ADMINISTRATIVE REPORT

Date: November 30, 2000
Author/Local: J. Beresford /7789

RTS No.01717

CC File No. 1605

CS&B: December 14, 2000

TO:	Standing Committee on City Services and Budgets
FROM:	General Manager of Corporate Services/Director of Finance in consultation with the Corporate Management Team
SUBJECT:	2000 Operating Budget - Review

RECOMMENDATIONS

A. THAT Council approve the proposed adjustments to the 2000 Operating Budget revenue and expenditure appropriations as outlined in this Administrative Report dated November 30, 2000.

B. THAT any shortfall in the 2000 Operating Budget at the end of the year, including any deficiencies in the Park Board revenue programs as contemplated in the Global Budget arrangement, be funded first, from the net savings from the 2000 work stoppage, and then, if necessary, the Director of Finance report back to Council on the year end position with recommended actions to maintain a balanced budget.

COUNCIL POLICY

Council's standing instructions require that the Director of Finance report on the status of the Operating Budget as of June 30 and September 30 each year, along with recommendations for any appropriate adjustments.

Under provisions of the Park Board global budget, Council has authorized the Director of Finance to maintain a notional Revenue Stabilization Account to balance the annual surpluses or deficits that result from seasonal or weather related factors affecting the revenue program.

PURPOSE

The purpose of this report is to inform Council of the status of the revenue and expenditure appropriations in the 2000 Operating Budget and to recommend several adjustments that reflect revised expectations. The report also provides a summary of the impact of the recent work stoppage on the Operating Budget.

DISCUSSION

Under normal circumstances, staff would have reported the September Review of the Operating Budget in the latter part of October. However, the impact of the work stoppage on projections of the year-end position in most departmental budgets resulted in a delay in that report. Following the work stoppage, the corporate Budget Office, in conjunction with departmental staff, updated the September Review, which was completed on a “business as usual” basis. There are several recommended adjustments to the budget as a result of this review.

The review also focussed on identifying the impact of the recent work stoppage. However, the complex interrelationships in the Operating Budget and among the Operating Budget, the Utilities and the Capital Budget, make a full determination of strike impacts an imperfect task. Moreover, it will be possible for some departments, such as Engineering, Park Board and Building Management to complete all, or a portion, of their annual programs despite the seven week shutdown. As a result, it has been necessary to make assumptions about how savings from these programs will accrue in the Operating Budget.

In this report, the impacts of the normal review have been separated from those of the work stoppage, where possible.

THE NORMAL REVIEW

1. Revenue Appropriations

The review of revenue appropriations seeks to identify areas of significant variance that have arisen since the budget was approved in April. The Director of Finance is recommending several adjustments to revenue appropriations.

Adjustments to
Revenue Appropriations
Increase / (Decrease)

Taxation Revenue

Additional Revenue $2,300,000
Increase in Tax Adjustments ($2,300,000)
Net Adjustment $ 0

The 2000 Budget provided $4.0 million for tax write-offs and other adjustments to the tax levy. This included a provision for the Pacific Centre assessment appeal that was then before the Assessment Appeal Board. The basic provision of $2.0 million is intended to cover the City portion of property taxes that must be written off as a result of the assessment appeal process, including the portion that may be unrecoverable from other taxing authorities.

The decision on the Pacific Centre assessment appeal was delivered to the City at the end of September. The adjustments to assessed values made by the Board will result in a refund of taxes and rents-in-lieu totalling approximately $4.3 million. Resolution of assessment appeals involving other properties in the City have resulted in a net gain in revenue to the City of $2.3 million and it is proposed that these additional revenues be utilized to fund the shortfall in the provision for the Pacific Centre refund.

Penalties on Late Taxes $400,000

The balance of taxes outstanding after both the advance and main property tax due dates was higher than anticipated when the budget was developed, generating an additional $400,000 in penalties.

Receipts in Lieu of Taxes $779,000

There are three adjustments totalling $779,000 recommended as a result of higher than expected receipts-in-lieu of taxes from BC Gas, Property Endowment Fund properties and E-Comm.

License & Development Fees ($556,000)

Two adjustments are recommended in this area.
· Slightly lower than anticipated revenues are expected in development and building related revenues based on the business as normal scenario. An adjustment in the

revenue appropriations of $258,000 is recommended.

· License fees from business licenses and alarm permits are anticipated to be slightly lower than contemplated when the budget was established in April. The estimated shortfall is approximately $298,000.

On Street Parking Revenues $500,000

A review of parking meter revenue indicates that collections were ahead of expectations prior to the work stoppage, suggesting that revenues would exceed the budget by approximately $500,000.

Short-term Interest ($650,000)

In setting the estimate for short-term interest earnings, it had been anticipated that a debenture issue would have been completed in early fall, increasing the City’s cash balances. However, a delay in the timing of this debenture borrowing along with lower than anticipated short term interest rates during the year will result in lower than projected short-term investment income.

Net Increase in Revenue Appropriations $473,000

2. Expenditure Appropriations

Under normal circumstances departments are expected to operate within the expenditure appropriations approved by Council in April of each year. Where funding problems are identified during the year, departments are required to realign priorities or reallocate resources within existing budgets to the extent possible. This is an ongoing process in which Budget Office staff work with departments to identify and minimize the impact that these problems can have on the Operating Budget. The focus of budget review is generally restricted to those areas where departments have been impacted by factors which cannot otherwise be accommodated.

For the most part, departmental expenditure budgets remain within the allocations provided in the 2000 Operating Budget. Only one adjustment is being recommended by the Director of Finance at this time. However, there are three areas of the expenditure budget that are not specific to individual departmental budgets but which are of concern in projecting a year-end position:

Fringe Benefit Costs

At the beginning of the work stoppage, there was deficit in the fringe benefit accounts of approximately $1.0 million. In a normal year, this deficit would be eliminated, however, the impact of the work stoppage and benefit costs being higher than anticpated, are expected to leave the fringe benefit accounts in a deficit position. At year-end, staff will establish how much of any deficit should be allocated to the Utilities and to the capital program, however, there is concern that the Operating Budget may have to absorb some of the shortfall. A complete review of fringe benefits will be conducted as part of the 2001 budget process.

Wage Settlements

The majority of employment contracts for the City are now in place, removing a significant area of uncertainty for the Operating Budget. However, it is estimated that the cost associated with those settlements exceed the level contemplated during development of the 2000 Operating Budgetby up to $1.9 million, or about 0.5% of payroll. This shortfall will have to be factored into the year-end position.

Fuel Prices

The increased cost of energy has impacted significantly on the Operating Budget.
· While the City has been protected from much of the recent increases in natural gas prices through fixed price contracts for approximately 50% of our consumption, over the last two months, these costs have doubled.
· Increased prices for oil products have affected the cost of operations particularly in the areas of vehicle and equipment usage (Engineering, Police, Fire and Park Board), as well as in production at the Asphalt Plant.

The cummulative impact of these cost increases on the 2000 Operating, Utility and Capital Budgets is estimated at $1.0 million. Most departments will accommodate these additional costs within existing budgets by adjusting programs. It is anticipated that only the Park Board and Fire Department will be unable to achieve this result. Adjustments to department estimates are not recommended, although any shortfall that cannot be absorbed within existing operations will have to be dealt with in balancing the year end.

Fuel and natural gas prices will continue to be a problem for the Operating Budget in 2001.

As noted there is only one expenditure budget adjustment recommended by the Director of Finance at this time:

Adjustments to
Expenditure Appropriations
Increase / (Decrease)

Fire Department $284,000

In establishing the budget for the Fire Department, the provision for uniform purchases was set based on experience and excluded a full provision made for unused uniform entitlements remaining from the prior year. Use of these entitlements in 2000 has resulted in additional expenditures of $284,000, which are beyond the ability of the Fire Department to absorb. An adjustment to fund this “one-time” expenditure is recommended.

Net Increase in Expenditure Accounts $284,000

The net impact of adjustments to the revenue and expenditure appropriations has identified an net increase of $189,000, which the Director of Finance recommends be allocated to Contingency Reserve.

Park Board Global Budget

Review of the Park Board Global Budget indicates that, before accounting for the impacts of the work stoppage, there is a potential shortfall of approximately $587,000 in the Board’s net budget of $40.9 million.

Although most areas of the Park Board operations remain within funding levels, two areas are of concern:
· Revenue from weather-dependent programs including outdoor pools, concessions and golf courses have experienced shortfalls due to the wet weather through the spring and early summer months. Although these might have been reversed during the extended good weather in October and November, the work stoppage did not allow this to happen. Estimates of the deficit in these areas indicate a shortfall in the range of $260,000.
· As noted, the Park Board has been particularly impacted by increased natural gas and fuel prices. The forecasted shortfall for 2000 attributable to increased fuel prices is

approximately $327,000.

The year end position of the Board budget will also be impacted by the work stoppage and as a result, no adjustment to the Global Budget is recommended at this time.

The Park Board global budget arrangement provides the Director of Finance with the authority to provide for shortfalls in the Park Board revenue programs through an appropriation from Revenue Surplus. This is intended to balance the surplus / deficit cycle that can result from weather related impacts on the Board's programs.

CURRENT STATUS OF THE BUDGET

Review of the Operating Budget indicates that the budget is very tight and it will be a challenge to end the year in a balanced position. This report notes the concerns about the impact of the work stoppage along with operational issues and, while most departments are operating within their budget targets, there are some areas that may cause difficulties by year-end. A major snowfall would also have a significant impact on the City's ability to remain in a balanced position. In addition, there may be accounting adjustments required as part of the normal year-end audit that need to be accommodated within the budget. Contingency Reserve, coupled with net savings from the labour dispute, are likely to be required to cover additional costs for wage increases, energy and fringe benefit costs as well as any emergent items that arise during the 2000 year-end. As a result of this concern, departments are being asked to take particular care to control the use of discretionary funds for the balance of the year. Should it become necessary, the Director of Finance will report back as part of the normal year end with recommendations necessary to maintain the budget in a balanced position.

IMPACTS OF THE 2000 STRIKE

On September 27, 2000 CUPE 15 began a withdrawal of services that effectively shut down City operations by September 30. Two locals of the IBEW also began job action on September 28. As a result of the CUPE 15 strike, CUPE 1004 was “picketed out” for the duration of the work stoppage. Only the Vancouver Public Library (VPL) and Police and Fire departments remained almost fully operational. A limited number of CUPE 1004 members at the Park Board also continued to work along with workers deemed essential under the Essential Services Order and approximately 400 exempt and management staff.

With approximately 4,000 employees off work for 7 weeks, there were savings realized in the Operating Budget, the Utility Budgets and in the Capital program, primarily in the form

of unspent salary funding. However, the work stoppage also resulted in costs being incurred by the City to comply with the Essential Services Order, to ensure that some public services were maintained and to protect City assets. In addition, several of the City’s revenue sources were adversely affected by the dispute resulting in revenue losses.

This report concentrates on the impact that the strike had on the Operating Budget, that portion of the City’s operations that are supported by taxation and general revenues. Expenditure and revenue impacts in the Water and Solid Waste Utilities do not impact on the Operating Budget, since any savings accrue directly to rate stabilization reserves. As the Sewer Utility is partially funded from taxation, savings are shared with the Operating Budget. “Savings” in the capital program are really a deferral of work rather than a savings. This is because the capital program is a multi-year program and work not completed during the work stoppage will be scheduled later in the capital budget cycle. Based on the normal pattern of capital expenditures, the value of this deferred work is about $10 million. Unless Council is prepared to reduce the capital program outlined in the 2000 - 2002 Capital Plan, there are no cost savings to be realized.

It is also worth noting that, while certain City services were not operated during the work stoppage, departments have five weeks after the strike during which some programs can recover lost work. For example, in Parks and Engineering there are maintenance programs for buildings and other public works that can be completed or mostly completed despite the work stoppage. Moreover, in areas like Parks, program registrants have been offered refunds for programs that could not be delivered and it is uncertain what the impact of these initiatives will be by year-end. This will reduce the savings that might otherwise be anticipated from the strike.

The following table summarizes the costs and savings related to the strike as they are reflected in the Operating Budget. Additional information concerning the various categories of savings and costs are attached in Appendix A.

Strike Savings $(10,954,300)
Lost Revenues 4,324,600
Strike Costs 5,326,500
Net Strike Savings $( 1,303,200)

1. Cost Savings:

The most significant single area of cost savings was from salaries saved as a result of CUPE 15 strike and of CUPE 1004 being "picketed out". A review of payrolls before

and during the strike indicates “savings” in the range of $18 million. However, more than half of these savings were attributable to the capital and utility budgets. The net impact on the tax supported operations of the City is estimated at less than $7.0 million. In addition, program cost savings were realized throughout the budget, although these are very difficult to precisely identify. Where obvious cost savings have been identified they are accounted for in the indicated savings. However, it will be year-end before the full impact of these savings can be seen. In total, these savings are approximately $11.0 million.

2. Revenue Losses:

The work stoppage has also had an impact on the City’s revenues:

· Park Board revenue losses from golf courses and fall recreation programs are estimated at $2.0 million.
· Parking meter revenues were on average 25% to 30% below normal levels, resulting in a shortfall of $500,000.
· Enforcement in the on street parking program was reduced by approximately 80% and revenues from Bylaw fines are estimated to be down by $833,000.
· License and Development and Building Regulation fee revenue losses are estimated at $906,000.
· Civic Theatres are estimated to have lost approximately $87,700 in revenues from booking and concessions.

3. Strike Costs

The most significant costs are associated with maintaining City services, protecting City assets and complying with the Essential Services Order. Services were maintained at a number of civic facilities, including City Hall and Civic Theatres, where pre-existing contractual arrangements were honoured. During the seven week closure, exempt staff worked overtime at a total cost of $3.9 million. Miscellaneous costs total approximately $480,000. Finally, the agreement included a return to work payment to CUPE 15 that was not provided for in the budget and cost approximately $943,200.

The table indicates that the net savings to the Operating Budget are currently estimated at $1.3 million. However, there are still costs being incurred. As these costs take time to be reported through the financial system, a full accounting will not be available until year-end.

As a result, the final impact of the work stoppage will be included with the normal year-end.

CONCLUSION

A review of the 2000 Operating Budget indicates that while most departments are operating within their budget targets, there are some areas that may cause difficulties by year-end. The adjustments recommended will return the budget to a balanced position.

The Director of Finance notes that the 2000 budget remains very tight at this point in the year and the Corporate Management Team has agreed to take particular care to control expenditures to year-end.

* * * * *

Appendix 1
2000 Work Stoppage Costs and Savings

DETAILS	TOTALS	COMMENTS
Salary, materials & equipment costs	($7,645,800)	Savings reported net of specific recovery
Park Board salary & materials	($3,150,000)
Civic Theatres salaries & materials	($158,500)
Solid Waste Utility · Disposal · Residential Collection · Residential Recycling · Yard Trimmings · Other including wages · Transfer to Reserve Net Savings	$120,000 ($96,000) ($101,000) ($45,000) ($89,500) $211,500 $ 0	Savings accrue to the Solid Waste Capital Reserve
Waterworks Utility · Transfer to Reserve Net Savings	($613,900) $613,900 $ 0	Savings accrue to the Water Rate Stabilization Reserve
Sewer Utility · Transfer Reserve Net Savings	($302,400) $302,400 $ 0	Savings accrue to the Sewer Rate Stabilization Reserve
Strike Savings	($10,954,300)
Park Board Revenues	$1,997,900	Recreation program fees & admissions
Civic Theatre Revenues	$87,700	Concession revenues
License & Inspection Fees	$906,000	Trade permit & license fees
Parking Meter fees, By-law Fines	$1,333,000
Lost Revenues	$4,324,600
Direct Strike Costs	$4,383,300	exempt overtime and miscellaneous costs
Return to work	$943,200
Strike Costs	$5,326,500
Net Impact of the Strike	($1,303,200)

(c) 1998 City of Vancouver