ADMINISTRATIVE REPORT

TO:

Standing Committee on City Services & Budgets

FROM:

General Manager of Engineering Services
General Manager of Corporate Services

SUBJECT:

Exempt Properties Sewer User Fees

 

RECOMMENDATION

CONSIDERATION

GENERAL MANAGERS' COMMENTS

COUNCIL POLICY

On April 4, 2000, Council approved the phased implementation of user fees for the consumption based sanitary sewer services effective July 1, 2000, with 50% of the annual costs to be distributed as user fees in 2000 and 100% of the costs to be distributed as user fees beginning January 1, 2001.

PURPOSE

The purpose of this report is update Council on sewer utility issues related to properties that are exempt from property taxation and to recommend that Council reaffirm the City's commitment to the user pay concept encompassed in Sewer Utility implemented on July 1, 2000 which required all sewer users' participation in the City's sanitary sewer cost recovery system.

BACKGROUND

The development of user fees for sewer services in the City dates back to the 1980s. In 1989, a commission headed by former Director of Finance Peter Leckie recommended that, by implementing user fees for some City services, Council could eliminate a significant problem related to recovering those costs from assessment based taxation and bring more equity to the system of charging for City services. Sewer service was identified as the strongest option. This recommendation was echoed by a number of groups that reviewed property taxation issues in subsequent years. In each case, it was noted that properties that were exempt from taxation were avoiding their share of the costs of services like sewer and that user fees should apply to these properties.

Staff brought proposals for a sewer utility to Council for consideration on a number of occasions beginning as early as 1994 and, on every occasion, Council supported the user pay approach. Explicit in these decisions was the expectation that exempt properties would pay for their share of the sewer services. However, it was not until 2000 that the administrative and billing issues associated with the utility had been addressed so that the new system could be implemented. In March 2000, Council approved the implementation of user fees for the consumption component of the sanitary sewer system only. The new sewer fees represent about 43% of the total sewer costs. One half of this amount or 21.5% of the total sewer costs were transferred to user fees in 2000. The balance of these costs are being transferred to user fees in 2001.

The remaining 57% of sewer costs, comprising the infrastructure costs of the sanitary sewer operation and the entire storm sewer component continue to be funded from the general tax levy. These costs were proposed to be allocated on the basis of lot size, however, Council has deferred further consideration this component of the Sewer Utility.

DISCUSSION

The introduction of user fees for the consumption-based sanitary sewer costs has gone reasonably well. All properties have been billed for sewer services since July 1, 2000. Single family properties were billed 50% of the annual fee as part of their 2000 property tax billing. Properties with water meters have been billed with their regular water bill on the basis of water consumption since July 1, 2000. Full-year billing will proceed in 2001.

One of the significant changes with the implementation of sewer user fees was the treatment of the approximately 800 sewer accounts relating to tax exempt properties. A summary of the significant property groups included among the exempt properties, along with the projected sewer fees that apply, is provided in Appendix 1. For those that had previously made payments-in-lieu of taxes, introduction of sewer fees resulted in these payments being reduced and replaced with sewer fees on the same basis as taxable properties. However, for exempt properties that had not previously made payments-in-lieu of taxes, the new sewer fees represented a new cost. Consistent with the objectives of the sewer utility concept, these properties now share in the costs of the sanitary sewer system based on their use of that system, just like taxable properties.

While most of the exempt properties accepted this new approach for recovering sewer costs and paid the sewer user fees, the City has received requests from several formerly exempt properties for an exemption from the fees. These include the Vancouver School Board, Vancouver Hospital, Children's & Women's Health Centre of BC and Providence Health Care (Holy Family Hospital, Mount Saint Joseph Hospital, St. Paul's Hospital and St. Vincents' Hospital). These organizations are among a number of exempt property owners that had not been subject to charges for sewer services before the user fees were introduced. In response to these requests, City staff reviewed the user pay concept and the sewer costs recovery approach but maintained the position that they should participate in the sewer user pay system in accordance with Council's instruction on April 4, 2000.

All of these organizations, with the exception of Providence Health Care, have made full payments on the regular billings since July 1, 2000. Providence Health Care has withheld their sewer service payment.

These organizations have raised a number of concerns about the implementation of the sewer utility that can be generally summarized as follows:
1. Inadequate advance notice about the new sewer utility implementation.

One of the reasons that a mid-year implementation of sewer fees was recommended is that a phased implementation would lessen the initial year's impact on those properties that have to pay more under the new sewer cost recovery scheme. Although there had been information provided to property owners about the proposed change prior to 2000, specific communications relating to the implementation took place in March 2000 in several formats including newspaper advertisements in both major and community papers, a press release, direct mailings/fax to affected property owners and information made available on the City's website. Voice-mail, e-mail and fax-back were also made available at the same time for public input.

In addition, over 2000 information letters were sent to four groups of properties that were identified as requiring special notification. These included properties with high water consumption, exempt properties, strata corporations and property owners on the property tax deferral program. All of the organizations that have come forward requesting exemptions were notified of the changes at that time. On May 16, 2000, following Council's approval of the sewer user fees, more details about the new fees were sent out with the June property tax notice. In addition, on June 16, 2000, another notification letter with the new sewer rates information was sent to all the exempt properties that would have an estimated annual sewer fee of more than $100.

While every attempt was made to provide notification to affected property owners, it is acknowledge that the notification schedule may not have coincided with the budget development schedules of some organizations that may already have prepared their 2000 budgets when they were notified about the change. However, overall, it is believed that adequate notification steps were carried out in a timely manner throughout the sewer fees implementation process and these steps were similar to those that staff deployed when the Solid Waste Utility was implemented in 1998.

2. The principle of revenue neutrality does not apply to exempt properties because they are facing increased costs without offsetting tax savings.

The statement that "shifting to a fee-based system would be revenue-neutral for the City as a whole" does not mean revenue-neutral for individual properties. The implementation of sewer user pay system for sewer services has been revenue neutral for the City as a whole. With new fees in place, the City has raised no more revenue than it did when these costs were recovered from property taxes. However, revenue neutrality was clearly never intended to apply to individual properties whether they were taxable or exempt.

As noted in the March 20, 2000 report, some tax-exempt properties are required to pay for sewer services for the first time. The report also noted that the properties that are exempt from taxation under the Vancouver Charter are responsible for paying fees and charges for service outside the general purposes property tax and having these properties share in the cost of the sewer system was one rationale for moving to the user pay system.

With the implementation of the consumption based sanitary sewer fees, approximately $2.1 million in sewer costs annually that were previously charged as part of the property tax and payment-in-lieu of taxes processes are now being recovered through sewer fees from exempt properties. This "new" revenue has been taken into account in calculating sewer fees and effectively reduces the total amount paid for sewer services by existing taxable properties.
3. Insufficient discussion in the Sewer Utility report on the potential concern from exempt property owners.

One of the most difficult issues that had to be dealt with in implementing sewer user fees was the treatment of exempt property because of the variety of types of exempt properties and the legislative provisions that governs them. However, throughout the design process for the user fees, it was consistently argued that equity in distributing sewer costs on a user fee basis should require exempt properties to pay their fair share of the costs. This position was highlighted throughout the process of reporting the utility concept and, by its approval, Council supported the approach.

Exempt properties including schools and hospitals already pay for water and solid waste services in Vancouver and sewer fees extends that requirement to sewer services. Furthermore, exempt properties in other municipalities in the Lower Mainland have been paying user fees for water, sewer and garbage removal services for many years, so that application of fees to these properties brings a measure of regional equity.

4. Assumption of 85% of water consumption being discharged back to the sewer system is not valid for some sewer users.

The sewer costing model developed for the City is based on the assumption that, on average, 85% of water consumption is discharged to the public sewer system. However, the model also acknowledges that some sewer users and especially those with high water consumption, may discharge considerably less than 85% of their consumption to the sewer system. These users are eligible to apply to the City Engineer for a sewer rate adjustment. Several such applications from users such as golf courses and cruise ship operations have already been processed and fees appropriately adjusted. Information relating to the application for a sewer rate adjustment has been provided to the staff in Vancouver Hospital as this might be applicable to them.

REQUESTS FOR EXEMPTION FROM SEWER FEES

Staff continue to support the principle that all sewer users should contribute to the cost of the sewer system through the payment of fees based on consumption. Recommendation A seeks Council confirmation of this principle. Approval will require both the School Board and the hospital groups that have come forward to pay these fees along with other property owners in the City.

However, the hospitals have requested an exemption from sewer fees and the School Board has requested either an exemption or, at least, a deferral of the fees until 2002 to allow them to make the necessary budget adjustments.

Providing exemptions, either directly or indirectly, to the hospitals or School Board would have a cost. As the fees from these system users have been factored into the sewer costing model, exemption would require the identification of an alternative funding source. Council would either have to increase fees for other sewer users by the estimated $715,000 value of the exemption ($480,100 for the hospitals and $233,500 for the School Board). Based on the revenue base in the sewer costing model, this would result in an increase of approximately 2.8% in existing fees across all users. Alternatively, Council could provide this exemption through annual grants, requiring an to increase grant funding in the Operating Budget, equivalent to a one time tax increase of approximately 0.2%. Providing this relief might also encourage other exempt property owners to appeal the application of sewer fees to their properties.

Staff do not support the exemption of the hospital sector from sewer user fees. As noted above, one rationale for implementing sewer user fees was to ensure that all property participated in the costs of the sewer system. This sector already shares in the costs of the water and solid waste systems and extension of sewer fees to this third civic utility service brings equity to the system. Moreover, hospital facilities already pay these costs in other municipalities in the lower mainland.

Staff also do not support the exemption of the School Board from sewer users fees. As with the hospital sector, the Board already shares in the costs of the water and solid waste systems and extension of this requirement to this third civic utility service brings equity to the system. Charging these fees to the school board also creates equity with other school boards in the region who are funded for these costs by the provincial government and pay local municipalities for them. Moreover, it would be difficult to argue in favour of an exemption for the School Board from sewer user fees and not extend that exemption to water fees, which the board has paid for many years.

However, there is a difference between the hospital and school sectors that might be used as a rationale for distinguishing between them in the application of sewer fees if Council is inclined to do so. That difference is that the School Board primarily serves the same residents of Vancouver that would provide the subsidy if fees were waived. Hospitals, on the other hand, serve a population that goes well beyond the taxpayer of the City of Vancouver and exempting them from these fees would represent a subsidy from other system users in the City to this broader public interest that goes beyond the benefit derived from them.

The consideration items in this report provide two options for Council to consider should an exemption for the school board be considered appropriate:

· Consideration B provides for a temporary deferral of these costs until 2002 to allow the School Board to make the necessary provision in its budget to accommodate sewer fees.
· Consideration C provides for a permanent exemption from sewer fees.

In either case, adjustment to the fees paid by other sewer users would be required to replace the foregone revenue, with adjustments beginning in 2002 since fees for 2001 are already set.

CONCLUSION

Staff believe that the policy of having all sewer users in the City participate in the new sewer user pay system is consistent with Council commitment to a fair and equitable local government practice. Staff continue to support this user pay approach and recommend Council reaffirm this policy.

* * * * *

APPENDIX 1

EXEMPT PROPERTIES ANNUAL SEWER FEE ESTIMATES

 

Projected Annual Water Consumption
(in units)

Projected 2001 Sewer Fees (85% billable @$0.827 per unit)

%

Charitable & Other Agencies
Churches
Colleges
City of Vancouver
Federal Agencies
Hospitals
Provincial Agencies
Schools (Private)
Vancouver School Board

TOTAL EXEMPT PROPERTIES

325,549
80,907
84,930
807,922
314,726
684,409
434,364
28,123
332,185

3,093,115

$230,090
$57,380
$59,760
$569,357
$221,237
$481,105
$305,733
$19,769
$233,510

$2,177,941

10.6%
2.6%
2.8%
26.1%
10.2%
22.1%
14.0%
0.9%
10.7%

100.0%

Total Projected 2001 Consumption based Sanitary Sewer Fees $25,521,400

Exempt Properties Percentage of Total Consumption
based Sanitary Sewer Fees 8.5%