Agenda Index City of Vancouver

ADMINISTRATIVE REPORT

TO:

Vancouver City Council

FROM:

General Manager of Corporate Services / Director of Finance
in consultation with the Corporate Management Team

SUBJECT:

2001 Operating Budget - Interim 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. There are generally three reports to Council in the budget building process.

· The Preliminary Budget Report provides Council with the first indication of the budget request from Departments and Boards and seeks Council guidance on the policies that will govern the administrative review of the estimates. This report was considered by Council on December 12, 2000.
· The Interim Report summarizes the results of the detailed administrative review of the budget and seeks Council approval to finalize the estimates, bringing the budget into balance.
· The Final Report on the Operating Budget presents the finalized revenue and expenditure estimates including any final adjustments approved by Council at the interim report stage. The Final Report is accompanied by a resolution in which Council adopts the estimates for the year.

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. However, 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 are approved by Council. This includes the creation and deletion of regular positions and the allocation of funding from revenues or taxation.

PURPOSE

The purpose of this report is to:

BACKGROUND

On December 12, 2000, the Director of Finance brought the preliminary estimates to Council for information. The budget position identified in that report indicated a shortfall, prior to a detailed review, that would have required a property tax increase of 4.7% to balance the budget. The report noted that a number of factors were impacting on the 2001 Operating Budget including, negotiated wage settlements for City staff, non-salary inflation, significant increases in the cost of natural gas and fuel, the operating costs of new or expanded services approved by Council or arising from the Capital Program, and the second year of the phased implementation of sewer user fees.

Staff indicated that the normal process of reviewing revenues, departmental expenditure requests and other aspects of the budget would proceed based on standing instructions to provide only for approved levels of service and for increases necessary to deal with workload and health and safety issues. It was anticipated that Council would receive a report back on the status of the budget by mid March.

During discussion on the report, Council expressed concern that the tax increase indicated in the preliminary estimates was considerably above the inflationary levels that had been Council policy. Staff were requested to report back on the measures that would be necessary if the property tax increase was to be held at inflationary levels and what additional actions would be necessary to reduce the tax increase below inflation.

DISCUSSION

Staff have completed the administrative review of the revenue and expenditure estimates. The process involved review and updating of estimates of revenues, debt charges and regional sewer costs from the preliminary estimates to ensure they reflected the most recent information. In addition, the Budget Office has worked with departments to ensure that individual departmental budgets met target expenditure levels, providing sufficient funding to maintain programs, services and staffing at approved levels and that requests for additional funding beyond these target could be justified on the basis of Council approvals, health and safety concerns or short term workload issues.

The budget position that follows from this review indicates that additional action will be required if the 2001 tax increase is to be held to the level of local inflation. The following summarizes recent measures of the consumer price index in Vancouver:

As inflation has been increasing in recent months, staff targetted a tax increase in the range of 2.5% to 2.75% as being reflective of local inflation for the purposes of developing the budget. This follows from the fact that one of the major drivers of local inflation is energy prices which are also a major driver in the City's budget. Proposals for achieving a tax increase in this range are included in this report. In order to eliminate a tax increase, it would be necessary to identify additional budget adjustments totalling approximately $9.0 million.

The Current Budget Position

The following table summarizes the current position of the operating estimates following the administrative review described above:

Additional detail of these estimates is provided in Appendix 1 along with comparative information from the 2000 Operating Budget. The following summarizes the major expenditure and revenue issues in the budget.

1. The Expenditure Estimates

As noted, the expenditure side of the budget is comprised of four components: departmental expenditures, utility expenditures; debt charges and transfer to other funds/reserves. The interim estimates include expenditures of approximately $637.3 million in 2001, up 3.4% from the 2000 final budget. Of this total expenditure, $532.3 million is supported by property taxes and general revenues and $105.0 million is supported by utility user fees.

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) Salary and Benefit Costs

.
ii) Inflation in Non-Salary Costs

iii) New Programs and Services

Utility Expenditures

The City has established three utilities that provide services to property. The water and solid waste utilities are fully funded from fees while the sewer utility, being implemented over 2000 and 2001, is funded approximately 43% from fees and 57% from property taxes.

· Cost increases in the water utility are driven by increases in the cost of water purchased from the region which have increased by 8% over 2000. A reduction in water debt costs allowed Council to hold the increase in water rates for 2001 to approximately 2.0%, bringing the flat rate water charge to $261. Metered rates were increased by the same percentage.
· Improved revenues from recycling and efficiencies in the solid waste operation allowed Council to approve a reduction in Solid Waste fees for residential properties for 2001, reducing the charge from $159 to $149. Charges for non-residential users of the system remain at the regional disposal rate.
· The second phase of the implementation of user fees for sanitary sewer services is being implemented in 2001. As a result, $12.5 million in sewer costs will be removed from the property tax levy and replaced with user fees. This will result in an overall reduction in tax supported costs equivalent to 3.2% of the property tax levy, distributed as a 5.2% reduction to residential properties and a 2.0% reduction to non residential properties.

As noted, the property tax levy does not support any of the water or solid waste costs in the budget, however, approximately $31.2 million of sewer cost are collected through the tax levy.

General Debt Charges

Debt charges arise from the City's capital expenditure process. Capital expenditures are planned over a three year period with funding being derived from debt and capital from revenue. Council is required to make full provision for the principal and interest costs associated with debt financing. Water debt charges are covered by user fees. Sewer debt charge are covered by a combination of user fees and property taxes. General debt chargesare related to all other components of the capital program including public works, parks and recreation, library and public safety.

General debt charges have been reduced in 2001 by approximately $2.2 million (including the tax supported portion of sewer debt charges) as a result of several factors. Higher coupon debt has been replaced with debt with lower interest rates resulting in lower interest costs. In addition, the deferral of the 2000 borrowing program until February 2001 resulted in the deferral of approximately $8.7 million in principle and interest costs from 2001 until later years.

Transfers to Reserves/Funds

There are three transfers from the operating budget included in this component of the expenditure budget.

· the 2000 - 2002 Capital Plan calls for a contribution of $12.6 million from the Operating Budget. This provision has increased $2.1 million from 2000 as a result of the rescheduling of $1.5 million in Capital from Revenue approved by Council in 2000.
· funding for the Information Technology Long Term Financing Plan, at $5.3 million, is maintained at the same level as in 2000.
· other transfers include a $340,000 provision for the 2002 election and $664,000 transfer to the Liability Insurance Reserve.

2. The Revenue Estimates

The revenue side of the Operating Budget is comprised of four components: Taxation Revenue, General Revenues, Utility Revenues and Transfers from Reserves / Funds. The interim estimates include revenues of $622.6 million in 2001, up 1.0% from 2000 prior to consideration of a tax increase.

Taxation Revenue

Taxation revenues are those derived from property taxation sources and include the general purpose tax levy, receipts in lieu of taxes paid by properties not subject to property taxation as well as penalty and interest charges for outstanding and arrears taxes. The interim estimates establishe these revenues at $401.2 million.

· The general purposes tax levy has been set at $361.4 million prior to consideration of a tax increase. This includes:

· The provision for tax adjustments has been established at $1.75 million, reflecting the reduction in assessment appeals now before the Assessment Review Panel and the City's exposure to adjustments to the property tax levy.
· Receipts-in-lieu of taxes have increased to reflect a detailed review of grantable property carried on the 2001 Assessment Roll.

General Revenues

Several adjustments have been made to estimates of general revenue based on updated information and additional revenues identified by departments. The more significant issues are as follows:

· Provincial Revenue Sharing is comprised of two components:

· Short term interest earnings have been adjusted to reflect changing cash balances as a result of the recent debenture issue and changes in short term interest rates.
· On Street Parking Revenue has been adjusted to r reflect 2000 earnings and program changes going into 2001.
· Increases in Service and Inspection fees reflect increasing activity in this sector of the economy. As many of these fees require inflationary adjustments to reflect increases in City costs, this report will recommend a further adjustment to this revenue, subject to a report back from the General Manager of Community Services.
· Park Board and Civic Theatres revenues have been set to reflect adjustment to fees and charges approved by Council (Civic Theatres) and the Park Board.
· There are two issues reflected in Miscellaneous Revenue:

Overall, with the exclusion of one-time revenues associated with the Host City Agreements (casino revenue) received in 2000, general revenues are anticipated to increase to $105.9 million (2.8%) over the 2000 budget level.

Transfers from Reserves

The transfer from other funds and reserves includes:

· The annual surplus on the City's sinking fund, which offsets debt charges on the City's outstanding debt. Lower interest rates in 2000 have resulted in a 25% reduction in the surplus to $3.3 million.
· The annual dividend from the Property Endowment Fund that is held at $7.0 million.
· the transfer from the Art Gallery Reserve which assists with the Art Gallery operating grant, is estimated at $160,000.

These transfers are held at preliminary estimate levels.

3. Indicated Tax Increase

As noted, the position reflected above would require a tax increase of 4.1% in order to bring the budget into balance. This is comprised of increases of approximately

As noted above, the tax increase indicate above compares to the inflationary target of 2.5% to 2.75% adopted for preparation of the 2001 Operating Budget.

For the average residential property (valued at $370,000), a 4.1% increase would increase general purpose taxes by about $45. For commercial properties, the increase would be approximately $0.62 per thousand dollars of assessed value, or $310 on a $500,000 property.

4. Park Board Global Budget

The interim estimates make full provision for the Park Board Global Budget of $45,028,700,including added basic funding of $672,000. This represents an increase of 7.8% from the 2000 final budget. The provision has been calculated by the City and Board staff according to the agreed upon principles.

The change in the Park Board basic estimates in 2001 reflects a variety of adjustments arising from the global budget arrangement. These require the Board to increase revenues based on the level of inflation in City costs in order to qualify for adjustments on the expenditure side equivalent to those available to other departments. The base budget has been adjusted to reflect changes in salary costs arising from collective agreements and non-salary costs have been increased by the same 1.5% provided to all departments for the preparation of the 2001 operating budget. A further provision for specific expenditure increases such as natural gas and fuels that exceed these inflation guidelines, as well as the annualized impact of added basic approved by Council in 2000 have also been included in these estimates.

Added basic is the ongoing operating costs that arise from the Park Board capital programs. Under the global budget arrangement, Council has agreed to add these costs to the Park Board budget. The 2001 allocation includes $672,000 of additional funding for maintenance and support of systems infrastructure, buildings and parks infrastructure, as well as the operating costs of the expanded community centres and new parks.

Should Council approve additional budget reductions to achieve its taxation targets in 2001, adjustments will be required to the Park Board Global Budget for changes impacting on the Board. Two specific adjustments are presented for Council consideration later in this report, including a $330,000 apportioned share of the reductions proposed to achieve an inflationary tax increase and possible further reductions should Council wish to move the tax increase below the level recommended in this report.

REDUCING THE TAX INCREASE BELOW 4.1%

In order to respond to Council's policy of holding tax increases near the rate of inflation, and then to the request for information on the measures necessary to reduce the tax increase to as low as 0%, the Director of Finance, in conjunction with the Corporate Management Team, developed a series of proposals to further reduce the budget. Targets were calculated for each department on a pro-rata basis and staff used these as a guide to identify areas of the budget where revenues could be increased or expenditures adjusted in order to reduce the tax increase below 4.1%. CMT then categorized these proposals into those adjustments that could be made without significant impact on services and those that would result in more significant service level reductions, especially to the public. In putting these proposals forward, the Corporate Management Team notes that it is increasingly difficult to make changes in the budget without impacting on service, both internally or to the public.

1. Achieving an Inflationary Tax Increase

i) Low Impact Adjustments to the Budget

From this review, CMT identified a number of adjustments to the budget that can be implemented without significant impact on the services delivered by the City or that are available because of consolidation of effort or the achievement of efficiencies in departmental operations.

The following adjustments are recommended by the Corporate Management Team:

Park Board and Library Board staff have been working with CMT on initiatives to reduce the tax increase to inflationary levels, however, the Boards have not approved specific reductions for consideration. As a result, CMT recommends that Council approve general reductions in the Board budgets. Based on this approval, the Boards will determine the specific adjustments that would be necessary. Corporate Management Team also recommends that a pro rata reduction be applied to the Grants budget by limiting the inflationary increase in funding to 1.0% over the 2000 levels.

These recommended adjustments are equivalent to a tax increase of 0.6%. If Council agrees to accept these recommendations, the anticipated tax increase will be reduced to 3.5%, including 3.0% for City costs and 0.5% for GVS&DD and TransLink costs.

ii) Recognize Casino Revenue Sharing Funds

On February 24, 2000, Council agreed to enter into Host City Agreements with the Provincial government providing access to a share of revenue from gambling in the City. In 2000, Council recognized this funding to offset limited time expenditures in the budget so as not to create a dependency on the revenue.

The Director of Finance recommends a similar strategy in 2001. This will ensure that Council has the option of utilizing these revenues to assist with the 2001 budget without making long term commitments as to their use. As such, the budget does not become dependent on these revenues and face the possibility of negative impacts if the revenue declines. It is anticipated that these revenues could reach $3.5 million in 2001.

Several of the limited time expenditure identified 2000 can continue to be supported by casino revenue in 2001. These include funding for the downtown eastside initiatives (police beat team, administrative costs for the Vancouver Agreement), the Downtown Transportation Plan and the Community Visioning projects. The cost of these projects are approximately $2.0 million. In addition, the 2001 budget includes additional funding related to these projects and several other limited time expenditures, including the C-2 Zoning Review, the Vancouver Richmond Transit Study.

These are all one-time, or at least limited-term, commitments leaving Council free to consider the ongoing use of these funds after 2001. Budget planning for 2002 excludes provision for continuation of revenue from this source.

iii) Increase in Development and Trade Fees

Development and Trade Fees have not been increased in recent years to keep up with cost increases incurred in their administration. The General Manager of Community Services will bring forward a report to Council in the near future recommending an inflationary adjustment to these fees of 3.5% that will generate approximately $350,000 in 2001. These revenues are recommended to be added to the budget at this time.

Council concurrence with these recommended revenue proposals would reduce the indicated tax increase to 2.5%, including 2.0% for City costs and 0.5% for GVS&DD and TransLink costs.

2. Reducing the Tax Increase Below Inflation

The second level of budget adjustments identified by the Corporate Management Team would move the tax increase below the level of current inflation, however, these proposals will impact directly on the programs and services provided by the City and will impact onCity staff. These proposals would:

· reduce the level of internal support provided by Human Resources, Corporate Services and Community Services,
· reduce policy and administrative support in Community Services,
· reduce service levels to the development community, especially on major project applications,
· reduce enforcement activities related to property,
· reduce staffing levels and the ability to deliver services in the Police and Fire departments,
· reduce the maintenance and cleaning of City streets,
· defer the Emergency Preparedness Program,
· reduce grant funding to social, cultural and daycare organizations,
· reduce services to the public and hours of operation in the Parks and Library systems

If Council wishes to consider these proposals, it is recommended that Council approve Recommendation B(ii), thereby deferring consideration of the final budget postion until the meeting of City Services and Budgets Committee on March 29, 2001. Prior to that meeting, staff would develop a more detailed listing of the proposals and provide them to the affected unions and other stakeholder groups to ensure that they have an opportunity to bring their comments and concerns forward.

THE POLICE WORKLOAD STUDY

In December 2000, the Police Board tabled a major review of workload issues affecting the department. The result of that study is a request by the Board for an increase in the authorized strength of the department of up to 143 officers as follows:

· permanent extension of the 20 temporary officers currently assigned to the Downtown Eastside Police Beat Team. These positions were approved by Council for a three year period beginning in 1999. Unless Council agrees to continue funding these positions, they will be phased from the force during 2001.
· the addition of 123 additional officers to the force to deal with a number of workload issues documented in the workload study.

City staff have been working with the Police department to review this request, however, it is impossible to report the results of that work in time for the request to be dealt with in full in the 2001 budget. In the meantime, if Council wishes to begin to respond to the request this year, there is an opportunity to increase the authorized strength now without significant cost in 2001 beyond those already included in the budget. That is because the budget already provides funding for the DTES Beat Team for most of the year and because the departmentis currently over its authorized strength of 1066 officers by 16 sworn staff, positions that are already funded for a portion of the year in the interim estimates.

Council has three options for dealing with the workload study at this time:

Option 1: Defer consideration of the request until City staff are able to complete the review of the request and bring forward a position. The difficulty with this proposal is that if Council were to subsequently agree to increase staffing in the department, the opportunity to take advantage of existing staffing levels in the department would be lost and it would be difficult to provide additional funding until the 2002 budget.

If Council were to support an interim increase in the authorized strength pending the report back on the workload study, there are two proposals put forward, one by City staff and one by the Police Board:

Option 2: City staff have done a preliminary review of the workload study and acknowledge that there may have been impacts on service as a result of changes in process imposed on the department by federal and provincial legislation and by the courts. However, the review of the study has not been completed and City staff are not in a position to agree that the department requires 143 additional officers to offset these losses.

Option 3: In addition to the 36 officers proposed above, the Police Board has requested an additional 14 officers be added to the authorized strength in 2001 for a total of 50 new officers. As these additional officers cannot be recruited until later in 2001, the cost of this proposal is approximately $725,000 this year (compared to $575,000 in Option 2) resulting in an additional tax increase of 0.25%. However, in 2002, the cost of this proposal increases to approximately $2.5 million.

These latter options are reflected in Recommendation C(i) and C(ii) respectively. Whatever action Council takes on this request, a report on the Workload Study will be brought forwardto Council for consideration before the summer break.

If Council were to approve either option 2 or 3, the impact on taxes would not exceed 0.25% thereby increasing the tax increase to approximately 2.75%, including 2.25% for City costs and 0.5% for GVS&DD and TransLink impacts.

THE IMPACT OF CITY CHARGES ON PROPERTY

The impact of a 2.75% tax increase, together with the changes in other user charges is summarized below for the average single family property:

Average Residential Property

$377,971

  

$369,834

2.0%

         

Levy

1999

 

2000

 
         

General Taxes

1,183.01

 

1,149.85

2.9%

         

Sewer Fee

132.00

 

63.00

109.5%

Solid Waste Fee

149.00

 

159.00

-6.3%

Water Rates

261.00

 

256.00

2.0%

         

Total City Charges

1,725.01

 

1,627.85

6.0%

Tax rates for Class 06, Business and Other properties would increase by approximately $0.40 per thousand dollars of assessed value leading to a tax increase of $200 from $7,167 to $7,367, on a property valued at $500,000.

OUTLOOK FOR THE 2002 OPERATING BUDGET

Given that the decisions still to be made regarding the 2001 Operating Budget will impact on 2002, it is difficult to provide an accurate picture of next year. However, a projection based on the 2001 budget position suggests that:

· a tax increase in excess of 3.5% seems likely to maintain the base budget. This position is driven primarily by increasing salary costs, growth in regional sewer costs and by the funding of the 2000-2002 Capital Plan.
· however, there are a number of uncertainties that could impact on this position, including the level of taxes from new construction; the success in maintaining andincreasing revenues from telecommunications companies using City rights-of-way; the future of provincial revenue sharing programs and funding from TransLink; the ongoing cost related to EComm; and, the impact of new programs and services that will come to Council during the year. These uncertainties are reflected in the projection by increasing the Contingency Reserve provision, however, there may be additional impacts on the projected tax increase.
· if Council agrees to increase the sworn staffing at the Police department the impacts on the 2002 budget vary depending on the number of officers added and the timing with which they are recruited. Based on the proposal in this report, those costs could add the equivalent of 0.5% to the 2002 tax increase, before providing for another increment in 2002.

In summary, there would appear to be continuing challenges to maintaining an inflationary tax increase in 2002. With the completion of the 2001 Operating Budget, staff will begin to address these issues and will report back with updated projections for the 2002 budget in September, allowing Council to provide guidance on the development of next year's operating budget.

BRINGING THE OPERATING BUDGET INTO BALANCE

With the decisions made as part of this report, the Operating Budget can be brought into balance. The following reports to Council will complete the budget process:

· On April 10, Council will consider the final estimates representing a balanced budget.
· On April 26, City Services and Budgets Committee will consider a report from the Director of Finance presenting options of the distribution of the property tax levy and putting forward the general purpose property tax rates for 2001. Following the decisions on this report, the 2001 General Purposes Rating Bylaw will be brought forward for approval on May 6.
· On May 8, City Services and Budget Committee will consider the Basic and Supplementary Capital Budgets.

CONCLUSION

The interim estimates of the 2001 Operating Budget indicate that a property tax increase of 4.1% would be necessary to provide for the costs of base City programs and the added basic costs associated with new programs approved by Council.

The Director of Finance and Corporate Management Team are recommending a number of adjustments to the interim estimates to assist with the meeting budget targets. First, a seriesof initiatives with low impact on the budget are recommended that will reduce the tax increase by 0.6%. In developing these proposals, staff attempted to identify budget adjustments that did not impact on staffing or public service. Second, it is proposed that the revenue from gaming be brought into the budget and allocated primarily to limited-time expenditures. It is also recommended that fees related to development and building be increased by 3.5% to reflect increased administrative costs. These proposal will reduce the indicated tax increase to 2.5%.

Moving the 2001 property tax increase below the 2.5% recommended will require reductions in service levels. Should Council wish to achieve an increase below this level, it is recommended that the Director of Finance report to City Services & Budgets Committee on March 29 with specific proposals.

Finally, the Police Department has brought forward a request for additional sworn staff to meet workload issues. Three options for dealing with this request are presented in the report.

The final stage in completing the 2001 Operating Budget involves bringing a final budget forward for approval. Following the decisions of Council related to the budget, the Director of Finance will make final adjustments to the budget and report back to Council on April 10, 2001.

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ag010313.htm

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