Killaloe, Hagarty and Richards chief administrative officer Tammy Gorgerat, left, reads responses to questions about the Killaloe Drinking Water System at the Dec. 2 council meeting. Couns. Maureen MacMillan and Bil Smith listen to Gorgerat's respones. Robert Fisher photo
KILLALOE – The Killaloe Drinking Water System (DWS) services approximately 300 users in the former Village of Killaloe. That’s according to the most recent DWS financial plan.
Killaloe, Hagarty and Richards chief administrative officer Tammy Gorgerat presented a brief overview of the plan at the Nov. 4 council meeting and council voted to approve the plan. Council has engaged in protracted and, at times, heated discussion about whether general taxation is helping fund the DWS.
The system is more than 30 years old and shows minimal tangible assets due to amortization over time, meaning there has been little capital investment in the system since its installation. The plan notes, “… the low net book value implies that investments in new assets has been minimal and a more significant reinvestment may soon be necessary to maintain performance and reliability.” (emphasis added)
The plan, prepared by the Ontario Clean Water Agency (OCWA); which manages the DWS for KHR, states that, while the plan includes costs to operate the system, “the system is approaching the end of its financial life,” as evidenced by the low tangible asset value.
The plan shows positive cashflow generation solely because of drawing on reserves from the Special Area Rate Reserve and the Special Area Rate. Individual users will pay $1,546 per year in 2025 ($129 per month) rising to $2,183 in 2031 ($182 per month). The plan contemplates more than $70,000 in transfers from the SAR and SARR in 2025 and amounts ranging from approximately $65,000 to $33,000 from 2027 to 2031.
“[I]t’s important to note that the current amortization expense does not include assets that have been fully amortized but are still in use. Because a large portion of the system’s assets fall into this category, the chart (of cashflows) presents an overly optimistic view of financial performance.” (emphasis added) The report notes that ongoing maintenance of “aging assets” and replacement, “are not reflected in the projections. To ensure a more accurate financial outlook, future planning should consider the hidden costs associated with these fully amortized but operational assets.”
Financial plans such as for the Killaloe DWS are required under provincial legislation for regulated water systems that are incorporated into municipal operations and do not operate as standalone utilities. The Province of Ontario passed the Safe Water Drinking Act in 2002, following the Walkerton incident. The intent of the legislation is that municipal drinking water systems are self-sustaining; that is that revenues from the system cover both operating and capital expenses, including upgrade and replacement of aging infrastructure. The systems should not rely on general taxation for financial viability.
The Killaloe system relies on fixed-rate billing to customers and transfers from the Special Area Rate (SAR) and Special Area Rate Reserve (SARR). Gorgerat provided responses to 10 questions about the plan and the DWS at the Dec. 2 council meeting. Staff and council received multiple versions of the financial plan; one of which did not, initially, include the SAR and SARR transfers. The answer to one question states, in part, “Jason Younker in his conversation with Wil, commented that it is common practice for small municipalities in Ontario with water and wastewater systems to have a part of the Special Area Rate and transfers from reserves to help cover the shortfall between the user charges and expenditures.” Younker prepared the report for OCWA.
Both the Madawaska Valley and Bonnechere Valley systems use reserves to balance the revenues and expenses. The reserves are specific to the water system, however, and not combined with a broader special area rate tax. The reserves in both systems are accumulated solely from system users.
One of the questions was whether there are residents who pay the Special Area Rate and who are not on the Killaloe DWS. Staff replied, “If you are a taxpayer in Killaloe, you pay the Special Area Rate whether you are connected to the water system or not.” The answer would seem to indicate that there are residents who pay the SAR who are not on the DWS. The SAR, according to municipal staff, does incorporate the DWS in part of its calculation. The DWS, “was one of the reasons that the Killaloe Special Area Rate was set up a number of years ago versus even higher increases to the water rates,” notes the staff report.
The DWS has an accumulated debt to the municipality and the report states the debt will eventually be repaid by 2031. One of the questions posed to staff was how the debt will be repaid if the system will continue to operate at a deficit without SAR and SARR transfers. Staff responded, “If the mayor and council during the budget process from 2026 to 2031 do not transfer funds from the Special Area Rate Reserve (if there is any available funds to be transferred – used it all up in 2025) (emphasis added) or from the Ottawa River Power Reserve or raise the water rates or a combination of all of the above, the working debt will not be paid off by 2031.” Without the SAR and SARR transfers, the system would generate deficits of $70,000, $60,000, $45,000, $30,000, $29,000, $31,000 and $29,000 from 2025 through 2031.
The township annual report shows the Killaloe wastewater system has an accumulated deficit at the end of 2024 of $16,600; an increase of more than $10,000 from 2023. One of the questions in the staff report was whether the wastewater deficit is also funded by the SARR. Staff replied, “The Killaloe Special Area Rate doesn’t fund any of the Killaloe wastewater system expenditures.”
The reserve balance in the DWS, separate from the SAR and SARR was just over $15,000 at the end of 2024 with an accumulated working debt of nearly $58,000. The financial plan states, “Major maintenance expenses are funded directly from the (Special Area Rate) yearly revenue.” Notes to the plan indicate major maintenance, “is comprised of out-of-scope services performed by OCWA for the continued maintenance and operation of the plant, but do not increase the value of the (tangible capital assets).” (emphasis added)
Ontario Regulation 453/07 reads, in part, “The financial plan must be approved by a resolution that indicates that the drinking water system is financially viable,” for new systems. There is no explicit mention of ongoing viability for systems where licenses are being renewed, however, it can be implied by the requirement for new systems.
The plan concludes by stating, “Killaloe’s Drinking Water System (DWS) will remain in deficit throughout the planning period and will only reach a break-even point with its working debt despite several years of high rate increases. These rate increases are significant improvements for the system’s finances but will need to continue past 2028 if the system hopes to build out the system reserves.” The low value of tangible assets indicates, “limited investment and a larger capital infusion may soon be necessary.
“Overall, the DWS’s financial health is improving but is still in poor condition.” (emphasis added)
Ontario Clean Water Agency graphic
The plan recommends extending the 10 per cent annual rate increases beyond 2028 and that the township evaluate future financing opportunities, “to address potential capital needs.”
Extending the 10 per cent rate increase by three additional years would bring the residential rate to $2,489 or $207 per month.
Walkerton inquiry
Recommendation 47 in the Report of the Walkerton Inquiry states, “The provincial government should require municipalities to submit a financial plan for their water systems, in accordance with provincial standards, as a condition of license for their water systems.
“Municipalities need to ensure that their water systems are adequately financed … Without adequate resources, corners will inevitably by cut … Ultimately safety will be jeopardized.”
The report further reads that in some municipalities, “the costs of running the water system and, in particular, sustaining its infrastructure, may not be as well understood. They may not be fully aware of the system infrastructure and its replacement value or the costs arising from the operating requirements of the system. The municipality may not be in a position to put adequate resources into the system if municipal decision-makers do not know what the full costs actually are.”
Municipalities should follow a full-cost accounting approach to the system, including, “The full cost of providing the water services includes the operating costs, financing costs renewal and replacement costs and improvement costs.” The Killaloe DWS plan does not consider replacement costs, according to OCWA.
Provincial guidelines
The province issued a set of guidelines for municipalities in 2007 designed to assist in developing financial plans and achieving financial sustainability.
Principle #1: Ongoing public engagement and transparency can build support for, and confidence in, financial plans and the system(s) to which they relate.
Principle #2: An integrated approach to planning among water, wastewater, and storm water systems is desirable given the inherent relationship among these services.
Principle #3: Revenues collected for the provision of water and wastewater services should ultimately be used to meet the needs of those services.
Principle #4: Life-cycle planning with mid-course corrections is preferable to planning over the short-term, or not planning at all.
Principle #5: An asset management plan is a key input to the development of a financial plan.
Principle #6: A sustainable level of revenue allows for reliable service that meets or exceeds environmental protection standards, while providing sufficient resources for future rehabilitation and replacement needs.
Principle #7: Ensuring users pay for the services they are provided leads to equitable outcomes and can improve conservation. In general, metering and the use of rates can help ensure users pay for services received.
Principle #8: Financial Plans are “living” documents that require continuous improvement. Comparing the accuracy of financial projections with actual results can lead to improved planning in the future.
Principle #9: Financial plans benefit from the close collaboration of various groups, including engineers, accountants, auditors, utility staff, and municipal council.
Questions
The OCWA-prepared financial plan and staff responses to questions lead to several other questions Killaloe taxpayers may want answered.
Is the DWS using proportionally more of the SAR and SARR than it should be?
Why is the DWS potentially needing to rely on reserves that are not part of the system (the Ottawa River Power Reserve)? What will be the impact of depleting the Ottawa Power System Reserve?
The plan incorporates rate increases of 10 per cent annually through 2028 and two per cent annually from 2029 through 2031. How much more would rates need to go up to offset the need to transfer funds from the SARR or the Ottawa River Power Reserve?
Does the township have a plan for replacing aging assets, as the plan states will be needed? If not, when will it start developing that plan and accumulating reserves to fund necessarily capital investments? The system cost $4 million in 1992. Inflation from then to 2025 is 96 per cent, meaning replacement cost today would be $7.84 million based solely on inflation. How much will rates need to rise to build the necessary reserves?
Flat-rate billing is an inequitable cost recovery method. Why wouldn’t the township install meters so users are billed for what they actually use?
Does the township have a financial plan for the wastewater system and how are deficits in that system financed?
Does the township have operational plans for the wastewater system showing the financial life of those assets and whether capital investment is needed in that system?
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