December 18, 2013

Town needs extra revenue for infrastructure

As published in The Erin Advocate

To build up a war chest of capital funding for roads, bridges, culverts and other facilities, the Town of Erin will need a dedicated stream of revenue for the next 20 years, councillors were told at a special meeting last week.

The money would be equal to an extra 2.5% in local tax revenue every year, above and beyond increases needed to cover other operating costs and inflation. This Capital Levy Increase would be reduced by whatever project grants might be provided by the provincial and federal governments.

As well, to meet the targets, the Town would need to borrow an average of $824,000 each year for the next ten years, according to the Asset Management Plan prepared by Watson & Associates Economists. It is for existing assets only, not new ones that might be needed due to growth.

Council voted to adopt the Plan, which identifies the condition and replacement cost of each major Town asset (not including vehicles), and its level of priority. Such a plan is now required by the province for grant applications.

Ontario currently has the Municipal Infrastructure Investment Initiative (MIII), allocating $98 million in funding to projects throughout the province over three years.

The Plan does not actually bind Town Council to any particular tax increases or borrowing – it is only a recommended strategy. Councillor Josie Wintersinger and Mayor Lou Maieron were not at the meeting, but the Plan was endorsed by Councillors Brennan, Tocher and Callaghan.

“You are approving the concept, but decisions on increases will be made in annual budget deliberations,” said Dan Wilson, Associate Director at Watson’s. “The Plan is very modest in its expectations. If you want more, you’ll have to change the 2.5% dramatically.”

Every municipality has similar issues, with some needing Capital Levy Increases of 1.5% to 6% annually. Wilson warned that debt is just a way of spreading cost over time, and that the Town should not use up its full legal debt capacity.

The levy will accumulate significant funds as each increase becomes part of the base taxation. Marshall said 2.5% of Erin’s tax revenue may amount to $117,500. That is within a 2013 capital budget of $3.35 million, to which local taxpayers contributed $665,000.

The Town has already been using the accumulating levy strategy, collecting an extra $200,000 in taxes in 2012. That tax revenue stayed in the budget, and the Town collected another extra $200,000 in 2013 (total extra of $400,000 for 2013). Marshall is proposing an additional $214,000 next year, effectively bringing the 2014 total to over $600,000 and the three-year total to over $1.2 million.

That is still far less than the optimal funding required to build up reserves and keep capital assets in good condition. Erin taxpayers are only investing about $1 million per year, rather than the $5 million needed, said Wilson. The Asset Management Plan would eliminate this infrastructure funding gap gradually over 20 years.

The Town’s existing assets cost a total of $52 million to build over the last 100 years, but they’ve depreciated about 46% to a net value of $28 million. The total replacement cost in 2013 dollars is $177 million, according to the Plan.

The Capital Levy Increase will be a percentage of progressively larger budgets over the years due to factors such as inflation. The projections are based on base budget growth estimated at 2% annually, and on an estimate that the cost of building infrastructure will rise about 3% annually.

Marshall said closing the gap in 20 years is good compared to some larger municipalities which expect the process to take 40 years.

“This document must be kept up to date to be useful,” said Wilson, noting that revision is already needed since the town failed to get an expected $2 million grant for rebuilding the Station Street dam, bridge and roadway.

Possible construction of a sewer system is not included in the plan. Such a system would be funded primarily by development charges for new subdivisions and by a surcharge on existing urban homes that get the service, as opposed to taxpayers at large. As soon as sewers are built, the Town would be expected to start setting aside money for their repair or replacement many decades in the future.

Similarly, water infrastructure is financed by its urban users, and it is expensive because the number of users is relatively low. Erin’s water system is about ten years ahead of the Town at large when it comes to upgrading its assets, said Wilson.