Agenda Index City of Vancouver

ADMINISTRATIVE REPORT

TO: Vancouver City Council

FROM: Director of Finance, in consultation with the Corporate Management Team

SUBJECT: 1999 Operating Budget - Projections

RECOMMENDATIONS

GENERAL MANAGER COMMENTS

CITY MANAGER'S COMMENTS

salary and benefit costs in our collective agreements, the impacts of general inflation, the impact of external factors on our non-taxation revenues and the addition of new operating costs as well as the growth in regional sewerage costs.

COUNCIL POLICY

It has been Council policy for many years that general purpose tax increases associated with development of the annual operating budget be held within the range of local inflation.

It is Council policy that changes in service levels, either expansions or reductions be approved by Council. This includes the creation and deletion of regular positions and the allocation of funding from revenues or taxation.

In approving the annual operating budget, Council has adopted the practice of passing tax increases related to requisitions from outside agencies, including the Greater Vancouver Sewerage and Drainage District, through to taxpayers rather than forcing reductions in City programs and services to meet Council's taxation objectives.

PURPOSE

The purpose of this report is to present the projections for the 1999 Operating Budget and to propose adjustments to the budget position reflected in the projection that keeps the increase in the general purposes tax levy in the range of local inflation.

BACKGROUND

On February 17, 1998, when considering the preliminary report on the 1998 Operating Budget, Council approved recommendations of the Director of Finance and the City Manager as follows:

A. THAT Council direct staff to submit a two year plan to manage the 1998 and 1999 tax increases . . .

B. THAT, as part of that two year plan, staff report back . . . on $3.5 million and $7.0 million expenditure reductions (roughly equal to 1% and 2% on taxes) beyond those achieved through normal budget review process for consideration in developing the two year taxation plan.

On April 7, 1998, staff reported the interim estimates of the 1998 Operating Budget to Council, including a response to the instructions to develop a two-year budget and taxation plan. The recommendations approved by Council included measures that brought the budget into balance with a 2% general purposes tax increase, comprising 1.1% for net increases in City expenditures and 0.9% for increases in the requisition from the GVS&DD. The measures approved by Council included new and expanded revenues and expenditure reductions with an ongoing impact of $2.2 million annually. Budget adjustments approved by Council impacted on all of the major departments with the exception of the Library.

Included in that report was a series of proposals for additional budget reductions that could be considered in developing the 1999 Operating Budget, the second in the two year budget plan. These proposals included a mix of new or expanded revenues, expenditure reductions related to achievement of internal efficiencies and additional reductions reflecting changes to service levels. In considering these proposals, Council instructed the Director of Finance, in consultation with the Corporate Management Team, to report these items back when it deals with the projections for the 1999 Operating Budget.

DISCUSSION

In recent weeks, the Director of Finance has worked with Corporate Management Team to update the budget projections and develop a strategy for developing the 1999 Operating Budget. This report presents the results of this work and recommends measures that will achieve Council's policy of general purpose tax increases in the range of local inflation.

The 1999 Budget Projections

The Operating Budget projections provide the first opportunity to review the issues that will impact on the next Operating Budget, including an estimate of the general purposes tax increase that would be necessary to maintain existing service levels. Development of the 1999 projections has involved a review of both revenues and expenditures in the budget, taking a perspective that they should present a realistic picture of the 1999 Operating Budget, especially if the result was a gap between the indicated tax increase and Council's taxation policy that would necessitate service level and/or staffing reductions. In presenting these projections, the Director of Finance notes that there are likely more threats to achieving the budget presented in the projection than there are opportunities to improve its position.

Overall, the projections indicate an increase of 3.1% in the expenditure budget and continued slow growth in non-taxation revenues. This combination indicates that a property tax increase in the range of 3.1% would be necessary in 1999 to maintain existing service levels.

1. The Revenue Projections

The revenue side of the Operating Budget includes the following components:

The projected increase in taxation revenue reflects the following:

· the downturn in construction activity in the City has begun to impact on the taxes generated from new construction. Initial expectations for 1999 are new revenues in the range of $4.0 million, down 18% from 1998. Declining activity in this industry will continue to impact on the budget in future years.
· the City is close to concluding several long standing valuation issues on properties held by senior governments. As a result, it is projected that revenue from grants-in-lieu of taxes will increase in 1999.

It is anticipated that general revenue will grow at 1.1% overall, equivalent to about $1.2 million. With the exception of those issues noted below, this level of growth is related primarily to changes in activity levels or to inflationary adjustments in fees rather than to the introduction of new or expanded revenue sources:

· Growth in cash reserves, in part tied to the timing of debenture issues, suggests a modest increase in short term interest earning can be expected in 1999. The projections include additional revenue of $300,000 or 2.8% over the 1998 level.
· On Street Parking revenues continue to grow as a result of increases in parking meter rates to reflect appropriate pricing of on-street parking, the expansion of the program into new areas and efficiency improvements in the enforcement area. The projection includes growth in both Parking Meter and Bylaw Fines revenues totalling about $850,000 in 1999.
· With the downturn in the provincial economy, there has been a slowdown in the pace of development and building activity that is reflected in Service and Inspection revenues. The 1998 budget position reflected a $1.0 million (5.3%) reduction from the 1997 level and there is concern that actual results this year will not achieve budget levels. The implications for 1999 are that revenues from these sources will continue to decline and the projection has been adjusted accordingly.

In addition to these changes, there are two other components of the revenue budget that require some comment:

· the projection holds the Provincial Equalization Grant at 1998 levels of $5.8 million. Council is aware of the significant reductions in transfer payments from Victoria since 1992, including the $17 million reduction in 1997 that forced both service level reductions and extra-ordinary tax increases. There has been no indication from the provincial government about the future of those payments beyond 1998 and, therefore, no reason to force additional reductions at this time by removing those grants from the projections.
· The projection includes the receipt of $1.5 million from the GVTA to support maintenance of the regional major road network in the City. Transfer of these funds to Vancouver is part of the devolution of responsibility for maintenance of secondary provincial highways in the region. Although this recovery has been included in the projection, application of this program in Vancouver has not been approved by Council, nor has the GVTA met to approve the transfer of funds.

Loss of either of these revenues would significantly worsen the 1999 projection and force either additional tax increases or service level reductions. Elimination of the Equalization Grant by the province would require an additional 1.6% increase in taxes. Failure to achieve the major road maintenance funding is equivalent to a 0.4% tax increase.

2. The Expenditure Projections

The expenditure side of the operating budget projections includes the following components (with the projected 1999 expenditures and percent change from 1998):

There are a number of drivers on the expenditure side of the projection, including:

· salaries, wages and benefits represent the most significant single class of expenditure in the Operating Budget at approximately $335 million. In the final year of the current collective agreements, most employees will receive a 1% increase. However, arbitrated salary increases for firefighters and sworn police staff, plus other changes in these collective agreements, will result in increases beyond inflationary levels. Overall, this represents an increase in the expenditure budget exceeding $6.0 million, equivalent to a 1.7% tax increase.

· departmental expenditures will also increase by the cost of new or expanded services that arise from the capital program or from Council approvals. There are several noteworthy additions in 1999:

· the City's new core financial / human resource-payroll system will go into production early in 1999. With this start-up, the City will be responsible for additional licencing and software maintenance costs estimated at $645,000 annually.
· there are a variety of other new costs anticipated to impact on the budget in 1999, including costs arising from the Park Board capital budget, increased operating costs associated with a variety of Engineering initiates and continuation of recently-approved program expenditures on the downtown eastside.
· the financing plan associated with the City's capital program anticipated growth in debt charges and capital from revenue contributions that exceed inflation. In 1999, these expenditures are anticipated to increase by $3.7 million. In addition, lower interest rates have resulted in a decline in the actuarial surplus on the Sinking Fund by approximately $600,000 from the 1998 level.
· as noted above, regional sewerage costs associated with enhanced treatment facilities continue to increase at rates well above local inflation. The GVS&DD requisition is expected to be in the range of $28.2 million, 12.6% above the 1998 level.

Recommended Budget and Taxation Target

The Director of Finance and the Corporate Management Team are satisfied that the current budget projections are indicative of the budget position that Council can expect once detailed budget preparation begins in January, 1999. The 3.1% tax increase suggested by the projections, comprised of 0.9% for regional sewer costs and 2.2% for growth in net City expenditures, reflects the impact of developing a budget for currently approved city operations and service levels in 1999.

However, a tax increase at this level does not satisfy Council's policy of inflationary tax increases. In order to meet that target, staff have developed a strategy for balancing the budget with a target tax increase of 1.9%. This position reflects a tax increase related to growth of City expenditures of 1.0% - equivalent to local inflation - and an additional increase of 0.9% related to flow through of GVS&DD costs.

Achieving this target involves a net reduction in the operating budget projections equivalent to a tax increase of 1.2%, or $3.8 million.

Adjustment to Achieve The Budget Targets

Working the Operating Budget to an envelope defined by a 1.9% tax increase represents a reduction in service levels, whether or not these reductions are visible in their impact on customer service. That is because with a tax increase of 1.9%, the budget will not grow sufficiently to provide for the increased contractual costs associated with collective agreements, the impacts of normal inflationary cost increases on other expenditures or the new costs associated with such expanded or new services as E-Comm or those associated with our approved borrowing plan related to capital expenditures. As noted above, it would take a tax increase estimated at 3.1% to avoid this result.

In order to identify the measures to be considered for achieving the budget and taxation target, CMT revisited the proposals submitted to Council with the Interim Budget in April, 1998 and identified new proposals that reflected new opportunities or changed circumstances within their departments. The objective was to develop a package of budget adjustments that minimized impacts on the delivery of public service.

The proposals recommended by the Corporate Management Team to achieve the budget target are summarized in Appendix 2. In addition to the proposed GVTA revenue, there is one new revenue source proposed by Engineering Services and a series of expenditure reduction proposals totalling $3.7 million on an annual basis which are distributed across all of the major business units in the organization. These reductions are aimed at taking advantage of efficiencies in departmental operations and limiting reductions to administrative support costs. However, after eight years of budget management programs, in which administrative and program reductions exceeding $20 million have been removed from the budget, the organization is generally beyond the point where reductions can be absorbed without impacting on service. As a result, the proposed reductions will result in an increased administrative burden and, in some cases, in the services following from those processes moving more slowly. While staff have attempted to minimize the direct impact on the public, the proposals recommended below do touch on public service and demonstrate that the ability to make "invisible" reductions is limited in the short term.

The recommended adjustments affect 27ftes, including full time, part time and auxiliary positions. If Council adopts these adjustments, the reductions will be made in time to be fully effective in the 1999 Operating Budget. The provisions of respective collective agreements will be observed in dealing with the individuals involved.

Approval of the recommendations in this report and the proposed budget adjustments that accompany them, will define an envelope within which staff will develop the detailed 1999 Operating Budget. However, as noted above, there are several factors that might impact on the final budget estimates by the time Council approves them in April 1999.

Implicit in Recommendation A is that Council agrees to pass any increase in regional sewerage costs through to taxpayers as a tax increase rather than further reduce City expenditures. Should these costs change before April, the expectation is that the regional component of the proposed tax increase - now 0.9% - will be adjusted accordingly.

With respect to the expenditures that Council is responsible for, there may well be changes before the budget process is complete that will require adjustments to be made. However, with the exception of a heavy snowfall, staff do not believe any of these will have significant impacts and it is unlikely that any will eliminate the need to deal with the gap between the 3.1% tax increase identified in the projection and Council's policy suggesting a tax increase in the range of 1.0%. The strategy outlined in this report is based on the assumption that we will receive both the provincial Equalization Grants and recoveries from the GVTA. If these are not realized, there will be no choice but to increase taxes beyond the 1.0% target or consider additional expenditure reductions to offset the loss.

CONCLUSION

The projections for the 1999 Operating Budget suggest that a tax increase in the range of 3.1% will be required to maintain existing service levels and provide for approved expenditure increases related to collective agreement costs, general inflation and new and expanded services. However, recognizing that Council has a policy of maintaining property tax increases at or near the level of local inflation, the Director of Finance, in consultation with the Corporate Management Team, has developed a budget plan which involves new or expanded revenues and expenditure reduction proposals for Council's consideration in order to hold the property tax increase to 1.9% for 1999, comprising a 1.0% increase for growth in City costs and 0.9% for growth in regional sewer costs.

ATTACHMENTS THAT DO NOT HAVE ELECTRONIC COPY ARE AVAILABLE ON FILE IN THE CITY CLERK'S OFFICE

* * * * *

csb1.htm

Comments or questions? You can send us email.
[City Homepage] [Get In Touch]

(c) 1998 City of Vancouver