ADMINSTRATIVE REPORT

Date: December 11, 2000
Author/Local: Ken Bayne / 7223

RTS No:

CC File No: 1605

Council: December 12, 2000

TO: Vancouver City Council

FROM: General Manager of Corporate Services / Director of Finance

SUBJECT: 2001 Operating Budget Projections

INFORMATION

THAT Council receive the projections for the 2001 Operating Budget for INFORMATION.

COUNCIL POLICY

It has been Council policy for many years that general purpose tax increases associated with development of the annual operating budget be held within the range of local inflation.

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.

In approving the annual operating budget, Council has adopted the 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 reductions in City programs and services to meet Council's taxation objectives.

PURPOSE

The purpose of this report is to advise Council of factors driving changes anticipated in the 2001 Operating Budget and to seek Council input to the budget development process.

BACKGROUND

For the past several years, staff have presented projections for the Operating Budget to Council as part of the normal budget building process. These reports generally come early in the process and,

· provide Council with information about the factors driving changes in the Operating Budget.
· give Council the opportunity to provide input to the process of developing the detailed estimates and assists the Corporate Management Team in developing strategies that meet Council's service level and taxation objectives.

DISCUSSION

The Operating Budget projections provide the first opportunity to review the issues that will impact on the next Operating Budget, including an estimate of the general purposes tax increase that would be necessary to maintain existing service levels. In recent weeks, the Director of Finance has worked with Corporate Management Team to update the projections for 2001 and to develop a timetable for preparing and reporting on the 2001 Operating Budget.

Development of the 2001 projections has involved a review of both revenue and expenditure budgets in the tax-supported programs. The projections do not deal with the user fee supported utility budgets that are being reported separately to Council. While the projections are not the detailed budget, they do present an overall picture of where staff expect the 2001 Operating Budget to be at the end of the budget process. As such, the projections help to identify any gaps between the indicated tax increase and Council's taxation policy that could necessitate service level adjustments on either the revenue or expenditure side of the budget.

The following table summarizes the projection for the 2001 Operating Budget and provides a comparison with the 2000 Operating Budget.

		2000	2001	% Change
Revenues
	Taxation Revenue	$404,908	$395,900	-2.2%
	General Revenue	79,514	72,700	-8.5%
	Transfers	11,562	11,600	0.0%
	Total Revenues	$495,983	$480,200	-3.2%
Expenditures
	Departmental Expenditures	416,373	$424,600	1.9%
	Debt Charges	74,377	67,000	(10.0)%
	Transfers	5,232	5,300	2.1%
	Total Expenditures	$495,983	$496,900	0.2%
Shortfall		$ 0	$ 16,700
Projected Tax Increase			4.7%

The Expenditure Projections

As noted, the expenditure side of the budget is comprised of three components: departmental expenditures, debt charges and transfer to other funds/reserves. The projection indicates expenditures of approximately $496.9 million in 2001, up 0.2%. While this increase seems modest, the second phase implementation of sewer user fees has distorted this increase by moving tax supported expenditures in 2000 to user fee support in 2001. Without this change, expenditures would have risen by 2.7% over the 2000 level.

1. Departmental Expenditures

Departmental expenditures are those related to the programs and services provided by the City. There are a number of factors driving the changes projected in departmental expenditures:

i) Sewer Utility Implementation - Phase 2

The second phase of implementation of sewer user fees will occur in conjunction with the 2001 Operating Budget. The balance of consumption based costs will now be recovered through user fees rather than through property taxation. The impact of this change will be seen on both the revenue and expenditure side of the budget. Approximately $12.4 million of costs will be removed from the property tax levy and be replaced by user fees of an equivalent amount. Because this is a revenue neutral change, this will result in a tax reduction of 3.2% overall, allocated to the property classes on the basis of consumption of sanitary sewer services. Residential properties will see a tax reduction of approximately 5.2% while non-residential properties will see a reduction of approximately 2.1%.

ii) Salary and Benefit Costs

The conclusion of collective agreements for most employee groups and the anticipated settlements for those still in negotiation will be one of the primary drivers in the 2001 budget. Based on estimated payrolls, these additional costs are expected to be in the range of $7.0 million over the 2000 level. In addition, the budget will have to be adjusted for ashortfall in funding from the 2000 Operating Budget of up to $1.9 million. While some of these costs will be offset by additional revenue from cost recovery fees and charges, it is anticipated the impact on taxes will be equivalent to an increase of approximately 2.5%
.
iii) Inflation in Non-Salary Costs

The tax supported payroll accounts for approximately 75% to 80% of departmental budgets. The balance is comprised of material, equipment and other input costs associated with the programs offered by the City. The budget process normally provides for average increases in these expenditures equivalent to local inflation. An allowance of 1.5% is built into the projection and is expected to add about $800,000 to the budget.

However, there are specific areas in the budget where costs will increase much faster than normal inflation:

· natural gas costs are also increasing much faster than local inflation. For example, the City spends approximately $3.0 million annually on natural gas to heat facilities and as an input at the Asphalt Plant. Over the last two months, the cost of natural gas purchased by the City has doubled and is projected to increase further. While staff have taken steps to stabilize prices by contracting for natural gas on longer term supply contracts these are available for only about 50% of consumption. For these purchases, it is anticipated that prices will double again in the first half of 2001. For the balance of our consumption purchased from BC Gas, costs have already increased by 30% and are expected to increase up to an additional 40% in the new year. . Energy Management staff indicate the impact on the 2001 budget will be an increase of up to $2.0 million (66%) over 2000 budget levels.
· the 2001 budget will also have to be adjusted for increases in the cost of fuel for the City's fleet and equipment. The 2000 budget did not anticipate the cost increases experienced during the past few months and the 2001 budget will have to be adjusted to accommodate.

While some of these additional costs will be funded from the Capital Budget, the impact on the Operating Budget is significant. A careful review of these impacts during budget review confirm the additional funding necessary. In the longer term there may be ways to offset some of these increased costs through energy conservation measures, however, there are few easy ways to protect the budget from these increases in 2001.

iv) New Programs and Services

There are a number of new or increased expenditures related to programs and services approved by Council over the past few years:

· the implementation of the E-Comm model for emergency service radio and dispatch services is nearing completion. Vancouver Police and Fire departments are now on the new radio system and the Police Department is being dispatched by E-Comm personnel. It had been anticipated that with the roll out of the new E-Comm CAD system and the transfer of Fire dispatch to E-Comm, the City's costs would increase by approximately $1.8 million in 2001, completing the phase-in of new costs. However, the organization has frozen requisitions to members in 2001 at 2000 levels so that the only new costs are those related to the potential transfer of Fire dispatch services. The development of E-Comm has allowed the City to forego significant costs associated with upgrading our radio and dispatch systems and will provide significant additional benefits to our emergency services.
· the upgrading of Park Board facilities and services funded in the Capital Budget brings new operating costs to the budget each year. These new costs will be confirmed during budget review discussions but are expected to add approximately $1.1 million to the Operating Budget.
· There are a number of limited time projects that have been approved by Council during the past year that will result in additional costs in the budget. These include the community visioning projects, transportation studies, the Secondary Suite Review and C-2 Zoning Review.

In most cases, these new expenditures are added to the budget without offsetting revenues or reductions elsewhere in departmental budgets.

While the projections have specifically accommodated several new expenditures in 2001, there are several areas where additional costs may arise before the budget is complete:

· the Downtown Eastside Police initiative added 20 sworn staff for three years at a cost of $3.2 million. Council's current commitment to this project ends after 2001 and the Operating Budget was to realize an $800,000 savings next year. However, with the roll out of Council's revitalization plan for the area, there is concern that this commitment must continue beyond 2001, requiring continuation of that funding.
· the Police department is currently undertaking a manpower review similar to the one completed in the late 1980s. While the department has not identified specific needs, it is anticipated that a request for additional manning could come forward in 2001
· The City has been working with the Worker's Compensation Board on plans to ensure that we are compliant with the various standards the Board establishes. In order to ensure compliance, and thereby reduce our exposure to WCB premiums and potential penalties, it may be necessary to allocate funding to improvements in workspace and training. While the specific needs are being determined, there is no allocation within the 2001 projection for these costs.
· departments have identified a number of projects that could be brought forward to Council for consideration in 2001, all requiring new funding.

The impact of these initiatives on the 2001 budget is unknown at this time. Should any of these be approved, funding will have to be provided from the Contingency Reserve provision in the projections.

2. Capital Program

The capital program provides funding for principal and interest payments related to the City's debenture program and for the "pay as you go" provision of the Capital Plan. Despite an increase in the provision for capital from revenue, these costs are projected to decline by $2.2 million (3.2%) in 2001, helping to offset other increases in the budget:

· the 2000 budget included a transfer of $870,000 from the Debt Repayment Reserve to equalize the changes in debt charges. This transfer has been eliminated for 2001.
· principal and interest charges on tax supported debentures have dropped from 2000 by approximately $4.8 million, the result of debenture maturities and the deferral of the planned 2000 debenture issue. This action has allowed the budget to avoid over $6.0 million in new debt cost in 2001, the equivalent of a 1.75% tax increase. In addition, the deferral has allowed a rebalancing of the impact of the borrowing program on taxes over the next three years.
· in balancing the 2000 Operating Budget, Council agreed to a deferral of $1.5 million in capital from revenue in the 2000-2002 Capital Plan to 2001 and 2002. One half of this deferred amount has been brought into the 2001 budget, bringing the provision for capital from revenue to $2.1 million over the 2000 level.

3. Transfers to Other Funds/Reserves

Funding from the Operating Budget is provided to three purposes:

· the Information Technology Financing Plan is a multi-year plan that is being used to upgrade and replace the City's technology infrastructure and applications. The transfer in 2001 is similar to that in 2000.
· the budget provides an annual contribution to the costs of the triennial civic election. The 2001 allocation is $340,000.
· the City is self insured for liability purposes. The annual transfer to the Liability Insurance Reserve of $657,000 ensures the integrity of the reserve.

Although the increase in this provision is 2.2%, the amount of the increase is just $110,000.

The Revenue Projections

The revenue side of the Operating Budget includes three components: General Revenues,Transfers into the Budget and Taxation Revenue. The projections indicate that, before providing for an increase in the property tax levy, revenues are expected to decline by 3.2% to $480.2 million. As with the change in departmental expenditures, this decline is in part the result of the implementation of sewer user fees.

There are several factors impacting on the projection of general revenues:

· the 2000 Operating Budget included $6.0 million in revenue from the Host City Agreements (casino revenue), including approximately $2.0 million in one time revenue. Council agreed to bring this funding into the 2000 budget as an offset to several limited time expenditures. Ongoing use of this funding is subject to a report back from staff which has not yet occurred and, as a result, funding totalling an estimated $3.8 million has been excluded from the projection. This revenue is equivalent to a tax increase of $1.1%.
· the delay in the 2000 debenture issue will reduce cash balances and short term interest earnings by approximately $700,000 (6.1%) from the 2000 budget position.

Other changes in the revenue budget reflect normal changes in activity levels and adjustments to fees and charges to reflect City costs.

No changes are projected in the funds transferred into the Operating Budget from the Sinking Fund or Property Endowment Fund.

There are three significant issues related to taxation revenues:

· as noted above, the phased implementation of sewer user fees, along with changes to the assessment roll, has resulted in a reduction in the tax levy by $12.9 million.
· taxes from new construction value added to the assessment roll are projected at $2.2 million, down from $4.9 million in 2000. This reflects the decline in construction related activity that has resulted in lower development related revenues over the past two Operating Budgets.
· with the resolution of the Pacific Centre assessment appeal, the provision for tax adjustments has been restored at the normal provision of $2.0 million. This allocation will be reviewed based on outstanding appeals at the time the budget is struck.

The Projected Budget Position

As noted, the shortfall between the revenue and expenditure projections for the 2001 Operating Budget totalling $16.8 million will require a property tax increase in the range of 4.7% or equivalent expenditure or revenue program changes.

A tax increase at this level does not satisfy Council's policy of inflationary tax increases.

In order to meet that target, currently in the range of 2.7%. It has been Council policy to pass increases in the GVS&DD requisition through to taxpayers to prevent the possiblity that City programs would be reduced to accommodate cost increases that are beyond Council's control. This would suggest that a property tax levy increase in the 3.0% range could be justified. In order to meet that objective, a combination of expenditure reductions or revenue increased in the range of $7.2 million will have to found in the current projections.

Next Steps in the Budget Process

As a result of the labour dispute, development of the 2001 Operating Budget is currently behind the schedule adopted earlier this year. While it had been anticipated that the major decisions related to the budget and approval in princple would be complete by early February, it now more likely that approval will not be possible before mid March.

Departments are currently completing development of their detailed estimates. Review of these estimates will provide the first check for the projections presented in this report. It is expected that theBudget Office will be prepared to report these estimates in mid-February. This report will provide an update on the budget position and outline measures to meet Council's taxation targets. Should adjustments be required to the expenditure program, these would be considered by Council prior to final approval of the 2001 Operating Budget in mid March.

CONCLUSION

The 2001 Operating Budget will present several challenges if Council's policy of holding tax increases to local inflation is to be maintained. The projections indicate a propety tax increase in the range of 5.0% will be necessary to maintain currently mandated programs, to provide for salary and other inflationary increases and to accomodate the costs of new programs and services anticipated in the budget.

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(c) 1998 City of Vancouver