Fiscal Strategy Town of Newmarket

Report prepared by Bill Hughes September 2020 Outline

Part A: Introduction 1. The concept of financial sustainability 2. Intergenerational equity

Part B: Fiscal Strategy 3. Fiscal strategy framework 4. Comparative fiscal diagnostics

2 Outline continued

Part C: The Fiscal Strategy In Practice 5. Managing the capital plan 6. Growth capital 7. Asset management 8. Water and wastewater 9. Building reserves 10.Using debt wisely 11.Finding additional revenue

3 Outline continued

Part D: Conclusion 12.Concluding Comments

Appendix A: List of Recommendations Appendix B: Consultant profile

4 Part A Introduction

5 1. The concept of financial sustainability

6 Financial sustainability is about the stewardship of the long term

• Financial sustainability requires long-term planning; it does not just happen • It is mostly about managing two things: service levels and infrastructure • Service level and infrastructure decisions both typically have operating and capital dimensions • The key to financial sustainability is taking the necessary steps now to manage both short and long-term risks

7 There are plenty of conceptual definitions of financial sustainability

“...a government’s ability to manage its finances so it can meet its spending commitments, both now and in the future. It ensures future generations of taxpayers do not face an unmanageable bill for government services provided to the current generation”.

Source: Local Government Association of Australia

8 A pragmatic approach to financial sustainability focuses on capabilities

In practical terms, a municipality is financially sustainable if…. 1. Its tax effort and other revenues are commensurate with its level of service aspirations 2. It can adjust its capital plan, its operating programs and its service levels in response to changes in economic conditions (e.g., pandemic) or transfer payments 3. It can keep its infrastructure in a state of good repair and replace it at the right time 4. Financial responsibility is shared fairly between current and future residents (inter-generational equity)

9 And a couple more for growing municipalities

Additional conditions need to be met for financial sustainability in growing municipalities: 5. Growth can be accommodated without unacceptable tax levy, user rate or debt increases 6. Service levels can be increased as the municipality urbanizes

10 There are potential challenges to municipal financial sustainability

1. The future cost of infrastructure investments, particularly asset management 2. A mismatch between level of service aspirations and fiscal capacity 3. Unforeseen shocks to revenue or spending, such as an economic downturn or a reduction in transfer payments 4. Growth that does not materialize as expected 5. Water rates that are set at less than full cost recovery 6. Inadequate revenue

11 2. Inter-Generational Equity

12 Inter-generational equity is a sleeper issue

• Good fiscal planning means that the generation of people who benefit from an asset is also the one paying for it

• However, several sources suggest that the children of baby boomers will be the first generation in recent history to have lower lifetime income than their parents

• The introduction of municipal tangible capital asset accounting in 2009 is helping municipalities realize that a “pay-as-you-go” philosophy substantially disadvantages future generations 13 Income gains are going to the older generations

Average Annual Individual Income By Age Group, Ontario, 1976-2018 $ Thousands Constant 2018 $ 70

60 55-64 50 25-34 40 65+ 30

20 16-24 10

0

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Income Statistics Division, Statistics Canada Does not include impact of TFSAs, which increase incomes among older people especially 14 Family formation is being delayed

Age-Specific Fertility Rates Live Births per 1000 by age Ontario, 2000-2018 120 30-34

100

80 25-29

60 35-39

40 20-24

20 15-19 40-44

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

15 Commentary on previous slides

• Since 1976, income gains have gone to the 55-64 and 65+ age groups, whereas the incomes of younger age groups have stagnated or fallen • Fertility rates of women in their 20s have fallen significantly since 2000, a comparatively short period in demographic trend analysis • During the same period, fertility rates for women in their 30s and early 40s have risen, with an especially sharp rise in the 35-39 age group • These trends are inter-related and indicate that younger people are having a harder time making headway in the labour market

16 Inter-generational equity has profound implications for municipal finance

• There is a growing realization in municipal circles that meeting future asset management needs is going to be very expensive • Because infrastructure is less expensive in the early part of its life and more expensive later when life cycle rehabilitation and replacement expenses occur, it is easy for today’s generation of tax- and rate-payers to pay significantly less than the true cost of their use of infrastructure • The implication for municipal finance is that robust saving for future asset management needs is a matter of inter-generational fairness

17 Part B Fiscal Strategy

18 3. Fiscal strategy framework

19 The purpose of a fiscal strategy is to provide a path to financial sustainability

20 The elements of a sound fiscal strategy for Newmarket are straightforward in high level concept but complex in execution: (1) management of the capital plan, (2) reserve management, (3) debt management, and (4) revenue enhancement

21 The key elements of a Fiscal Strategy for Newmarket

Capital Reserve Management Management

Fiscal Strategy

Revenue Debt Enhancement Management

22 4. Comparative Fiscal Diagnostics: Newmarket’s financial situation in perspective

23 Newmarket in comparison to others

• It is helpful to compare Newmarket’s financial situation with other municipalities • This requires establishing a comparator group • Municipalities have both commonalities and differences—there is no perfect comparator group • For the purposes of this analysis, Newmarket’s comparator group will be defined as lower tier municipalities within regions (including the District of Muskoka) and separated cities • Separated cities typically have relationships with their neighbouring counties 24 Municipalities in the comparator group

Lower Tiers in the East Gwillumbury Thorold GTA Georgina Niagara Falls Pickering Mississauga Niagara-on-the-Lake Ajax Brampton St. Catharines Whitby Caledon Lincoln Oshawa Oakville Grimsby Clarington Burlington North Dumfries Scugog Milton Cambridge Uxbridge Halton Hills Kitchener Brock Lower Tiers outside the Waterloo GTA Vaughan Wilmot Fort Erie Markham Wellesley Port Colborne Richmond Hill Woolwich Wainfleet Whitchurch-Stouffville Gravenhurst West Lincoln Aurora Bracebridge Pelham Newmarket Lake of Bays King Welland 25 Municipalities in the comparator group

Lower Tiers outside the London Lower Tiers in the GTA: GTA continued Barrie 24 Huntsville Orillia Lower Tiers outside the GTA: 25 Muskoka Lakes Pembroke Georgian Bay Separated Cities: 14 Separated Cities Total: 63 Cornwall Brockville Kingston Belleville Quinte West Peterborough Guelph Stratford St. Thomas Windsor

26 Fiscal diagnostic charts are revealing

• The following pages provide a series of charts comparing Newmarket to its comparator group • The charts are in pairs---one with lines showing the Ontario average and one with lines showing the comparator group average • The orange dots are GTA municipalities; the blue dots are the remainder of the comparator group • The findings arising from the fiscal comparator diagnostics inform the fiscal strategy

27 Newmarket’s rankings in the comparator group (of 63)

• Population: 24th • Population growth 2001-2016: 18th • Households: 25th • Land area: 58th • Population density: 3rd • Weighted assessment: 23rd

28 Data Sources

• The data sources for the fiscal diagnostic charts are: Ø The Ministry of Municipal Affairs and Housing’s Financial Information Returns, which consist of comprehensive self-reported financial information from municipalities using templates provided by the ministry Ø Statistics Canada’s 2016 Census data

29 A few definitions

• Fiscal capacity is weighted assessment per household. Weighted assessment is the sum of assessment for each property class multiplied by the tax ratio for the class • Infrastructure intensity is tangible capital assets per household • Remaining useful life of infrastructure is the percentage of the asset’s cost that has not yet been amortized • Selected municipalities are labelled for reference purposes • Newmarket is always labelled 30 More explanation

• The charts are divided into quadrants • Before the comparative charts are presented, an explanatory slide describing how to interpret positioning in the various quadrants of the chart is provided • These interpretive charts are always labelled “Understanding the quadrants in the charts” • The next slide is the first of these interpretive charts

31 Understanding the quadrants in the charts

$ thousandsFiscal capacity and infrastructure intensity 1000

900

800 High fiscal capacity High fiscal capacity Low infrastructure intensity High infrastructure intensity Fiscal 700 Capacity The best position Likely a manageable position 600

500

400

300 Low fiscal capacity Low fiscal capacity 200 Low infrastructure intensity High infrastructure intensity Probably a manageable position May be unmanageable without 100 external funding or shifting costs to future generations 0 - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

Infrastructure per household 32 Fiscal Capacity and Infrastructure Intensity Lower Tiers and Separated Cities, 2016 $ thousands Lines showing Ontario averages 1000

900 East Gwillumbury

800 Stouffville King Fiscal 700 Richmond Hill Markham Capacity Aurora 600 Newmarket

500

400 Barrie 300

200 Windsor Quinte West 100

0 - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 Infrastructure per household Sources: MMAH FIR and Statistics Canada 33 Fiscal Capacity and Infrastructure Intensity Lower Tiers and Separated Cities, 2016 Lines showing comparator group averages $ thousands 1000

900 East Gwillumbury 800 Stouffville King 700 Markham Fiscal Richmond Hill Capacity Aurora 600

500 Newmarket

400 Barrie 300

200 Quinte West Windsor

100 Georgina

0 0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000

Infrastructure per household Sources: MMAH FIR and Statistics Canada 34 Newmarket’s fiscal capacity is good

• Newmarket’s fiscal capacity is above the average for both Ontario and its comparator group • Newmarket is in the “high fiscal capacity, high infrastructure intensity” quadrant (barely) when measured against its comparator group • When measured against all Ontario municipalities, Newmarket is in the “high fiscal capacity, low infrastructure intensity” quadrant • The Town has somewhat less fiscal capacity than most of its York Region counterparts

35 Higher infrastructure intensity means that more fiscal capacity is needed

• Newmarket’s infrastructure intensity is about average for its comparators and other GTA municipalities (exactly at the median) • It is below average for Ontario • Newmarket is in a fairly good position—above average fiscal capacity and average infrastructure intensity

36 Understanding the quadrants in the charts Infrastructure intensity versus remaining life Infrastructure per household 50000

45000 Plenty of infrastructure Plenty of infrastructure 40000 Old infrastructure Newer infrastructure Highly challenging Time to adjust to financial needs 35000

30000

25000

20000 Less infrastructure Less infrastructure 15000 Old infrastructure Newer infrastructure Requires action but more Best position 10000 likely to be feasible

5000

0 20 30 40 50 60 70 80 90 Remaining Infrastructure Life (%) 37 Infrastructure Intensity per household versus Remaining Life Infrastructure Lower Tiers and Separated Cities, 2016 Intensity Lines showing Ontario averages 50,000 Wellesley 45,000 Markham

40,000 Quinte West

35,000 Aurora King

30,000 East Gwillumbury

25,000 Georgina Stouffville Newmarket 20,000

15,000 Kitchener

Richmond Hill 10,000 Georgian Bay 5,000

- 20 30 40 50 60 70 80 90 Remaining Life (%) Sources: MMAH FIR and Statistics Canada 38 Infrastructure Intensity per household versus Remaining Life (%) Infrastructure Lower Tiers and Separated Cities, 2016 Intensity Lines showing comparator averages 50000

45000 Markham Belleville 40000

35000 King 30000 East Gwillumbury Aurora Georgina 25000 Stouffville Newmarket 20000 Richmond Hill

15000 Kitchener

10000

5000

0 20 30 40 50 60 70 80 90

Remaining Life (%) Sources: MMAH FIR and Statistics Canada 39 Newmarket’s infrastructure position is reasonable

• Newmarket has an average amount of infrastructure per household • The Town’s infrastructure is noticeably newer than the Ontario average and slightly newer than the comparator group average • Newmarket is in the lower right quadrant in relation to the Ontario average • This is good news—it means that the Town has time to build funds to meet its future infrastructure rehabilitation and replacement needs

40 Understanding the quadrants in the charts Fiscal Capacity and Reserves per household $ thousands 1000

900

800 High fiscal capacity High fiscal capacity Low reserves High reserves Fiscal 700 Insufficient savings The best position Capacity Does not mean reserves are adequate 600

500

400

300 Low fiscal capacity Low fiscal capacity Low reserves High reserves 200 Recipe for future problems Reserves may be vulnerable

100

0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Reserves per household 41 Fiscal Capacity and Reserves per household Lower Tiers and Separated Cities, 2016 $ thousands Lines showing Ontario averages 1000

900 Vaughan 800 Stouffville Markham King Fiscal 700 Newmarket Richmond Hill Capacity 600 Aurora

500 East Gwillumbury

400

Georgina 300

200

Georgina 100

0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

Sources: MMAH FIR and Statistics Canada Reserves per household 42 Fiscal Capacity and Reserves per household Lower Tiers and Separated Cities, 2016 $ thousands Lines showing comparator averages 1000

900 Vaughan Markham 800 Stouffville King Fiscal 700 Newmarket Richmond Hill Capacity 600 Aurora

500 East Gwillumbury

400

Georgina 300

London 200

100

0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Reserves per household Sources: MMAH FIR and Statistics Canada 43 Reserves are an issue for Newmarket

• Newmarket has below average savings in relation to both Ontario and the comparator group • Two thirds of GTA lower tier municipalities have more savings per household • Aurora, Richmond Hill and East Gwillumbury have more than twice Newmarket’s reserves per household, while Vaughan and King have 50% more • Even municipalities that already have above average reserves almost certainly need to save more

44 Understanding the quadrants in the charts Fiscal Capacity and Debt per household $ thousands 1000

900

800 Fiscal High fiscal High fiscal capacity Capacity 700 capacity High debt Low debt Requires careful management 600 Best position

500

400

300

200 Low fiscal Low fiscal capacity capacity Above average debt 100 Low debt Potentially difficult to manage Responsible 0 0 1000 2000 3000 4000 5000 6000

Debt per household 45 Fiscal Capacity and Debt per household Lower Tiers and Separated Cities, 2016 Lines showing Ontario averages $ thousands 1000

900 Vaughan 800 Fiscal Richmond Hill King Capacity Markham 700 Aurora 600 Stouffville

500 Newmarket 400 Barrie

300

200 East Gwillumbury

100

0 0 1000 2000 3000 4000 5000 6000

Sources: MMAH FIR and Statistics Canada Debt per household 46 Fiscal Capacity and Debt per household Lower Tiers and Separated Cities, 2016

$ thousands Lines showing comparator averages 1000

900 Vaughan 800 King Richmond Hill Oakville Fiscal 700 Markham Capacity Aurora 600 Stouffville

500 Newmarket 400 Barrie 300

200 East Gwillumbury

100

0 0 1000 2000 3000 4000 5000 6000

Sources: MMAH FIR and Statistics Canada 47 Newmarket’s debt is reasonable

• Newmarket’s debt is slightly below the provincial and comparator averages, which are about the same • Combined with its higher than average fiscal capacity, it is in the upper left quadrant of both charts, the best position • However, it has more debt than 17 of the 24 lower-tier GTA municipalities, so debt levels should be carefully watched • Seventeen of the 39 non-GTA lower tiers in the comparator group are in the “low fiscal capacity, high debt” quadrant, so some may be challenged

48 Understanding the quadrants in the charts Reserves versus Debt per household 6000

5000 Reserves Per High reserves High reserves household 4000 Low debt High debt The best position Needs to be carefully managed

3000

2000 Low reserves Low reserves Low debt High debt 1000 Can mean Problematic financial challenges 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

Debt per household 49 Reserves versus Debt per household Lower Tiers and Separated Cities, 2016 Lines showing Ontario averages 6000

5000 Reserves East Gwillumbury Per household 4000 Richmond Hill Kingston

Aurora Peterborough

3000 Vaughan

King Belleville

2000 Stouffville Quinte West Newmarket 1000 Pelham

Markham 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000

Debt per household Sources: MMAH FIR and Statistics Canada 50 Reserves versus Debt per household Lower Tiers and Separated Cities, 2016 Lines showing comparator averages

6000

5000 Reserves Per East Gwillumbury household Kingston 4000 Richmond Hill

Aurora Peterborough 3000 Vaughan Belleville King

2000

Stouffville Quinte West Newmarket 1000 Pelham

Markham 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Debt per household Sources: MMAH FIR and Statistics Canada 51 Room for improvement in the reserve- debt relationship

• Newmarket is in the lower left quadrant of both charts (barely)—lower than average reserves and slightly lower than average debt • While it is acceptable, Newmarket’s reserve/debt position has room for improvement in relation to other GTA municipalities

52 Understanding the quadrants in the charts

$ thousandsFiscal Capacity versus Total Revenue per household 1000

900

800 High fiscal capacity High fiscal capacity 700 Lower revenue per household High revenue per household Fiscal Suggests self-imposed Suggests high service levels Capacity 600 fiscal constraints or external subsidies 500

400

300 Low fiscal capacity Low fiscal capacity Low revenue per household High revenue per household 200 Suggests involuntary low Suggests high tax levels or service levels subsidies 100

0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000

Total Revenue per household 53 Fiscal Capacity versus Total Revenue per household Lower Tiers and Separated Cities, 2016 $ thousands Lines showing Ontario averages 1000

900

Vaughan Markham 800 Oakville King 700 Fiscal Richmond Hill Capacity 600 Aurora East Gwillumbury

500 Newmarket

400 Guelph

300

200 St. Catharines Pembroke Windsor

100 Cornwall 0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000

Sources: MMAH FIR and Statistics Canada Total Revenue per household 54 Fiscal Capacity versus Total Revenue per household Lower Tiers and Separated Cities, 2016

$ thousands Lines showing comparator averages 1000

900 Markham Vaughan 800 Oakville King Fiscal 700 Richmond Hill Capacity Aurora 600 East Gwillumbury 500 Newmarket

400

300

200

100

0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000

Sources: MMAH FIR and Statistics Canada Total Revenue per household 55 Newmarket’s total revenue per household is about average, despite higher-than-average fiscal capacity

• When compared to Ontario, Newmarket has high fiscal capacity but slightly below average revenue per household, which suggests self-imposed fiscal constraints • When compared to the comparator group, Newmarket has slightly above average revenue per household • In the comparator group chart, only GTA municipalities are in the upper right quadrant (high-high) and only non-GTA municipalities are in the lower right quadrant (low-high) • In both charts, the median is below the average

56 Understanding the quadrants in the charts Fiscal Capacity versus Own Source Revenue per $ thousands household 1000

900

Fiscal 800 High fiscal capacity High fiscal capacity Capacity Low own source revenue High own source revenue 700 Self-imposed fiscal constraints Financially self-reliant

600

500

400

300 Low fiscal capacity Low fiscal capacity Low own source revenue High own source revenue 200 Likely dependent on subsidies or Suggests high tax effort offers lower service levels 100

0 0 1000 2000 3000 4000 5000 6000 7000 Own Source Revenue per household 57 Fiscal Capacity versus Own Source Revenue per household Lower Tiers and Separated Cities, 2016

$ thousands Lines showing Ontario averages 1000

900 Vaughan 800 Richmond Hill King Markham Oakville 700 Fiscal Lake of Bays Caledon Capacity 600 Aurora East Gwillumbury 500 Newmarket

400

300 Kingston

200 Oshawa Peterborough

100 Georgina

0 0 1000 2000 3000 4000 5000 6000 7000

Own Source Revenue per household Sources: MMAH FIR and Statistics Canada 58 Fiscal Capacity versus Own Source Revenue per household Lower Tiers and Separated Cities, 2016

$ thousands Lines showing comparator averages 1000

900 Richmond Hill Vaughan Fiscal 800 Capacity King Markham Oakville 700 Caledon 600 Aurora East Gwillumbury 500 Newmarket

400

300 Kingston 200

100 Georgina

0 0 1000 2000 3000 4000 5000 6000 7000 Own Source Revenue per household Sources: MMAH FIR and Statistics Canada 59 The Town is quite reliant on own source revenue

• Newmarket is in the top right quadrant (high- high), suggesting that it is relatively self-reliant • Approximately 77% of the Town’s revenue is own source revenue, above the average for the comparator group • Some municipalities with own source revenue per household higher than Newmarket are paradoxically less reliant on own source revenue as a percentage of total revenue (e.g., all the municipalities in the upper right quadrant, although King is about the same)

60 Understanding the quadrants in the charts

$ thousandsFiscal Capacity versus Expenditures per household 1000

900

800 High fiscal capacity High fiscal capacity Low expenditures High spending Fiscal 700 per household Suggests high service levels Capacity Suggests self-imposed 600 spending constraints

500

400

300 Low fiscal capacity Low fiscal capacity Low spending High spending 200 Reacting to fiscal realities Likely external funding sources

100

0 0 1000 2000 3000 4000 5000 6000 7000 8000 Expenditures per household 61 Fiscal Capacity versus Expenditures per household Lower Tiers and Separated Cities, 2016 Lines showing Ontario averages $ thousands 1000

900 Vaughan 800 Fiscal Markham King Capacity 700 Lake of Bays Richmond Hill

600 Aurora Newmarket East Gwillumbury 500

400 Guelph Stratford 300

200 Windsor Port Colborne Cornwall

100

0 0 1000 2000 3000 4000 5000 6000 7000 8000 Expenditures per household Sources: MMAH FIR and Statistics Canada 62 Fiscal Capacity versus Expenditures per household Lower Tiers and Separated Cities, 2016 $ thousands Lines showing comparator averages 1000

900 Vaughan 800 Markham King

Fiscal 700 Richmond Hill Capacity Aurora 600 Newmarket East Gwillumbury 500

400

300

200

100

0 0 1000 2000 3000 4000 5000 6000 7000 8000 Expenditures per household Sources: MMAH FIR and Statistics Canada 63 Newmarket’s spending is average to below average

• Despite higher than average fiscal capacity, Newmarket’s expenditures per household are below the Ontario average and at the comparator group average • Most GTA municipalities spend less than Newmarket, possibly showing the impact of economies of scale and the fact that most do not have responsibility for water and wastewater • Municipalities with lower fiscal capacity and higher spending per household tend to be separated cities

64 Understanding the quadrants in the charts Total Revenue versus Expenditures per household 9000

8000 Higher revenue Higher revenue 7000 Lower expenditures Higher expenditures Revenue Implies contributions High service levels 6000 to reserves

5000

4000

3000 Lower revenue Lower revenue Lower expenditures Higher expenditures 2000 Adapting to fiscal realities Fiscally difficult Potentially weak 1000 contributions to reserves

0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 Expenditures

65 Total Revenue versus Expenditures per household Lower Tiers and Separated Cities, 2016 Lines showing Ontario averages and GTA/Non-GTA trendlines Revenue 9,000 East Gwillumbury

8,000 GTA 7,000

Aurora Non-GTA 6,000 Oakville Brockville 5,000 Caledon Newmarket 4,000

Woolwich Burlington 3,000

2,000

1,000

0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 Expenditures

Sources: MMAH FIR and Statistics Canada 66 Total Revenue versus Expenditures per household Lower Tiers and Separated Cities, 2016 Revenue Lines showing comparator averages and GTA/Non-GTA trendlines 9000 East Gwillumbury 8000 GTA 7000 Non-GTA 6000 Aurora Oakville Brockville 5000 Caledon Newmarket 4000

Woolwich Burlington 3000

2000

1000

0 0 1000 2000 3000 4000 5000 6000 7000 8000 9000 Expenditures Sources: MMAH FIR and Statistics Canada 67 Newmarket’s revenue-expenditure relationship is fairly average

• When compared to the Ontario averages, Newmarket has close to average revenue and below average expenditures • When compared to the comparator group, Newmarket has approximately average revenue and expenditures • It is above the non-GTA trendline and below the GTA trendline • Almost all municipalities have higher revenue than expenditures. The difference consists of contributions to reserves, capital spending and the annual surplus.

68 Key findings

• Newmarket has moderately high fiscal capacity and average to slightly below average infrastructure intensity • This may be partly because of its compact geography, which requires less infrastructure, but that is offset to some extent by its responsibility for water and wastewater distribution and collection infrastructure (shared by the separated cities and by the lower tiers in Waterloo and Niagara Regions, but by no other municipalities in the comparator group)

69 Key findings continued

• In addition to having average to below average infrastructure intensity, Newmarket has newer than average infrastructure • This is a good position, because it means there is time to build reserves • Despite its positive fiscal capacity, Newmarket has below average reserves • Only four of the lower-tier GTA municipalities in the comparator group have lower reserves per household

70 Key findings continued

• Newmarket has roughly average levels of debt • However, 18 of the 24 municipalities in the comparator group with above average fiscal capacity (based on the comparator group) have less debt than Newmarket • This suggests that Newmarket’s debt needs to be carefully managed • When reserves and debt are examined together, Newmarket’s overall reserve/debt position has room for improvement, particularly in comparison to other GTA lower tiers

71 Key findings continued

• Newmarket’s above average fiscal capacity does not result in significantly above average total revenue (slightly below average in relation to Ontario and slightly above average in relation to the comparator group) • Newmarket is generating slightly above average own source revenue per household, but almost a third of the comparator group municipalities generate more own source revenue, even though many have less fiscal capacity

72 Key findings continued

• Newmarket’s expenditures are relatively low given its fiscal capacity • Newmarket tracks below the revenue-expenditure trend line for its GTA comparators

73 Conclusions

• Newmarket’s overall financial picture is reasonably good • It is well-positioned to implement a sound long- term fiscal strategy • The strategy should seek to: Ø Manage the capital plan to balance demand, service levels, delivery ability and financial capacity Ø Price water and wastewater correctly Ø Aggressively build reserves, particularly for future asset management needs and contingencies Ø Keep a watchful eye on debt levels Ø Identify additional sources of revenue

74 Part C The Fiscal Strategy in Practice

75 5. Managing the capital plan

76 Capital spending is usually between $15 and $27 million

Capital Spending $ Millions Actual, 2010-2020 50 45 43 40 35 30 27 26 25 21 22 20 18 16 16 16 15 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

77 Less than half the capital budget is delivered in most years

Capital Delivery Percentage of Budget 100

90

80

70

60 54 52 50 42 41 40 38 40 36 35 28 30 25 20

10

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

78 Capital budgets have exceeded delivery capacity

Capital Delivery $ Millions Comparison of budget to actual 120

100

80

60

40

20

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Budget Actual

79 Some areas have delivered more of their budget over the past nine years

Best performers (although Most challenged to deliver none are good) • Water • Roads • Library • Facilities • Parks and trails • Corporate management • Fire

80 Capital priorities over the last nine years as approved in the budget

Capital Priorities based on the budget % of approved budgets, 2011-2019 Other Corporate 6% management Fire 18% 9%

Library 2%

Parks and Trails 13%

Roads 26%

Facilities 10%

Water, sewer, storm 16% 81 But differences in the capital delivered shifts those priorities

Capital Priorities as delivered % of actuals, 2011-2019 Other 7% Corporate Fire Management 7% 21% Library 1%

Parks and Trails 10%

Facilities 13%

Roads Water, sewer, storm 34% 7%

82 Capital delivery affects implementation of Council priorities

• Low and differential rates of capital delivery mean that Council priorities are not being implemented as planned • For example, Roads was 26% of the nine-year budget, but ended up at 34% of delivered capital • On the other hand, water, sewer and stormwater were 16% of the budget, but only 7% of delivered capital • The Town took a positive step forward in 2019 with $24 million of in-year downward revisions in the capital plan. After these changes are taken into account, capital delivery was 99%

83 Setting priorities for capital budgets is not a simple matter

• While calculations of discounted cash flows and internal rates of return can be useful, they typically have difficulty assigning adequate weights to social, environmental and other difficult-to-quantify public costs and benefits • Rank-ordered, criteria weighted schemes have found favour with some, but results can vary widely with the weights assigned to criteria

84 Things to consider in setting capital priorities

• The total capital budget • Growth versus rehabilitation and replacement • Sector investment needs (roads, water, parks, etc.), including master plans if available • Individual project merits • Funding sources • Future obligations (operating costs, asset management costs) • Optimal timing

85 Capital Spending Authority allows better management of the capital plan

• Capital Spending Authority is simply the authority Council gives to spend money on capital • In a Capital Spending Authority model, Council gives authority to spend the entire capital budget in the first year plus multi-year spending authority for projects with existing contracts that stretch beyond the current year or projects where it is reasonably anticipated that there will be multi- year contracts in place during the current year

86 The Town is implementing Capital Spending Authority

• Capital Spending Authority replaces the practice of budgeting the total cost of multi-year projects in the current year • The Town has already taken steps towards a Capital Spending Authority model • The next step is to define it more narrowly so that Capital Spending Authority in future years is restricted to existing contracts (projects already under way) or contracts that can reasonably be expected during the year

87 Realistic Capital Budgeting

• The Town needs to set more realistic capital budgets or increase the capacity of staff to deliver (or both) • Part of this involves eliminating capital carryovers, which the Town is doing with the 2020 budget • Capital carryovers allow departments to carry over unspent money to future years

88 Setting targets for capital delivery

• There are problems with capital carryovers: accumulation of ability to spend, no budgetary incentive to deliver on a timely basis, lack of accountability • Capital carryovers are no longer needed with the introduction of Capital Spending Authority and can be safely eliminated • A reasonable target for delivery of the capital budget would be 80-90% • This target may need to be scaled up over several years

89 Ten and Twenty-Year Capital Plans

• Short-term capital priorities should be informed by longer-term plans, especially since it can take multiple years for a project to obtain all the necessary approvals • In addition, funding sources need to be carefully managed over time • For these reasons, it makes sense for staff to provide Council with a well-developed ten-year capital plan as part of the budget process, complete with project-by- project funding sources • In addition, staff can maintain a similar twenty- year plan for internal purposes (longer for asset management purposes, but with less detail)

90 Council approvals of capital

• Council should approve three things as part of capital budget approvals: Ø Capital Spending Authority, which includes the capital budget for the budget year Ø A ten-year capital plan (note that approval of the ten-year plan does not constitute authority to spend on projects that are not part of Capital Spending Authority) Ø Funding sources by project for both Capital Spending Authority and the ten-year plan

91 Structuring Capital Budgets

• To help Council set capital priorities, the capital budget should include: Ø Growth versus rehabilitation and replacement Ø Pre-construction versus construction Ø Funding source analytical overview (to summarize project-level information) Ø Departmental/functional area information

92 Composition of 2019 actual capital spending

Actual capital spending, 2019 Total = $26.2 million

Corporate Other Management Fire 4% 10% 7% Library 1%

Parks and Trails 9%

Facilities 10%

Roads 45%

Water, sewer, storm 14%

93 Composition of 2020 capital budget Capital budget, 2020 Total=$39.5 million Information Legislative services Library 0% Recreation technology 1% 1% 3% Public works 14%

Fire 27%

Engineering 39%

Water meters 12% Asset Management Planning and Building 1% 2% 94 Consistency of information contributes to better decision-making

• The formats of the 2019 actuals and the 2020 budget are different • This makes comparison and therefore decision- making difficult • It would be useful to have both a departmental and a functional/sectoral breakdown of both the budget and actuals

95 Recommendations

1. Council approval of Capital Spending Authority in the budget should constitute the authority to spend on a capital project 2. In the case of multi-year projects, Capital Spending Authority can extend for the full term of the project. Normally this would involve multi- year contracts 3. Capital Spending Authority for multi-year projects should automatically be built into the budget if the projects are already in progress

96 Recommendations continued

4. Council should approve both the annual capital budget and Capital Spending Authority each year 5. Council should publish a ten-year capital plan with complete project-by-project funding sources as part of the budget process 6. Staff should maintain an internal 20-year capital plan (and longer for asset management purposes)

97 Recommendations continued

7. Capital carryovers should be eliminated (achieved in the 2020 budget process but needs to be continued). If a project has not been started, it should go through the budget process again 8. Capital projects should be divided into pre- construction and construction components wherever appropriate (i.e., where environmental assessments, land acquisition, engineering design and so on are required)

98 Recommendations continued

9. Council should approve pre-construction and construction activities separately for the same project 10.Construction of a capital project should only be approved once pre-construction activities and approvals are complete. Both pre-construction and construction can be approved for the same budget year if there is a solid expectation that pre-construction activities will be completed during the year and the project will start construction

99 Recommendations continued

11.Business cases should be required for projects over $100,000. These could be incorporated in the Town’s decision packages 12.The capital budget should include breakdowns of growth versus rehabilitation and replacement 13.The budget process should include an analysis of the factors affecting capital priority setting and a discussion of the rationale for the capital projects selected for both Capital Spending Authority and the Ten-year Plan

100 Recommendations continued

14.As part of the budget process, Council should see a “best estimate” of year-end capital spending, showing the portion expected to be delivered by functional area/priority, pre- construction versus construction, growth versus rehabilitation and replacement, and anything else that would help with priority-setting 15.The capital budget overview should include both a departmental and a functional/sectoral breakdown 16.The budget and the actuals from the previous year should be presented on a consistent basis

101 6. Growth Capital

102 About 36% of the capital budget is typically allocated to growth projects

Growth Capital as a percentage of total 2016-2020 50.0 46.7 45.0

40.0 36.5 35.0 34.9 35.0 29.1 30.0

25.0

20.0

15.0

10.0

5.0

0.0 2016 2017 2018 2019 2020

Note: These numbers are estimates based on the recommended budget in the capital budget detail appendices. Growth as a percentage of actual is not available 103 Three quarters of budgeted funding for growth projects is from DCs

Shares of funding for growth projects 2016-2020

Other 14%

Operating 1% ARF 6% Reserves 4%

DC 75%

Note: These numbers are estimates based on the recommended budget in the capital budget detail appendices. Funding based on actuals is not available. 104 Infrastructure growth exceeds population growth in most municipalities

Increase in population versus infrastructure per capita Lower Tiers in Regions, 2011-2016 40.0 Infrastructure (% increase) 35.0

30.0 Aurora 25.0

20.0

15.0

10.0 Newmarket

5.0

- -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Population (% increase) 105 Increasing investment in infrastructure is creating financial pressure

• The previous slide showed that most municipalities, including Newmarket, increased their infrastructure per capita faster than their population growth between 2011 and 2016 (the period for which data were available) • This was part of a longer-term trend towards increased municipal investment in infrastructure • Some of it may be catch-up investment as municipalities became more aware of the need to invest in asset management • It could also reflect the replacement of older infrastructure at higher cost or infrastructure contributions from developers in growing municipalities • More infrastructure translates to higher asset management costs and higher operating costs

106 Newmarket’s $98,079 combined single- family DC is 8th of 22 in the GTA

Single Family Detached DCs Combined Upper and Lower-Tier Thousands GTA Municipalities, 2019 120

100

80

60

40

20

0

King Milton Brock Aurora Wh itby Caledon Oakville Toronto Oshawa Vaughan Markham Georgina Brampton Pickering Burlington Clarington Newmarket Halton Hills Mississauga Richmond Hill

East Gwillimbury

Whitchurch-Stouffville

107 Newmarket’s $28,902 lower tier charge is 9th of 21 in the GTA

Single Family Detached DCs Lower Tier Only GTA Municipalities, 2019 Thousands

50

40

30

20

10

0

King Wh itby Milton Brock Vaughan Oakville Caledon OshawaAurora Markham Pickering Georgina Brampton Stouffville Clarington Burlington Mississauga Newmarket - Halton Hills Richmond Hill East Gwillimbury

Whitchurch

108 Newmarket’s $79,717 large apartment charge is 6th of 22 GTA municipalities

Large Apartment DCs

Thousands $ GTA Municipalities, 2019 100 90 80 70 60 50 40 30 20 10 0

King Aurora Wh itby Brock Milton Caledon Oakville Oshawa Toronto Vaughan Markham Brampton Georgina Pickering Newmarket Clarington Burlington Mississauga Halton Hills Richmond Hill East Gwillimbury

Whitchurch-Stouffville

109 Newmarket’s $62.75 per square foot retail DC is 7th of 22 in the GTA

Retail DCs GTA Municipalities, 2019 70

60

50

40

30

20

10

0

King Aurora Milton Wh itby Brock Oakville Toronto Oshawa Caledon VaughanMarkham Georgina Brampton Pickering Newmarket Burlington Clarington Halton Hills Mississauga Richmond Hill East Gwillimbury

Whitchurch-Stouffville

110 Newmarket’s $30.50 per square foot industrial DC is 6th of 22 in the GTA

Industrial DCs $ per sq ft GTA Municipalities, 2019 40

35

30

25

20

15

10

5

0

King Brock Aurora Whitby Milton Vaughan Oakville Caledon Toronto Oshawa Markham Georgina Brampton Pickering Newmarket Burlington Clarington Mississauga Halton Hills Richmond Hill East Gwillimbury

Whitchurch-Stouffville

111 Components of Newmarket’s development charges

Description Residential Non- Residential Non- Amount per Residential share Residential capita ($) Amount per % share Sq meter ($) % General 73.75 1.35 71.2 28.8 Government Library 281.26 0 100 0

Fire 251.92 4.69 71.2 28.8

Parks and 4069.91 0 100 0 Recreation Yards and Fleet 209.83 3.85 71.2 28.8

Parking 128.62 2.36 71.2 28.8

Waste collection 46.57 0 100 0 and transfer Roads, sidewalks, 3108.00 57.55 71.2 28.8 water, sewer, storm 112 DCs do not cover all new infrastructure

• Newmarket typically receives local water and wastewater systems and local roads through subdivision agreements with developers • Development charges therefore cover the portion of other Town-owned infrastructure attributable to growth (minus various deductions related to historical service levels, benefit to existing development and post-period benefit)

113 Newmarket’s development charge bylaw is current

• Newmarket has an up-to-date development charge bylaw (2019) • Its development charge rates tend to be in the top third of GTA municipalities • This may be partly due to timing differences in when municipalities are updating their DC bylaws (required every five years) • It is also related to the Region’s relatively high DCs • The Region’s capital costs are higher because of its distance from Lake Ontario, which is its water source and location of its wastewater treatment 114 The Town has a single non-residential DC

• Newmarket has differentiated residential charges that closely follow the Region’s structure of residential charges • However, unlike the Region, Newmarket has a single non-residential charge • The Region separates retail from other kinds of non- residential development (offices, industrial) because the infrastructure associated with retail contributes to a higher non-residential charge, disadvantaging office and industrial • Separating retail from office and industrial results in a higher charge for retail but a lower charge for office and industrial

115 90% of Newmarket’s DC collections have been residential

Development Charge Collections 2011-2019 Thousands $ 10000

9000 Total 8000

7000

6000

5000

4000 Residential 3000

2000 Non-Residential 1000

0 2011 2012 2013 2014 2015 2016 2017 2018 2019

116 $13 million shortfall in expected DC collections over the last five years

Percentage of Actual compared to expected DC Collections 2014-2019

Non-Residential 44.1

Residential 69.6

Total 64.7

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0

Percent of expected DC collections that were actually collected 117 The biggest shortfall is in non- residential collections

• Over the past five years, the Town has collected well under half the expected non-residential DC revenue • There are two main reasons for this: (1) slower- than-expected growth, and (2) changes in the structure of employment that cause over- estimates in DC Background Studies

118 Work-at-home is becoming more common

• The 2014 Background Study does not appear to have included any allowance for work-at-home employment • The 2019 Background Study assumed work-at- home of about 10% • The Region of Peel has estimated work-at-home and “no fixed place of work” at about 18% • Work at home will likely grow much more rapidly than previously thought due to the effects of the pandemic. Some of the current changes in work are likely to become permanent

119 Space per worker is falling

• Those who do not work in business establishments do not require space. If the work- at-home/no fixed place of work are under- estimated, the number of employees who require floor space is over-estimated and non-residential DCs are set too low (and capital requirements may be set too high) • Furthermore, there is a trend towards increasing densification of office space (less space per worker), which means less office space is needed and DC rates therefore tend to be set too low for a given amount of infrastructure investment

120 There are structural problems with non- residential DC calculations

• The factors that affect the non-residential DC calculation are based on historical data. Future changes are not captured • As a result, DC rate-setting does not adequately consider trends in floor space per worker • If floor space per worker is over-estimated, non- residential development charges are set too low

121 Toronto and Peel are capturing an unexpectedly large share of growth

Annual Population Change 60000 GTAH Census Divisions, 2006-2019

50000

40000

30000

20000

10000

0 Toronto Peel York Halton Durham Hamilton 122 York Region is tracking below Growth Plan expectations

• The Growth Plan allocates 20% of population growth and 26% of employment growth to York Region between 2016 and 2041 • However, between 2011 and 2019, York Region grew by a little over 15,000 people per year, only about 60% of the annual growth projected by the Growth Plan

123 Newmarket’s population is growing

Annual Population Newmarket, 2006-2019 Thousands 92

90 89.496 87.749 88 86.855 87.214 86.096 86.167 86 85.073

84 83.475 82.418 82 81.517 80.255 80 79.115 78.247 78 77.458

76

74

72

70 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

124 But growth has been uneven and reflects the Region’s slower growth

Annual population change Newmarket, 2006-2019 2000

1800 1747 1598 1600

1400 1262 1200 1140 1057 1023 1000 868 901 789 800 688

600 535

400 359

200 71 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

125 Development charge collection timing is more important to the Region

• The slower-than-expected pace of growth matters less to Newmarket than to York Region because of differences in infrastructure responsibilities • The Region must install high-cost water and wastewater treatment and pipe systems in advance of growth, as well as build arterial roads • Because these investments happen before development charges are collected, in some cases many years before, the Region issues debt to finance infrastructure • If development charge collections are reduced or delayed, this can affect the Region’s debt servicing costs

126 The residential growth forecast for Newmarket seems reasonable

Population Growth, Newmarket Historical versus Forecast Development Charge Background Study, 2019 10000 8832 9000 8634

8000

7000

6000

5000

4000

3000

2000

1000

0 Actual 2009-18 Forecast 2019-28

127 The employment forecast in the DC Background Study is highly optimistic

Employment Growth, Newmarket Historical versus Forecast Development Charge Background Study, 2019 4000 3576 3500

3000

2500

2000

1500

1000 836

500

0 Actual 2009-18 Forecast 2019-28

Note: Excludes work from home 128 Development charge forecasts inform capital planning

• Development charge forecasts are useful in planning the capital program, especially in developing a ten-year capital plan • Changes to the Development Charge Act introduced through Bill 108, including a freeze on development charge rates as of the date of site plan or rezoning application, and provisions for the phased payment of development charges for rental housing, institutional and non-profit development may affect future development charge collections (in addition to York Region’s deferral of office development charges)

129 The Province’s omnibus COVID legislation affects development charges

• Bill 197, The COVID-19 Economic Recovery Act, 2020, received Royal Assent in July 2020 • This Act amends and rolls back many of the changes introduced through Bill 108 in 2019

130 The new legislation affects Newmarket

• The new legislation does several things relevant to Newmarket: 1. It includes a prescribed list of services for which charges are allowed under the Development Charges Act 2. It eliminates the 10% deduction for soft services under the Development Charges Act 3. It narrows the scope of the new Community Benefits Charge to high density residential development and allows blending of development and community benefit charges 4. It essentially preserves the existing parkland dedication regime (in contrast to Bill 108)

131 Services for which DCs are allowed

Water supply services, including Library services distribution and treatment Long-term care services Parks and recreation services, Wastewater services, including except for the acquisition of sewers and treatment services parkland Storm water drainage and Public health services control services Childcare and early years Services related to a highway programs and services Electrical power services Housing services Policing services Services related to provincial Ambulance services offence proceedings, including Fire protection services by-law enforcement services and municipally administered Transit services court services Waste diversion services Emergency preparedness 132 The current DC service categories will need to be reviewed

• It is unclear whether all of the items currently categorized as “general government” in the 2019 DC Background Study would be eligible. Some may need to be recategorized and some may not be eligible • The treatment of municipal parking may also need to be reconsidered. Parking may need to be recategorized as “services related to a highway” or as a park improvement.

133 Elimination of the 10% discount creates an opportunity

• The new legislation eliminates the 10% discount for soft services • This creates two opportunities: Ø To increase DC rates to cover more of the cost of growth Ø To increase contributions to the asset replacement fund using assessment growth revenue, a portion of which is no longer needed to pay for the 10% discount (see section on reserves)

134 The Act provides substantially more flexibility in the design of DCs

• A new schedule repeals and replaces section 7 of the current Act and provides for services to be included in classes • Classes can be composed of any number or combination of services, including parts or portions of the services listed in subsection 2 (4) of the Act or parts or portions of the capital costs listed in subsection 5 (3) in respect of those services • A class is deemed to be a single service for the purposes of the Act in relation to reserve funds, the use of money from reserve funds and credits

135 The community benefits charge applies to high density residential development

• The community benefits charge will not apply to: Ø Development of a proposed building or structure with fewer than five storeys at or above ground Ø Development of a proposed building or structure with fewer than 10 residential units Ø Redevelopment of an existing building or structure that will have fewer than five storeys at or above ground after the redevelopment Ø Redevelopment that proposes to add fewer than 10 residential units to an existing building or structure Ø Types of development or redevelopment prescribed in a future regulation.

136 The Community Benefits Charge is broad in scope but narrow in application

• A Community Benefits Charge can be imposed to pay for the capital costs of facilities, services and matters required because of development or redevelopment • Before a by-law imposing a CBC is enacted, the municipality must complete a strategy that assesses the services and costs to be funded by the CBC • However, the same rules and restrictions that apply to the calculation of development charges do not apply to community benefits charges • A CBC by-law is subject to appeal to the LPAT

137 CBCs and DCs can both be used

• The Community Benefits Charge will be capped based on a percentage of the land value prior to rezoning or site plan application (percentage to be prescribed by regulation) • A CBC can be used to fund services eligible for DC funding, but the actual capital costs intended to be funded by a CBC cannot overlap with those intended to be funded by a DC (no double dipping) • A CBC can cover parkland, but the capital costs included in a CBC cannot overlap with costs funded through the municipality’s cash-in-lieu of parkland account (requires provincial clarification)

138 Recommendations

1. Staff should monitor residential versus non- residential development charge collections and compare the results to expected ratios from the Development Charge Background Study 2. The annual development charges report should include a breakdown of residential versus non- residential collections and disbursements

139 Recommendations continued

3. If the results of the residential compared to non- residential analysis show that non-residential development charge collections continue to lag, the Town should shift costs to residential in the next Development Charge Background Study to the extent that is fair and reasonable 4. Recognizing that non-residential development charge collections may be permanently impaired, the Town should develop a plan to address the tax levy impact of the shortfall, either by constraining the capital program or raising additional revenue to compensate for the shortfall 140 Recommendations continued

5. Staff should prepare forecasts of development charge collections and present them as part of the budget process 6. In the next development charges update, the Town should require a reconciliation of post- period benefits identified in the 2019 Development Charge Background Study with the new development charge to ensure that previously identified post-period benefits are being appropriately captured in the new bylaw

141 Recommendations continued

7. In the next development charges study, the Town should require Town-wide engineered services to be calculated separately (roads and associated infrastructure, water, sewer, stormwater all treated separately) 8. The Town should monitor growth trends and adjust the capital plan so that it is reasonably commensurate with the rate of growth 9. The Town should consider a non-residential development charge structure that parallels the Region’s

142 Recommendations continued

10.As soon as is practicable, Newmarket should revise its development charge bylaw to incorporate the beneficial changes with respect to the elimination of the 10% discount for soft services, adjust the services eligible for DC recovery, and consider introducing a class-based approach to DCs 11.Staff should prepare a community benefits charge strategy and bylaw for Council’s consideration

143 7. Asset Management

144 The Province has mandated municipal asset management planning

July 1, 2019 July 1, 2021 July 1, 2023 July 1, 2024

Strategic asset Asset Asset Adds proposed management management management levels of service and financial policy plan for core plan for all strategy infrastructure. infrastructure Includes inventory, current service levels and costs to maintain service levels

145 The Town has made good progress on asset management

1998: Creation of the Asset Replacement Fund in response to Provincial transfer payment cuts 2009: Introduction of tangible capital asset accounting 2013: Introduction of infrastructure levy 2014: First asset management plan, focused on core infrastructure. No substantive financial strategy 2014: Capital Financing Sustainability Strategy by Hemson Consulting

146 Continued progress on asset management

2016: Integrated asset management strategy developed by Yaku Consulting and Cole Engineering. Prior to Provincial regulatory regime. Characterized Newmarket as between 2 (Establishing) and 3 (Developing) on a five-point maturity scale. No financial content. 2017: Council approves integrated asset management strategy 2017: Provincial municipal asset management planning regulation passed (December) 2017: Level of service analysis (December 2017)

147 Continued progress on asset management

2019: Council approves a strategic asset management policy in compliance with the Provincial municipal asset management planning regulation 2020: Town begins work on the second stage of Provincial regulation dealing with core infrastructure

148 Creation of a dedicated asset management team is a positive step

• The Town has established a Corporate Asset Management Office • In July 2020, the Office developed a project charter for the work needed to comply with the second stage of the Provincial requirements (asset management plans for core infrastructure must be in place by July 2021) • Core infrastructure includes water, wastewater, stormwater, roads, bridges and culverts

149 The big challenge for asset management will be to achieve integration between asset management plans and financial plans

150 Asset management plans need to be fully funded

• This means: Ø Asset management plans need to be integrated with the capital budget Ø Capital plans (budgets) need to have long time horizons: 10 years, 20 years, even longer for some assets Ø Funding sources need to be identified as part of the capital budget Ø Funding sources for costs beyond the capital plan horizon need to be rigorously estimated

151 Cost estimates need to be realistic

• Book values developed to meet tangible capital accounting needs result in large under-estimates of asset management costs • As a last resort, book values can be inflated to present day dollars • A better approach is to use engineering estimates of current replacement values and life cycle costs that can be empirically validated

152 Level of service decisions are crucial

• Most municipalities have what is commonly termed a “deferred maintenance backlog”, which is really an asset management backlog • One of the issues in asset management planning is whether the current backlog is acceptable or whether a reduction in the backlog is desired • This is a level of service decision with significant financial implications

153 Good asset management planning requires a commitment to savings

• Some municipalities may need to simultaneously reduce a deferred maintenance backlog and save for future asset management needs • Most, and possibly all, municipalities will have to save much more aggressively to meet future asset management needs and achieve reasonable intergenerational equity

154 Asset funding needs estimates

• The following slides show decade-by-decade estimates of Newmarket’s funding needs for various kinds of infrastructure • Year-to-year estimates were prepared by Town staff using the best information available to them at the present time. They were translated to decades estimates by the consultant • These estimates will be refined as asset management plans are developed in detail • Water, wastewater and stormwater are dealt with in the next section of this report

155 Funding needs for roads come in waves

$ Millions Asset Funding Needs for Roads 140

120 120 119 120 117 100 100 93 92 88 80

60

40

20

- 20s 30s 40s 50s 60s 70s 80s 90s

156 Funding needs for parks are reasonably consistent over time

$ Millions Asset Funding Needs for Parks 60 56 54 51 50 49 50 47 47 44 40

30

20

10

- 20s 30s 40s 50s 60s 70s 80s 90s

157 Funding needs for facilities are around $40 million per decade, except for a bump in the 2060s

$ Millions Asset Funding Needs for Facilities 70 67 60

50 46 40 42 41 42 41 40 39 30 20 10 0 20s 30s 40s 50s 60s 70s 80s 90s

158 Funding needs for fire are about $4 million per decade, except for the 2020s Asset Funding Needs for Fire

$ Millions 14 14

12

10

8

6 5

4 4 4 4 4 4 4

2

- 20s 30s 40s 50s 60s 70s 80s 90s

159 A note on fire

• Funding needs for fire may be under-estimated in future decades, given the large discrepancy between near-term needs in the 2020s and future needs • These estimates may need to be reassessed as part of asset management plan development

160 Funding needs for libraries are about $5 million per decade, declining in the later decades

$ Millions Asset Funding Needs for Libraries 6 6 5 5 5 5 5 4 4 4 4

3

2

1

0 20s 30s 40s 50s 60s 70s 80s 90s

161 Funding needs for fleet are less than $400,000 per decade

Asset Funding Needs for Fleet 450,000

400,000 390,500 390,500

351,000 345,500 350,000 328,500 312,000 306,000 300,000 267,000 250,000

200,000

150,000

100,000

50,000

- 20s 30s 40s 50s 60s 70s 80s 90s

162 Funding needs for IT are about $12 million per decade

$ Millions Asset Funding Needs for Information Technology 14 13 13

12 12 12 12 12 12

10 9

8

6

4

2

- 20s 30s 40s 50s 60s 70s 80s 90s

163 Funding needs for asset management for all tax-supported infrastructure are over $200 million per decade

Asset Funding Needs for All Tax-Supported Infrastructure 300

253 250 243 240 236

204 203 204 209 200

150

100

50

- 20s 30s 40s 50s 60s 70s 80s 90s

164 These estimates may be low

• It is likely that most of the estimates in the asset funding plan are too low • They do not appear to include future assets— assets that will be needed as the Town grows and that will have rehabilitation and replacement needs (and associated costs) • The current replacement values on which these estimates were based may also be too low

165 Current replacement values almost doubled between 2013 and 2020

Infrastructure Category 2013 Replacement Value 2020 Replacement Value $ Millions $ Millions Water 131.5 356.9 Wastewater 183.3 346.9 Stormwater 113.8 520.2 Roads 308.3 308.3 Bridges and Culverts 14.8 61.9 Roadside 67.3 78.6 Facilities 188.1 205.8 Parks and trails 54.7 53.8 Parking lots 7.7 18.5 Fleet 28.5 18.7 IT na 9.4 Fire na 14.2 Library na 3.7 Total 1098.0 2009.8

166 The increase in current replacement value is significantly under-estimated

• The estimate of current replacement value is considerably higher than in 2013 due to improved estimates and the inclusion of more assets • The main source of the increase is in water, wastewater and especially stormwater • However, the estimates for facilities and roads have not been updated since 2013 and funding needs have almost certainly increased substantially

167 Newmarket’s replacement investment in 2019 was well below amortization

Asset Replacement Spending versus Amortization $ millions 2019 18 16.85743 16 14 12 10 9.163888 8 6 4 2 0 Asset replacement spending Amortization Notes: Includes, water, sewer and stormwater. Asset replacement estimated from capital budget detail and delivery ratio. 168 Planned 2020 spending is below 2% of replacement value, a common metric

2020 Planned Asset Replacement Spending $ Millions compared to 2% of Current Replacement Value 45 40.196731 40

35

30

25 21.851992 20

15

10

5

0 2020 Planned Spending 2% of Current Replacement Value

169 It is below the average annual need for the 2020s identified by staff

2020 Planned Replacement Spending compared to average annual needs in the 2020s 35 31.064583 30

25 21.851992

20

15

10

5

0 2020 Planned Spending Annual Need 2020s

170 Asset management investment will need to increase over time

• If capital delivery is less than the amount budgeted, the gaps shown on the previous two pages will be even larger • The 2% comparison slide does not take adequate account of life cycle costs (or shorter life cycles). If it did, the gap would be larger • It is safe to conclude that Newmarket is not investing enough in asset management, given current service levels and infrastructure condition

171 Asset management plans involve tradeoffs

• An asset management plan that is both useful and of high quality necessarily involves tradeoffs • As the Town develops its overall asset management plan, Council will need to consider the relationships between: Ø Quantity of infrastructure Ø Level of service (desired level informed by financial constraints) Ø Acceptable level of infrastructure deficit Ø The cost of building adequate asset management reserves

172 Asset management plans should be integrated

• Under the Provincial regulation, level of service and financial strategy considerations are separated from the initial development of asset management plans and are delayed until 2024 • This separation does not make sense • Newmarket should develop integrated asset management plans, meaning that they should incorporate levels of service considerations and a funding plan from the beginning

173 Recommendations

1. The Project Management Office should accelerate work on asset management planning so that initial integrated versions of all asset management plans are available for consideration in the 2023 budget cycle (beginning in Fall 2022) 2. Asset management plans should include level of service considerations and a funding plan from the beginning so that appropriate tradeoffs can be made 3. The funding strategy embedded in asset management plans should be integrated with the budget process and the next update of the Development Charges Background Study

174 Recommendations continued

4. Staff should carefully review and update current asset replacement values and the current long- term estimates of funding needs as part of the asset management planning process 5. The funding plan should include estimates of the asset management costs associated with infrastructure for future growth 6. The Town should plan to increase future spending on infrastructure rehabilitation and replacement and incorporate steady increases for that purpose in the capital budgeting process

175 8. Water, Wastewater & Stormwater

176 Newmarket’s water rate increases have lagged York Region’s

Annual Percentage Increase Combined Water and Wastewater, 2011-19 12 11.34

10 10 10 10 10 10 9 9 9 9 8.5 8.4 8 6.5 6.2 5.71 5.8 6 5.1 4.5

4

2

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Newmarket York Region

177 The effect is to squeeze Newmarket’s own spending

• York Region’s water rates have been increasing at 9% per year for six years (2020 is the last year), following more than five years of 10% per year increases • If Newmarket’s water rates are rising more slowly than York Region’s, then payments to York Region must be taking up a larger share of the water budget • This necessarily constrains either the Town’s own spending or its contributions to reserves

178 Is Newmarket at full cost recovery at current prices?

• The answer is “no” • Although the water and wastewater financial plans show large surpluses, this relies on book value amortization • If amortization is based on current replacement value and the expected life is shortened to 70 years (from 80) to account for the presence of some shorter-lived assets (such as valves), net income was almost $3 million below full cot recovery in 2019 Note: This assumes the revenue and expenses found in the financial plans for 2019, as the segmented information in the financial statements includes waste management

179 Asset funding needs for water balloon as assets age

$ Millions Asset Funding Needs for Water 120 109

100 85 80

60 54 47 46 39 42 40 34

20

0 20s 30s 40s 50s 60s 70s 80s 90s

180 Asset funding needs for wastewater almost double by the 2030s and then escalate rapidly until the 2080s

$ Millions Asset Funding Needs for Wastewater 140

119 120

100 82 80 70 60 45 40 29 23 19 20 10 - 20s 30s 40s 50s 60s 70s 80s 90s

181 Stormwater needs are modest initially but then become very large in future decades $ Millions Asset Funding Needs for Stormwater 300

253 250

200

150 111 116 100

48 50 42 18 17 24 0 20s 30s 40s 50s 60s 70s 80s 90s

182 Saving or spending based on book value amortization is not enough

Asset Management Needs Water and Wastewater 2019 Estimates based on Amortization $ Millions 6 5.3 5

4

3 2.3 2

1

0 Book Value Amortization Replacement Value Amortization

183 Fortunately, there is time to build reserves because Newmarket’s infrastructure is young

Water and Wastewater

Replacement Timing Replacement Value in Percentage 2013 1-10 Years 4,792,000 1%

11-20 Years 5,255,000 2%

21-30 Years 31,532,000 10%

31-40 Years 50,454,000 16%

41-50 Years 42,010,000 13%

51+ Years 186,744,000 58%

Total 320,787,000 100%

184 It may be worth looking at single-tier delivery

• York is one of only three regions in the province with two-tier water delivery • The others are Niagara and Waterloo • “Watertight”, the report of the Water Strategy Expert Panel, recommended consolidation of two-tier systems in 2005 • Hemson’s 2014 Capital Financing sustainability Strategy recommended that the Town look at uploading part or all of its water and sewer system

185 Two-tier systems are more expensive than one-tier systems in regions

Average Annual Residential Cost of Water and Wastewater, $ One-Tier versus Two-Tier Systems in Regions, 2019 1200 1116

1000

793 800

600

400

200

0 One-Tier Systems Two-Tier Systems

Source: BMA, 2019 186 There are economies of scale

Average Annual Residential Cost of Water and Wastewater $ By Population Size , 2019 1400 1272 1213 1200 1036 1000 928

800

600

400

200

0 0-14999 15000-29999 30000-99999 Over 100000

Source: BMA, 2019 187 Newmarket’s cost of water is 17% above the average for its size category

188 Newmarket’s situation is something of a paradox

• Newmarket’s cost of water is 17% above the average for its size category • However, its water and wastewater price is still not high enough to build the reserves needed for future asset management needs • York Region’s costs are relatively high because the region does not have direct access to Lake Ontario and therefore must build and maintain long pipes • The Region charges a uniform rate, so all of the local municipalities are equally affected by the Region’s costs

189 Newmarket introduced a stormwater levy in 2017 • The new stormwater levy changes the funding for stormwater from the property tax base to a proxy user-pay regime • As a transitional measure the Town reduced the property tax increase by 2.6% • The Town is significantly increasing the stormwater levy (10.9% in 2020 and a projected 18.09% in 2021) • These increases will need to continue, due to the forecast rise in asset management funding needs • A rate study and financial plan will be needed, comparable to water and wastewater

190 Recommendations

1. Set water rates according to Newmarket’s long- term needs 2. Commission or carry out a comprehensive rate- setting study that covers water, wastewater and stormwater rates 3. Ensure that the rate-setting study considers long- term asset management funding needs, inter- generational equity, water demand (impact of conservation), the cost of climate change adaptation, increased costs due to intensification, and a contingency factor for yet-to-be identified costs such as regulatory changes

191 Recommendations continued

4. Investigate the reasons for Newmarket’s historically higher than average rates and address controllable factors 5. Develop 80- to 100-year asset management plans for water, wastewater and stormwater, and firm ten-year capital plans with funding sources identified 6. Integrate the rate plan with the ten-year capital plan and long-term asset management plans 7. Increase rate stabilization reserves to allow for economic as well as weather-related variations in revenues

192 Recommendations continued

8. Develop detailed financial plans for water and wastewater that include an analysis and forecast of capital and operating costs and incorporate the results of the rate-setting study 9. Extend the time horizon of the water and wastewater financial plans to ten years 10.Develop a financial plan for stormwater comparable to the plans for water and wastewater

193 Recommendations continued

11.Consider working together with the other “Northern Six” municipalities in York Region to investigate the benefits and costs of transferring local water and wastewater responsibility to the Region or cooperating in other ways

194 9. Building Reserves

195 Building and managing reserves is key to achieving financial sustainability

196 Newmarket’s tax-supported reserves per capita are the lowest in its population size range

Tax-Supported Reserves per capita Municipalities 30,000-99,999 population, 2019 1400

1200 1164

1000 966 959 948 1000 905

776 800 772 758 687 683 679 658 654 647 641 563 600 544 526 522 491

400 361 300 290

200 67 0

Sarnia Innisfil Aurora Norfolk Timmins WellandFort Erie Caledon Stratford Cornwall Pickering Belleville Georgina Lakeshore North Bay Halton Hills Orangeville St. ThomasNewmarket Quinte West Peterborough New Tecumseth Sault Ste. Marie Centre Wellington

Source: BMA Consulting. Excludes upper tiers and Orillia Whitchurch-Stouffville

197 Newmarket’s tax-supported reserves per capita are the lowest in the GTA

Tax-Supported Reserves per capita, GTA municipalities, 2019 2500

2191

2000

1652 16151573 1500

1126 948 1000 890 869 851 772 758 721 705 668 654 628 625 616 610 526 505 504 500 300 195 67 0

King BrockAurora Wh itby Milton Oakville Toronto CaledonOshawa Pickering Georgina Brampton Vaughan Markham Clarington Burlington Newmarket York Region Peel Region Halton Hills Mississauga Halton Region Durham Region East Gwillimbury

Whitchurch-Stouffville Source: BMA Consulting 198 Newmarket has almost doubled its total reserves over the last ten years

Growth in Total Reserves and Reserve Funds $ millions 2011-2019 70

60.646083 60 54.382417 53.05887

50 47.650546 47.691999 44.607025 40.050459 40.478279 40 35.018357

30 28.164578

20

10

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note: Excludes obligatory reserves 199 Reserves are currently at just over $54 million

• Reserves are down from their peak level and are currently about the same level they were in 2017 • A key factor in the accumulation of reserves has been under-delivery of the capital program

200 Over 60% of reserves are for capital purposes

Composition of Reserves and Reserve Funds 2019 LTD 9% Rate stabilization 3% Operating reserves 27%

Asset replacement fund 41% Capital reserves 20%

201 The proportion of capital reserves has increased in the last five years

Composition of Reserves Composition of Reserves and and Reserve Funds Reserve Funds

Rate 2019 2014 stabilizat LTD Operating LTD Operating ion 9% reserves 15% reserves 3% 27% Rate stabilizati 39% on 2%

Asset replace Asset ment replacem fund Capital ent fund Capital 41% reserves 36% reserves 20% 8%

202 Newmarket has three key reserve challenges

• The main reserve-related issues for Newmarket to address are: Ø The need to build asset management reserves aggressively over time Ø Inter-reserve borrowing Ø Lack of reserves needed to manage newly realized future risks • In addition, there has been a proliferation of reserves as the Town’s needs have evolved

203 Elements of a reserve strategy • The reserve strategy should have at least the following elements: 1. A plan to build asset management reserves 2. Resolution of the inter-reserve borrowing issue 3. A new contingency reserve 4. A new growth capital reserve to deal with protracted or permanent shortfalls in development charge collections and to pay for non-DC-eligible infrastructure

204 The Asset Replacement Fund has quite variable balances

• The Asset Replacement Fund is divided into individual reserves intended to fund different types of capital • The fund has reserves with positive balances of some $57 million, offset by other reserves with negative balances of some $35 million

205 Asset Replacement reserves are highly skewed

Asset Replacement Funds

With Large Positive With Large Negative Balances Balances Water Facilities

Wastewater Parks

206 The current Asset Replacement Fund is just over $22 million

Growth in Asset Replacement Fund Balance 2011-2019 $ Millions 35

31.053913

30 27.953992

25 22.653403 22.319524

20 18.394533

15.905427 14.539143 15 13.786922 13.757352

9.686946 10

5

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

207 The water and wastewater ARF balances amount to $44 million

Asset Replacement Fund Balances $ Millions Water and Wastewater, 2011-2019 60

51.460899

50 46.61892 44.15732 41.99223 38.902369 40 Total W&WW 35.560196

31.529119

30 27.36018

23.332737 Water

2018.586468 Wastewater

10

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

208 Several tax-supported ARF reserves have positive balances over $1 million

Asset Replacement Fund Balances $ Millions Tax-Supported over $1 million positive, 2011-2019 7

6 Roads

5

4 IT

3 Other 2 Library 1

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

209 Parks and Facilities have large negative ARF balances

Asset Replacement Fund Balances $ Millions Tax-Supported with negative balances, 2011-2019 0

-5

Parks

-10

-15 Facilities

-20

-25 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

210 Contributions to the Asset Replacement Fund have been quite variable

Annual Asset Renewal Fund Contribution % Percentage Tax Increase, 2011-2020 1.2

1 1 1

0.83 0.8 0.77 0.8 0.74 0.75

0.6

0.4

0.2

0 0 0 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

211 Substantial savings for asset management needs to start now

• The previous sections showed that asset management needs will grow over time as assets age and new infrastructure is brought into service • To avoid substantially disadvantaging future generations, it will be necessary to save significantly more than is currently needed for rehabilitation and replacement

212 Large intra-fund borrowing has developed in the ARF

• Tax-supported asset replacement reserves are currently borrowing about $23 million from rate- supported asset replacement reserves • There is little prospect that this internal “book- keeping” loan can be repaid in the foreseeable future, given that a 1% increase in the property tax levy yields about $625,000

213 Restructuring the Asset Replacement Fund

• The Asset Replacement Fund needs to be restructured to address past imbalances between the various sectors of the fund • This will involve eliminating the internal “book- keeping” loan, and adjusting the tax- and rate- supported portions of the reserve so that all sectors have a reasonable positive balance at the beginning of 2021

214 Restructuring the ARF should reflect asset management plans

• The pooling of rate-and tax-supported portions of the Asset Replacement Fund should be abandoned to avoid the practice of intra-fund lending between sectors of the ARF with different funding sources (tax versus rates) • Finance should review the allocation of funds to the various sectors and recommend revised allocations to Council • The allocation of contributions to sectors within the Asset Replacement Fund should be periodically reassessed based on asset management plans

215 Funding contributions to the Asset Replacement Fund

• Additional funding sources will be needed to build the Asset Replacement Fund • These could include: Ø Repurposing the Hydro dividend over five years to contribute the entire dividend to the ARF, rather than using it to subsidize operating expenditures (possibly subject to a carve-out for the new Contingency Reserve) Ø Transitioning to allocating a consistent minimum of a 1% incremental tax levy to the ARF

216 Reducing draws from the Asset Replacement Fund

• To temporarily reduce draws on the Asset Replacement Fund, rehabilitation spending could be distinguished from replacement spending and draws from the ARF could be restricted to replacement spending only • Rehabilitation spending would be funded directly from the tax levy or rates, as the case may be

217 Chaos theory and the butterfly effect “Tiny differences in input could quickly become overwhelming differences in output—a phenomenon known as “sensitive dependence on initial conditions.” In weather, for example, this translates into what is only half-jokingly known as the Butterfly Effect—the notion that a butterfly stirring the air today in Peking can transform storm systems next month in New York.”

James Gleick, Chaos: Making a New Science

.

218 We are seeing chaos theory realized in municipal finances

• As a result of the COVID-19 pandemic, it is now clear that small, unexpected changes can materially affect municipal financial conditions • Most municipalities will likely be able to cope with the financial effects of the pandemic, particularly with provincial assistance • However, it is a warning that non-financial events can have significant financial impacts • The exact nature of these events is inherently unpredictable (butterfly effect—they could be health-related, environmental, exogenous economic shocks, etc.)

219 Making provision for the unexpected and the unknown

• It would be prudent to establish a new contingency reserve of significant size to enable the Town to deal with unexpected revenue or expenditure shocks • Such shocks could last for multiple years or occur in close succession • The reserve could be used for either capital or operating purposes

220 A growth reserve is also needed

• The second new reserve could be a growth reserve • This reserve would be designed to address shortfalls in growth-related revenue (see the previous chapter on growth) and growth-related costs that are not currently eligible for development charge funding • It would also be a hedge against potential changes in the legislative or regulatory regime governing development charges

221 Funding sources for the new growth reserve

• The growth reserve could be funded through: Ø A budgetary allocation each year corresponding to the avoided cost of the 10% discount, once a new development charges bylaw has been passed Ø A share of the annual surplus

222 Reserve consolidation is in order

• Newmarket currently has 137 reserves and reserve funds (excluding deferred revenue) • Many of these are small reserves with narrow purposes • The effect of this is to reduce flexibility in the use of reserves and to increase administrative burden • The current list of reserves could be reviewed with an eye to consolidation and reorganization • Some reserves could be rolled into the new contingency reserve or the new growth reserve

223 Recommendations

1. A new Contingency Reserve should be established to provide support for unforeseen and currently unquantifiable needs (e.g., pandemic, climate change, disasters, emergencies, changes in Provincial funding) 2. A new Growth Reserve should be established to fund shortfalls in development charge collections and non- DC-eligible growth infrastructure 3. The new Growth Reserve should be funded by a budgetary allocation each year corresponding to a minimum of the avoided cost of the 10% development charge discount for planned growth projects that year plus an allocation from the annual surplus

224 Recommendations continued

4. A separate pay-as-you-go reserve should be established for ongoing rehabilitation spending to give the Asset Replacement Fund Reserves time to build 5. The pay-as-you-go capital reserve should be funded by allocations in the budget process 6. The Asset Replacement Fund Reserve should be restructured according to the estimated needs identified in preliminary asset management plans 7. Future contributions to the various sectors in the Asset Replacement Fund should be based on needs identified in asset management plans

225 Recommendations continued

8. The only draws from the Asset Replacement Reserve for the next ten years should be for replacement spending 9. The contribution to the Asset Replacement Fund should be increased by a minimum of 1% per year for the next ten years 10.Each year’s incremental contribution should add to the base contribution to the Asset Replacement Fund

226 Recommendations continued

11.The contributions to the Asset Replacement Fund should be in addition to the funding needed for capital rehabilitation projects 12.After ten years, the contributions to the Asset Replacement Fund should be reassessed 13.After ten years, the condition of the Asset Replacement Fund should be evaluated in relation to then current asset management plans with a view to determining whether draws for rehabilitation purposes are feasible

227 Recommendations continued

14.The current internal loan between the rate- and tax-supported portions of the Asset Replacement Fund should be eliminated 15.The policy of pooling rate- and tax-supported Asset Replacement Fund reserves should be dropped, and intra-reserve borrowing between tax and rate-supported reserves should not be permitted

228 Recommendations continued

16.Over the next five years, the Hydro dividend should be transitioned to a contribution split 75:25 between the tax-supported Asset Replacement Fund and the new Contingency Reserve 17.Over the next five years, the annual surplus should be transitioned to a contribution split: Ø 50% to the new tax-supported Growth Reserve Ø 25% to the new Contingency Reserve Ø 25% to other reserves that are below target, and if none, to the Asset Replacement Fund

229 Recommendations continued

18.Finance staff should prepare long-term reserve forecasts and present them to Council as part of the fiscal strategy update during the budget process 19.The Town’s Reserve Policy should be amended to reflect the recommended changes in this report 20.The Town’s Surplus Policy should be updated to reflect the recommended changes in this report

230 10. Managing Debt

231 Newmarket’s debt per capita is below the average and median in its size class

Total Debt Outstanding Municipalities 30,000-99,999, 2019 2500

2131 20782033 2000 1798 1594 1500 1191

946 1000 929 905 888 886 817 809 745 673 625 535 422 500 367 302 244 228 228 206 164 158 143 0

Orillia Sarnia Norfolk Innisfil Aurora Welland Caledon StratfordBelleville Timmins Cornwall Fort ErieGeorgina North Bay Pickering Haldimand Lakeshore St. Thomas Newmarket OrangevilleHalton Hills Quinte West Peterborough New Tecumseth Sault Ste. Marie Centre Wellington

Source: BMA Consulting Whitchurch-Stouffville 232 Newmarket’s debt per capita is relatively high among lower-tier GTA municipalities

Total Outstanding Debt per capita GTA Municipalities, 2019 700 673 625 600 563

489 500 480 424

400 367 354 302 300 234 228 206 189 200 164 142 130 88 100 32 29 0 0

King Milton Aurora Brock Wh itby Oakville Oshawa Caledon Pickering GeorginaVaughan Brampton Markham Newmarket Burlington Clarington Halton Hills Mississauga

East Gwillimbury

Whitchurch-Stouffville

Source: BMA Consulting 233 Newmarket’s debt to reserve ratio is relatively weak

Debt to Reserve Ratio Lower-Tier GTA Municipalities, 2019 2.00 1.80 1.76 1.60 1.40 1.20 1.00 0.93 0.84 0.78 0.80 0.65 0.57 0.54 0.60 0.48 0.43 0.40 0.38 0.40 0.24 0.21 0.21 0.21 0.15 0.20 0.08 0.08 0.04 0.00 0.00

King Milton Aurora Brock Wh itby Oshawa Oakville Caledon Pickering Georgina BramptonVaughan Markham Newmarket Burlington Clarington Halton Hills Mississauga

East Gwillimbury

Whitchurch-Stouffville Source: BMA Consulting 234 Debt servicing costs are relatively high

Debt Servicing Costs as a % of Own Source Revenue % Lower Tier GTA Municipalities, 2019 8 7 6.78 6.77

6 5 4.78 4.77 4.65 4 3.29 3 2.65 3 2.44 2.39 1.93 2 1.22 1.02 0.98 0.85 1 0.69 0 0 0 0 0

King Milton Brock Aurora Whitby Oshawa Oakville Caledon Vaughan Georgina Markham Pickering Brampton Burlington Clarington Newmarket Halton Hills Mississauga

East Gwillimbury

Whitchurch-Stouffville

235 Newmarket’s debt has increased in the last three years

• Newmarket’s total outstanding debt at the end of 2019 was approximately $45.1 million, down over $11 million from the previous year • However, at the end of 2017, the Town owed $33.7 million in long-term debt • The main reason for the increase is the purchase of the Mulock farm in 2018, which resulted in the issuance of a $26 million 30-year debenture at 3.65% • This increase was partially offset by a decision to pay off the remaining $8.1 million owing for the Joint Operations Centre constructed in 2009

236 Excluding the debt for the Mulock Farm, much of the remaining $20 million will be paid off by 2024

Project Rate (%) Maturity Outstanding

Mulock Farm 3.490 2048 25,498,038

Land for recreational 5.724 2024 4,469,874 facilities Youth Center 5.724 2024 1,035,703

Downtown renewal 5.724 2024 328,518

Recreation facility 5.246 2024 4,243,900

Parkland 5.246 2024 902,182

Traffic flow 5.246 2024 519,878 improvements Downtown 5.246 2024 141,463 revitalization Recreation facility 4.756 2026 6,648,199

FCM loan 2.00 2031 1,293,960

237 The Mulock Farm debt is reasonable

• The rationale for the 30-year term of the Mulock Farm debt is sound, but the rate seems somewhat high in the current environment • York Region recently issued a ten-year debenture at 1.49% • It may be worth investigating the potential for refinancing at a shorter term and a lower rate

238 Newmarket’s debt management policy is sound

• The Town’s debt policy was updated in 2018 • It provides that annual debt servicing costs (principal and interest) plus annual capital lease payments must not exceed 10% of the previous year’s own source revenue • It also must not exceed the Provincially-assigned Annual Repayment Limit for the Town, but the Town’s own criterion is more stringent • Actual debt servicing costs were less than half that amount in 2019

239 Internal borrowing policy may need to be tightened

• The debt management policy allows internal borrowing from reserves with a payback period of no more than 10 years • This is a long payback period. The Town may wish to consider a shorter payback period such as five or seven years to ensure that the investments make good financial sense • The policy says that the reserves from which money is borrowed are supposed to earn an interest rate not less than prime. An alternative would be to charge the estimated market rate if the Town had borrowed the money or the Town’s expected rate of return on its investments, so as not to have reserves unduly subsidizing internal borrowing 240 More on internal borrowing policy

• As discussed in the previous section, the practice of internal borrowing between tax- and rate- supported reserves should be eliminated • The policy also provides that the total borrowing from reserve funds should not exceed 50% of the reserve fund balance. This could compromise the availability of reserve funds for future use • Furthermore, as the Town accumulates more reserves, the 50% allowance could conflict with the debt servicing limits in the policy

241 Recommendations

1. The Town should stay on its current trajectory to pay off its existing debt by 2026, save for the Mulock Farm debt 2. The internal borrowing provisions of the debt management policy should be tightened with respect to payback period, interest rate earned, and portion of the reserve fund balance available for internal borrowing 3. Although the 10% limit on debt servicing costs as a share of own source revenue is reasonable, in practice the Town should strive to keep it below 5%

242 Recommendations continued

4. The Town should consult with York Region with respect to the potential for refinancing its Mulock Farm debt at a shorter term and a lower rate

243 11. Enhancing Revenue

244 Implementing the fiscal strategy would be easier with more revenue

• Newmarket has several options available for increasing revenue: a. Moderate increases in property taxes at the appropriate time b. Revenue from assessment growth c. Increases in the dividend from Newmarket Hydro or other means of extracting value d. Higher investment returns

245 11a. Property tax revenue

246 Newmarket has slightly below average assessment per capita compared to GTA municipalities

Weighted Assessment per capita Lower-tier GTA municipalities, 2019 350000

300000

250000

200000

150000

100000

50000

0

King Aurora Milton Wh itby Brock Oakville Caledon Oshawa Vaughan Markham Pickering GeorginaBrampton Burlington Newmarket Clarington MississaugaHalton Hills Richmond Hill East Gwillimbury

Whitchurch-Stouffville

247 Newmarket’s proportion of residential assessment is about average

Residential Share of Assessment GTA Municipalities, 2019 100.0 90.5 89.7 89.5 88.7 88.2 87.8 90.0 86.4 86.1 85.5 84.9 83.9 83.4 82.9 81.7 81.5 79.8 79.5 79.3 78.9 75.4 80.0 74.1 72.8 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

King Brock Aurora Whitby Milton Oakville OshawaCaledonVaughan Toronto Georgina Markham Pickering Brampton Clarington Newmarket Burlington Halton Hills Mississauga Richmond Hill East Gwillimbury

Whitchurch-Stouffville

248 Newmarket’s all-in tax rates are below the GTA average in all categories

All-in Tax Rates % Newmarket is below GTA average, 2019

Industrial 17.1

Commercial 8.5

Multi-Res 35.7

Residential 7.7

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0

249 Newmarket’s residential property taxes are about 5% below the GTA average

Residential Property Taxes $ GTA municipalities, 2019 9000 7972 8000

7000 5900 5711 6000 5532 5497 5474 5406 5281 5210 5096 5013 4805 4703 5000 4541 4454 4390 4345 4231 4225 3993 4000 3633

3000

2000

1000

0

King Aurora Wh itby Brock Milton Oakville Caledon Oshawa VaughanPickering MarkhamBrampton Georgina Newmarket ClaringtonBurlington Mississauga Halton Hills Richmond Hill East Gwillimbury

Whitchurch-Stouffville

250 Newmarket’s residential property taxes as a share of income are below the GTA average

Residential Property Taxes as a % of Income GTA Municipalities, 2019 6.00

5.00 4.79 4.79 4.72 4.30 4.22 4.18 4.17 4.04 3.99 3.84 3.77 4.00 3.67 3.60 3.47 3.46 3.34 3.28 3.13 3.10 3.00 2.72

2.00

1.00

0.00

Brock Wh itby Aurora Milton Oshawa Caledon Oakville Brampton PickeringMarkhamGeorgina Vaughan Newmarket Clarington Burlington Mississauga Halton Hills Richmond Hill East Gwillimbury

Whitchurch-Stouffville

251 Newmarket’s property taxes are quite low in relation to median house value

Property Tax as a % of Median Property Value GTA municipalities, 2019 3.00

2.45 2.50

2.00 1.78 1.54 1.50 1.35 1.18 1.09 1.09 0.98 0.95 0.96 1.00 0.85 0.85 0.78 0.67 0.70 0.57 0.56 0.59 0.54 0.50 0.41 0.42

0.00

King Brock Wh itby Milton Aurora Oshawa Caledon Oakville GeorginaBrampton Pickering Markham Vaughan Clarington Burlington Newmarket Halton Hills Mississauga Richmond Hill East Gwillimbury

Whitchurch-Stouffville

252 By virtually any measure, Newmarket’s residential property taxes are below the GTA average

253 Newmarket’s taxes on multi-res walk- ups are low

Property taxes for Multi-Res Walk-ups GTA Municipalities, 2019 2500 2293 2189 2095 2087

2000 1946 1938

1554 1546 1483 1500 1374 1300 1245 1221

1035 992 971 1000 925 816 801 782

500

0

King Whitby Brock Milton Aurora Oshawa Oakville Caledon Pickering Brampton Georgina VaughanMa rkham Clarington Burlington Newmarket Mississauga Halton Hills Richmond Hill

Whitchurch-S touffville

254 So are its taxes on multi-res high rise

Property taxes for Multi-Res High Rise GTA Municipalities, 2019 3000 2703 2484 2500 2370 2258 2216 2066 2000 1871 1843

1500 1326 1312 1148 1108 1107 1087 1045 964 1000 929 906

500

0

King Wh itby Milton Aurora Oshawa Oakville Pickering Brampton Georgina VaughanMarkham BurlingtonClarington Newmarket MississaugaHalton Hills Richmond Hill

Whitchurch-Stouffville

255 Taxes on offices are slightly above average

Property taxes for Offices Per sq. ft. GTA municipalities, 2019 6.00

5.14 5.00

3.91 3.87 3.85 3.81 4.00 3.72 3.66 3.55 3.48 3.48 3.37 3.35 3.23 3.20 3.14 3.00 2.91 3.00 2.64 2.45

2.00

1.00

0.00

King Wh itby Aurora Milton Oakville Caledon Oshawa Pickering Brampton Vaughan Georgina Markham Newmarket Clarington Burlington Mississauga Halton Hills Richmond Hill

Whitchurch-Stouffville

256 Industrial taxes are lower than average

Property taxes for industrial (standard) Per sq. ft. GTA municipalities, 2019 3.50 3.08 2.96 3.00 2.62 2.60 2.56 2.44 2.50 2.41 2.18 2.17 2.15 2.15 2.06 2.03 1.95 1.95 2.00 1.94 1.91 1.90 1.89 1.88

1.50 1.11 1.00

0.50

0.00

King Milton Wh itby Aurora Brock CaledonOakville Oshawa Brampton MarkhamGeorgina Vaughan Pickering Burlington NewmarketClarington Mississauga Halton Hills Richmond Hill East Gwillimbury

Whitchurch-Stouffville

257 Newmarket’s non-residential property taxes are also comparatively low

• York Region’s tax ratios for multi-residential are set at 1.00, much lower than most other municipalities. This helps explain Newmarket’s significantly lower multi-residential property taxes • Newmarket’s property taxes on offices are not materially above the GTA average ($3.55 versus $3.46 per square foot) • Newmarket’s property taxes are below the GTA average for standard industrial ($2.03 versus $2.19 per square foot) and slightly above the average for large industrial ($1.66 versus $1.58 per square foot)

258 Lower-than-average taxes are not necessarily positive

• Lower taxes suggest one or more of the following: Ø Fewer services Ø Lower service levels Ø More efficient delivery of services Ø Inadequate savings (contributions to reserves) Ø Or a combination of the above • Lower residential taxes may also indicate a large commercial and industrial sector with high tax ratios (e.g., Toronto)

259 Current practice is to keep property tax increases below 3%

Newmarket Annual Property Tax Increases Increase in Newmarket portion, 2011-2020 7

5.89 6 5.59

5 Total 3.95 4.54

4 3.5 2.99 2.95 2.72 3 2.99

2

1

0.39 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

260 There is some room for property tax increases above the rate of inflation plus population growth when the economy improves

261 11b. Assessment growth

262 Annual assessment growth is typically in the 1-2% range—growing but not fast

Annual Assessment Growth $ Newmarket, 2011-2019 2.5

2 2 2 2

1.5 1.5 1.5 1.3 1.23 1.24 1.23

1 1

0.5

0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

263 The use of new revenue from assessment growth is restricted

• Newmarket has a policy of restricting the use of additional tax revenue generated by assessment growth to growth-related needs • The tax impact of assessment growth is different than the absolute percentage change in assessment because of the impact of tax ratios. This is a more accurate measure

264 Only growth-related costs can be funded from assessment growth revenue • Examples of growth-related costs that can be funded from assessment growth: Ø The operating costs of additional services for population growth resulting from new development Ø Non-DC-eligible capital, such as municipal administration buildings Ø Funding the 10% DC discount for soft services (see previous section for recommendations on this topic)

265 The Town’s assessment growth policy is a good policy

• The assessment growth policy has the effect of imposing fiscal discipline on program areas • Revenue from growth cannot be applied to increase levels of service • There are two theoretical issues: Ø In some program areas in certain years there may be diseconomies of scale associated with growth that raise unit costs across the board Ø There may be municipal-level economies of scale or scope that departments do not consider when making their growth funding requests

266 Assessment growth revenue may increase

• If population growth picks up in York Region as expected in the Growth Plan, assessment growth in Newmarket may see a corresponding increase • The pandemic and its associated changes in home and work preferences may contribute to growth in the Region

267 11c. Newmarket Hydro

268 Newmarket is active in the hydro business

• The Town wholly owns Newmarket Hydro Holdings, which in turn owns Newmarket’s local distribution company, Newmarket-Tay Power Distribution Limited • Newmarket owns 93% of NT Power and Tay owns the other 7% • NT Power purchased Midland Power Utility Company in 2018 • Envi Network, a local internet service provider, was established in 2018 as a wholly-owned subsidiary of Newmarket Hydro Holdings and Tay Hydro

269 NT Power distributes a dividend to the Town

• The dividend has stayed constant at $1,336,000 since 2012, except for an uptick in 2013 • It is generally 40-60% of net income

Newmarket Hydro and Related Payments $ thousands 2003-2019 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

270 Some LDCs are able to provide significant dividends and even protect them in the face of income challenges

LDC Total Net Income Net Income Dividends Revenue $ Millions as % of $ Millions (2018 or Revenue 2019) $ Millions Alectra (2018) 3,452 109 3.2 69

Lakeland Power 45.9 1.7 3.7 1.5 (2019)

Elexicon (2019) 53.8 -1.9 -3.5 7.0

Festival Hydro 84.3 2.2 2.6 1.0 (2019)

271 Newmarket’s hydro dividend is relatively low as a share of tax revenue

Selected Net Taxation ($ Hydro dividend ($ Percentage Municipalities millions) 2018 or thousands) 2019 Centre Wellington 15.5 557 3.6

Huntsville 14.6 402 2.8

Whitby 86.7 2921 3.4

Vaughan (Alectra) 202.3 12651 6.3

Markham (Alectra) 162.5 8460 5.2

Orangeville 36.0 447 1.2

Orillia 59.8 800 1.3

Halton Hills 50.3 1692 3.4

Burlington 164.7 5687 3.5

Brantford 153.2 2221 1.4

Newmarket 63.6 1336 2.1

272 The Town is changing its treatment of the hydro dividend

• The board has been declaring the dividend for the previous year in December • Until 2019, the Town’s practice was to accrue the dividend on the basis that it was a consistent amount consistently paid by the board • The Town did not accrue the dividend for the 2020 budget on the basis that it could not be guaranteed given the uncertainties created by the pandemic • This is a positive change that should be retained

273 The Town could consider a comprehensive review

• A detailed review of the financial situation of NT Power or ENVI is beyond the scope of this report • The Town may wish to undertake both a strategic/policy review and a financial review of these organizations • These reviews could be done separately or together and commissioned by the Town or the boards • The reviews should identify options for increasing the dividend or other revenue from NT Power • In the meantime, the Town should move away from using the dividend to subsidize the operating budget, as previously discussed

274 11d. Investment

275 Newmarket has a passive approach to investing

• The Town currently employs a passive approach to investing, common in many municipalities • This usually involves buying GICs or principal protected notes • The advantage of this approach is that the municipality’s principal is protected, and returns are certain (in the case of GICs) • However, in a low interest rate environment, such as the one being experienced now, returns tend to be low and may not even keep up with inflation

276 Newmarket’s investments are conservative

Composition of Investments Reserve Funds, 2019 Total = $72.3 Million PPNs External Loans 6% 0%

Internal Loans 13%

GICs 81%

277 In December 2018, the Town invested $30 million in a laddering strategy

• The idea of a laddering strategy is to reduce risk by locking in interest rates, but also to keep flexibility to reinvest as rates rise • It works less well when rates are falling, although the principal is protected

Newmarket Laddering Investments, 2018

Issuer Amount ($) Term Interest rate (%)

BNS 6000000 1 year 2.85

BNS 6000000 2 years 3.26

BNS 6000000 3 years 3.33

BNS 6000000 4 years 3.43

CIBC 6000000 5 years 3.55 278 Newmarket’s investment returns are consistent with its investment strategy

• Over the past five years, the Town’s investment returns averaged 2.52%, with a median return of 2.23% Investment Returns on Reserve Funds 2015-2019 %5

4 3.69

3 2.83 2.23 2.07 1.85 2

1

0 2015 2016 2017 2018 2019

279 The investment strategy prescribes how investment returns are to be used

• The Town’s investment strategy was most recently updated in 2016 • It allows for investment income to be allocated to operating and reserve funds based on targets set in the budget process • In practice, a distinction is drawn between earnings up to the benchmark level and earnings above the benchmark level, where the benchmark is defined as the return earned on the Town’s bank balances (i.e., no investment effort) • In 2019, the Town earned above-benchmark returns of $273,370, $75,000 of which was allocated to the operating fund and the rest to reserve funds

280 Investment returns are substitutes for future tax and rate increases

• Capital budgets and long-term capital plans are usually expressed in current dollars • Investment returns can accomplish three things: Ø Increasing reserves to deal with inflation in capital costs Ø Providing for unanticipated increases in infrastructure costs (unrelated to inflationary increases) Ø Contributing to future asset management costs--as a substitute for a portion of the tax and rate increases that would otherwise be necessary

281 The Province provides municipalities with two broad options for investing

• Municipalities can choose to invest under the “Legal List” or the prudent investor standard • In either case, municipalities are permitted to invest “money not required immediately” • “Money not required immediately” is not defined in the Act or the regulation, so there is some scope for municipalities to define it according to their individual circumstances

282 Ontario Regulation 438/97 defines the “Legal List”

• Generally, municipalities can invest in the following securities: (1) government issued or guaranteed debt; (2) bank and financial institution debt; (3) corporate debt of up to five years; (4) certain asset-backed securities and corporate paper • Under the Legal List, a municipality can only invest in Canadian equities or Canadian corporate bonds with maturities of more than five years through ONE Investment • Investments must meet prescribed credit quality standards (ratings)

283 The prudent investor standard is new

• Effective January 1, 2019, a municipality that meets certain requirements can pass a bylaw enabling it to invest money that it does not require immediately in any security in accordance with the prudent investor standard and the applicable Municipal Act regulation • Municipalities investing under the prudent investor standard must exercise the care, skill, diligence and judgement that a prudent investor would exercise in making an investment • A municipality’s investments must be diversified in a manner appropriate to general economic and market conditions 284 The requirements for prudent investing are deliberately onerous

• Municipalities must individually or collectively have at least $100 million to invest or individually have net financial assets of at least $50 million • Newmarket qualifies on the second criterion • A municipality must also establish its own Investment Board or participate in a Joint Investment Board with other municipalities • The municipality must delegate control and management of the municipality’s investments to the Investment Board (based on the municipality’s definition of “money not required immediately”)

285 The Investment Board is a municipal services board or a joint board

• Council members and municipal staff cannot be members of the board, except for the treasurer • Council must approve an Investment Policy Statement describing the municipality’s objectives for investment return, risk tolerance, liquidity and other relevant considerations • The Investment Board then develops an Investment Plan, which must implement the Investment Policy • The board also must report to Council at least annually

286 The best options for improving investment returns lie with external experts

• It is unrealistic to expect Newmarket to establish its own investment board or a team of staff to manage investments • The best options to improve returns are: Ø Ask York Region to invest on the Town’s behalf* Ø Invest through One Investment Legal List funds Ø Invest through One Investment Prudent Investor funds *Although Regional Council approved investing on behalf of local municipalities some time ago, the $100 million minimum has been a barrier 287 ONE Investment’s Legal List Funds

Fund Five-Year One-Year One-Year Annualized Annualized Annualized Return as of Return as of Return as of July December 2019 December 2019 2020 High Interest 2.44 0.91 (current rate) Savings Account (HISA) Canadian 4.22 2.61 5.00 Government Bond

Canadian 2.53 4.96 7.34 Corporate Bond

Canadian Equity 7.5 18.3 -2.53

Note that ONE also has a money market fund that is currently being phased out

288 ONE’s Legal List funds have attracted many municipalities

As at HISA Government Corporate Equity December Bond Bond 31, 2019

Number of 118 68 50 57 municipalities investing

Average 11.5 3.4 5.5 6.9 balance per investor ($ millions)

Total in fund ($ 1360.9 227.9 277.1 391.7 millions)

289 The ONE Joint Investment Board

• Six founding municipalities have cooperated with ONE Investment to establish the ONE Joint Investment Board: Bracebridge, Huntsville, Innisfil, Kenora, District of Muskoka and Whitby • Others are expected to invest through the board • The ONE Joint Investment Board option is open to all municipalities that have “money not required immediately” that they wish to invest under the prudent investor standard and who do not wish to establish their own Investment Board • The Board consists of investment and municipal finance experts. Two treasurers from the founding municipalities are on the board

290 ONE Investment’s prudent investor offerings

• Some “Legal List” funds are being mirrored under the prudent investor program during start-up • ONE’s HISA is also available to prudent investors

Mirrored Funds New “prudent-only” funds

Canadian Government Bond Global Fixed Income

Canadian Corporate Bond Global Equity

Canadian Equity

291 The ONE Joint Investment Board is brand new

• The ONE Joint Investment Board was legally established in May 2020 • With the Board’s approval, ONE Investment has hired managers for the global equity and global fixed income offerings • Investment returns are not yet available

292 The prudent investor standard holds the promise of higher risk- adjusted investment returns over the long term

293 Strictly as an illustration

• Newmarket had approximately $54,082,164 invested throughout 2019 • The Town earned $1.6 million on these funds • As an illustration, if the Town had invested in ONE’s Legal List offerings in the following ratios—20% HISA, 20% Government Bond, 40% Corporate Bond, 20% Canadian Equity—the return would have been over $6.6 million • Of course, this is a point-in-time illustration and it would be possible to have scenarios where the return would have been less than $1.6 million

294 Recommendations

1. The Town should consider moderate increases in property taxes to support infrastructure investment, primarily asset management, after economic conditions have improved 2. The current policy governing the use of assessment growth revenue should be retained 3. Any portion of assessment growth revenue not needed for growth purposes in the budget should be allocated to the new Growth Reserve

295 Recommendations continued

4. The Town should request an analysis of the corporate strategy and financial situation and prospects of both NT Power and Envi Network from these companies 5. Depending on the results of the self-analysis, the Town should consider commissioning independent analyses of both companies with a view towards maximizing the value of NT Power and increasing the dividend it provides and assessing the market positioning of ENVI

296 Recommendations continued

6. The practice of allocating investment returns above benchmark to subsidize operating should be abandoned. Investment returns on reserves should be entirely allocated to reserves 7. The Town should consider allocating a portion of its investments to ONE Investment, either through the Legal List or prudent investor 8. The Treasurer should provide a stand-alone investment report to Council annually, including both realized and mark-to-market returns

297 12. Conclusion

298 Concluding Comments • Newmarket is well managed financially and well positioned to adopt and implement a long-term fiscal strategy • The key to a viable long-term fiscal strategy is to see the relationships between the elements of the strategy and to recognize that changes in one aspect of the strategy will have ripple effects on others • The strategy is intended to mitigate significant future risks, especially related to asset management, financial pressures associated with growth, and contingencies that cannot be anticipated (such as pandemics) 299 Concluding Comments

• Over time, Newmarket has developed a variety of mechanisms to subsidize its operating budget. Most of these should be reversed in favour of building reserves • A significant restructuring of the Town’s reserve funds is needed • The Town would benefit from a careful examination of options to increase revenue

300 Concluding Comments

• Decisions related to the fiscal strategy should take into account inter-generational equity, so that current tax- and ratepayers are covering the true cost of the services they are consuming and not passing on hidden costs to future generations • An annual fiscal strategy discussion can improve the budget process by lifting the discussion beyond a focus on scrutiny of tax-based expenditures • Newmarket’s budget process would benefit from an introductory presentation that included operating, capital and rate budgets

301 Concluding Comments

• This introductory presentation combined with a fiscal strategy update during the process would allow Council to consider the budget in an integrated manner and assess both the short and long-term impacts of their decisions • Generally the Town would benefit from extending the time frame for its financial planning—-multi- year operating budget, ten-year capital budget, long-term reserve and debt forecasts, DC revenue forecasts, and long-term asset management plans

302 Elements of a Fiscal Strategy for Newmarket

Capital Reserve Management Management

Fiscal Strategy

Revenue Enhancement Debt Management

303 Recommendations

1. The Treasurer should provide an annual update of the fiscal strategy to Council as part of the budget process, and a detailed review of the strategy at the beginning of each Council’s term 2. The budget process should include an introductory overview presentation of the entire budget in an integrated fashion—operating, capital and rate-supported 3. The Town should extend the time frames for its financial planning—-multi-year operating budget, ten-year capital plan, long-term reserve and debt forecasts, DC revenue forecasts, and long-term asset management plans 304 Appendix A List of Recommendations

305 List of recommendations

Chapter 5: Managing the capital plan 1. Council approval of Capital Spending Authority in the budget should constitute the authority to spend on a capital project 2. In the case of multi-year projects, Capital Spending Authority can extend for the full term of the project. Normally this would involve multi-year contracts 3. Capital Spending Authority for multi-year projects should automatically be built into the budget if the projects are already in progress 4. Council should approve both the annual capital budget and Capital Spending Authority each year 5. Council should publish a ten-year capital plan with complete project-by- project funding sources as part of the budget process 6. Staff should maintain an internal 20-year capital plan (and longer for asset management purposes) 7. Capital carryovers should be eliminated (achieved in the 2020 budget process but needs to be continued). If a project has not been started, it should go through the budget process again 306 List of recommendations

8. Capital projects should be divided into pre-construction and construction components wherever appropriate (i.e., where environmental assessments, land acquisition, engineering design and so on are required) 9. Council should approve pre-construction and construction activities separately for the same project 10. Construction of a capital project should only be approved once pre- construction activities and approvals are complete. Both pre-construction and construction can be approved for the same budget year if there is a solid expectation that pre-construction activities will be completed during the year and the project will start construction 11. Business cases should be required for projects over $100,000. These could be incorporated in the Town’s decision packages 12. The capital budget should include breakdowns of growth versus rehabilitation

307 List of recommendations

13. The budget process should include an analysis of the factors affecting capital priority setting and a discussion of the rationale for the capital projects selected for both Capital Spending Authority and the Ten-year Plan 14. As part of the budget process, Council should see a “best estimate” of year-end capital spending, showing the portion expected to be delivered by functional area/priority, pre-construction versus construction, growth versus rehabilitation and anything else that would help with priority-setting 15. The capital budget overview should include both a departmental and a functional/sectoral breakdown 16. The budget and the actuals from the previous year should be presented on a consistent basis

308 List of recommendations

Chapter 6: Growth Capital 1. Staff should monitor residential versus non-residential development charge collections and compare the results to expected ratios from the Development Charge Background Study 2. The annual development charges report should include a breakdown of residential versus non-residential collections and disbursements 3. If the results of the residential compared to non-residential analysis show that non-residential development charge collections continue to lag, the Town should shift costs to residential in the next Development Charge Background Study to the extent that is fair and reasonable 4. Recognizing that non-residential development charge collections may be permanently impaired, the Town should develop a plan to address the tax levy impact of the shortfall, either by constraining the capital program or raising additional revenue to compensate for the shortfall 5. Staff should prepare forecasts of development charge collections and present them as part of the budget process

309 List of recommendations

6. In the next development charges update, the Town should require a reconciliation of post-period benefits identified in the 2019 Development Charge Background Study with the new development charge to ensure that previously identified post-period benefits are being appropriately captured in the new bylaw 7. In the next development charges study, the Town should require Town- wide engineered services to be calculated separately (roads and associated infrastructure, water, sewer, stormwater) 8. The Town should monitor growth trends and adjust the capital plan so that it is reasonably commensurate with the rate of growth 9. The Town should consider a non-residential development charge structure that parallels the Region’s 10. As soon as is practicable, Newmarket should revise its development charge bylaw to incorporate the beneficial changes with respect to the elimination of the 10% discount for soft services, adjust the services eligible for DC recovery and introduce a class-based approach to DCs 11. Staff should prepare a community benefits charge strategy and bylaw for Council’s consideration 310 List of recommendations

Chapter 7: Asset Management 1. The Project Management Office should accelerate work on asset management planning so that initial integrated versions of all asset management plans are available for consideration in the 2023 budget cycle (beginning in Fall 2022) 2. Asset management plans should include level of service considerations and a funding plan from the beginning so that appropriate tradeoffs can be made 3. The funding strategy embedded in asset management plans should be integrated with the budget process and the next update of the Development Charges Background Study 4. Staff should carefully review and update current asset replacement values and the current long-term estimates of funding needs as part of the asset management planning process 5. The funding plan should include estimates of the asset management costs associated with infrastructure for future growth

311 List of recommendations

6. The Town should plan to increase future spending on infrastructure rehabilitation and replacement and incorporate steady increases for that purpose in the capital budgeting process

Chapter 8: Water, Wastewater and Stormwater 1. Set water rates according to Newmarket’s needs 2. Commission or carry out a comprehensive rate-setting study that covers water, wastewater and stormwater rates 3. Ensure that the rate-setting study considers long-term asset management funding needs, inter-generational equity, water demand (impact of conservation), the cost of climate change adaptation, increased costs due to intensification, and a contingency factor for yet-to-be identified costs such as regulatory changes 4. Investigate the reasons for Newmarket’s historically higher than average rates and address controllable factors

312 List of recommendations

5. Develop 80- to 100-year asset management plans for water, wastewater and stormwater, and firm ten-year capital plans with funding sources identified 6. Integrate the rate plan with the ten-year capital plan and long-term asset management plans 7. Increase rate stabilization reserves to allow for economic as well as weather-related variations in revenues 8. Develop a detailed financial plan for water and wastewater that includes an analysis and forecast of capital and operating costs and incorporates the results of the rate-setting study 9. Extend the time horizon of the water and wastewater financial plans to ten years 10. Develop a financial plan for stormwater comparable to the plans for water and wastewater 11. Consider working together with the other “Northern Six” municipalities in York Region to investigate the benefits and costs of transferring local water and wastewater responsibility to the Region or cooperating in other ways 313 List of recommendations

Chapter 9: Building Reserves 1. A new Contingency Reserve should be established to provide support for unforeseen and currently unquantifiable needs (e.g., pandemic, climate change, disasters, emergencies, changes in Provincial funding) 2. A new Growth Reserve should be established to fund shortfalls in development charge collections and non-DC-eligible growth infrastructure 3. The new Growth Reserve should be funded by a budgetary allocation each year corresponding to a minimum of the avoided cost of the 10% development charge discount for planned growth projects that year plus an allocation from the annual surplus 4. A separate pay-as-you-go reserve should be established for ongoing rehabilitation spending to give the Asset Replacement Reserves time to build 5. The pay-as-you-go capital reserve should be funded by allocations in the budget process 6. The Asset Replacement Reserve should be restructured according to the estimated needs identified in preliminary asset management plans 314 List of recommendations

7. Future contributions to the various sectors in the Asset Replacement Fund should be based on needs identified in asset management plans 8. The only draws from the Asset Replacement Reserve for the next ten years should be for replacement spending 9. The contribution to the Asset Replacement Fund should be increased by a minimum of 1% per year for the next ten years 10. Each year’s incremental contribution should add to the base contribution to the Asset Replacement Fund 11. The contributions to the Asset Replacement Fund should be in addition to the funding needed for capital rehabilitation projects 12. After ten years, the contributions to the Asset Replacement Fund should be reassessed 13. After ten years, the condition of the Asset Replacement Fund should be evaluated in relation to then current asset management plans with a view to determining whether draws for rehabilitation purposes are feasible

315 List of recommendations

14. The current internal loan between the rate- and tax-supported portions of the Asset Replacement Fund should be eliminated 15. The policy of pooling rate- and tax-supported Asset Replacement Fund reserves should be dropped, and intra-reserve borrowing between tax and rate-supported reserves should not be permitted 16. Over the next five years, the Hydro dividend should be transitioned to a contribution split 75:25 between the tax-supported Asset Replacement Fund and the new Contingency Reserve 17. Over the next five years, the annual surplus should be transitioned to a contribution split: o 50% to the new tax-supported Growth Reserve o 25% to the new Contingency Reserve o 25% to other reserves that are below target, and if none, to the Asset Replacement Fund 18. Finance staff should prepare long-term reserve forecasts and present them to Council as part of the fiscal strategy update during the budget process

316 List of recommendations

19. The Town’s Reserve Policy should be amended to reflect the recommended changes in this report 20. The Town’s Surplus Policy should be updated to reflect the recommended changes in this report Chapter 10: Managing Debt 1. The Town should stay on its current trajectory to pay off its debt by 2026, save for the Mulock Farm debt 2. The internal borrowing provisions of the debt management policy should be tightened with respect to payback period, interest rate earned, and portion of the reserve fund balance available for internal borrowing 3. Although the 10% limit on debt servicing costs as a share of own source revenue is reasonable, in practice the Town should strive to keep it below 5% 4. The Town should consult with York Region with respect to the potential for refinancing its Mulock Farm debt at a shorter term and a lower rate

317 List of recommendations

Chapter 11: Enhancing Revenue 1. The Town should consider moderate increases in property taxes to support infrastructure investment, primarily asset management, after economic conditions have improved 2. The current policy governing the use of assessment growth revenue should be retained 3. Any portion of assessment growth revenue not needed for growth purposes in the budget should be allocated to the new Growth Reserve 4. The Town should request an analysis of the corporate strategy and financial situation and prospects of both NT Power and Envi Networks from these companies 5. Depending on the results of the self-analysis, the Town should consider commissioning independent analyses of both companies with a view towards maximizing the value of NT Power and increasing the dividend it provides and assessing the market positioning of ENVI

318 List of recommendations

6. The practice of allocating investment returns above benchmark to subsidize operating should be abandoned. Investment returns on reserves should be entirely allocated to reserves 7. The Town should consider allocating a portion of its investments to ONE Investment, either through the Legal List or prudent investor 8. The Treasurer should provide a stand-alone investment report to Council annually, including both realized and mark-to-market returns

319 List of recommendations

Chapter 12: Conclusion 1. The Treasurer should provide an annual update of the fiscal strategy to Council as part of the budget process, and a detailed review of the strategy at the beginning of each Council’s term 2. The budget process should include an introductory overview presentation of the entire budget in an integrated fashion—operating, capital and rate- supported 3. The Town should extend the time frames for its financial planning—-multi- year operating budget, ten-year capital plan, long-term reserve and debt forecasts, DC revenue forecasts, and long-term asset management plans

320 Appendix B Consultant Profile

321 Bill Hughes is a Senior Fellow at the Bill chaired the Infrastructure Table of the Institute on Municipal Finance and Provincial-Municipal Fiscal and Service Governance at the Munk School of Delivery Review, developed the Global Affairs and Public Policy. province’s first long-term infrastructure He is a member of the ONE Investment plan, and provided analytical support to Advisory Committee. the Water Strategy Expert Panel. He has co-taught a graduate course on Bill was a member of the board of policy development at the University of directors of the Move Ontario Trust until Toronto’s Munk School of Global Affairs its wind-up in 2017. and Public Policy for the past 10 years. In 2016, he received the Municipal Bill has over 35 years of experience in Finance Officers’ Association’s finance and public policy at both the Leadership Award. provincial and municipal levels of He has a Master’s of Business government. Administration from the Schulich School Before his retirement, Bill was the of Business, a Master’s of Environmental Commissioner of Finance and Treasurer Studies from York University, a Bachelor for the Regional Municipality of York for of Arts degree from the University of seven years. Toronto, and has completed the Non- Profit Governance Essentials course Prior to joining York Region, Bill held from the Institute of Corporate Directors. senior positions in the Ontario government, mainly at the Ministry of Until his retirement, he was also a Finance and the Ministry of Registered Professional Planner. Infrastructure. Most recently, he was the Assistant Deputy Minister of Infrastructure Policy and Planning.

322