APPENDIX 7: FINANCIAL IMPACT ANALYSIS OF PROPOSED ANNEXATION

Airdrie / Rocky View Annexation Application

September 2011

Financial Impact Analysis of Proposed Annexation

Prepared for the

Alberta Municipal Government Board

Pursuant to s.118 of the Municipal Government Act, 2010 Chapter M-26, 1

Jointly prepared by

April 5, 2011

Table of Contents
1. Introduction ....................................................................................................................................... 3 A. Background .................................................................................................................................................... 3 B. Purpose and Organization of the Report ............................................................................................ 3 2. Existing Financial Position ............................................................................................................ 4 A. Definitions ...................................................................................................................................................... 4 B. Financial Indicators .................................................................................................................................... 5 3. Annexation Assessment ................................................................................................................. 7 A. Property Tax Revenues ............................................................................................................................. 7 B. Equalized Assessment................................................................................................................................ 7 C. Proposed Annexation Process Costs .................................................................................................... 8 D. Transfer of Assets and Infrastructure Reimbursement ............................................................... 9 4. Annexation Operating and Capital Impacts .......................................................................... 10 A. Operating Impacts on the County....................................................................................................... 10 B. Operating Impacts on the City ............................................................................................................. 11 C. Capital Impacts on the County ............................................................................................................. 12 D. Capital Impacts on the City ................................................................................................................... 12 5. Summary ............................................................................................................................................ 15 A. Rocky View County .................................................................................................................................. 15 B. City of Airdrie ............................................................................................................................................. 15

1. Introduction
A. Background The City of Airdrie and Rocky View County have been in discussions surrounding a proposed annexation for the past two years. During this time, staff and members of Council from both municipalities have had staff meetings, public consultation sessions, formal negotiation committee meetings and a non-statutory public hearing. The resulting annexation proposal that was agreed to by the Inter-municipal Annexation Negotiation Committee (IANC) would involve the transfer of municipal jurisdiction for 79 quartersections of land from the County to the City, as identified in the proposed annexation area map. B. Purpose and Organization of the Report With the conclusion of negotiations by the IANC, this report was developed by staff from both municipalities at the request of the IANC. It analyzes the financial impacts of the proposed annexation and associated compensation on both municipalities and makes this information available to both municipalities and the Alberta Municipal Government Board. This report is divided into five sections: Section One provides an introduction and outlines the purpose and organization of the report. Section Two presents the existing financial situation of both municipalities including financial benchmarks and comparative indicators. Section Three details annexation related impacts based on the identified benchmarks and indicators in Section Two. Section Four analyzes the financial impacts of the proposed annexation on operations and capital planning for both municipalities. Section Five provides a summary of the information and analysis from the report. C. Methodology While both municipalities utilized comparable financial indicators in Section 2 and 3, the methodologies used in Section 4 vary by municipality and take into account differences in approaches and availability of data. The City utilized its 2011 Operating Budget, which identified staff and expenses needed to accommodate the annexation while the County utilized proportional costs on a per capita basis from its 2010 Financial Statement.

2. Existing Financial Position

A. Definitions The indicators used in the report to review municipal fiscal health are defined below. Net Financial Assets This factor is the difference between financial assets and liabilities and is an important indicator of a municipalitys viability. Tangible Capital Assets Tangible Capital Assets are considered non-financial asset. They are deemed to be acquired for municipal use and not intended to be used to generate income or to be sold to create additional economic resources. Operating Expenditures Expressed on a per capita basis this indicator helps provide an indication of expenditure levels normalized for population. Reserves Reserve fund balances can have a number of benefits. Operating reserves provide a cushion that can help a municipality to absorb unexpected swings in their revenues or expenditures. Capital reserves allow a municipality to fund future capital expenditures. Expressed on a per capita basis, it can help provide an indication of how much a municipality has put aside. Debt Levels Debt Levels refer to the debt incurred by a municipality in relationship to the site of its annual revenues and expenditures.

Debt Limits refer to guidelines provided by the Province of Alberta and policies adopted by a municipality to limit their debt to a percentage of revenues, or on a per-capita basis.

Property Taxes Municipal tax rate levels give an indication of the tax burden exerted by the municipality. Tax rates are a function of service levels, expenditures and assessments. The residential/non-residential mill rate split gives an indication of the burden placed on non-residential properties relative to residential properties. A high split may restrict a municipalitys ability to shift additional tax burden onto non-residential properties.

Total tax rate levels (municipal and education combined) give an indication of the total property tax burden placed on property owners in a municipality.

Equalized Assessments Equalized assessments expressed on a per capita basis help normalize assessment bases across municipalities by taking into consideration the size of the municipalities being compared. Non-residential percent helps provide an indication of the amount of non-residential assessment base in relation to the total assessment base.

Non-residential equalized assessment per capita helps gives an indication of the value of nonresidential properties in relation to population.

B. Financial Indicators Table 1 compares the size of the proposed annexation area to the County as a whole. As indicated in Table 1, the proposed annexation represents between 1.27% and 2.21% of County indicators including population, dwelling units, assessment, roadways and land area. Table 1: Proposed Annexation Area Relative to the County
County Total Population Dwelling Units Assessment (million) Roadways (km) Area in Hectares (Acres) 38,066 12,279 $ 13,860.6 2,386 km 403,428 (996,119) Proposed Annexation Area 714 230 $182.3 52.8 km 5,115 (12,640) Percent of Total 1.88 % 1.87 % 1.32 % 2.21 % 1.27 %

Table 2 and Table 3 provide selecte financial information for the County and the City. Information found in Table 2 is based on 2009 audited Financial Statements for each municipality. They provide a baseline for comparative analysis of financial indicators in Table 3 and subsequent sections of this report. Table 2: Financial Information for the County and City
Indicator Net Financial Assets Tangible Capital Assets Total Reserves Long Term Debt County $ 41,204,721 $ 338,067,729 $ 28,475,558 $ 60,869,049 City $ 26,280,276 $ 379,702,376 $ 56,186,047 $ 34,170,853

Comparative information identified in Table 3 is based on the Alberta Municipal Affairs 2009 Financial Indicators Report. In this report each municipality is benchmarked against other comparable municipalities. For the County, the comparable group consists of Parkland County, M.D. of Foothills, Sturgeon County, Red Deer County, County of Grande Prairie and Leduc County. For the City, the comparable group consists of the City of Red Deer, City of Lethbridge, City of Medicine Hat, City of St. Albert and City of Grande Prairie. The indicators identified in Table 2 and Table 3 attests to the Countys and Citys existing financial position and ability to sustain future activities. Table 3: Comparative Financial Indicators for the County and City
Financial Indicator County County Comparable Group Median 5.4 9.1 4.5 $ 342 37 % $ 2,133 27 % City City Comparable Group Median 7.6 14.6 6.7 $ 146 20 % $ 2,497 38 %

i.

2010 Tax Rates Residential Equalized Non-Residential Equalized Municipal Equalized 4.7 9.1 3.2 $ 391 19 % $ 2,077 57 % 5.4 9.7 4.1 $ 155 15 % $ 1,696 23 %

ii. Assessment Equalized Assessment per capita (thousands) Percentage of Non Residential Equalized iii. Operating Costs per capita iv. Percentage of Debt Limit used

3. Annexation Assessment
A. Property Tax Revenues Due to the transfer of lands identified for the proposed annexation, there is an expected reduction in property tax revenue for the County and a proportional increase in property tax revenue for the City. While tax rates are set annually and are different for the City and County, the IANC has agreed that tax rates for agricultural properties in the proposed annexation area will remain at County rates for 30 years with all other properties remaining at County rates for 20 years. Table 4 summarizes the property tax rates and revenues for 2010. This figure is used to evaluate the short term financial impacts on property tax revenues for each municipality. As growth occurs in the proposed annexation area, the tax base is expected to expand and transition to City tax rates.
Table 4: 2010 County Municipal Tax Rates and Revenue Assessment Category Residential Farm Non- Residential Linear M&E Total Municipal Tax Rate 1.9737 4.4409 5.9212 5.9212 5.9212 Municipal Tax Revenue $ 328,399 $ 65,185 $ 98,396 $ 9,080 $ 6,794 $ 502,865

B. Equalized Assessment Equalized Assessment is a process used by the Province of Alberta to collect requisitions from municipalities to pay for educational services that are provided by the Province. The revenue is generated through property taxes and is in addition to the municipal tax revenue identified in Table 2. Since the equalized assessment for any given year reflects the previous years tax base, the IANC agreed that the education taxes attributed to lands within the proposed annexation area will be the responsibility of the City for a period of one year assuming an effective date of Dec.31. If the effective date is not December 31, the Citys responsibility for such education taxes may increase to 2 years. For 2010 the Rocky View County education taxes associated with the Equalized Assessment for the proposed annexation area equals $467,113. The City and County intend to use Under/Over Levies, which allow the City to overpay the Province the proportional amount for education taxes for one or two years, and the County to underpay the Province the same amount. This approach will not have a bearing on the municipal tax rates for either municipality.
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C. Proposed Annexation Process Costs The process of preparing for, negotiating and transitioning the proposed annexation have significant costs related to staff and elected officials time, external resources, and supportive expenses. To summarize the costs incurred as part of this process, Table 5 separates the proposed annexation process into three distinct phases: Phase 1 June 2009 - April 2010: Involved a number of preliminary meetings between the two municipalities, background studies to examine and understand the need for an annexation and open houses to consult with the public prior to initiating a formal annexation process. Phase 2 April 2010 - April 2011: Began with the formal Intent to Annex Notice submitted to the Province of Alberta by the City of Airdrie and involves formal Intermunicipal Annexation Negotiation Committee meetings, annexation negotiation related communication, and the preparation, review and approval of the annexation application. Phase 3 April 2011 - December 2011: Involves the annexation application review by the Municipal Government Board, which will likely include a Board hearing, as well as staff time required to transition the annexed lands. Table 5: Proposed Annexation Process Costs
Phase 1: Background County Staff IANC Expenses Mediation Legal Fees* Supporting Studies** Application Fee Subtotal per Phase TOTALS: County City Combined $ 69,973 $ 290,434 $ 360,407 $ 5,118 $ 1,025 $ 6,427 City $ 2,696 $ 1,200 $ 100,000 $ 113, 696 Phase 2: Negotiations County $ 23,525 $ 6,640 $ 1,975 $ 5,000 $ 15,000 $ 52,140 City $ 41,331 $ 6,514 $ 2,100 $ 5,000 $ 25,000 $ 50,000 $ 130,005 Phase 3: MGB & Transition* County $ 9,030 $ 576 $ 300 $ 1,500 $ 11,406 City $ 4,370 $ 563 $ 300 $ 2,500 $ 39,000 $ 46,733

* Based on estimates ** Supporting Studies: Comprehensive Growth Study, Ecological Inventory and Servicing Study

Of the estimated $360,407 of costs associated with the proposed annexation process, approximately $260,000 has already been spent by both municipalities. A significant portion of the remaining amount is the result of legal and application fees. D. Transfer of Assets and Infrastructure Reimbursement While Tangible Capital Assets are non-financial assets, they do have a bearing on the long term infrastructure burden that an individual municipality carries. Table 6 summarizes the assets that are being transferred from the County to the City as part of the proposed annexation. In addition to road assets, two municipal reserve properties are also being transferred to the City. The existing public works facility owned by the County within the current City boundaries is remaining under County ownership and management. Table 6: Tangible Capital Assets being transferred in the proposed Annexation
Asset Type Oil Roads Chip Seal Roads Paved Roads Gravel Roads Municipal Reserve Total Quantity 2238.7 m 8855.4 m 18321.9 m 23348.6 m 2 parcels : 9.10 ha (22.46 ac) 52764.7 m Value $ 1,074,700 $ 5,756,020 $ 16,617,966 $ 11,674,315 $ 776,280

$ 35,899,281

In addition to the transfer of Tangible Capital Assets, the City has agreed to reimburse the County for road improvements (adjusted for depreciation) that were undertaken prior to the effective date of annexation. This will include the transfer of a proposed debenture for and upgrade to Range Road 13 scheduled for 2011. A summary of the reimbursement costs are provided in Table 7 below. Table 7: Infrastructure Reimbursement
Road Type Chip Seal Roads Paved Roads Gravel Roads Total Cash Reimbursement Total Debenture Transfers Length 8115.6 m 7276.5 m 23348.6 m 16998.3 m 3200 m Depreciated Value $ 40,360 $ 1,073,163 $ 521,314 $ 1,634,837 $ 850,000

4. Annexation Operating and Capital Impacts

A. Operating Impacts on the County The proposed annexation will affect municipal operation costs for Rocky View County. According to the Broad Function Expenses from the Alberta Municipal Affairs 2009 Financial Indicators Report, the two primary tax supported operating expenses that will be impacted by the proposed annexation are transportation and recreation, as shown in Table 8 below. Transportation expenses are based upon the Countys 2010 budget and include only tax supported expenses, as opposed to improvements funded by grants or levies. Recreation costs are based on the Airdrie Recreation Agreement paid in 2010. The amounts provided for the proposed annexation area are per kilometer for transportation costs, and per capita for recreation costs. Other tax supported operational expenses, such as general governance, protective services and environmental costs will not be significantly affected by the proposed annexation and are therefore not represented in Table 8 below.
Table 8: County Annual Tax Supported Expenses County total Road Length (Statistical Information Return) Road Maintenance & Construction (2010 Budget) Recreation (Airdrie Recreation Agreement Paid in 2010) Total 2,386 km $ 10 million Proposed Annexation Area 53 km $ 222,360 Percent of total 2.21 % 2.21 %

$ 203,496

$ 24,062

11.82 %

$ 246,422

Table 8 illustrates the 2010 Annual Tax Supported Expenses for the County, which totals $246,422 and indicates the amount that Rocky View County will no longer pay in tax supported operating expenses as a result of the proposed annexation. When compared to tax revenue of $502,865 in Table 4, the proposed annexation will have a negative effect of $256,443 on a yearly tax supported operating cycle. Thus, in the short term, the remainder of Rocky View County will be required to absorb this shortfall, which amounts to 0.5% of Rocky View Countys total municipal tax budget of approximately 47 million for 2010.

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B. Operating Impacts on the City Proposed annexation related staffing increases In order to be prepared for the planned 2012 annexation, a number of staff position(s) were approved through the 2011 budget process. These positions were necessary to begin activities as of January 1 2012 with respect to assessment, taxation, park operations and public works. This information is identified in Table 9 below.
Table 9: City staffing costs associated with the proposed Annexation Budget Year 2011 2011 2011 2011 2011 2012 TOTALS Position Assessor Taxation Clerk Snow / Ice Control Equipment Operator Parks Gardener / Operator Parks Gardener / Operator All Positions FTE 0.80 0.60 1.50 2.00 1.00 1.00 6.9 Start date July 1 Sept. 1 Sept. 15 April 1 April 1 April 1 2011 Cost $ 36,000 $ 14,000 $ 50,000 2012 Cost $ 74,000 $ 43,000 $ 98,000 $ 146,000 $ 74,000 $ 55,000 $ 490,000 2013 Cost $ 76,000 $ 44,000 $ 100,000 $ 150,000 $ 76,000 $ 76,000 $ 522,000

*Staffing costs include salaries, benefits and equipment costs.

It should be noted that 2011 staffing costs for assessment and taxation were included because of their role in annexation transition planning. Other expenditures Expenditures over and above those related to the annexation process, have been approved through the 2011 budget process or planned for the forecasted 2012 and 2013 budgets. They are identified in Table 10 below. The $3,709 in 2011 is a result of an agreement between the IANC to provide maintenance for the 1 mile of Range Road 292 within the proposed annexation area in order to facilitate the upgrade of Range Road 292 in 2012, which would occur outside of the annexation timeframe.
Table 10: Budgeted expenses associated with proposed Annexation 2011 Roads gravel Roads snow and ice control Roads perimeter road dust control Roads guard rail maintenance Total 11 2012 $ 17,400 $ 41,000 $ 20,700 $ 5,000 $ 84,100 2013 $ 17,400 $ 41,000 $ 20,700 $ 5,000 $ 84,100

$3,709
$3,709

Additional tax revenue associated with the proposed annexation Additional tax revenue will be realized as describe in Table 4. Based on 2010 property tax requisitions this amount stands at $502,865. This revenue will work towards offsetting the planned annexation expenditures detailed above. Net effect of proposed annexation on operations (excluding operating reserve) Excluding the costs associated with the annexation process and taking into account all remaining variables, the net result of the proposed annexation on operations is identified in Table 11 below. The net operating cost associated with the proposed annexation increases to $204,364 in 2013 and is expected to decline rapidly as development begins to occur in the proposed annexation area. The additional operating costs for 2012 and subsequent years will be incorporated into future funded operating budgets.
Table 11: Net Operational costs of the proposed Annexation on the City 2011 Revenue Additional tax revenue Expenses Salaries wages, benefits Roads maintenance gravel, snow and ice, guard rails etc Debt cost Total expenses Net cost $ 50,000 $3,709 $ 53,709 $ 53,709 $ 490,000 $ 84,100 $ 101,129 $ 675,229 $ 172,364 $ 522,000 $ 84,100 $ 101,129 $ 707,229 $ 204,364 $ 502,865 $ 502,865 2012 2013

Additional governance costs would be required for the City as a result of the annexation, however governance costs for the County will remain relatively the same, which accounts for some of the difference in expenses versus savings for the County and City. C. Capital Impacts on the County The primary impact of the proposed annexation on the County is on operating expenses rather than on capital projects. In order to capture capital investments made by the County between 2006 and 2011 on roads within the proposed annexation area, the IANC agreed to reimbursement as identified in Table 7. D. Capital Impacts on the City The City annually prepares a ten-year capital plan for Council consideration. The current years plan was adopted by City Council as part of the Citys budget process. The plan assigns current and future projected revenue sources for projects identified in the plan.
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Whenever possible, the City attempts to fund capital projects with grants, developers contributions, or other sources such as community fundraising where applicable, as part of its broad capital improvement plan. When such funds are insufficient, the City uses debenture financing and/or draws on other reserves. Key affordability factors from the 2011-2020 capital planning process are summarized in Table 12. Table 12: Citys 2011-2020 ten year capital plan debt projections
2011 Provincial Debt Limit Total debt under limit Service on debt under limit Self imposed Debt limit (10%) Debt per capita gross Debt per capita tax supported $ 60.1 M $ 14. M 6.067 % $ 1,193 $ 603 $ 60.5 M $ 14.1 M 6.864 % $ 1,427 $ 825 $ 72.2 M $ 15.2 M 7.091 % $ 1,364 $ 727 $ 80.8 M $ 16.6 M 6.436 % $ 1,411 $ 697 $ 100.2 M $ 19.1 M 5.552 % $ 1,343 $ 614 2012 2013 2014 2015

Capital costs included within 2011 capital budget The 2011 capital budget included approval to purchase a Fire Services Tender. The tender is required to move large volumes of water into areas that are not protected by fire hydrants for structural and wild-land fire fighting. Fire equipment requires plenty of lead time for delivery. This vehicle will be ordered in 2011 with an expected receiving date in early 2012. It is expected that sufficient parks and public works machinery and equipment is available to provide the necessary services to the proposed annexation area. The budgeted cost for this equipment currently stands at $255,000. It should be noted that while the annexation process was identified as a trigger for the acquisition of this equipment, it is expected that this equipment will also service the needs of the current City. Additional capital costs associated with proposed annexation Table 6 describes the agreed upon reimbursement with respect to this proposed annexation. Cash reimbursement is expected in the amount of $1,634,838 and is related to the cost of road improvements undertaken prior to the effective date of annexation. A transfer of debenture is planned for the Range Road 13 upgrade in 2011. Some capital costs associated with agricultural services and weed control may also be required that are yet to be determined. We do not anticipate these costs to be significant and therefore have not included them in this calculation. Impact of proposed annexation on operating reserves The cash reimbursement associated with the proposed annexation is projected to be funded using general operating reserve dollars. The opening general operating reserve balance at January 1, 2011 is projected at $9,838,106. Of this balance, approximately
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$7MM is considered uncommitted. Payment of the cash reimbursement from this reserve will bring the uncommitted balance down to $5,361,027. This represents a 23% reduction in uncommitted operating reserves. Additional debt associated with proposed annexation As part of the infrastructure reimbursement agreed to by the IANC and detailed in Table 7, the City will take on additional debenture payments related to the Range Road 13 upgrades scheduled for 2011. The amount to be finance totals $850,000. Interest rate on this debenture is estimated at 3.5% based on a ten year term and rates posted for March 2011 on the ACFA web site. The debenture will become the Citys responsibility in 2012 for a period of 10 years. Payment of interest and principal are detailed in Table 13 below. Table 13: Annual Debenture Payments for 2011 Range Road 13 Upgrade
2011 Debt interest Debt principal Total 2012 $ 28,538 $ 72,592 $ 101,129 2013 $ 26,027 $ 75,102 $ 101,129

Impact of proposed annexation on City debt limit An increase of the City of Airdries debt will occur as a result of the negotiated debenture transfer for the upgrade of Range Road 13. The Citys 2011-2020 Ten year Capital Plan has been revised to include the cost of this additional debt. The increase in debt is minimal and thus will have a minor affect on City of Airdrie debt limits. Self imposed debt percentages and debt per capita change are identified in Table 14 below. The proposed annexation will result in a short term increase of approximately 1% in annual debt payments and will continue to enable the City to remain well within its self-imposed debt limits.
Table 14: Revised Debt Factors for the City that includes proposed annexation related debt 2011 Self imposed Debt limit (10%) Without proposed Annexation With proposed Annexation Debt per capita (gross) Without proposed Annexation With proposed Annexation Percentage Change% $ 1,193 $ 1,193 0% $ 1,427 $ 1,444 1.2 % $ 1,364 $ 1,379 1.1 % $ 1,411 $ 1,423 0.9 % $ 1,343 $ 1,354 0.8 % 6.067 % 6.067 % 6.958 % 7.041 % 7.172 % 7.251 % 6.525 % 6.581 % 5.639 % 5.685 % 2012 2013 2014 2015

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5. Summary
A. Rocky View County The financial impact of the proposed annexation on Rocky View County will be minimal as it represents less than 2% of its population and dwelling units, 1.3% of its assessment, 2.2% of its roadways and 1.3% of its land area. However, the proposed annexation area generates $502,865 in municipal tax revenue, which would no longer be available for the County. At the same time, the County will also experience $246,422 in savings on tax supported operating expenses. Thus, the annexation will have a negative effect on a yearly operating cycle that will need to be absorbed by the remainder of the County. However, as $246,422 represents 0.5% of the approximately 47 million 2010 municipal tax budget for the County, the affect on the County is minimal. B. City of Airdrie The financial impact of the proposed annexation on the City of Airdrie will be minimal as large portions of the operating costs associated with this proposed annexation are already budgeted for by the City in 2011. With short term net operating losses peaking in 2013 at $204,364 the City anticipates that subsequent growth and development in the proposed annexation area will result in a decrease to this amount. Additionally, the proposed annexation related impact on long term debt peaks at 1.2% in 2012 and will decrease over the ten year payment period. A 23% reduction in uncommitted operating reserves to pay for infrastructure reimbursement is the only significant financial impact associated with the proposed annexation on the City of Airdrie. It should be noted that these improvements are attached to the value of increased life expectancy of roads in the proposed annexation area and therefore should help lower road maintenance costs for the City had they not been undertaken by the County.

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