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Author/Local: Ken Bayne / 7223
SUBJECT: 1998 Operating Budget - Preliminary Report
A. THAT Council receive the preliminary estimates of the 1998 Operating Budget for information and refer them to the Corporate Management Team and the Budget Office for detailed review and report back.
B. THAT in reviewing the estimates as submitted by departments, staff be instructed to:
- bring departmental budgets within appropriate target levels, reflecting only the cost of providing 1997 service levels at 1998 costs.
- remove any supplemental requests that reflect increase in service levels, new programs or staffing, and instruct departments to bring those requests to Council for consideration, with appropriate offsetting expenditure reductions or revenue increases.
C. THAT the Director of Finance, in consultation with the Corporate Management Team, report back to Council with the interim estimates and a plan for bringing the budget into balance.
The City Manager notes that while the estimates presented in this report have not been reviewed in detail, it is clear that without expenditure reductions Council’s target of a tax increase in the range of local inflation cannot be achieved. This reflects Council-approved capital programs and a period of peak debt charges, and cost increases outside Council’s control – loss of non-tax revenue, an arbitrated settlement for police officers significantly beyond inflation, and increases in regional sewer levies. Base departmental budgets have not increased beyond inflationary levels.
There are a number of factors which will impact taxation levels in the next two years. A modest surplus is anticipated in 1997 as a result of the labour dispute. While it is appropriate to use this surplus to reduce costs to the taxpayer, it would be appropriate to spread the impact of this over more than one year. The creation of utilities in 1998 and 1999 will reduce tax levels, but result in an increase in user fees for some taxpayers. The costs of the new emergency communications system delivered through E-Comm will impact the 1999 budget and taxation levels. While each budget year must stand alone, the City Manager believes it would be desirable to develop a specific two year taxation plan to smooth these impacts.
More generally, the cost of capital programs now represents a significant driver of tax increases. While some of this impact will be shifted to user fees with the implementation of utilities, the rate of increase remains a concern. While Council did consider this issue prior to the development of the 1997-1999 Capital Plan, Council may wish to begin the capital plan review process in 1998, rather than 1999, with a view to placing tighter limits on debt charges.
The arbitration process for police and fire wages continues to generate unacceptable budget impacts. Despite a significant effort in the most recent hearing to adjust the basis on which police settlements are arbitrated, the award in the recent police arbitration was based primarily on comparisons to the highest paid police officers across Canada. This resulted in settlements significantly beyond those obtained by other unions. This is a significant concern, particularly if the local economy is less robust than those elsewhere in Canada. Recommendation F of this report proposes that Council prepare a brief to the Province in this regard.
The general pressure on tax increases as a result of wage settlements, capital expenditures, regional costs and residual impacts from the loss of Provincial funding may once again have placed the City in the position of having to cut its own operating expenditures if Council’s tax objectives are to be reached. Better City Government initiatives may offer some assistance, however, many of these initiatives currently under way offer operating savings only in the longer term. While budget reduction efforts are disruptive, there is likely no alternative in the short term. If Council approves development of a two year tax plan, budget reductions should also be considered in a two year context.
In light of these comments, the City Manager RECOMMENDS approval of A to C, and D to F, below:
D. THAT Council direct staff to submit a two year plan to manage the 1998 and 1999 tax increases, reflecting a number of circumstances – an anticipated 1997 surplus, the implementation of utilities in 1998 and 1999, and significant cost increases from capital programs and authorized service level increases.
E. THAT, as a part of that two year plan, staff report back, with the Interim Estimates, on $3.5 and $7.0 million dollar expenditure reductions (roughly equal to 1% and 2% taxes) beyond those achieved through normal budget review process for consideration in developing the two year taxation plan.
F. THAT Council direct staff, in consultation with the GVRD Labour Relations Department, to develop a submission to the provincial government requesting changes in the legislation governing police and fire wage arbitration.
The Vancouver Charter requires the Director of Finance to present the estimates of revenues and expenditures to Council not later than April 30 each year and for Council to adopt a resolution approving the budget and a rating bylaw establishing general purposes tax rates as soon thereafter as possible.
The process of developing the Operating Budget normally involves three reports to Council. The preliminary report, presented near the end of January, outlines the position of the budget prior to a detailed review and seeks Council instruction on the overall budget envelope that meets Council’s budgetary targets. Subsequent reports submitted in April each year, bring the detailed estimates to Council for final consideration and approval.
Council has maintained a policy of holding changes in the general purposes tax levy to the level of local inflation.
The 1998 Operating Budget Estimates submitted to the Budget Office, reflect a preliminary view of the budget, prior to any detailed analysis by staff and prior to consideration of budget direction and guidelines being provided by Council.
The presentation in this report reflects the establishment of the Solid Waste and Sewer utilities and their removal from the tax supported operations of the City. Based on the budget estimates, as submitted, the following increases in taxes and utility fees would be required for 1998:
Increase
Increase
Tax Supported Expenditures
4.1%
Sewer
7.1%
With respect to property taxes, staff believe that the projected increase, after detailed review of the budget, might be reduced to approximately 2.5%.
Water and Solid Waste fees have already been approved for 1998. As noted, water rates increased by 6%. Solid Waste fees are based on a 1% increase in residential garbage costs plus the new recycling charge. Council has not decided on an implementation strategy for Sewer fees, however, a report on this issue will be before Council in March. If sewer userfees are implemented in 1998, the tax levy will be reduced for all classes of property to be replaced with user fees based on an increase in costs of 7.1% over 1997. If sewer fees are not implemented, these costs would remain on the tax levy, increasing the anticipated 2.5% property tax increase to about 3.2%.
As the indicated increases in property taxes and utility fees do exceed local inflation, the City Manager is raising the option for Council to establish a two year plan for budget and tax increases. This report identifies the factors generating tax increases for 1998 and 1999, which would be the starting point for consideration of expenditure reduction proposals.
With respect to the Sewer Utility, Council has approved separating it from tax supported activities, in part, because of the high costs of infrastructure programs at both the regional and local levels. As is the case with the water utility, which has experienced increases averaging 8 - 10% in recent years, the sewer utility has, and will continue to have, increases significantly above the rate of inflation. For 1998, Council will have to decide whether the cost increases should be passed on to users as tax or user fee increases, or whether there should be offsetting reductions in other areas of the budget to manage the overall burden increase to taxpayers.
This report reviews the status of the 1998 Operating Budget at the preliminary estimate stage, provides information about the major drivers in the estimates and indicates the implications of these estimates for general purposes taxation in 1998. Using these estimates as a base, the report seeks Council approval to refer the budget to the Budget Office and Corporate Management Team for detailed review and report back.
Council has undertaken several initiatives that impact on the preparation and presentation of the 1998 Operating Budget.
On November 9, 1997, City Services and Budgets Committee considered a report on the projections for the 1998 Operating Budget. That presentation highlighted several revenue and expenditure issues that were the major drivers in a projected general purposes tax increase of 4.0% to 4.5% range for 1998.
On October 7, 1997, Council approved the creation of the Solid Waste Utility and the adoption of user fees for residential garbage collection and disposal and blue box recycling services. At the same meeting, Council instructed staff to work toward a mid 1998 implementation of the proposed Sewer Utility, including the development of user fees for both sanitary and storm sewer costs. Introduction of these user fee based utilities impacts significantly on the Operating Budget because the services to be provided in the utilities have previously been funded from the general purposes tax levy.
On December 4, 1997, Council approved 1998 user fees for the Water and Solid Waste Utilities. The increase in fees for water consumption rose by an average of 6% above the 1997 level, reflecting increases in water purchase costs from the Regional District and increased debt charges related to the system maintenance and upgrading costs being undertaken by the City. The flat water rate for unmetered water connections, including single family residences, increased from $218 in 1997 to $231 in 1998.
The introduction of the Solid Waste Utility in 1998 means that residential properties will no longer pay for garbage and recycling services through the general purposes tax levy. The residential levy will be reduced by approximately $8.4 million to be replaced with user fees based on a mandatory service unit costing $145 annually. The new fees reflect only inflationary increases in garbage collection costs from 1997, plus a new charge for blue box recycling which has not previously been charged to residential properties.
Since the budget projections were presented in November, the process of developing the preliminary estimates has continued. This process involved review and updating, where appropriate, of the estimates of revenues, debt charges and regional sewer costs from the budget projections to ensure they reflect actual experience from 1997, as well as any additional information received since the fall. In addition, the Budget Office has worked with departments to develop expenditure targets upon which departmental budgets will be based. These budget targets make provision for the estimated costs of providing 1997 programs and services at 1998 costs, as well as for changes in expenditure levels arising from Council decisions on new or expanded levels of service.
All departments and boards have now submitted their detailed expenditure estimates. These estimates are summarized in Appendix 1 along with the anticipated revenues, debt charges and transfers that form part of the budget.
The presentation of the 1998 Operating Budget in Appendix 1 represents a change from presentations in prior years. With the approval of user fees for Solid Waste, the cost of these services along with those for water, no longer impact on general purposes taxes. As a result, the revenues and expenditures of the Water and Solid Waste Utilities have been omitted from the presentation to focus attention on those factors that are influencing the general purposes tax levy. Estimates for these utilities, based on the approved user fees, will be included at the interim estimate stage of the budget for Council’s information.
Council has also instructed that staff report back on implementation of sewer user fees in mid 1998. As a decision to proceed with this utility has not been made, the preliminary estimates do include all sewer-related costs. Council will further consider the utility model for sewers in a report in March. If a decision is made to proceed with this implementation, appropriated adjustments will be made to the Operating Budget estimates.
The following table summarizes the current position of the 1998 Operating Budget with comparable information for 1997. This presentation excludes the costs and revenues associated with the water and sewer utilities in both years.
These estimates are shown in more detail in Appendix 1 of this report.
The estimates presented in Appendix 1 are those submitted by departments prior to any review. As such the variances indicated between the 1998 preliminary estimates and the final 1997 budget, represent only the starting position of the budget. The intent of Budget Review will be to validate or eliminate requests that exceed budget targets. What is important at this stage of the budget process is an understanding of the factors that are driving the changes in the budget and the development of strategies that will assist in bringing the estimates in line with Council’s overall budget and taxation targets.
The revenue estimates as presented in Appendix 1, show an overall reduction of $13.2 million or 2.8%, from the 1997 level. This reduction reflects the impact of removing taxation and other revenues related to Solid Waste (which total $19.9 million). If the impact of these adjustments is eliminated from the preliminary estimates, revenues have increased 1.4% or $6.4 million over 1997.
Taxation Revenues are those generated by the general purposes tax levy. Two adjustments have been made to the opening tax levy bringing the estimate to $344.7 million prior to the application of any increase that Council may approve later in the budget process. The first adjustment relates to the creation of the Solid Waste Utility. As indicated during consideration of the Solid Waste Utility, the implementation of user fees for residential garbage and recycling will mean a reduction in the residential tax levy of approximately 5.6%, with the reduction targetted at properties in the residential class. The impact of the $8.4 million reduction for the transfer of solid waste costs is discussed later in this report.
The second adjustment to the tax levy arises from the addition of tax revenue from new construction value. A review of the completed assessment roll for 1998, received early in January, indicates new tax revenue totalling $4.9 million, up from $3.9 million projected in November.
There is continuing concern about the outstanding appeals before the Assessment Appeal Board. As a result, the estimates maintain the provision in the budget for tax write-offs at $2.0 million. Revenue expectations related to payments-in-lieu of taxes from senior governments, most notably the Federal Crown and federal Crown Corporations, have been reduced from previous years. Discussions related to the outstanding claims for payments-in-lieu have been on-going and staff expect to be in a position to report to Council on this issue prior to completion of the Operating Budget.
Other Revenue estimates include those for funding from the Provincial Government and most of the City’s fees and charges.
·The Minister of Municipal Affairs has confirmed that funding under the Equalization Grant program will continue and the preliminary estimates include this funding.
·Short term investment income has been increased to reflect higher interest rates and cash balances in the Revenue Fund.
·The increase in Licence Fees reflects the impact of fee increases approved for 1998.
·Service and Inspection Revenues are projected to decline by 2.3% from 1997. The most significant reductions are in the Trade Permit area where the level of activity declined in the closing months of 1997 and is expected to remain up to 10% below recent levels. This represents a loss of revenue of up to $1.1 million (7.5%) from 1997 results. Increases in some Engineering fees and charges are expected to partially offset these reductions.
·The estimate of revenues from Property Rentals has been increased from 1997 and from the projections presented in November. The recent agreement with Cadillac Fairview related the lease of the Pacific Centre parking garage has restored these revenues to 1997 levels.
·The City’s On-Street Parking Program continues to generate additional revenue following from increases in voluntary payments and extension of meter hours approved in 1997. Revenues from the parking program and bylaw fines are expected to increase by 8% over 1997 levels to $20.5 million. These increases are partially offset by expenditure increases in Engineering and Financial Services related to administration of the program.
·An increase in Miscellaneous Fees and Receipts is almost entirely accounted for by the recovery from the Port of Vancouver for policing services provided under an agreement signed during 1997. This new recovery offsets additional manpower costs in the Police Department.
Transfers into the Operating Budget include: the annual transfer from the Property Endowment Fund ($7.0 million); funding from the Hastings Park Reserve for maintenance of the PNE site pending relocation of the annual fair after 1999; and, the interest earned on the Art Gallery Reserve that offsets the annual operating grant to the Vancouver Art Gallery.
2. The Expenditure Estimates
The preliminary estimates include expenditures totalling $475.6 million, including Departmental Expenditures, Debt Charges, City & Regional Sewer Costs and Transfers Out of the Operating Budget. If the 1997 costs associated with Solid Waste are removed from the presentation, this represents an increase of $22.3 million or 4.9% over the 1997 level.
Departmental Expenditures include the operating costs of the programs and services offered by the City. The preliminary estimates indicate a $12.6 million or 3.6% increase in these expenditures over 1997, after adjusting for the impact of creation of the Solid Waste Utility and Sewer Utility.
Appendix 1 summarizes the changes in these estimates from 1997. However, as noted above, the preliminary estimates reflect departmental submissions that have not been subject to detailed review. Four factors tend to skew these variances:
·the departmental estimates exceed the budget targets developed by the Budget Office by approximately $3.0 million. One of the primary goals of Budget Review will be to review departmental submissions against these targets and make the appropriate adjustments.
·the preliminary estimates exclude any provision for turnover. Turnover is the salary savings that results of staff vacancies during the year. The 1997 Operating Budget reflected in Appendix 1 includes $2.6 million of turnover that was allocated to departments during the budget process. A review of the potential for turnover will be undertaken during the Budget Review process with appropriate allocations made to departmental budgets.
·the 1997 departmental budgets include funding for New and Non Recurring items which has been provided for, but not allocated, in the 1998 estimates.
·the 1997 departmental budgets included in Appendix 1 reflect adjustments made as a result of the transfer of strike savings reported in the September Budget Review Report. These one-time transfers have reduced departmental budgets by $4.7 million, giving the appearance of increases that are not real.
As a result of these factors, comparison of departmental expenditure estimates in Appendix 1 can be misleading. The process of reviewing these estimates will be undertaken over the next two months and will form the basis of the Interim Report in early April.
The preliminary estimate for Contingency Reserve is set at $5.5 million. This includes a general provision (normally in the range of $2.0 million) that will become part of the final budget to be approved by Council in April and be available to deal with issues that arise during the year. In addition, at the preliminary estimate stage, Contingency Reserve makes provision for issues that will be dealt with during the budget review process.
Debt Charges include the principle and interest payments due on the City’s tax-supported debentures in 1998. Ignoring the decline in Local Improvement Debenture costs, which are funded by a specific and offsetting levy to benefitting property owners, tax-supported debt charges are expected to increase by $2.6 million or 7.2% over the comparable 1997 level. When combined with the decline in surplus transferred from the Sinking Fund, the net increase in charges related to tax-funded debt is $4.4 million (15.1%). While representing a significant increase, the change in debt charges is consistent with the expectations in the 1997-1999 Capital Plan.
The other major funding component of the City’s capital program is reflected in the Transfer for Capital Purposes. Funding for this program was reduced in 1997 to assist in dealing with the reduction in transfer payments from the Provincial Government. The 1998 preliminary estimates include a 16.0% increase in these costs to return this funding to levels consistent with the 1997-1999 Capital Plan and to add $1.0 million of the $2.0 million approved by the voters in an opinion question on Community Centre upgrading.
Sewer Costs are also anticipated to increase beyond the rate of inflation and the rate of expenditure growth in the rest of the Operating Budget. The requisition from the Greater Vancouver Sewerage and Drainage District is expected to be approximately $24.66 million, up 12.1% from 1997. While increasing at a slower rate than regional costs, the costs associated with the City’s portion of the sewer system are also expected to rise by 3.6%. If sewer user fees had been in place, these fees would have increased by 7.1% in 1998.
3. Synopsis of the Drivers in the 1998 Estimates
When Council received the projections for the 1998 Operating Budget in November, staff identified a series of "drivers" that were putting pressure on the budget and on taxation levels. The preliminary estimates presented in this report continue to reflect the impact of these items. In summary, they are:
i)Erosion of Non-Taxation Revenues
Almost one third of the City’s revenues come from a variety of non-taxation sources. Since the early 1990s, the Operating Budget has been impacted by the variability of these revenues. Successive Budget Management Programs were, in part, reactions to the structural problems this variability created in the budget. The most significant impact was the withdrawal of transfer payments by the Provincial Government that left a $17.2 million shortfall in the 1997 Operating Budget. Council countered this reduction by a series of expenditure reductions, revenue enhancements and tax increase that exceeded local inflation.
The 1998 preliminary estimates continue to focus attention on the variability of non-taxation revenues, this time in the development and building regulation area. While the current decline in these revenues is the result of the cyclical nature of the development industry, they are notable because the City’s costs in this area are mostly fixed and short-term adjustments are not readily available. The problem with relying on these revenues is that action taken in one year to secure the revenue base is often completely offset in a subsequent year by changes in another category of non-taxation revenue. Fortunately, increases in On Street Parking and other revenues will offset these reductions in 1998, however, these kinds of offsets cannot be counted on every year.
ii) Impact of New Collective Agreements
The single most significant component of the increase in departmental expenditures in the 1998 preliminary estimates is the impact of new collective agreements for City employees. These contracts generally call for a 1% increases in salaries for 1998. However, the settlement for Police sworn staff, imposed on the City through binding arbitration, requires a 2.5% funding increase over the level included in the 1997 Operating Budget. Taken together with a provision for anticipated increases for Fire Department uniform staff, new contracts will add approximately $5.6 million to the 1998 Operating Budget, equivalent to a 1.6% tax increase.
iii) Costs from the City’s Capital Program
The City’s ongoing infrastructure replacement and upgrading program covered within the 1997-1999 Capital Plan is also putting pressure on the Operating Budget as a result of increased debt charges. One of the significant concerns at the time of approving theCapital Plan was that, unless the City was prepared to accept higher than normal debt costs, this program could not be maintained. Council’s decision to proceed with the program and absorb the medium term increase in operating costs is one of the significant drivers in the 1998 estimates for which there are no obvious offsets.
The 1998 preliminary estimates also includes one half of the $2.0 million provision for Community Centre upgrading that was approved by the voters in an opinion question at the time the Capital Plan was approved. The balance of this funding will be included in the 1999 Operating Budget.
The increase in debt charges related to the tax-supported capital programs will add $4.6 million to the Operating Budget in 1998, equivalent to a 1.3% tax increase. If the loss of Sinking Fund surplus is added, this rises to a 1.8% tax increase.
iv) Growth in Sewer Costs
Costs related to the growth of sewer costs, at both the City and regional level have been identified as having a major impact on the growth in the City’s budget for several years. Although the increases in regional costs anticipated in the early 1990s have been offset by lower capital and borrowing costs, the growth in the regional sewer requisition has out paced the growth in City costs for several years. Taken together, increased operating and debt costs for the City portion of sewer costs and the growth in regional costs, will add $3.8 million to the 1998 budget, equivalent to a 1.3% tax increase.
Treatment of these costs in 1998 will depend on implementation of the sewer utility. As noted above, under the utility model, these cost increases would be passed on in user fees, eliminating any impact on the general purposes tax levy. However, should Council decide not to proceed with the utility, these costs, and their tax impacts, will have to be accommodated within the Operating Budget.
The growth in the budget is influenced by a variety of factors that follow from Council approval of expenditures that maintain the City’s infrastructure and improve the services delivered to the public or are beyond Council’s control. Holding growth in the budget to inflationary levels in the face of these pressures will require identification of new revenues or offsetting expenditure reductions that will impact on current services.
IMPACT ON GENERAL PURPOSES TAXES
The presentation of budget impacts in this report attempts to reflect the overall impacts on taxpayers, incorporating both property taxes and utility fees. However, the impacts on property taxes, alone, are more difficult to explain. With the introduction of the solid waste utility fees, the average residential property will experience a reduction in taxes of 5.6%, as those costs will be funded through user fees. Thus, even with all properties experiencing a nominal 4.1% increase in taxes (ie. the preliminary estimate before Budget Review), the residential rate would be a reduction of 1.5%. Similar rate reductions would accrue to all properties if Sewer user fees were to be introduced in 1998.
OUTLOOK FOR 1999
Looking ahead to 1999, there are certain factors which will impact on the budget, including the following:
·non taxation revenues would be at risk if the province decides to eliminate the Equalization Grant or if there is a protracted slowdown in development in the City.
·although salary increases in the current collective agreements will not have as significant an impact on the operating budget in 1999, the growth in salary costs will likely exceed local inflation.
·the City will face the new operating costs associated with the opening of E-COMM and other new services and facilities.
·the borrowing program related to the 1997-1999 Capital Plan will continue to add debt servicing costs at a rate that exceeds inflation.
·although increases in regional sewer costs have begun to reach the peak identified in the regional long range plan, the City’s requisition for 1999 should continue to grow. Taken together with further increases in City debt charges for sewer purposes, it is anticipated that the demands on the budget will continue to grow faster than inflation.
Staff will be reporting on more detailed projections for the 1999 Budget shortly, and will quantify the factors impacting 1999, in order that a two year plan for budgets and taxation might be developed.
THE NEXT STEPS IN DEVELOPING THE BUDGET
It is recommended that Council refer the preliminary estimates to the Budget Office for detailed review with departments with instructions to:
- bring departmental budgets within appropriate target levels, reflecting the cost of providing approved service levels at 1998 costs.
- remove any supplemental requests that reflect increased in service levels, new programs or staffing and instruct departments to direct those requests to Council for consideration with appropriate offsetting expenditure reductions or revenue increases.
- report back to Council with the interim estimates and a plan for bringing the budget into balance within an acceptable taxation target.
It is anticipated that the interim estimates would be ready to report back to Council in the first week of April.
SUBSEQUENT EVENTS
With the approval of the recommendations of this report and the direction received from Council, staff will begin the detailed review of the budget estimates for report back in early April. The following represents a tentative timetable of subsequent budget events.
February 2 -March 13
the preliminary estimates will be reviewed in detail by the Budget Office and departments with a view to moving departmental submissions to targets established by the Budget Office.
February 19
City Services and Budgets Committee will consider the adoption of assessment averaging for 1998.
March 26
City Services and Budgets Committee will consider creation of the proposed Sewer Utility, including implementation options and mitigation measures to facilitate the new user fees.
April 7
Council will consider a staff report on the Interim Estimates on the 1998 Operating Budget, including the Park Board Global Budget.
April 30
City Services and Budgets Committee will consider the final report on the 1998 Operating Budget.
CONCLUSION
This report is the first of three reports that Council will consider over the coming months leading to approval of the 1998 Operating Budget in late April. These preliminary estimates indicate an initial shortfall of revenue over expenditures of $15.8 million prior to a detailed review by the Budget Office. This increase is driven by pressures on the budget including a continued fallout of the impact of the loss of Provincial funding, service level decisions made by Council (e.g. increases in debt charges or new costs related to service expansion) , and other factors which are beyond Council’s control (e.g. loss of non-taxation revenue, salary and wage cost increases, increases in regional sewer costs). It is recommended that Council refer the budget to the budget review process and that the Director of Finance be instructed to report back in early April with revised estimates that fit within Council’s budget and taxation targets.
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