Agenda Index City of Vancouver

ADMINISTRATIVE REPORT

TO: Vancouver City Council
FROM: General Manager of Corporate Services / Director of Finance
SUBJECT: 2000 Operating Budget - Preliminary Report
 

RECOMMENDATION

CONSIDERATION

CITY MANAGER COMMENTS

COUNCIL POLICY

The Vancouver Charter requires the Director of Finance to present the estimates of revenues and expenditures to Council not later than April 30 each year and for Council to adopt a resolution approving the budget and a rating bylaw establishing general purpose tax rates as soon thereafter as possible.

The process of developing the Operating Budget normally involves three reports to Council. The preliminary report presented early in February, outlines the position of the budget prior to a detailed review and seeks Council instruction on the overall budgetenvelope that meets Council's budget and taxation targets. Subsequent reports submitted in April each year, bring the detailed estimates to Council for final consideration and approval.

It has been Council policy that general purpose tax increases associated with development of the Operating Budget be held within the range of local inflation.

In approving the annual budget, Council has adopted a practice of passing tax increases related to requisitions from outside agencies, including the Greater Vancouver Sewerage and Drainage District, through to taxpayers rather than forcing offsetting reductions in City programs and services to meet Council's taxation objectives.

It is Council policy that changes in service levels, either expansions or reductions, be approved by Council. This includes the creation and deletion of regular positions and the allocation of funding from revenues or taxation.

PURPOSE

This report is the first in a series of reports that Council will consider leading to approval of the 2000 Operating Budget by April 30. The purpose is it to present the preliminary estimates for the 2000 Operating Budget, to outline the factors influencing the growth in the budget and to seek Council instruction on bringing the budget into balance.

DISCUSSION

The preliminary report on the 2000 Operating Budget is the first of several reports that Council will consider before the end of April, all leading to the adoption of the City’s Operating Budget and approval of the general purposes tax rates.

At this stage of the budget process, staff have completed initial estimates of taxation and general revenues, confirmed expenditures related to debt charges and regional sewer requisitions and established the requirements for transfers to and from the Budget. In addition, departments have submitted their detailed estimates to the Budget Office. These estimates have not yet been the subject of detailed review, a process which takes place over the next few weeks, leading to the interim report on the budget in early April.

Presenting this raw data to Council at this time does not provide a meaningful framework within which to establish budget and taxation objectives for the year. As a result, theestimates presented in this report attempt to provide Council with a picture of where staff expect the budget to be once the review process is complete. It concentrates on the factors, both known and contingent, that are driving the growth in the budget. Within this context, it is anticipated that Council will be in a position to provide some guidance to staff on the criteria for the detailed review of the budget and on the tax increase target that would be acceptable.

With this instruction in hand, Budget Office staff will continue to work with departments to develop expenditure estimates that fit within the overall budget envelope. This envelope should make provision for estimated costs of providing 1999 program and service levels at 2000 costs, as well as for changes in expenditure levels arising from Council decisions on new or expanded levels of service.

It is also worth noting that the estimates presented in this report exclude the revenues and expenditures related to the City’s two utility operations, the Water Utility and Solid Waste Utility. Council has previously established fees for these utilities that will offset all of the associated costs and as such, these utilities will not impact on the general purposes tax levy. Revenue and expenditure estimates for these utilities will be included in the final budget estimates to be approved by Council in April.

1. The Current Budget Position

The preliminary estimates and their impact on the general purposes tax levy are summarized in the following table. These estimates make no provision for a general purposes tax increase.

A more detailed summary of the preliminary estimates is attached as Appendix 1. If no further action were taken, this shortfall would require a 5.25% tax increase to bring the budget into balance. The factors contributing to this growth are summarized in the following discussion about the revenue and expenditure estimates.

2. The Revenue Estimates

The preliminary revenue estimates indicate only moderate growth from the 1999 budget position to $516.2 million, an increase of 0.2%. The following summarizes the current position.

Taxation revenue includes the general purposes tax levy, receipts in lieu of property taxes and penalties and interest related to taxation. A review of the new assessment roll indicates new construction taxes of approximately $4.5 million, a slight increase from the 1999 level and indicating that the decline in building activity in the City may have bottomed. The estimates also include an increased provision for tax adjustments pending resolution of a number of assessment appeals, including Pacific Centre, which could result in a loss of taxable value and tax revenue.

General Revenues includes income from the City’s fees and charges and a variety of other non-taxation sources. These revenues are expected to remain at 1999 levels of $96.6 million.

… the Provincial government has been silent on the continuation of the traffic fine revenue sharing begun in 1999 and, in the absence of any announcement, the budget continues to anticipate revenues of $3.5 million in 2000.
… interest on temporary investments will increase slightly with higher average interest rates in 2000 and changes in cash balances.
… revenues from licence fees are anticipated to increased based on Council approved fee increases.
… revenues from service and inspection fees declined by over $3.0 million from 1997 to 1999. The preliminary estimates anticipate that, while the decline has stopped, there will be no substantial change in revenues in 2000. In addition, adjustments to several revenue estimates are being recommended based on 1999 experience which failed to reach budget levels.
… revenues from the on-street parking program continue to grow faster than inflation asa result of rate adjustments and the expansion of metered areas.
… based on anticipated increases in costs and other fee adjustments, Park Board revenues are expected to increase by 1.5%, consistent with the expectations in the global budget arrangement.

As with other estimates reflected in these preliminary estimates, staff will be reviewing the revenue estimates prior to developing the interim estimates at the end of March.

There are three regular Transfers into the Operating Budget from outside sources and these have been estimated at similar levels to 1999:

… the transfer from the Property Endowment Fund remains at $7.0 million, consistent with Council approvals in prior years.
… the transfer from the Sinking Fund represents the surplus on the required earnings in the fund and remains at $4.8 million.
… the transfer from the Art Gallery Reserve represents the current earnings of the reserve and is utilized to partially offset the operating grant to the Vancouver Art Gallery.

Other major changes in the transfers into the budget in 2000 include: a reduction of $950,000 used in 1999 to fund the civic election; and a reduction of $500,000 from the Hastings Park reserve to assist the PNE with maintenance of the Hastings Park site. While the City is not required to fund a payment to the PNE in 2000, it is anticipated that additional costs will be incurred beginning in 2001 as a result of an extension of the Hastings Park lease.

3. The Expenditure Estimates

The preliminary estimates indicate expenditures of $535.65 million, up 4.0% from 1999. The following section identifies the factors that are affecting the major expenditure areas of the budget.

Departmental Expenditures are the costs of operating the programs and services of the City. The preliminary estimates at $414.2 million are up 3.8% from 1999. The estimates represent preliminary departmental expenditure targets based on providing the same service levels approved in the 1999 budget at anticipated 2000 costs. As such, an allowance has been included to deal with inflation in departmental expenditure budgets. In addition adjustments have been made for the cost of new programs and services approved by Council during the year as well as for the cost of one-time projects that have been completed.

There are several adjustments that are worthy of note at this stage of the budget process.

… Fringe Benefit costs related to salaries and wages have increased as a result of changes in several statutory programs including Canada Pension Plan and Workers Compensation. The most significant of these is the growth in WCB premiums which is estimated to cost the City an additional $1.6 million over the 1999 level. Overall, changes in fringe benefit rates are estimated at the equivalent of a 1.0% wage increase.

… The Emergency Operations and Communications Centre (E-Comm) became operational in 1999 with the transfer of regional E-911 and Police dispatch services to the new facility and the introduction of region-wide emergency radio services to the Fire and Police departments. E-Comm represents a significant improvement in the service levels of the Fire and Police departments. In 1999, a net increase in the Operating Budget of $3.8 million was provided. These net costs are expected to increase to $8.2 million in 2000, after removing offsetting expenditures from the Fire and Police department budgets. These costs are included in the departmental budgets in Appendix A.

… Added Basic, the cost of new programs and services approved by Council throughout the year or arising from the Capital Plan, also impacts on the growth of the Operating Budget. Several new operating expenditures are included in the overall budget position reflected in the preliminary estimates:

Staff will review each of these additional expenditures during the detailed review of the budget and allow only those that can be justified by specific Council approvals. Other funding requests tied to new programs or services will be referred to Council for approval before being included in the budget estimates.

The requisition from the Greater Vancouver Sewerage & Drainage District has been a driver in the Operating Budget for several years as the region passed along the costs of mandated environmental improvements. This growth will continue in 2000 with additional regional costs of $1.7 million, a 6.0% increase over 1999. During the budget process, Council will be considering the implementation of direct charges under the BODS/TSS pricing strategy that could divert these costs from the tax levy. If approved this change will have only minimal impact on the budget.

The Debt Charges provision in the budget provides for the principle and interest costs arising from the debenture borrowing program. The 2000 estimates make provision for net additional costs of $1.9 million following from two debenture issues undertaken in 1999. This is unusual growth in debt charges because the 1998 and 1999 debenture programs were both completed in 1999 with new debt charges being added in 2000. While the City plans to borrow again later in 2000, no provision is made for debt repayment, since the principle and interest charges will not begin until 2001.

Transfers from the Operating Budget are anticipated to decline in 2000 because liabilities provided for in the 1999 budget are not a factor. The transfers in 2000 are comprised of three components:

… Capital from Revenue is part of the financing plan for the City’s Capital Plan andprovides an alternative to debenture borrowing to finance the City's capital works. An allocation of $12.0 million is included in the 2000 estimates consistent with the expectations of the 2000 - 2002 Capital Plan.
… the City provides for the costs of the triennial civic election by reserving one third of the cost ($350,000) on an annual basis.
… In 1996, Council approved an ongoing allocation from the Operating Budget to the Information Technology Long Range Financing Plan which is being used to finance the upgrading and replacement of the City’s technology infrastructure and systems. The 2000 transfer is funded at $4.2 million.

4. Status of Contingency Reserve

Contingency Reserve is intended to provide funding for issues that arise during the year or for which there is some contingent liability that cannot be accurately quantified at the time the budget is set.

The preliminary estimates include a Contingency Reserve provision of $5.0 million. While this is higher than the normal funding level provided once the budget is approved, it is necessary to provide for a series of unresolved issues in the budget process as well as for funding difficulties that arise during the course of budget review. As greater certainty around these issues is gained, the Contingency Reserve allocation will be reduced.


COMPLETING THE BUDGET PROCESS

As noted above, the purpose of this report is to provide Council with information about the factors that are driving the growth in the Operating Budget as well as an indication of what magnitude of tax increase might be necessary to bring the budget into balance. The next steps in the budget development process are as follows:

Recommendations A and B ask Council to receive the preliminary estimates for information and refer them back to the Budget Office to undertake a detailed review with departments with instructions to:

Once this review is completed, the budget will be brought back to Council as the interim estimates. This report back is anticipated in early April.

As noted, it is anticipated that balancing the budget at the interim stage would likely require a tax increase in the 5% range. Consideration C, put forward by the Corporate Management Team, deals with the situation in which a tax increase of this magnitude is not acceptable to Council. It suggests a maximum general purpose tax increase of 4.0% based on a review of the drivers in the budget, including provision for general inflation in City costs; the increased costs of statutory fringe benefits; the costs of new programs and services, including E-Comm; and the pass-through of increased regional sewer costs.

Should Council adopt Consideration C, the Corporate Management Team will develop expenditure and revenue proposals for meeting Council’s budget and taxation objectives. These proposals will be reported back to Council as soon as possible to ensure they can have full impact in the 2000 budget. Each 1% reduction in the indicated tax increase will require increased revenues or reduced expenditures of approximately $3.7 million.

The City has undergone several budget management program during the 1990s in response to provincial downloading and to other increases in the budget. These budget management programs, in which administrative and program reductions exceeding $20 million have been removed from the budget, have left the organization generally beyond the point where program changes can be absorbed without impacting on service. As a result, any reductions that might be brought forward are likely to be visible changes in City services that will directly impact on the services received by the public.

In completing the 1999 Budget process, Council instructed the Corporate Management Team to report back on a major review of City programs and services, referred to as a Core Services Review. The expectation is that this process will provide Council information about what services the City provides, what they cost and what they produce in terms of outputs. This information would provide the context within which Council could make decisions about what services and programs the City should be providing and the means of doing so. This type of review is likely the most appropriate background against which service and service level decisions can be made. It has not been possible to begin this program during the budget process, however, it is intended to bring a proposal to Council once the budget is completed and begin to undertake this review before the end of the year.

CONCLUSION

This report is the first of three reports that Council will consider over the coming months leading to approval of 2000 Operating Budget in late April. The preliminary estimates indicate in initial shortfall of revenue over expenditures of $19.4 million prior to a detailed review by the Budget Office. This shortfall translates into a general purposes tax increase of 5.25% and is driven by pressures on the budget including service level decisions made by Council and other factors which are beyond Council's control. It is recommended that Council refer the budget to a detailed budget review by the Budget Office and that the Director of Finance be instructed to report back in early April with revised estimates that fit within Council's budget and taxation targets.

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APPENDIX A ON FILE IN THE CITY CLERK'S OFFICE

ag000215.htm

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