SUPPORTS ITEM NO. 5
CS&B COMMITTEE AGENDA
OCTOBER 26, 1995
ADMINISTRATIVE REPORT
Date: October 19, 1995
TO: Standing Committee on City Services and Budgets
FROM: General Manager of Corporate Services
SUBJECT: 1996 Operating Budget Projections
RECOMMENDATION
A. THAT in establishing the 1996 departmental operating budget
targets, Council instruct staff that the City's present
policy of holding tax increases to inflationary levels be
maintained. Currently the rate of local inflation is 2.7%,
but we are recommending a 2.5% tax increase for purposes of
developing 1996 budget targets, subject to a further review
in the early new year.
B. THAT in establishing the 1996 general purposes tax levy,
Council agree to pass through any tax increase attributable
to the Greater Vancouver Sewerage & Drainage District that
exceeds the tax increase percentage target approved by
Council.
COUNCIL POLICY
Council has followed a policy of holding increases in the general
purposes property tax levy (the balancing item in the annual Operating
Budget) to the level of local inflation.
PURPOSE
The purpose of this report is to summarize the projections for the
1996 Operating Budget and to seek Council instruction on a provisional
level of the general purpose property tax increase for 1996. A report
reference will be provided by the Comptroller of Budgets at the time
the report is considered by Council. The Appendix material outlines
the projected 1996 Operating Budget revenues and expenditures.
DISCUSSION
In recent years, Council has received an annual presentation which
outlines the projections for the following budget year. Staff have
typically used this presentation as a means of highlighting the
beginning of the budget process and for receiving Council input on the
issues facing the Operating Budget.
The revision of the budget process for 1995, in which departments were
required to submit their budgets to fit within an overall envelope ,
increases the importance of this presentation and the level of Council
input. In developing the 1996 budget estimates, the Corporate
Management Team would prefer a process in which they could concentrate
on building a budget that meets Council s overall fiscal objectives.
However, to make this process work, it is necessary to define the 1996
operating budget parameters early on. Estimates can be determined for
most components of the revenue budget, however, as the level of
increase in the general purposes property tax levy is a key component
in defining total City revenue, the revised budget process is
dependent on establishing a provisional tax increase percentage
target.
Recommendations A and B of this report seek that input from Council.
Council action on these recommendations will allow the budget process
to proceed in an orderly fashion, leading to a balanced budget
position early in 1996, subject to receiving 'hard' numbers for the
Province as noted below.
1996 OPERATING BUDGET PROJECTIONS
Our projection is that an increase of 3.4% in the general purposes tax
levy will be necessary to balance the 1996 Operating Budget based on
the assumptions contained in the projection model. These assumptions
will be reviewed as part of the presentation to Council.
This increase is comprised of two components. First, increases in the
City budget are projected to require a 3.6% tax increase. This
includes provision for normal inflation and other adjustments on the
1995 (or base) Operating Budget, plus expenditures for new services
(added basic) anticipated to be added in 1996. Some of these new
expenditures are offset by taxation revenue from new construction,
however, there remains a net increase in the expenditure budget that
will have to be covered by an increase in taxation or other revenues,
or by expenditure reductions elsewhere in the budget.
The second component of the projected tax increase is the requisition
from the Greater Vancouver Sewerage & Drainage District. Negotiation
among regional members has again delayed the significant cost
increases that have been anticipated as a result of secondary
treatment at Annacis and Lulu treatment plants.
However, while the 1996 requisition included in the preliminary
information from the GVS&DD suggest an increase over 1995 in the 1%
range (compared to the 30% range we expected), this requisition will
not be finalized until early in 1996.
There is concern, however, that if regional costs grow at a much
faster pace than City costs, our ability to absorb those costs and
maintain basic City services with an inflationary tax increase is
severely jeopardized. It is therefore the recommendation of the
Corporate Management Team that Council agree to pass through to
taxpayers any increase in the 1996 GVS&DD levy that exceeds the
inflationary tax increase approved by Council.
Expenditure Projections
Normal inflation and other adjustments in the 1996 Operating Budget
are anticipated at $8.0 million, including inflation in both
employment costs and other expenditures. These increases will be
somewhat offset by the anticipated completion of the 1994-1996 Budget
Management Program. We note, however, that an additional $3.0 million
in expenditure reductions remain outstanding from the BMP program,
which have been removed in the 1996 projections. If these reductions
are not achieved in 1996, Council will have the option of funding
these costs with transitional funding from Revenue Surplus consistent
with the practice followed in prior budget years.
Some of the more significant expenditures to be added to the budget in
1996 include:
One time costs:
1996 Election costs $1,100,000
Fire Equipment costs 1,400,000
Annualized costs:
Central Library $1,200,000
Police Building rent 1,125,000
Park Board added basic 900,000
Staff Training & Development Program 375,000
New Debt Charges $2,630,000
Revenue Projections
While City expenditures are anticipated to grow by 2.7% over 1995
(excluding GVSDD), the projection for new revenue growth is below
2.0%. This means that to achieve projected expenditure levels, the
tax levy will have to be increased above the level of general
inflation to balance the budget.
The most significant component of new revenue is from the addition of
new construction value to the Assessment Roll. Preliminary discussion
with the Assessment Authority suggests that new construction for 1996
could approach the levels experienced in 1995 ($6.9 million in new
taxes). However, as those values have not been confirmed, our
projection takes a more conservative view ($5.2 million).
On the other hand, we have a concern around the outstanding assessment
appeals in the downtown core area. Recent decisions from the
Assessment Appeal Board suggest that the City may face assessment
adjustments for commercial space that could negatively impact on the
tax levy.
Growth in non-taxation revenues is expected to be marginal at best,
and there are more risks than opportunities for increases in this
areas we move into the new budget year. Activity levels in the
development and construction sector appear to have peaked and we
anticipate shortfalls in the 1995 Operating Budget as a result. The
City s generally lower cash balances and lower short term interest
rates both contribute to lower interest earnings. Revenues from both
Parking Meters and Bylaw fines are down as a result of continuing
problems with vandalism and theft. There is also concern about the
ability of the Park Board to generate revenues from many of their
programs at traditional levels. All of these factors suggest that a
cautious view be taken to 1996 revenues at this point.
Support for the Operating Budget from other funds and reserves is also
expected to decline. Lower interest rates and more stable holdings in
the Sinking Fund will reduce the transfer to the budget in 1996 as
well. Moreover, the projections do not include the Budget Management
Program transitional funding that has been provided from Revenue
Surplus.
Council should be aware that our projections for 1996 have identified
several potential problems which may significantly change the
projected budget picture. These include:
Regionalization of Health Services
At present, negotiations are continuing with the Vancouver Health
Board on the proposed take-over of health services currently
provided by the City, either directly or under cost-sharing
arrangements with the City. In developing the projections,
Council will note that the net city cost ($7.0 million) of the
Health Department has be included. If negotiations are
successful, the bulk of these City costs will become the
responsibility of the Health Board and the City will no longer be
required to tax for them. However, the assumption of the
projections is that, if this happens,
Council will reduce the tax levy accordingly as a one-time
reduction to taxpayers. This reduction in City cost should not
be used to offset cost increases elsewhere in the budget.
Provincial Grants and Other Cost-Sharing Arrangements
In the 1995/96 federal budget, provincial governments were put on
notice to expect reductions in federal transfer payments. One of
the programs that may be at risk is the Canada Assistance Program
(CAP). The City currently receives approximately $1.8 million in
CAP funding annually, supporting staff positions and programs in
Social Planning, the Carnegie Centre, the Park Board and the
Community Services Grants budget. The risk is that the Province
will reduce or eliminate these cost sharing arrangements. A
funding reduction of this magnitude represents a tax increase of
0.6% in addition to the above projection.
The reduction in federal transfer payments could also impact on
the City in other ways. Although we have received no indication
from the government that such a move is contemplated, one of the
ways to pass these reductions through to municipalities would be
by reducing the amount of Municipal Grants (Revenue Sharing).
The City currently receives $20.0 million (almost 4% of its
revenue) from this source and any reduction in this source will
be an additional impact on the above projection.
Additional Police Costs Arising
from the Oppal Commission Report
The Oppal Commission report on Policing in British Columbia had
wide-ranging recommendations that could impact police operating
costs. Council has already approved the purchase of semi-
automatic revolvers for the Vancouver Police Department at a cost
of $1.3 million. There is the potential for additional costs
estimated at $700,000 to $800,000 related to additional programs
that may be mandated by the Provincial Government.
CONCLUSION
Overall, the slow growth of revenues, normal inflation in City base
costs and the addition of new expenditures from approved program
additions are projected to lead to a situation where the tax levy must
increase over the rate of inflation, which presently sits at 2.7%.
The projection for 1996 is for a tax increase in the range of 3.4%,
but we are recommending a tax increase target of 2.5% for purposes of
developing the City's 1996 operating budget, subject to Council
reviewing this target percentage early in the new year.
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