ADMINISTRATIVE REPORT

Date: April 12, 1999
Author/Local: K.Bayne / 7223
RTS No.: 0655
CS&B Date: April 15, 1999
CC File: 1605

TO:	Standing Committee on City Services and Budgets
FROM:	Director of Finance
SUBJECT:	1998 Operating Budget -Year-end Adjustments

RECOMMENDATION

THAT Council approve the following transfers from reserves into the 1998 Operating Budget in order to offset the current shortfall position:

Reserve for Tax Write-Offs $2,353,000
Capital Reserve $2,892,344
Debt Repayment Reserve $1,157,000
Reserve for Property Tax Arrears $2,530,666

GENERAL MANAGER COMMENTS

The General Manager of Corporate Services RECOMMENDS approval of the foregoing.

COUNCIL POLICY

The Vancouver Charter requires the City to maintain a balanced budget.

Council authority is required to draw funds from reserves.

PURPOSE

The purpose of this report is to provide an interim report on the 1998 Revenue Fund operating results at the year end and to seek Council approval to fund the current shortfall position.
BACKGROUND

The potential liabilities associated with property tax appeals and outstanding grants in lieu of taxes have been reported to Council by the BC Assessment Authority and the Director of Finance several times over the last few years. In annual reports to Council, the Area Assessor has commented on the number of outstanding assessment appeals going back several years that had the potential to impact on City revenues. One of the largest single appeals was Pacific Centre, a decision on which came down in the fall of 1998 and has led to a significant refund of property taxes and rents-in-lieu of taxes to Cadillac Fairview.

In reporting on the status of both the 1997 and 1998 operating budgets, the Director of Finance noted that outstanding grants-in-lieu of taxes related to Vancouver Port Corporation (1985 - 1998), the Canadian Broadcasting Corporation (1994 - 1998) and Canada Post Corporation (1995 - 1998) were of particular concern because resolution of the City's claims might result in lost revenue. This caution was also brought forward in the 1998 September Review report that Council considered on December 3, 1998.

The City's Operating Budget is backed by general and specific purpose reserves that can be accessed in the event of unexpected or extra-ordinary events that lead to a shortfall position. These reserves are funded from the annual operating budget when potential liabilities are identified. The difficulty in attempting to making full provision for anticipated impacts is understanding both the timing and extent of those impacts. Throughout this period, the annual budget has made provision for potential revenue losses related to tax write-offs and other issues associated with the budget.

On December 3, 1998, Council approved the following recommendation of the Director of Finance in relation to the City's year-end:

C. THAT any shortfall in the 1998 Operating Budget at the end of the year be funded first from the Capital Reserve, including any deficiencies in the Park Board revenue programs as contemplated in the Global Budget agreement.

This recommendation was part of the financial plan, including access to reserve funds, that had been developed to handle any adverse financial impacts from the resolution of these potential liabilities.

DISCUSSION

In an unexpected turn of events, several major issues that finance staff had been following were resolved during the last few weeks of the year, albeit with significant negative impact on the year-end financial results. The following table summarizes the results of the 1998 operating budget year, indicating a shortfall or revenues over expenditures of $8.9 million. Additional detail is provided in Appendix 1.

		Budget	Actual	(Over) / Under
Revenues
	Taxation Revenue	$376,007,700	$371,993,926	$4,013,774
	General Revenue	88,650,200	85,307,739	3,342,461
	Utility Revenues	72,205,100	72,262,574	(57,474)
	Transfers	13,238,700	13,271,528	(32,828)
		$550,101,700	$542,835,767	$7,265,933
Expenditures
	Departmental Expenditures	$486,312,400	$487,955,845	($1,775,199)
	Debt Charges	43,594,600	43,591,856	2,744
	Transfers	20,194,700	20,263,321	(68,621)
		$550,101,700	$551,811,022	($1,709,322)
Current Budget Position		$0	($8,971,775)	$8,971,775

There are a variety of reasons for this deficit position, however, for the most part, this position is the result of the extraordinary items in the budget discussed below rather than the normal operations of City departments.

1. The Revenue Results

There were two significant events late in 1998 that have impacted on the City's revenues. The full impact of these events were unknown even at the time that the September Budget Review was developed:

Assessment Appeals:

During 1998, the Assessment Authority and Assessment Appeal Board moved to complete outstanding appeals dating back several years. This level of activity resulted in significant downward adjustments to several properties on the assessment roll and the refund of general purposes taxes that went beyond the annual provision in the Operating Budget. Overall the cost of assessment appeals exceeded the provision in the budget by $2.4 million.

The most significant single appeal ruling related to Pacific Centre for the 1993 and 1994 assessment years and resulted in a reduction in the taxable value of the property by approximately $90 million in 1993 and $44 million in 1994. The City provided refunds of general property taxes ($1.26 million) and rents-in-lieu of taxes ($2.27 million) to Cadillac Fairview totalling $3.54 million. There was no specific provisionfor these payments in the 1998 Budget, although staff had developed a contingency plan to deal with possible adverse results.

Grants-in-Lieu of Taxes Settlements:

In December, 1998, Council approved the settlement of outstanding grants-in-lieu of taxes with the Vancouver Port Corporation dating back to 1985. The settlement avoided the necessity of continuing a protracted negotiation with the Port Corporation in which the Corporation had the upper hand because of the permissive nature of grant program. However, the final cost of the settlement to the City was $1.93 million in lost revenue - an amount that was not provided for in the Operating Budget

There were also final settlements of claims with two other federal Crown agencies related to payments-in-lieu of taxes. After several years of discussions, the BC Assessment Authority reached valuation settlements on both the downtown mail handling facility of Canada Post Corporation and the regional headquarters of the Canadian Broadcasting Corporation. Both of these settlements resulted in a reduction of the value that had been used for developing revenue estimates and in a loss of revenue totalling $550,000. Again, these settlement were finalized late in the year and the loss of revenue was not provided for in the budget.

The total impact on the budget of these assessment and taxation related issues was $7.15 million.

There were two other noteworthy variances on the revenue side of the Operating Budget:

… Short term interest earnings were below estimates by $696,000 reflecting lower than anticipated cash balances and the deferral of the 1998 debenture issue.
… Trade and Inspection Fees were below estimates by $912,000, reflecting the significant decline in construction activity during the fall of 1998. This shortfall was experienced despite adjustments to the budget side totalling over $1.0 million at September Budget Review. Actual revenues for the year were almost $2.0 million below the original 1998 budget level, reflecting the downward trend in these revenues which quickly accelerated in the fall of 1998.

Overall, after allowing for surpluses in other areas of the revenue budget, the overall shortfall on the revenue side of the budget was $7.1 million.

2. The Expenditure Results

Overall, actual expenditures exceeded the budget by $1.9 million or 0.4%. For the most part, departments remained within the budget targets established in the Operating Budget, with two notable exceptions. The following table summarizes the results by business group:

		Budget	Actual	Under / (Over)
Mayor & Council		$1,229,000	$1,218,937	$10,063
City Manager		8,458,470	8,493,112	(34,652)
Corporate Services		21,434,300	21,181,218	253,082
Human Resources		2,896,000	2,795,775	100,225
Community Services		31,776,630	31,762,669	13,961
Fire & Rescue Services		59,972,800	60,813,613	(840,813)
Police Services		109,998,800	112,816,871	(2,818,071)
Engineering Services		97,085,800	96,604,722	481,078
Snow Fight		342,500	1,215,312	(872,812)
Park Board		38,403,700	38,070,867	332,833
Library Board		26,380,700	26,466,009	(85,309)
Miscellaneous		84,924,400	83,461,857	1,462,543
		$482,903,100	$484,900,962	($1,997,872)
				0.4%

As noted, most departments remained within the budget targets established during the 1998 budget process. There are two notable exceptions:

… The Police department exceeded its target by $2.8 million. As subsequent review of this result has indicated that about $750,000 of this amount was beyond the control of the department. The balance is comprised of expenditures on special projects such as the home invasion task force and a variety of other projects related to the enforcement mandate of the department and involves mostly overtime expenditures. At the time September Budget Review was undertaken, it was anticipated that the department would contain most of these expenditures, however, the final results proved to be much worse than anticipated.

The City Manager and Comptroller of Budgets have subsequently met with the Chief Constable and Police Administrative Officer to ensure that adequate controls are in place to prevent a recurrence of this result. In developing the 1999 departmental budget, funding sources have been identified as contingencies in the event that re-allocations are necessary during the year and quarterly reporting on the budget status will be provided to the Police Board, the Budget Office and, if necessary, to Council

.
…
The Fire Department budget was overspent by $840,000. The items that account for this overexpenditure have been identified and, for the most part were beyond the control of the department. These included, under-funding in the salary and benefits areas and unbudgetted expenditures related to staff retirements and double-banking. The department was also required to correct an accounting error that occurred in 1997 ($155,500) and was the victim of an overcharge for fuel as a result of a computer system problem which nets to zero in the overall City accounts.

Budget Office and Fire staff have reviewed these issues in developing the 1999 estimates.

… Council will also note that approximately $875,000 of snow fight costs were unfunded in the 1998 Operating Budget. Much of this over-expenditure relates to the late December snow falls experienced by the City. It is not the City's practice to budget for fall snowfight costs when developing the annual budget, but to absorb these costs within the existing Contingency Reserve allocation should they occur.

DEALING WITH THE SHORTFALL POSITION

The City does not currently have sufficient operating fund balance in Revenue Fund Surplus to absorb the current shortfall. However, the City does have more than adequate reserves which can be accessed to the shortfall position. The Director of Finance recommends the following transfers from reserves:

Reserve for Tax Write-Offs $2,353,000

The reserve for tax write-offs has been created over past several years in anticipation of that resolution of outstanding assessment appeals would result in revenue losses to the City. This transfer will eliminate the balance in the reserve, and replenishment of the reserve will be provided for, as appropriate, from future budgets.

Capital Reserve $2,892,344

The Capital Reserve accounts for surpluses and deficits on projects funded from Capital from Revenue, and the balance in this reserve had built up in recent years due to certain fortuitous events. Due to the existance of certain contingencies (which materialized in 1998), staff had kept this funding aside as part of the financial plan to fund costs otherwise not provided for. In approving the September Budget Review, Council approved the use of this reserve as the first source to fund any shortfall in the 1998 Operating Budget. This transfer will fully deplete this reserve.

Debt Charges Equalization Reserve $1,157,000

One of the recommendations of the September Budget Review Report was to transfer the funding for interest costs of the deferred 1998 debenture issue to the Debt Charges Equalization Reserve. As this deferral also impacted short-term interest earnings in

the 1998 budget, it is recommended that this allocation be reversed and the funds be made available to offset the current shortfall position in the budget.

Reserve for Property Tax Arrears $2,530,666

The Reserve for Property Tax Arrears is a financing reserve established in the 1970s to provide an internal source of financing for property tax arrears. As the City now has significant cash reserves in the Capital Financing Fund and Property Endowment Fund to provide for this purpose, it is recommended that the reserve be eliminated and funding be transferred into the 1998 year end.

In summary, the transfers recommended above will leave the 1998 budget year end in the following position:

Recommended Funding Sources $ 8,933,010
1998 Budget Shortfall (8,971,775)

Adjusted Final 1998 Results $ (38,765)

With the transfers recommended above, the 1998 Revenue Fund operations will be close to a balanced position and the external auditors will be able to complete their audit of the City's financial statements for presentation to City Services and Budgets Committee on April 29, 1999.

CONCLUSION

As a result of several extraordinary items that have left the 1998 budget year-end in a shortfall position, the Director of Finance is recommending the transfer of funds from several of the City's reserves. These transfers will result in the year end results being close to a balanced position.

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