Kenneth Bayne, Director of Financial Planning &Treasury

April 19, 2000

TO: Mayor Owen and Councillors

Copy: Judy Rogers, City Manager

Ulli Watkiss, City Clerk
Estelle Lo, General Manager of Corporate Services

FROM: Ken Bayne, Director of Financial Planning & Treasury

SUBJECT: 2000 Operating Budget: Recommendation for Capital Program Deferral

The purpose of this memo is to clarify the recommendation in the Interim Operating Budget report related to the “deferral” of the capital program.

The City plans its capital expenditures over a three year period. The current plan, which was approved by Council in September 1999 identifies programmatic expenditures areas and a number of specific projects that are to be funded in annual capital budgets over the period 2000 - 2002. The plan does not speak to the specific timing of program or project expenditures, which come to Council for approval in annual capital budgets.

The Capital Plan is supported by a financial plan which among other things identifies the source of funding for the expenditures in the plan, be it debenture funding, capital from revenue or other sources. The financial plan also provides some guidance as to the when funding will be provided to ensure that the impact of the plan on the operating budget can be minimized. This financial plan is flexible and while we have normally provided funding on a relatively even basis over the three year plan, there is nothing that suggests this is a requirement. In fact, the advantage of the three year plan is that we are able to match the need for capital funding in any year with the ability of operating budget to accommodate it without impacting on taxes.

This is the rationale for the recommendation to defer a portion of capital from revenue funding until the last two years of the plan. The financial plan originally indicated that $12 million of capital from revenues would be included in the 2000 Operating Budget. However, with the indicated increase in taxes exceeding Council’s policy guidelines, staff looked at the possibility of changing the way capital from revenue funding would be provided over the course of the plan. Based on this review, it was determined that there was a greater capacity in the 2001 and 2002 Operating Budgets to accommodate capital from revenue funding without driving tax increases than there was in 2000. This conclusion followed from the fact that the factors driving the expenditure budget in 2000,primarily added basic costs, will not recur in 2001 and 2002. As a result, the Director of Finance has recommended the deferral or rescheduling of this funding.

The deferral does not suggest that the any of the program or project funding in the Capital Plan is in jeopardy. In fact, the expectation is that we will be able to provide all of the necessary funding over the three year period, albeit on a different timetable than originally anticipated.

There are risks to this deferral. We have made the recommendation based on our preliminary view of the 2001 and 2002 operating budgets. Should circumstances in these budgets change, either because of unanticipated growth in expenditures or the loss of revenue, Council may be in a position of having to provide additional funding in the budget or eliminate components of the Capital Plan to meet taxation targets. Council has taken such action in the past. In fact, one of the advantages of supporting the capital expenditure program with funds from the budget is that annual decisions can be made on the priorities for operating and capital expenditures where there are higher priority expenditure demands or where the budgetary and taxation objective cannot be met.

On balance, the Director of Finance and City Manager consider this a risk that is worth taking in the first year of the Capital Plan and recommend the deferral to Council.

Should Council agree, the 2000 Capital Budget will proceed as planned. Staff will balance the application of debenture funding and capital from revenue to minimize the impact on major program or projects in the plan. The outcome of this effort will be reported to Council in the report on the 2000 Capital Budget scheduled to be considered by City Services and Budgets Committee on May 18, 2000.

Ken Bayne
Director of Financial Planning

& Treasury Services

(c) 1998 City of Vancouver