SUPPORTS ITEM NO. 2 CS&B COMMITTEE AGENDA JANUARY 18, 1996 ADMINISTRATIVE REPORT Dated: January 11, 1996 TO: Standing Committee on City Services and Budgets FROM: Director of Finance, in consultation with the Corporate Management Team SUBJECT: 1996 Operating Budget - Preliminary Report RECOMMENDATION A. THAT Council approve the financial strategy for the 1996 Operating Budget, as detailed in this report, which establishes a target general purposes tax increase not to exceed 1%. B. THAT any decreases in funding from the senior governments be added to the general purposes taxes in 1996 only and THAT the impacts of these reductions in future years, including any potential program adjustments, be reviewed with Council in developing the 1997 Operating Budget. CITY MANAGER'S COMMENTS The foregoing recommendations establish a cap on the 1996 general purposes tax increase at 1%. This recommendation reflects a budget position in which departmental budgets will be developed based on a 0% tax increase but acknowledges that there are several outstanding issues that may require Council to chose between making service reductions or moving away from that objective. Over the next two months, leading to Council consideration of the budget at the Interim Report stage, these issues will be reviewed by staff and Council and decisions can be made on their resolution within an acceptable budget envelope. The City Manager believes that this is a realistic budget position at this stage of the process and reiterates the commitment of staff to move the final position as close to a 0% tax increase as possible. The City Manager RECOMMENDS approval of A and B, 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 purposes tax rates as soon thereafter as possible. The process of developing the Operating Budget normally involves three reports to Council. The preliminary report, presented in January, outlines the position of the budget prior to a detailed review and seeks Council instruction on the overall budget envelope including the targets for the general purpose tax increase. Subsequent reports, submitted during April, bring the detailed estimates to Council for final approval. Council has followed a policy of holding increases in the general purposes tax levy to the level of local inflation. PURPOSE The purpose of this report is to respond to Council s direction on the 1996 Operating Budget and to seek approval of a strategy for balancing the budget with a tax increase that will not exceed 1%. BACKGROUND On November 7, 1995, staff presented the preliminary projections for the 1996 Operating Budget to Council. That projection was based on providing funding necessary to support approved levels of service from projected revenues. In order to provide for a balanced budget, the projection identified that a general purposes tax increase of 3.4% would be required in 1996, this before a detailed review of departmental requests and before consideration of any extra-ordinary measures being taken. The recommendation of staff was that Council adopt a preliminary tax increase target of 2.5% with a report back on the steps necessary to achieve that level. In response to the staff recommendation, Council approved the following resolution: THAT in establishing the 1996 Operating Budget at this time, Council instruct staff to develop the 1996 departmental budget targets on the basis of a 0%, 1% and 2% tax increase, subject to a further review in the new year, reflecting; - the costs/savings associated with the transfer of the Health Department, or the continued cost of the Health Department remaining with the City; - the impact associated with any major changes to the City s non-tax revenues related to external economic factors outside the control of City Council; - the possibility of transferring funds in the amount of $2.0 million from the Truck and Equipment Revolving Fund; - confirmation of the BC Assessment Authority estimates on new construction values for 1996; - the proposed impacts of budget reductions necessary to achieve a 0%, 1% and a 2% tax increase under one or several of the above scenarios. FURTHER THAT in establishing the 1996 general purposes tax levy, Council agree to pass through any tax increase attributable to the Greater Vancouver Sewerage and Drainage District that exceeds the tax increase percentage targets approved by Council. DISCUSSION Since the projections were presented to Council, staff have begun to address Council s specific instructions in addition to looking for other opportunities to meet Council s budget objectives. We are now at the point where a balanced budget is possible with a tax increase of between 0% and 1% without impacting on existing service levels and without further increases in user fees. The essential elements of this financial strategy are as follows: - a review of the revenue and expenditure projections. - a review of reserves to identify ongoing and one-time funding possibilities that can be utilized without creating a dependency which would create budget shocks in future years. - utilizing the savings of $6.4 million realized from the transfer of Health functions to the Vancouver Health Board. The specific actions identified below and the current budget position are presented with a note of caution. The 1996 budget is still in the early preparation stages and we expect some changes in the estimates as we develop the budget in more detail. In addition, we have identified several outstanding issues that may impact on the position presented here before we report back to Council with the interim report in early April. The Current Budget Position The budget projections indicated that the 1996 Operating Budget would reach $547 million, including a 3.4% general purposes tax increase. Reducing the tax increase to fit Council s 2%, 1% and 0% tax increase scenarios would mean adjustments to these projections as follows: 2% scenario $7.7 million 1% scenario $10.9 million 0% scenario $14.1 million These adjustments would either be in the form of revenue increases or expenditure reductions. In working to Council s targets, staff has concentrated on identifying adjustments to the 0% scenario, as this level addresses Council s most aggressive budget objective and the most demanding to achieve. The proposed strategy is to direct departments to develop detailed budget estimates with the objective of achieving a 0% tax increase, including the use of savings from the transfer of the Health function to the Vancouver Health Board. Recommenda-tion A, reflecting a cap of 1% on the increase in the tax provides contingency funding for known issues that must be resolved or issues that may emerge during this next phase of budget building and that could result in a final tax increase in the 0% to 1% range. The budget adjustments summarized below represent a combination of responses to Council s instructions. With Council approval of the strategy underlying these adjustments, staff will have a mandate within which detailed budget estimates can be developed for report back to Council in April. The following summarizes the significant changes to the budget arising from this review, starting from the 0% tax increase scenario and a shortfall of $14.1 million: Proposed Adjustments ($000) Initial Budget Shortfall Position (14,120) Revenue Adjustments Taxes from Roll Adjustments 590 Taxes from New Construction 1,670 Interest Income 1,000 3,260 Expenditure Adjustments Increase in Contingency Reserve (1,400) Reduction in Fringe Benefit Rates 1,000 Debenture Rebates 505 105 Reserves Funds Fire Trucks from Plant Account 1,250 1,250 Revised Budget Position (9,505) Health Department Funding 6,395 Current Budget Shortfall (3,110) This shortfall represents a general purposes tax increase of approximately 0.9%. The adjustments reflected above include the following: Revenue Adjustments Adjustments to the revenues follow from receipt of the 1996 Assessment Roll and the revenue impacts associated with the 1996 debenture issue. - early discussions with the Assessment Authority had indicated new construction value on the 1996 roll in the range of $900 million. However, new information from BCAA indicates that $1.8 billion in new construction value has been added, thereby increasing tax revenue from this source from the $5.0 million reported in the budget projections to $6.7 million. Other roll adjustments have added an additional $0.6 million to the revenue estimates. These additional revenues will be subject to final adjustments when the 1996 Roll is authenticated in April. - the 1996 debenture issue will increase the City s cash reserves in 1996 and the expected income from short term investments will increase by $1.0 million above previous levels. Expenditure Adjustments Three expenditure adjustments are being proposed at this time: - We have proposed an increase of $1.4 million in the Contingency Reserve provision in the budget to accommodate several pending issues. There are two issues in the Police Department budget that could have an impact on the 1996 Operating Budget: The first relates to the recommendations of the Oppal Commission; the second to maintenance of adequate staffing levels in the department. Both of these issues are the subject on ongoing discussions with the department. In addition, we are aware of requests related to the 1996 CityPlan program and to departmental and board programs that will have to be considered in the context of this budget. - In 1994, the City took responsibility for a CUPE disability plan approximately $2.4 million which had been held in trust was returned. As these funds are no longer required for the ongoing operation of the plan, it is appropriate that they be brought into the 1996 Operating Budget to offset the cost of benefits to CUPE employees. Reduction in CUPE fringe benefit rates will result in savings in the 1996 budget. The balance of the funds will be utilized in 1997 and 1998. - It is proposed to reduce the effective interest paid on two City debenture issues held by the Property Endowment Fund down from the current 12% and 13% to 8%. This will bring the costs to the operating budget more in line with current long term rates and to a level consistent with interest paid on debt held by the Capital Financing Fund. Use of Reserves Council requested that staff review the availability of reserve funds to assist with achieving the 1996 budget scenarios. The City has a number of reserves which have been set up under Council authority to hold funds for specified purposes. In cases where these reserves have proved to be in excess of our needs, the funds have been used to assist with meeting budget objectives. In each instance, that use diminished our overall financial position. In reviewing the use of reserve funds in the 1996 budget, we have avoided the use of reserves to fund on-going activities, as ultimately the reserves would be depleted and Council would be faced with a tax increase simply to continue an existing activity. However, Council did raise the potential of utilizing existing resources in the Truck and Equipment Reserve to assist with the 1996 budget. The Plant Account provides a revolving fund for the replacement of virtually all City vehicles and a variety of equipment, with the exception of Police and Fire vehicles. The reserve accumulates funds over the life of a piece of equipment sufficient to provide for its replacement at the end of its economic life. As a result, there are considerable cash balances in the fund that are not required immediately. Staff are not in favour of transferring funding on a one-time basis from the Plant Account as it simply shifts the budget problem by one year. However, a preliminary review of the Reserve indicates that sufficient cashflow exists to finance the replacement of new fire trucks beginning in 1996. This will mean a reduction in expenditures estimated at $1.25 million in the 1996 budget. In subsequent years, the cost of replacing fire apparatus would continue to be funded from the reserve and the Fire Department budget would begin to make payments to the reserve sufficient to provide for the equipment replacement at the end of its life. The financial impact of this change on the operating budget will begin to even out as the reduction in replacement costs is offset by rental rates paid into the Reserve. Over the next two months, staff will confirm that this proposal is viable, with details reported to Council with the Interim Report on the 1996 Operating Budget. Council also expressed concern about the difficulty which the cost of the 1996 civic election creates with its triennial "bump" in the budget. In order to avoid these irregular costs, Council directed that staff seek ways to fund this cost over the term of Council. Co- incidentally, the one-time reduction in fringe benefit rates noted above is equivalent to the $1.1 million cost of the 1996 election and staff propose no further action to offset this expenditure in 1996. Beginning in 1997, an annual provision can be made to spread election costs over three years. Transfer of the Health Department Council requested that the budget scenarios include the impact of utilizing the savings from the transfer of Health Department functions to the Vancouver Health Board. The budget position indicated above has been built on the assumption that these savings be captured and passed onto the taxpayers through reduced taxes. For many years, Vancouver taxpayers have been disadvantaged as a result of Provincial policies on funding health costs. While taxpayers in most municipalities in the Province have had their community health costs funded wholly or largely by the Province, Vancouver taxpayers have received a level of cost-sharing for a relatively short period of time. At this point, it is recommended that the savings associated with the transfer of the Health Department should be passed to the taxpayers by reducing the tax levy below the level that would otherwise be required to fund existing service levels under conditions of normal inflation. In addition to these direct savings, the Operating Budget includes staff training and other support funding to the Health function. It will be an objective during the detailed review of the budget to eliminate these, providing additional savings to assist in achieving the budget objective detailed in the recommendations. Staff and Service Level Reductions While Council has not specifically raised the issue of service level reductions, it is acknowledged that reductions in expenditure levels could be utilized as well as the initiatives presented above to achieve the 1996 taxation targets. However, it is noted that the City has engaged in four separate budget management programs in the past decade. Expressed in current dollars, the revenue and expenditure adjustments achieved through these programs have exceeded $30 million funding that has been utilized to offset the costs of new programs and services and to limit the increases in the budget overall. Having worked through these priority review exercises, departments have eliminated most of the flexibility in their departmental budgets and are at the point where further reductions can only be achieved by real reductions in staffing and service levels. As part of the current budget review exercise, departments were asked to indicate how they would respond to requests to reduce expenditures by 3.5% below current levels. This represents a total of $11.0 million in reductions, equivalent to the 1994-1996 Budget Management Program. Their responses included a mix of adjustments that can be achieved with varying impacts on service levels. These impacts include reductions in police staffing and protection services, reductions in fire staffing and equipment and closure of fire halls, reduced Library and Park Board facility hours and higher fees and reduced maintenance of the City s water, sewer, communications and streets infrastructure. In the case of almost every department, reductions will mean job loss and reduced public service. In the absence of the savings from the transfer of the Health Department, the budget position presented in this report could not have been achieved without considering these kind of service impacts. The City has recently embarked on a major review of its processes and systems with a view to improving customer service, achieving greater efficiencies, and positioning itself to handle future demands on its services. This effort is creating major demands on staff time and significant adjustments in the way staff perform their functions. It is the view of the Corporate Management Team that it is important to continue with this program in order to achieve the service improvements, and cost-saving which the initiatives promise. While it remains possible to achieve further budget reductions through program and staffing cuts, the CMT note that this would be disruptive to the Better City Government initiatives which aim to produce higher levels of public service in a more cost-effective manner in the future. In taking the budget through the next steps, staff will review the reduction proposals submitted by departments and take advantage of those that can be achieved without impact on service levels. These changes will be improve the budget position presented above and will be used to keep the recommended tax increase as close to Council s 0% scenario as possible. Downloading from Senior Governments While this budget strategy and the adjustments outlined above have brought us to a position where the budget can be balanced with a tax increase close to 0%, there is one issue that presents considerable uncertainty in the budget process. To date, Federal and Provincial government have shown a tendency to address their budget and accumulated deficit problems by a combination of expenditure reductions and cutbacks on contributions to junior levels of government. When faced with these reductions, municipal government has few options other than to reduce staffing and service levels or to pass the reductions through in the form of property tax increases. There is no provision in the budget position presented above for major shocks from this kind of downloading . We have assumed that Provincial Revenue Sharing and Canada Assistance Plan funding flowing through from the Province will remain at 1995 levels. It is impossible to anticipate what, if any, changes might be made to these cost sharing arrangements and it is unlikely that any information will be forthcoming before the provincial government budget is introduced in late March or early April. By that time, the City s budget will be in the final stages of preparation and it will be difficult to cope with significant funding reductions. It is therefore proposed that the City proceed with the preparation of its budget on the current basis and that, if the City is faced with reductions in transfer payments or cost sharing and is unable to make corresponding reductions in its expenditures, these reductions be passed through to taxpayers as a tax increase in 1996 only, with the reasons for the increase clearly identified to Vancouver taxpayers. Operating Budget impacts of these changes on service levels in future years will be reported to Council as part of budget preparation in 1997. This policy for 1996 will eliminate a factor of considerable uncertainty in our budget building process which can only be otherwise accommodated by making program cuts now. The Next Steps As we go through the process of building the 1996 Operating Budget in detail, it is likely that other issues will arise. Where those issues have significant budget impacts, they will be brought forward for Council consideration. Less significant items will be handled as part of the normal process, with a full report to Council at the Interim Report stage in early April. However, within the 1% cap proposed in this report, the next step in our process will be to bring the budget position as close to a 0% tax increase as possible without reducing current service levels. Council action on these recommendation will confirm this mandate. CONCLUSION The position of the 1996 Operating Budget has been reviewed following Council s consideration of the preliminary projections in November, 1995. This report responds to Council s instruction and proposes a strategy to bring the budget into balance within Council s general purposes taxation guidelines. The actions recommended include the results of a review of the revenue and expenditure estimates; use of reserves where appropriate to fund expenditures; and, the use of savings from the transfer of the Health Department to the Vancouver Health Board. There are several outstanding issues to be addressed as the budget process moves into the detailed estimates stage, however, approval of the recommendations in this report will provide a framework within which that work can be completed for report back to Council in April. * * * * *