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.
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