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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