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Capital Funds Development Charge Funds Operating Funds

Capital Reserve Funds

The District has thirteen capital Reserve Funds to finance the replacement and upgrade of infrastructure along with related studies. As noted in the Capital Financing section, 96.5% of the expenditures in the 10-year capital forecast are financed from internal reserves. As such, these reserves are critical for the long term sustainability of the District.

Funds for these reserves are generally derived from the operating budget through contributions to reserves and interest earned on investments. In 2020, the total contributions to reserves are $29.2 million with capital reserve contributions totalling $28.4 million and contributions to operating and other reserves totalling just under $800,600. The contributions to capital reserves are increasing by just under $1,002,600 from last year and reflect increases in line with the District’s asset management plan of 5% for the Roads Capital Reserve and 1.97% for all other Tax Supported Capital Reserves, except the Port Carling Locks Reserve.

It should be noted that in 2018, the contributions to the Port Carling Locks Capital Reserve were insufficient to fund the 10-year capital program. As a result, an increase to this reserve was approved over a three-year period with an annual increase of $46,525 in 2018, $79,500 in 2019 and $29,200 in 2020. In addition, a loan was approved from the Corporate Capital Reserve of $1,404,650 in 2018 to be repaid over a period of 20 years at 3.53% interest. Reserve contributions are projected to increase by 1.97% annually for the remainder of the 10-year forecast in line with the asset management guideline.

Staff are proposing to eliminate a withdrawal from the Debt Reduction Reserve in 2020 which has been used to partially mitigate the increase in policing costs related to the change in the OPP Billing Model. The discontinuation of this transfer is consistent with the phase-in approach proposed in 2018. It should be noted that there were surpluses in operations in both 2015 and 2016 that were transferred into the Debt Reduction Reserve and it is a portion of these surpluses that were being utilized.

As noted above, the inflation or increase for ongoing capital reserves contributions is just under $1,002,600 and matches the asset management guideline which indicated an increase in the reserves of 1.97% for all capital reserves with the exception of the Roads Capital Reserve contribution which increased 5.0%. Many municipalities are choosing to have a dedicated capital levy to support rehabilitation and replacement of assets. For information purposes, the District’s increase in reserve contributions is the equivalent to 1.3% of the prior year’s net levy.

Development Charge Reserve Funds

There are only two services in the Tax Supported Budget that receive funding from Development Charges; Roads and Hauled Sewage. Revenue for these funds is derived from Development Charge (DC) fees and is used to fund capital projects with an identified growth component. The District conducted a Development Charges Study in 2019. The study quantified the development charges by calculating both the population growth and eligible growth related expenditures over a 30-year period. In July 2019, a new development charges by-law was passed that maintained the current charges resulting in a discount of approximately 58% for residential and commercial accommodation development and 92% for non-residential development. Following a second public meeting, Council approved rates at 50% of the maximum permissible rates within the 2019 Background Study for residential and commercial accommodation developments and froze the non-residential rates resulting in a discount of 92%. The current by-law is in effect until July 14, 2024. However, if the draft by-law authorized by Council is passed in December 2019, new rates will come into effect on January 1, 2020 and the by-law will expire on January 1, 2025.

The revenue projections contained in this budget are based on the approved development charges rates in July 2019 and the growth forecast contained in the Background Study. Both the Roads and Hauled Sewage DC reserves show positive closing balances in the 10-year forecast period using these reduced revenue projections. If the projects, as outlined in the 10-year capital budget and

forecast with partial financing from development charges, proceed as planned and projected revenue from development charges is not achieved, a shortfall in planned funding will occur. This shortfall will have to be financed from existing Capital Reserves or the issuance of internal or external debt.

Financing of individual capital projects has been maintained at prior year levels as Council had requested additional time to consider the DC rates. Once Council has finalized its decision on the DC rates, staff will be updating the DC capital financing based on the 2019 Background Study. On average, roads projects are financed 3.5% over the next ten years from DCs. For hauled sewage projects, the funding from DCs ranges primarily from 20% to 39% as most capital projects scheduled involve expansion of current services. On average, hauled sewage projects are financed 16.7% over the next ten years from DCs.

Operating Reserve Funds

The District has nine operating Reserve Funds that are regularly used to manage the District’s self-insured health and dental

benefits, as well as, WSIB programs. In addition, there are other programs that are operating in nature for which reserves have been established such as Affordable Housing, Gateway Homes Initiatives, The Pines Community Support Fund and the Muskoka Services Investment Fund. Income for these funds is derived from the operating budget and is generally used to fund expenditures within the operating budget. It is an effective means to smooth out year-over-year fluctuations in the District’s net levy. The following are items impacting the 2020 budget:

There are a number of proposed transfers ($1,285,700) from operating reserves to fund programs as follows:

 $600,000 is being withdrawn from the Hospital reserve to assist hospitals with capital acquisitions in accordance with the new funding application and evaluation process and Council approved projects;

 $160,000 is being withdrawn from the WSIB reserve to finance a portion of health and safety staffing and program initiatives;

 $73,500 is being withdrawn from the Corporate Capital reserve to finance the District’s 50th _{Anniversary celebration ($30,000)}

and a portion of energy related initiatives ($43,500);

 $260,000 is being withdrawn from the Gateway Homes reserves to fund a portion of the MAHIP expenditures;

 $127,200 is being withdrawn from the Affordable Housing reserve to fund an Affordable Housing Project Coordinator position within MAHIP ($88,776) and administration related to the IAH program ($38,424);

 $30,000 is being withdrawn from the Muskoka Services Investment Fund reserve to finance Strengthening Communities initiatives;

 $20,000 is being withdrawn from the Debt Reduction Reserve to finance the remainder of the consulting contract related to the evaluation of the Fairvern project; and

 $15,000 is being withdrawn from Pines Community Support to fund minor capital purchases at The Pines, subject to the Advisory Committee’s approval.

The following section deals with the sustainability of the capital and operating reserve funds and their potential impact on the operating budget.

Sustainability

The increases in contributions to reserves being proposed are in line with the District’s asset management plan guidelines which reflect an increase of 5.0% for Roads and 1.97% for all other Tax Supported Capital Reserves, except the Port Carling Locks reserve.

The following table shows the recommended contributions to the various reserves as funded from the Tax Supported Operating Budget for the years 2019 – 2023. Capital Reserves have been increased in accordance with the guidelines noted above.

The Debt Reduction Reserve Fund contribution is consistent with historical levels of $3,958,658. However, this contribution is projected to reduce in 2022 and be completely phased out by 2025. Staff will be assessing if this funding allocation should be maintained or shifted to other capital reserves to fund future community projects.

Reserves/Reserve Funds 2019 Budget 2020 Budget Difference 2021 2022 2023

Roads Capital $16,790,039 $17,629,541 839,502 $18,511,018 $19,436,569 $20,408,397 Debt Reduction 3,958,658 3,958,658 0 3,958,658 3,000,000 2,000,000 Environmental 2,647,000 2,699,146 52,146 2,752,319 2,806,540 2,861,826 Corporate Capital 1,057,760 1,079,919 22,159 1,063,059 1,062,060 1,082,983 Fleet Capital 599,741 622,296 22,555 634,555 647,056 659,803 Ambulance Capital 582,341 593,813 11,472 605,511 617,440 629,603 Pines Capital 529,400 539,829 10,429 550,464 561,308 572,366 Airport Capital 529,400 539,829 10,429 550,464 561,308 572,366

Port Carling Locks Capital 409,783 439,009 29,226 447,657 456,476 465,469

Community Housing Capital 211,760 215,932 4,172 220,186 224,524 228,947

Planning Capital 132,580 135,192 2,612 137,855 140,571 143,340 Computer Equipment 127,055 129,558 2,503 132,110 134,713 137,367 ITSC Reserve 16,175 21,494 5,319 21,924 22,362 22,818 Operating Reserves Hospital Financing 600,000 600,000 0 600,000 600,000 600,000 Total $28,191,692 $29,204,216 $1,012,524 $30,185,780 $30,270,927 $30,385,285

Future Year Projected Contribution Requirements

Capital Reserves

As noted above, the contribution to the Port Carling Locks reserve has been increased by just over $29,200 in 2020 in order to fund the 10-year capital plan. The proposed increases in 2021 and 2022 are in line with the asset management guideline of 1.97%. The contributions to the operating reserves have been maintained at current levels.

Debt and Debt Capacity

In the 2020 Draft Capital Budget and Forecast, there is no external debt required to finance the forecasted capital expenditures. The establishment of the Debt Reduction Reserve fund has provided a vehicle to finance all of the projected debt through internal loans. The total debt required over the 10-year period is $37.3 million, summarized as follows:

• $7.5 million to refinance balloon payments on existing external debt,

• $9.5 million grant for the Fairvern redevelopment ($1 million was authorized in 2018),

• $3.3 million to finance future cell development at Rosewarne Landfill in 2021,

• $4.0 million to finance various capital projects in Water between 2020 and 2024, and

• $13.2 million to finance the Mountview and Golden Pheasant projects in Wastewater in 2020 and 2028. A more detailed breakdown of the Debt Reduction Reserve fund is included in the Sources of Financing section.

The accompanying graph highlights the projected balances, draws and loan repayments for the Debt Reduction Reserve fund. The graph depicts a similar story to previous reports to Council on the status of the reserve fund in terms of commitments and utilization. Similar to last year, the contributions to the reserve

fund have been continued to 2024. As noted earlier, staff has not assumed any borrowing related to development charge revenue shortfall in the 10-year forecast period.

In developing the graph, staff has assumed that all existing balloon debentures will be financed from the Debt Reduction Reserve Fund and that new internal debt will be issued at 3.00% and amortized over a 20-year period.

(20) (15) (10) (5) 0 5 10 15 20 25 30 35 40 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 ($ m illio n s )