City of Vancouver

 

1997 Operating Budget - Preliminary Report

 

ADMINISTRATIVE REPORT

Date: January 30, 1997

TO: Vancouver City Council

FROM: Director of Finance

SUBJECT: 1997 Operating Budget - Preliminary Report

RECOMMENDATION

A. THAT Council approve a base 1997 general purposes tax increase of 2.0% to provide for inflation, new programs and structural changes as reflected in the City's 1997 Operating Budget.

B. THAT Council approve an incremental tax increase of 1.0% over the 1997 base increase to provide for inflation and growth in the costs of operating the City's Sewer Utility.

C. THAT Council approve an incremental tax increase of 3.0% as an alternative to major service cuts in those areas that received strong support from the public (Policing, Fire Protection, Community Services, Traffic Management and Planning), representing additional revenues of $9.9 million to offset about 57% of the $17.2 million loss of Provincial transfer payments.

D. THAT the reports on Tourism Vancouver, Regional Development Cost Charges and City Programs in the Provincial Field previously submitted to Council on December 10, 1996 be referred to the City Services and Budgets Committee on February 6, 1997 for consideration and appropriate action.

E. THAT staff be instructed to report back on other revenue and user fee increases submitted by Departments in response to the present budget crisis for consideration on February 20, 1997. The list of items as outlined in Appendix II (Download Excel spreadsheet) of this report represents well over $3 million in potential revenues or the equivalent of about a 1% tax increase.

F. THAT staff be directed to identify items to eliminate the remaining shortfall in the 1997 Operating Budget for further Council consideration in the approximate amount of $2.1 million through a combination of service reductions and/or administrative budget adjustments which arise out of the normal course of a budget review at this stage of the budget cycle.

FURTHER THAT Council indicate to staff those service areas and reduction items enumerated in the list attached as Appendix II of this report which should be considered for elimination or, alternatively, assign budget reduction targets to Departments and Boards.

G. THAT Council instruct staff to report back on February 20, 1997, on the impact of the selected service level reductions/budget reduction targets, allowing sufficient time for delegations to arrange to speak to these items before the cuts are confirmed for immediate implementation. Any transitional issues will be reported as well.

H. THAT funds designated as "capital from revenue" be considered for annualizing and transitioning revenue increases and service reductions under a worst case scenario and be provided from the 1997 capital program on a one-time basis, with specifics reported back to Council at the appropriate time.

I. THAT the Director of Finance be instructed to report back to Council with policy options around the application of the 1997 property tax increase (all-in) approved by Council this day, including an exploration of weighting the tax increase more heavily on the residential sector.

J. THAT the preliminary 1997 Operating Budget estimates as set out in Appendix I (Download Excel spreadsheet) of this report be received for information.

K. THAT the preliminary 1997 Operating Budget estimates be referred to the Budget Office and the respective Departments for review to fit within the budget recommendations approved by Council this day in accordance with Council policy, as follows:

GENERAL MANAGER'S COMMENTS

The public survey process indicated a preference for user fees before property tax increases before major service cuts in terms of a priority order for addressing the City's current budget situation. The recommendation items set out in this report follow that order of priority.

The General Manager of Corporate Services on behalf of the Corporate Management Team therefore RECOMMENDS approval of A, B, C, D, E, F, G, H, I, J and K, noting that the recommendations contain a 1997 cumulative tax increase of 6.0%, leaving about $2.1 million to find in new revenues and service cuts.

On the other hand, the Corporate Management Team recognizes that Council may choose to select a lower tax increase number and thus leave more to find in other revenues and service cuts.

COUNCIL POLICY

City Council is the approving body for the City's annual operating and capital budgets.

Council policy is to limit increases in the City's general purposes tax levy to inflationary levels.

PURPOSE

The purpose of this report is to present the preliminary 1997 operating budget picture to Council and to recommend a course of action to balance the budget based, in part, on public opinion the City has received around its broad-based public consultation program.

BACKGROUND

On November 26, 1996, the Province announced changes to a number of programs through which municipalities receive funding support from

the government. For the City of Vancouver, these changes mean a net reduction in payments totalling $17.2 million in 1997.

As reported on December 10, 1996, this reduction represents the loss of the second largest source of revenue for the City after property taxes. Taken together with the other factors that influence operating revenues and expenditures, the loss of transfer payments from the Province results in a projected shortfall of up to $26.8 million in the City's 1997 Operating Budget. Since the City's budget must be balanced each year, this shortfall will need

to be eliminated, either by increasing revenues (property taxes, user fees) or by reducing expenditures, or a combination of both.

Our Dec 10th projections indicated that the $26.8 million shortfall, expressed as a 1997 tax increase, had the following components:

 Changes to base budget  2.0%
 Growth in sewer utility costs  1.0%
 Provincial transfer payment reductions  5.2%
   
 Total projected tax increase  8.2%

Eliminating this magnitude of a shortfall will require some hard choices to be made between increasing property taxes beyond inflationary levels, examining the cost recovery aspects of our user fees and charges, and reducing service levels either selectively or across the board. In order to better position itself to make these choices, Council approved a broad public information and consultation process, as described below, to gauge the mood of the public on the trade-offs that will be necessary to balance the budget.

As previously mentioned, Council called for a broad public consultation with three input streams to consider the views of individuals and a range of social, cultural, business and neighbourhood organizations. Council heard a full report on results of these streams at its meeting on January 28, 1997.

Firstly, the Mayor's Forum series of community group meetings, held between December 23rd and January 22nd, gave the Mayor and members of Council the opportunity to hear the views of 800 individuals representing 160 organizations.

Secondly, beginning January 5th, approximately 350,000 copies of a four-page City Choices information flyer (in English and Chinese) were distributed through seven newspapers, more than 100 community outlets and via the City's website. The flyer included a questionnaire, of which 1,763 were completed, returned and tabulated. This input was supplemented by 136 voice mail and 48 Internet e-mail responses. The City Choices consultation concluded with a special Council meeting on January 30th at John Oliver Secondary School.

Finally, from January 10th though to January 22nd, the Angus Reid Group conducted a scientific, random sample telephone survey of 1,000 residents and 300 business operators. Survey questions were formulated following from the input of six focus groups involving 53 residents whose deliberations helped to shape the design and content of the flyer.

DISCUSSION

This preliminary report on the 1997 Operating Budget is the first of several reports that Council will consider before the end of April this year, all leading to the adoption of the Final Budget and approval of the City's 1997 general purposes tax rates. The preliminary budget represents the opening budget position which will undergo adjustment as we move through the budget building process.

1. The Current Budget Position

All departments and boards have now submitted their detailed estimates of revenues and expenditures for the City's 1997 Operating Budget. Departmental expenditure estimates were developed on the basis of expenditure targets for each department that were established by the Budget Office. These targets include the estimated costs of providing 1996 programs and services at 1997 costs, as well as provision for expenditures arising from Council decisions on new or expanded service levels. The preliminary budget also provides an update of the revenue estimates that were included in the projections presented to Council on December 10, 1996. Appendix I of this report summarizes the preliminary estimates as submitted.

The preliminary estimates indicate revenues from all sources will be $531,157,100 and expenditures will be $558,643,900, leaving a shortfall of $27,486,800. This shortfall compares with the projected shortfall of $26.8 million reported to Council on December 10, 1996. While the shortfall is not significantly changed overall, the difference is the result of budgeting at a much more detailed level as reflected in the preliminary estimates. In addition, we have adjusted revenue and expenditure items to account for information received since the projections were compiled in the fall. For example, taxation revenues have been adjusted following an analysis of the preliminary Assessment Roll, which confirmed new construction taxes will be lower than we had earlier predicted. Additionally, we have adjusted our provision for fringe benefit costs as a result of our review of 1996 experience and our statutory responsibilities under senior government benefit programs. The current estimates therefore represent an appropriate position from which to begin the budget process.

The actual budget shortfall in the City's 1997 Operating Budget at this stage of the budget cycle is approximately $27.5 million. This shortfall continues to represent a 1997 property tax increase of 8.2%.

It is important to note that the current estimates do not include any provision for salary/wage increases for City staff in 1997. As noted in our earlier projections, contracts for all employee groups expired at the end of 1996. A 1% increase across all employee groups would represent approximately $3.3 million in additional expenditures, equivalent to a 1.0% increase in property taxes. A method for dealing with this potential cost is outlined later in this report.

As noted above, the City's Operating Budget provides for all of the programs and services delivered in 1996, as well as for the costs of new programs and services arising from Council decisions over the last several years. This includes provision for additional debt charges related to the borrowing requirements associated with approved capital works/capital plans. In addition, the budget provides for reductions in several revenue sources, including short-term interest earnings, federal grants-in-lieu of taxes and, of course, the recently announced reductions in provincial grants and cost sharing.

In examining the factors that impact on our budget in 1997 and beyond, it is clear they represent long-term structural changes over which Council has little to no control, or which arise from service level changes approved by Council. In our opinion, these factors cannot be addressed by short-term solutions and our recommendation is to increase property taxes by 2.0% to fix the problem and maintain services levels rather than cut unrelated expenditures.

 

** Application of a 2.0 % tax increase reduces the current budget shortfall to $20.9 million.

The City operates three utilities - Water, Solid Waste and Sewer. Water costs are funded entirely from user fees and have no net impact on the Operating Budget, although both costs and revenues are included in the estimates for reporting purposes. Solid Waste and Sewer costs are funded by a combination of user fees and property taxes. Council will remember that the City has requested changes to the Vancouver Charter from the Province that will permit the City to bill all of these utility costs on a user-fee basis. The Province has not taken any action on this request, although we understand the necessary amendments may be introduced at the spring sitting of the Legislature.

The Sewer utility is funded entirely from property taxes and we anticipate that sewerage costs will increase well beyond inflationary levels. These increases will be driven by increases in City debt charges related to maintenance and environmental upgrading of the sewer system and by increases in sewerage treatment

costs passed on to the city by the Regional District. Council has also approved a plan to fund 50% of the regional "growth" costs from property taxes.

The City Engineer has submitted requests for additional funding related to the operation of the solid waste disposal system which go beyond our initial projections. These requests are related to the physical plant associated with the operation of the Vancouver South Transfer Station and the Vancouver Landfill and will be assessed during the next phase of the budget process. These costs could place additional pressure on the Operating Budget.

The City's utility costs supported by property taxes will increase by over $3 million in 1997, equivalent to a 1.0% tax increase. Staff note that these costs relate directly to the protection of the environment and many have been mandated by senior levels of government. In past years, Council has followed a policy of passing these costs through to taxpayers as a tax increase. Moreover, in recent surveys, the public has shown support for "green" taxes that maintain and improve the quality of life in Vancouver. As a result, staff recommend a 1.0% tax increase to offset these increased utility costs.

** Application of a 1.0% tax increase reduces the current budget shortfall to $17.6 million.

 

2. Subsequent Events

On January 30, 1997, Council approved adjustments to permit and development fees to bring these charges up to full cost recovery levels, including appropriate overhead allocations from other city departments that provide administrative support to those functions. Revenues are projected to increase by $3.9 million on a annual basis as a result of these fee adjustments.

** Application of the 1997 portion of these increased revenues (about $3.6 million) reduces the current budget shortfall to $14.0 million.

3. City Choices

If Council approves the recommended tax increases (3.0%) above, the current budget shortfall in the City's 1997 Operating Budget would be $14.0 million.

In order to provide Council with information around service cuts to balance the budget, Departments and Boards have each prepared a list of new revenue opportunities together with service cuts arranged in increasing order of severity. The Budget Office produced departmental targets for this purpose in relation to the size of each budget at budget reduction levels of $10 million, $15 million and $20 million, respectively. Council is referred to

Appendix II of this report for a high level summary of these items, arranged along the lines of the service areas identified in the City's public consultation process.

Outstanding Items

The December 10th Council package contained information reports on Tourism Vancouver and Regional Development Cost Charges. At that time, Council was provided with suggested staff recommendations to deal with these two issues in light of the budget crisis. Council chose instead to defer action until the public process had run its course and public opinion was in hand. Staff recommend that the report references be referred to the City Services and Budgets Committee for further consideration on February 6, 1997.

Council also requested a report for the December 10th meeting that dealt with City programs in the provincial field. This report indicated that most direct provincial funding has occurred through the Canada Assistance Program (CAP) and has been targeted at social welfare issues clearly within the Provincial and Federal government mandates. With the recent provincial cuts in transfer payments, the City's CAP funding was eliminated, affecting operations such as the Carnegie Centre, the Saller Centre, Parks and Recreation Youth Programs, Community Service Grants and staff support costs in the Social Planning Department.

Staff are puzzled by the Province's withdrawal of this targeted funding, which is inconsistent with their public stance to support our less advantaged citizens. While Council has the option to send a strong message to the Province in terms of its elimination of the CAP funding by reducing services in the aforementioned areas ($1.9 million annually), we suggest that it might be worthwhile to seek additional clarification from the Province on their willingness to stay the course.

Staff recommend that the report reference be referred to the City Services and Budgets Committee for further consideration on February 6, 1997.

New Revenue Opportunities

As a starting point to address the remaining budget shortfall, staff suggest that the new revenue opportunities identified in Appendix II be reported back to Council for consideration and approval on February 20, 1997. These items total well over $3 million and it is quite likely that a good number of them will be approved by Council, resulting in a revenue increase in 1997 in the order of $2.0 million as a conservative estimate.

** Application of a $2.0 million revenue increase (if approved) reduces the current budget shortfall to $12.0 million.

Tax Increases and/or Service Cuts

At this point, Council may balance the remaining budget shortfall either through a tax increase, or service cuts, or a combination of both. Given public preference in favour of a tax increase over major service cuts, but recognizing that this position is not held universally, staff propose a combination of an incremental tax increase and selective service cuts combined with other administrative budget adjustments. These adjustments include such items as the size of Contingency Reserve, finalization of the numbers around new construction and new tax revenues, negotiations around a settlement for Payments in Lieu of Taxes for Port Lands, the CBC building and others, and other expenditures in the General Government category of the City's Operating Budget.

This course of action considers the strong public support for City services generally and the willingness of our taxpayers to pay higher taxes to maintain these services. Given over 60% support in the residential sector to an increase in taxes, in preference to service cuts, Council could legitimately support an incremental tax increase of 3.0% over and above the structural tax increases (3.0%) discussed earlier in this report, on the basis of public opinion. An increase of this magnitude would offset approximately 56% of the $17.2 million cut in transfer payments, representing $9.9 million in additional taxation revenues, to further stabilize the ongoing health of the City's Operating Budget.

** Application of a 3.0% incremental tax increase reduces the current budget shortfall to $2.1 million.

The remaining shortfall would be met by selective service cuts and administrative budget adjustments, noting that upwards of $3 million of cuts/adjustments would be required to allow for the portion of the 1997 budget year prior to implementation. Council would need to provide staff with guidance around those service areas/reduction items that should be eliminated or, alternatively, provide specific dollar reduction targets for Departments and Boards. Staff would prepare the appropriate impact reports on the service cuts for Council consideration and approval on February 20, 1997.

A significant item yet to be considered is one of a wage/salary increase for 1997. As already mentioned, the preliminary budget figures do not include an allowance for any increase. A 1% across the board increase represents $3.3 million or a 1.0% tax increase. Depending on the course of action taken by Council, there may be funding on the table to address a payroll increase. At this point our preference is to meet a wage/salary increase with a corresponding service cut, should that action become necessary.

4. Property Tax Impacts

The City Choices flyer discussed the dollar impact of potential tax increases on sample residential (Class 1) and business (Class 6) properties. The City's 1996 general purposes tax rates for these classes of property were $2.66 and $14.56 for residential and business respectively, per thousand dollars of taxable value. Therefore, the average residential property in Vancouver, with an assessed value of $370,000, would see its 1997 taxes increase by about $59 with a tax increase at 6.0%. Similarly, a business property assessed at $900,000 would see its 1997 increase by about $786.

The above numbers assume an equal across the board tax increase for all classes of property. Council, however, has the option of levying a higher tax increase on certain classes of property as a matter of policy, especially in consideration of the response the City received from business taxpayers regarding their reluctance to absorb anything but a nominal tax increase.

Staff therefore suggest that they be directed to explore options for weighting a 1997 tax increase in that direction, alongside a normal across the board increase, and report those options back to Council later in the year in the form of a taxation policy report.

5. Capital from Revenue Program

The City's Capital from Revenue program, or pay-as-you-go as it is often called, is an alternative method to debenture borrowing as a means to finance the City's capital works. The program also gives Council more flexibility during the execution of a capital plan to vary or change capital projects and/or capital project financing on the fly.

The 1997-1999 Capital Plan recently approved by Council contained $32.2 million of capital from revenue financing for the three-year

period. Normally this funding is allocated equally in each year of the plan. As a last resort, staff suggest that certain capital projects funded from revenue could be deferred until a later date to provide one-time transitional funding for service cuts. This action, should it become necessary, would be reported back to Council at the appropriate time.

SUBSEQUENT EVENTS

With the approval of the recommendations of this report and the direction received from Council, staff will begin a detailed review of the budget estimates for report back at a later date. Additional reporting on service cuts may be required at the direction of Council.

The following represents a tentative schedule of subsequent budget events.

 

 Feb 06  Tourism Vancouver, Regional Development Cost Charges and City Programs in the Provincial Field reports to City Services and Budgets Committee for consideration.
 Feb 20   Service cuts and new revenues reports to City Services and Budgets Committee for consideration.
 Mar 27  City Services and Budgets Committee considers 1997 Park Board Global Budget report.
 Apr 10  City Services and Budgets Committee considers the Interim Report on the 1997 Operating Budget. This report will present the results of the budget review process and final recommendations for bringing the Operating Budget into balance.
 Apr 24  City Services and Budgets Committee considers the Final Report on the 1997 Operating Budget for approval.
 May 08

 City Services and Budgets Committee considers the allocation of capital funds from revenue along with final approval to the 1997 Basic and Supplementary Capital Budgets.

City Services and Budgets Committee considers the 1997 taxation policy options report, including a differential tax increase and a continuation of the phase-out of tax capping on commercial properties.

 May 15  City Services and Budgets Committee considers the formal budget resolution to adopt the City's 1997 Operating Budget and the property tax rating by-laws.

 

CONCLUSION

Given the recent $17.2 million down load from the Province and other economic factors impacting of the City's 1997 Operating Budget, immediate action needs to be taken in order to bring the budget into a balanced position. Council could decide to balance the budget with a tax increase or, alternatively, with service cuts applied selectively or across the board. Another option would reflect a combination of a tax increase and service cuts. The situation is critical and in the words of the Mayor in characterizing the down load "it is too much, too soon".

In order to assist Council in arriving at a decision to balance the budget, we have outlined a strategy in this report which systematically addresses the $27.5 million shortfall to a point where service cuts or incremental tax increases would be required to achieve a balanced position, separately or in combination. The recommendations of this report take into account the weight of public opinion we have received in response to the City's communication program and have the full support of your Corporate Management Team.

 

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Last modified: JANUARY 31, 1997
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