LATE DISTRIBUTION
FOR COUNCIL DECEMBER 10, 1996
RR1(i)
ADMINISTRATIVE REPORT
Dated: December 6, 1996
TO: Vancouver City Council
FROM: Director of Finance
SUBJECT: 1997 Operating Budget Projections
INFORMATION
The General Manager of Corporate Services submits this report for
Council s information.
COUNCIL POLICY
It is the practice of Council to receive projections of the Operating
Budget early in the budget building process and to provide instructions
to staff on the preparation of the detailed estimates.
The Vancouver Charter requires that the Operating Budget be presented to
Council by April 30 each year, however, the process for building the
estimates begins in the fall of each year.
It has been Council policy to limit increases in the City s general
purposes property tax levy to inflationary levels.
BACKGROUND AND PURPOSE
For the past several years, staff have brought projections for the
Operating Budget to Council as part of the normal budget building
process. These reports provide information to Council about the changes
anticipated in the Operating Budget and give Council the opportunity to
provide input to the process of developing the detailed budget
estimates.
On November 26, 1996, the Provincial Government announced changes to
programs through which municipalities in B.C. receive funding support
from the government. For the City of Vancouver, these changes mean a
net reduction in payments totaling $17.2 million in 1997. These
reductions will significantly impact on the 1997 Operating Budget.
The purpose of this and the accompanying reports, is to:
report the projections for the 1997 Operating Budget, including the
impact of the provincial funding cuts;
respond to the initiative of the Mayor to develop a public
information and consultation process aimed at encouraging community
input on how the challenges in the 1997 Operating Budget are to be
accommodated (report attached);
respond to requests from the Mayor and the Chair of the City Services
and Budgets Committee for information related to the 1997 budget and
the provincial funding cuts (reports attached).
DISCUSSION
The restructuring of Provincial transfer payment programs and the
reduction in funding that result, came at a time when most
municipalities were in the midst of developing their 1997 Operating
Budgets. The timing of the announcement has left municipalities with a
very short time frame in which to accommodate very significant
reductions in their budgets.
The reduction of funding for the City of Vancouver, totaling $17.2
million, represents the loss of the second largest source of revenue for
the City after property taxes. Taken together with the other factors
that influence revenues and expenditures in the City s Operating Budget,
the loss of transfer payments from the Province results in an
anticipated shortfall of up to $26 million in the 1997 Operating Budget.
As the City s budget must be balanced each year, this shortfall will
have to be eliminated either by increasing the revenues available to the
budget--through user fees or increased property taxes--or by reducing
expenditures.
THE 1997 BUDGET PROJECTIONS
The City provides a wide range of services to the public with funding
for these services coming from a combination of user fees, general
revenues and property taxes. The costs associated with delivering these
services are subject to inflationary pressures in the same way as the
costs faced by the public it serves. Where possible, fees, charges and
other revenues are increased to match cost increases however, a large
proportion of program expenditures must be paid for from property taxes.
As the cost of these tax supported services increases, property taxes
must increase as well.
1. Expenditure Projections
The following table summarizes the major areas in which the City
provides services along with the 1996 Operating Budgets associated with
them.
Service Area 1996 Budget %
Police & Fire Services $167,198,900 31.1%
Utilities (Water, Garbage, Sewer) 115,669,900 21.5%
Parks & Recreation Services 70,628,700 13.1%
Streets and Traffic 55,458,100 10.3%
Planning & Development 21,984,500 4.1%
Administrative & Miscellaneous 37,045,100 6.9%
Libraries 32,256,100 6.0%
Community & Cultural Services 20,350,700 3.8%
Capital Program 16,750,000 2.7%
Total $537,342,000 100.0%
Within these service areas, departmental operating costs
comprise the largest component at $420 million or 78%. These
are the direct cost of providing municipal services, including
salaries and benefits and other program costs.
The projections for 1997 indicate that these costs will
increase as a result of two factors:
General Inflation $1.1 million
New Program costs 3.1 million
Total $4.2 million
New program costs are those that result from Council approved
additions to the services provided by the City. In 1997, for
example, a new community centre in the Roundhouse community
(False Creek) will open at a cost of approximately $1.0 million
annually. In addition, Council has approved the next phase of
the CityPlan process ($470,000), expansions of the Community
Policing and other grant programs ($350,000) and one-time Police
and Engineering expenditures related to the Asia-Pacific
Economic Conference to be held in Vancouver ($300,000). As
these expenditure increases have no offsetting funding source,
they must be paid for from property taxes.
Debt Charges represent the second major component of City
expenditures. The City is required to fully provide for payment
of the principal and interest related to its debt in its annual
operating budget. This debt was incurred to provide and
maintain the basic infrastructure of the City, including water
and sewer systems, streets and a variety of civic buildings such
as fire halls and community recreation facilities.
The requirement for debt charges for 1997 will total
$71.6 million, an increase of $4.5 million from 1996.
The City also makes an annual contribution to its capital
program from current taxes, called Capital from Revenue. Use of
this pay-as-you-go policy effectively places limits on the
amount of debt incurred by the City while maintaining capital
programs required to maintain municipal systems and facilities.
The total amount of capital from revenue is determined in the
City s three year Capital Plan and forms an integral part of the
financing plan for our capital expenditures.
Based on the 1997 - 1999 Capital Plan, the contribution
is a slightly lower in 1997 compared to 1996.
2. The Revenue Projections
As noted above, the City derives its revenues from a variety of
sources. The major categories are summarized, along with their
1996 Operating Budget estimates, in the following table:
Revenue Source 1996 Budget %
Taxation Revenue $355,037,400 66.1%
Non-Taxation Revenues
Provincial Revenue Sharing 21,302,300 4.0%
Short Term Interest 13,141,000 2.4%
Utility Fees 54,619,200 10.2%
Parks & Theatres Revenue 28,733,600 5.3%
Fines, Fees & Licences 49,761,800 9.2%
Internal Transfers 14,836,600 2.8%
$537,342,000 100.0%
The process for balancing the budget matches City expenditures
against the revenues earned from non-taxation sources with the
difference being generated from property tax. The challenge on
an annual basis is to ensure that the growth in expenditures, as
a result of normal inflation and new program expenditures, is
offset by non-taxation revenue growth so that the growth in
taxation can be held to inflationary levels.
For the most part, it is the expectation that non taxation
revenues will increase annually in line with the costs of
providing the services they pay for. Where fees are charged for
City services, they are increased annually to match increases in
the associated costs so that the property tax levy is not
impacted. What cannot be controlled in these revenues are
situations where activity levels decline because of changes in
the economy or other external influences. The bulk of the
revenues generated in the Fines, Fees & Licences, Parks &
Theatre and Utility Fees categories are typical of revenue
sources subject to these situations.
The 1997 projections assume that these revenues will
increase to match increases in the expenditures they
support.
There are other sources of non-taxation revenue over which
Council does not have the same level of control. Short term
Interest earnings, for example, are almost entirely dependent on
the rates that those investments earn. During the last 18
months, significant declines in interest rates have impacted
directly on the amount of interest income earned. This type of
reduction, which has no offsetting reduction on the expenditure
side of the budget impacts directly on need for property tax
revenue.
It is our expectation that lower rates in 1997 will
result in a reduction of up to $4.1 million (25%) in
interest earnings from 1996.
elimination of provincial transfer payments is another
example of funding over which Council has no control.
Projections for 1997 indicate that, overall, non taxation
revenues will actually decline from 1996 levels, even before
consideration of the reduction in provincial transfer payments.
This will be the case despite imposition of inflationary
increases in most of our fees and charges.
The projections do not include provision for a property tax
increase. They are based on the 1996 property tax levy with
adjustment made for two factors that will impact on the tax
levy, irrespective of any tax increase approved by Council.
As a result of development in the City, new construction
value comes on the Assessment Roll each year generating
new tax revenues for the City. The projections
anticipate that taxation revenues will increase by $5.0
million in 1997. The amount of new taxes will not be
confirmed until January 1997 and any shortfall in this
revenue from the projections will place additional
pressure on the tax levy.
Grants-in-Lieu of taxes from senior governments are
expected to decline in 1997 as a result of changes in
the inventory of grantable properties in the City. This
is anticipated to reduce revenue in 1997 by up to
$900,000.
The most important conclusion from the revenue projections is
that there are changes occurring which are long term or
structural in nature and over which Council has no control.
While short term fluctuations in revenues can be balanced by
utilizing short term strategies (such as drawing from reserves),
these structural changes require a more permanent solution such
as offsetting expenditure reductions or property tax increases.
Overall, the projections indicate that changes in the base
budget will result in a 2.0% tax increase.
This projection includes no provision for a wage increase for
City staff whose collective agreements expire at the end of
1996. Based on our payroll, it is estimated that each 1% salary
increase will cost $2.7 million and will lead to an additional
tax increase of 0.8%.
3. The Utilities
The City operates three utilities: Water, Solid Waste and
Sewer. These activities are funded, in part, by user fees and,
in part, from the property tax levy.
The Water Utility is fully funded from user fees and has no
impact on the tax levy. Expenditure increases in this area are
fully offset by increases in user fees.
The Solid Waste Utility is the vehicle through which the City
provides garbage collection and disposal services and recycling
programs. In 1997, these services will be funded by a
combination of fees and property taxes. No extraordinary
expenditure increases are anticipated that will impact on the
tax levy.
The Sewer Utility is funded entirely from property taxes and, in
this area, it is anticipated that costs will rise well beyond
inflationary levels. These increases will be driven by
increases in City debt charges related to reconstruction of
sewer system and by increases in the sewage treatment costs
passed on to the City by the Regional District.
Overall, the projections anticipate Utility costs
supported by taxes will increase by over $3.0 million,
the equivalent of a 1.0% tax increase.
4. Provincial Transfer Payment Reductions
As indicated above, the Provincial Government has announced
elimination of several transfer payment programs through which
funding has been provided to support the activities of the City.
These reductions, which total $17.2 million will have the most
significant impact on the Operating Budget position for 1997.
The program changes can be summarized as follows:
Reductions:
Local Government Grants $20,508,300
Police Equalization Grant 771,300
Canada Assistance Plan (CAP) 1,905,100
Emergency Planning Grant 25,000
Total Reductions 23,209,700 Equalization Grant (6,019,200)
Net Reduction $17,190,500
The Equalization Grant is a new program introduced by the
Province to ensure that elimination of program funding does not
exceed 3.0% of the total revenues or 5.0% of property taxes of
individual municipalities.
This reduction represents a significant loss for the City s
Operating Budget. For example, it represents:
4.2% of net operating revenue
4.3% of departmental expenditures
180 police constables or 340 other staff positions
28% of the Fire Department Budget
the entire net cost of Park Board Recreation programs
100% of street maintenance and cleaning budgets
65% of the Library operating budget
a tax increase of 5.2%
These reductions come at a time when Council has just completed
the second of two Budget Management Programs since 1990. These
programs comprised a review of operations with a view to
eliminating functions that were of a lower priority for the City
in order to allow reallocation of funding to higher priorities
or to limiting the growth in the property tax levy. These two
programs had positioned the Operating Budget such that staff
were confident that the City could generally hold property tax
increases in the future near to the level of inflation.
The need to accommodate additional revenue reductions of the
magnitude announced by the Province clearly jeopardizes that
position.
5. Projection Summary
As indicated at the outset, the projections for 1997 indicate a
funding shortfall of about $26 million which will have to be
accommodated by increases in revenues (user charges and/or
property taxes) and/or reductions in expenditures. Expressed as
a tax increase, the impact would be as follows:
Indicated tax increased 8.2%
comprised of:
Changes in the base budget 2.0%
Growth in sewer utility costs 1.0%
Provincial transfer payment reductions 5.2%
A tax increase at this level compares with local CPI inflation
in Vancouver currently in the 1.0% range.
ADDRESSING THE PROJECTED SHORTFALL
Eliminating this funding shortfall will require choices to be
made between increased taxes and reduced service levels. These
choices will be made more difficult because the factors driving
the shortfall are structural:
the factors influencing the base budget will not change in
the short term.
sewer costs will continue to increase faster than inflation;
the provincial transfer payment cuts are permanent and may
become worse as the Province reacts to its own fiscal
problems.
These conclusions suggest that short term solutions are
inappropriate. Council action on the current difficulties must
be based in longer term solutions.
There are a range of options open to Council and the community
to deal with these difficulties. They range from an option to:
increase taxes to offset the loss of provincial revenues
and other increases in the City budget and maintain service
levels
to:
reduce service levels to offset the loss of provincial
revenues and hold tax increases at the level of inflation
Option 1 involves a significant tax increase but it does
preserve City services. Option 2 will involve significant
expenditure reductions, perhaps as much as $20 million if
Council decides to maintain a tax increase at inflationary
levels. Council will not be able to restrict these reductions
to invisible areas of the budget; they will impact on core
service areas. If Option 1 is pursued, there may be ways to
mitigate the tax impacts by differentiating among the various
classes of taxpayers or by spreading them over more than one
year. On the other hand, Option 2 will require the reductions
to be implemented very quickly in 1997 to be effective.
PUBLIC CONSULTATION
Irrespective of which direction Council takes, changes to the
budget under either option will require public support. While
the majority of the public has generally demonstrated a
willingness to accept inflationary tax increases to maintain
services, an increase of the magnitude suggested in Option 1 may
well go beyond the previous levels of support shown by City
taxpayers. On the other hand, reductions in City services will
also have direct, and perhaps less well understood, impacts on
the City and its citizens.
In an accompanying report, staff have outlined a public
information and consultation process designed to provide the
community with information about the current budget situation
and the opportunity to convey to Council their views on the
issues.
This process actually began with the publication of CityNews ,
a newsletter being distributed with 1997 advance tax notices.
The process also involves the publication of an information
flyer to be distributed as broadly as possible in the community;
a survey of public opinion on the issues and trade-offs
involved; and the opportunity for community groups to hear about
the issues first-hand through presentations by staff or Council
members. Public input to the budget decisions will also be
sought through a questionnaire on the proposed flyer, through
fax, voice and e-mail facilities, and through public meetings
with Council.
It is recommended that Council approve the recommendations in
that report so this work can proceed quickly.
TIMING OF THE BUDGET DECISIONS
The timing of the announcement on Provincial funding cuts has
made it imperative that decisions on the 1997 Operating Budget
be made quickly. As a result, we have established a very tight
timetable for the public consultation process. We anticipate
that the public information flyer will be delivered early in
January, followed by the public opinion survey. Staff will be
available throughout January to speak to community groups. The
City Clerk is arranging a date in late January for a Special
Council meeting so that the public can make its view known
directly to Council. This phase of the process will conclude on
February 4, 1997 at which time Council will be asked to provide
instructions on how to finalize the 1997 Operating Budget.
ATTACHED REPORTS
Following announcement of provincial funding reductions, the
Mayor and the Chair of the City Services and Budgets Committee
requested that information affecting the 1997 Operating Budget
be brought to Council. The following reports are attached for
Council s information:
City Choices - Public Process for 1997 Operating Budget
- recommends a public information and consultation
process related to the current budget position
Tourism Vancouver
- reviews City support to Tourism Vancouver, including
the contract for tourism related publications
Regional DCCs - Adjustment to Municipal Assist Factor
- reviews the arrangements and budgetary impacts of
implementing the Regional Development Cost Charge
City Programs in the Provincial Field
- reviews the range of activities within the Provincial
mandate in which the City is involved either in
partnership with the government or on its own
initiative.
CONCLUSION
The projections for the 1997 Operating Budget indicate that a
significant funding shortfall will have to be accommodated
either in the form of a tax increase in the range of 8.0% or
expenditure reductions of up to $26 million. This situation is
the result of structural changes in the base operating budget,
continuing increases in regional sewerage costs and, most
significantly, recently announced reductions in Provincial
transfer payments to the City, totaling $17.2 million.
The impact of these factors on City services and citizens is
significant, involving either extra-ordinary increases in taxes
or the loss of City services. It is proposed that Council
approve a broad public information and consultation process that
will gauge the mood of the public on the trade-offs that will be
necessary.
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