Many cities and towns are involved in the process of re-engineering the way they serve their clients and their residents

Developing a Business Model and Fiscal Model for the City of Ottawa

Introduction

Today, many corporations, not-for-profit agencies, NGOs and other types of organizations have come to realize the importance of having a business model. A business model differs from a business plan. A business model is (usually) a one page pictogram or flow chart of how the business or organization actually works. It describes the ‘engine’ of the organization.

For a Limited Liability Corporation (LLC), a business model has on one side, its clients and customers. On the other side are their suppliers. The business model shows how products and services move from their suppliers to their organization, how they add value through some sort of transformative process and deliver products and services to their clients and customers. There is a flow in the opposite direction (usually monetary) from clients and customers to the LLC and through them back to the suppliers.

There is another ‘orthogonal’ dimension to most business models without which they are incomplete—that is, there is a marketing dimension which shows how the LLC creates and maintains relationships with their customers and clients. As a rule, if a Corporation can’t effectively and relatively inexpensively establish relationships with new clients then the business will fail.

Recently, charitable organizations, for example, have realized that they too need a business model. They have a duty and obligation to their stakeholders to ensure that the maximum percentage possible of the funds raised by their organizations get to the intended audience and perform the good works that they were intended for. No one likes to give money to or sponsor a charitable organization that consumes most of its funds in administrative costs or fund-raising related costs. In other words, if they can’t cost-effectively market their services to their suppliers (of donations and grants), they won’t be in operation very long.

Cities ought to think about this trend too. They have many stakeholder groups; they deliver important services and products without which our cities would die; they have an obligation to be as efficient and imaginative as possible. Cities need to have a business model.

Fiscal Modeling

The subsidiarity principle is intended to ensure that decisions are taken as closely as possible to the citizen. To us, this means that decisions taken at a local, municipal level have more relevance to the day to day lives of the people than those taken by higher levels of government. Subsidiarity also implies that the closer government is to the people, the more efficient it is likely to be.

John Paul II, in Centesimus Annus (The Hundredth Year) wrote in 1991 that the ‘principle of subsidiarity’ must be respected:

"A community of a higher order should not interfere with the life of a community of a lower order, taking over its functions. In case of need it should, rather, support the smaller community and help to coordinate its activity with activities in the rest of society for the sake of the common good.”

We have confidence in the ability of our City to deliver on the promise of subsidiarity. But this does not mean that the City can’t improve on its current practices. Having a simple to understand, diagrammatic model of the way the City actually works (a business model) is another step forward in democratizing the City’s budget process; but it is also a tool for City Managers, Leaders and Citizens to try to improve the City’s performance in all aspects of its operation.

However, there is another element missing—the City also needs to have a fiscal model that underpins and reflects its business model.

No CEO of a major corporation today could possibly cope with the complexities of operating in the economic-political-social-environmental 21^st Century paradigm without these types of predictive tools. They need to be able to test their business models under different conditions to see what happens to their top line and bottom line when things change. And things always change. Nothing is static.

The Mayor and Councillors of a City the size of Ottawa need these types of tools too. The operations of a City like Ottawa are probably far more complex than the operation of a similar sized, single purpose corporation so they should at least have tools that are as good as their private sector counterparts.

Conclusion

To us, it is not acceptable to be advised that the City’s operations and business model are too hard for the average person to understand and that a fiscal model can’t be evolved.

Why should we guess what happens to our City’s budget when population increases, when residential densities drop, when dwelling occupancy rates and household size decrease, when new commercial assessment increases, when in-fill occurs, when building permit levels change and so forth?

Why shouldn’t we have a fiscal model of the City’s ‘business’ that is a reasonable approximation of the City’s revenues and expenses?

Why shouldn’t we publish this so that the Mayor, City Councillors and Citizens can better understand what happens to our City’s budget if we change directions or the economic circumstances of the day change?

A fiscal model can tell us many things but it can never take the place of judgment. No model can. But it can take some of the guesswork out of policy decisions.

Today, we don’t really know what causes urban sprawl. We don’t really know the cost and benefits of different types of development. We spend a lot of time guessing.

Are all suburbs ‘bad; is all in-fill ‘good’? Is the private vehicle always ‘bad’ and public transit always ‘good’?

Could it be that maximum heights, maximum densities, large set back requirements, huge open space requirements and myriad other zoning provisions are creating suburban sprawl not the other way round?

Why are ‘granny flats’, attic apartments, corner stores, two way streets, left turns, on-street parking, work from home, townhouses, duplexes, triplexes, co-ops, dual kitchens and mixed use frowned on and discriminated against in so many City codes and by-laws?

How is it possible that we can have one of the most desirable neighborhoods to live in anywhere right here in Ottawa with a plethora of mixed uses and a mixed community but which couldn’t be built today under existing City policies? (It’s called the Glebe.)

We need a business model for and a fiscal model of our City so we can test this and other assumptions to see if we can not only get a more efficiently run City but a better one too.

APPENDIX—REVENUE SIDE MODEL

The City’s revenue side model might look something like this:

Y (City) = DC(Res) x N(Res) + DC(Comm) x A(Comm) + m(Res) x AV(Res) + m(Comm) x AV(Comm) + G + User Fees + New Initiatives;

where Y stands for Income, Res is Residential, Comm is Commercial, N(Res) is number of new residential building permits, DC stands for Development Charge, A(Comm) is Area of new commercial structures, m is the mill rate, AV is Assessed Value, G stands for Grants.

There are undoubtedly many more variables that need to be looked at—some balance between simplicity and complexity and between aggregation and disggregation needs to be found. Certainly, the Revenue Side Model needs to be sufficiently fine in its detail so that key variables such as changes in DOR (dwelling unit occupancy rate), P (population) and density of development are included.

APPENDIX—NEW INITIATIVES

How can cities change their revenue picture? What are some of the other types of initiatives they can take to break out of the box they are in? Some of the solutions are obvious—like creating more commercial assessment. Some are less obvious—like turning some projects into ‘negative costs’ such as using more P3s (Private Public Partnerships).

Here are some ideas:

For years in the post war reconstruction period, new public investment in roads, water mains, sewers and other public infrastructure was looked at by most cities as a fiscal stimulus. Cities are in the enviable position that every new structure must use or subscribe to public services and pay, in perpetuity, an annual ‘hook-up’ fee called real property taxes. It is only in the last few decades that many cities have come to regard money spent on public infrastructure as an expense instead of an investment and a fiscal drag.
More Commercial Assessment is inarguably a fiscal plus for Cities. Cities provide very limited services to commercial operations and they yield much higher assessment and are subject to much higher mill rates. So anything that encourages commercial development is likely to assist the revenue side of a City’s operations.
More Commercial Assessment creates more demand for employees, unemployment drops, in-migration increases, more housing is demanded and more commercial development is needed too.
Cities can often get the private sector to pay for public infrastructure—the recently completed Bell Sensplex is one example. Toll bridges, toll roads, privatization (or commercialization) of public services such as garbage pickup, recycling, the new Ottawa Congress Centre or public transit also come to mind.
Cities may be able to move closer to a pay-as-you-go policy by using more P3s or by creating a bid system whereby the private operator who requires the lowest subsidy gets the contract.
Increase taxes.
Increase grants.
Increase donations.
Tax relief (such as the municipal GST tax relief announced by the GOC).
Tax points (such as the hoped for access to Gas Taxes).
Re-engineering of City services.
Dropping some City operations.
Make better use of City property such as annual assessments for private companies that access public rights of way for telecommunications, cable, gas, hydro, etc.
Exploit City property in new ways—sponsorships, air rights, signage and so on. Why can’t developers, for example, buy more density and height from the City? We want more density and we need more revenues too… Or why can’t people or businesses buy or sponsor street names?

There are more ways to increase revenues than just by increasing taxes. Some creativity and flair are also required. There is also a certain amount of risk in doing something new involving out-of-the-box thinking. But the risks of doing nothing are probably greater—a city in decline will certainly result from under-investment in public infrastructure.