratio)suchthatallotherfinancialcapacityconstraintsarerespectedandall otherfinancialneedsaremet.Theterm“notionally”indicatesthatcapitalprojectdeferrals andoperatingcostcontainmentmeasureswilloccurthroughtheannualbudgetingprocess toensurethatgeneraltaxincreasesandthedebtservicingratioremainwithintheir respectivelimitsinpractice.Withthatqualificationinmind,Table1forecastsgeneraltax increasesandthedebtservicingratio,thelatterdecomposedbyhousingandnon-housing purposes,incomparisontotheirlimitsoverthecourseoftheplanninghorizon.Orange shadinginTable1indicatescellsforwhichthevaluesthereinexceedapplicablelimits.

AccordingtoTable1,generaltaxincreasesexceedthe3%limitduring2023-2028butthen fallquicklyintonegativeterritorytowardtheendoftheplanninghorizon.Theprinciple factordrivingoutexceedancesingeneraltaxincreasesovertimeisthededicatedcapital levy;withoutthat,theexceedanceswouldpersistthroughto2031andbeyond.Whilethe lowandnegativegeneraltaxincreasesfor2029-2031suggestthereisroomformitigation throughtheshiftingexpendituresfromearlytolateryearswiththetax-supported operatingforecast,inrealitytherewilllikelybeconstraintsonsuchshiftinginanygiven year Inevitably,therefore,muchfirmermeasureswillbeneededtobringgeneraltax increasesdownto3%/yearduring2023-2028.

Theotherdimensionofthefinancialgapisrepresentedbyexceedancesintheoveralland purpose-specificdebtservicingratios AsindicatedbyTable1,thedebtservicingratiofor non-housingpurposesexceedsits7.5%limitasof2024whilethatforhousingpurposes exceedsits2.5%limitasof2030.Theoveralldebtservicingratioexceedsits10%limitas of2026.Notableisthathousingaccountsforalmosthalf(47%)ofthedebtissuancesover theplanninghorizonandyetitsdebtservicingratiolimitdoesnotbinduntil2030 The weightofhousingdebtisfeltlateintheplanninghorizononlybecausethehousingcapital forecastisheavilyback-endedandbecausethehousingdebtservicingratiolimitis,asa proportionofcapitalneeds,muchlargerthanthatfornon-housingpurposes.Forthese reasons,housingcommitmentsshouldbecarefullymonitoredasasignificantportionof theirfinancialburdenwillbefeltonlybeyond2031.Bycontrast,exceedancesinthenonhousingdebtservicingratioareexpectedtotaperoffafter2031duetothephasingoutof planneddebtfinancingoftax-supportedbaselinecapitalprojects.

Potential Measures for Closing the Financial Gap

AsindicatedbyTable1,simplyshiftingrevenuesandexpenditureswithintheplanning horizoncannotclosethefinancialgap;amuchmoredeterminedandintentionalapproach isrequiredtosecuretheCity’slong-termfinancialsustainability.Sincecontinuedand indefinitedeferralofcapitalneedsisentirelyunsustainableandsinceratepayer affordabilityisparamount,ultimatelyservicelevelsandtheassetportfoliomustbe reconsiderediftaxesanddebtaretoremainwithinCouncil-determinedlimits.Whatever approachistakentoclosingthefinancialgap,thatgapisafocalpointaroundwhichtough decisionslieaheadforCouncilregardingservicelevelsandtheassetportfolioifnot propertytaxesanduserfees.Inanefforttoinformsuchdecisions,thissubsectionoutlines severalpotentialmeasuresCouncilcouldconsiderintermsofprovidingstaffdirectionon closingthefinancialgap.

Likeanyotherplan,theLTFPmusttakevariousinputsandconstraintsasgiven.For presentpurposes,theseareprincipallytheCouncil-directedfactorsof(i)established

Table 1: Forecast of Financial Gap Indicators - 2022-2031

servicelevels,(ii)theexistingassetportfolio,(iii)notionsoftolerancefordebtand(iv) notionsofratepayeraffordability.SincetheLTFPmusttakethesedirectivesasgivenin ordertofunction,itcannotbeexpectedtoprescribeandreflecttheprecisechangesto themnecessaryforclosureoffinancialgapsandfasterattainmentoflong-termfinancial sustainability.Itcan,however,identifypotentialmeasureswhichCouncilcouldconsider forthosepurposesandforincorporationintofutureiterationsoftheLTFP.Recognizing thatcontinuedandindefinitedeferralofcapitalneedsisentirelyunsustainable,itis recommendedthatthefollowingmeasuresinsteadbeconsidered:

 Examinemunicipalservices,particularlythosesubsidizedbypropertytaxes,for opportunitiesforgreatercostrecoverythroughwiderorenhancedapplicationof userfeesandforgreaterefficiencythroughdispositionofinessentialassetswhose revenuepotentialsarelowcomparedtotheircosts.

 ConductamarketanalysisofuserfeestobenchmarktheCitywithpeer municipalitiesandothercomparableorganizations,assesstheCity’srelative competitivenessregardinguserfees,andidentifyopportunitiesfortheCitytobetter leverageuserfeesandalignthebenefitsandcostsofmunicipalservices.

 Explorethepotentialforenhancingcommercialrevenuessuchasthosederived frominvestments,advertisingandnamingrights.

 Explorethepotentialforservicereconfigurationsandefficienciesinlightofshifting ratepayerexpectationsandnewwaysofdoingbusiness(e.g.remotework)revealed bytheexperienceoftheCOVID-19pandemic.

 RevisitthehousingcapitalplanandensurethatitalignswiththeCity’sfinancial priorities,capacityandsustainabilityrequirements.

 Relaxthe10%debtservicingratiolimitbyredefiningitasa10-yearaverageas opposedtoanannualrestriction.

 Reviewtheassetportfolioforopportunitiestoreduce,reconfigureorreimaginethe City’sassetfootprintwithoutadverseimpactstoservicelevels.

 Reviewservicelevelsandadjustthemtoensuretheystrikeanappropriatebalance betweenratepayerexpectationsandaffordability.

Staffexpectstoexploretheseopportunities,andothersasmaybeappropriate,with Councilin2023toaddressthefinancialgap.

9. Appendix A: Tax-Supported Capital Forecast

TableA1: BaselineTax-SupportedCapitalExpenditureForecast - 2022-2031

TableA2: ExpansionaryTax-SupportedCapitalExpenditureForecast - 2022-2031

TableA2: ExpansionaryTax-SupportedCapitalExpenditureForecast - 2022-2031

TableA3: ExternalTax-SupportedCapitalExpenditureForecast - 2022-2031

Table A4: Tax-Supported SpecialProjects Expenditure Forecast - 2022-2031

Table A4: Tax-Supported SpecialProjects Expenditure Forecast - 2022-2031

Table A5: Tax-Supported Capital and Special Projects Expenditure Forecast Summary - 2022-2031

Table A6: Tax-Supported Capitaland SpecialProjects Financing Requirements Forecast - 2022-2031

Table A6: Tax-Supported Capitaland SpecialProjects Financing Requirements Forecast - 2022-2031

10. Appendix B: Water-Wastewater Capital Forecast

Table B1: Water-Wastewater Capital Forecast - 2022-2031

11. Appendix C: Tax-Supported and Water-Wastewater Operating Forecasts

TableC1: Tax-SupportedOperatingForecast - 2022-2031

Table C2: Water-Wastewater Operating Forecast - 2022-2031