Budget deliberations begin: the capital budget

Lots of questions and suggestions but few changes.

Once Council had completed its consideration of the water and wastewater budgets, City Treasurer and Chief Financial Officer Martin Hayward presented the City’s current financial position, its debts and its assets, and the 10 year plan in place to ensure that the City continues to improve its financial situation. London continues to enjoy a triple A rating first brought in by Mayor Jane Bigelow 34 years ago. That is a source of both pride and lower interest rates for London so it’s something that needs to be maintained.

In the late 1990s Council went on a bit of a “build and spend” spree, racking up debt that has since taken a lot of restraint to get under control. At the turn of the millennium, Londoners were challenged by double digit tax increases as the council of the day attempted to deal with the payments on the debts that were incurred by building libraries, the market, the John Labatt Centre, and other projects which, nice as they may be to have, are hard on the taxpayers’ pocketbooks.

Thanks to the sensible leadership of the current Chief Administrative Officer, Jeff Fielding, Council went on a diet consisting of a cap on new debt of $30M per year and increased focus on pay-as-you-go spending while building up reserves to deal with upcoming expenditures.

As a result, there has not been much money to play with and not much money for new projects. Part of any surpluses has been used to help forestall debt or squirreled away in contingency reserve funds to meet unexpected emergencies. The City identified projects in order of priority in a 10 year capital plan, juggling the dollars to ensure that the essentials were covered.

That came in handy in 2009 when stimulus funding became available. It allowed us to speed up necessary projects at one-third the cost, tightening things up a bit, so that we could pay our one-third share right away but saving us money in the long run. A condition of that funding was that we could not use it to reduce taxes; it was to stimulate employment. That means we now have a few extra dollars freed up over the next few years to spend on economic development, the kinds of projects that can bring jobs and keep them here for years to come. The previous council identified $67.8M worth including partnerships with the public, not-for-profit, and private sectors on such things as advanced manufacturing, a downtown arts district, a digital centre of excellence.

With these restraints in place, the previous council was able to maintain tax increases to below 3% per year. Last year it was 1.8% and with the water and sewer increases, it still averaged about 2.4%.

The current council has in mind a different diet, a tax freeze for the next four years.

At the same time, it has been developing a spectacular wish list: industrial land around the 401 and 402, energy-from waste projects, a new City Hall, a downtown theatre arts district, etc.

Mr Hayward was careful to point out the cost of adding on more debt. At present, the total debt that the City has taken out is $319.3M including water and wastewater debt. Interest on that is approximately 4.5%. Right now, we are paying about $58M per year in handling that debt. As well, we have another $270M that has been approved but not yet issued. Once those invoices are received, we’ll be looking at higher payments. By 2020, those will come up to nearly $90M per year. Adding another $100M for a City Hall or some other project will add another $12M to $13M per year in debt servicing.

And if interest rates increase, what then? We are fortunate to get good rates due to our Aaa rating. That, too, is based in part on our reserves and our capital plan. Changes in either could lead to a lower rating and higher borrowing rates. As Ward 5 Councillor Joni Baechler pointed out, we are currently spending $17.2 (about 4%) of our budget on interest payments. Even a small increase in interest rates, which appears likely, could have a significant influence on our overall budget.

Perhaps it would be better to put a few dollars into reserves and start saving for the wish list.

Currently, the City has a total of $341.6M in reserves and reserve funds. The money for these comes from the operating budget or from outside sources such as development charges. If there is a one-time savings on a particular project, the savings are often put into a reserve fund. The reserve funds are ear-marked for specific anticipated costs or a means of saving for special projects. In London we have been putting $2M each year into a reserve fund for affordable housing. This has allowed us to leverage additional money from other levels of government and the private sector to build more than 1,000 new units since 2005.

Ward 9 Councillor Dale Henderson questioned the need for so many reserves. “I don’t want everyone having a reserve fund”, he complained, with specific reference to the Convention Centre. Staff pointed out that assigning dollars to specific needs is a good way to protect our assets, to ensure that upgrades and life cycle maintenance are being undertaken. If funds enter the general stream, these may not get the attention required.

Ward 4 Councillor Steve Orser suggested that Council remove the contribution to the Convention Centre reserve, noting that there was already a $1.1M in their reserves. “If we deleted this, they could survive,” he suggested, completely ignoring the fact that those were dedicated to the operating side. The building is the City’s building. It is our responsibility to ensure that we have enough money to cover repairs and upgrades, such as a new roof or a new elevator, when those come due. We need to protect our investment which brings many people from outside London to our city. As Ward 8 Councillor Paul Hubert pointed out, it’s a very competitive market. There are other cities for organizations to choose for their conventions and conferences.

It was left to CAO Jeff Fielding to point out that these funds are drawn on only as they are needed and reinvested in the facility; they do not affect the bottom line as far as the taxpayers are concerned.

Baechler expressed concern that the reserves for the W12A landfill land acquisition at $13M might be inadequate for our needs since the estimate is that there are only 12 to 14 years left in the life of W12A. At this observation, the Mayor exclaimed that there are “exciting possibilities’ in dealing with garbage.

On the section dealing with Parks and Recreation, two councillors expressed concern about Storybook Gardens and its continued failure to break even. “We can’t keep doing the same old, same old,” Ward 11 Councillor Denise Brown observed while Ward 14 Councillor Sandy White felt obligated to bring forward complaints from her ward that they couldn’t drive around it in their cars anymore.

And so it went, with questions being raised about specific issues but few specific motions to alter the proposed budget. Some notes were made to review certain policies notably, at the behest of Ward 6 Councillor Nancy Branscombe, the traffic calming policies. Henderson wanted flashing lights at intersections starting at 11 p.m. but was informed that a review of other jurisdictions revealed that these were a safety hazard. He also wanted to replace large buses with smaller ones but learned that LTC has to plan for peak ridership. Putting on additional buses in peak times simply is too expensive in labour costs. White suggested that a planned new Southeast Library should be located in Glanworth.

Ultimately, all the projects in the capital budget were approved although retiring Roads Manager Dave Leckie offered up $125,000 left over from roads projects. That was quickly swallowed up by approval of a request for an additional $400,000 for asbestos removal at the police station with more to come in the following year.

The capital budget is the easy part, especially when you have limited city funds to $26M and need to give preference to those projects that will generate other sources of revenue. At the moment, most of the City’s efforts are directed to keeping what we have in shape. And Martin Hayward and others reminded Council that whenever they approve new projects they have to keep in mind that there will be the costs of operating them in subsequent years.

That work will start next week. It’s known as the Operating Budget.

That’s when the heavy lifting begins.