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HomeMy WebLinkAboutFCS-13-120 - 2014 Budget Process REPORT TO: Finance and Corporate Services Committee DATE OF MEETING: August 12, 2013 SUBMITTED BY: Ryan Hagey, Director of Financial Planning PREPARED BY: Ryan Hagey, Director of Financial Planning 519-741-2200 x 7353 WARD(S) INVOLVED: All DATE OF REPORT: August 6, 2013 REPORT NO.: FCS-13-120 SUBJECT: 2014 Budget Process RECOMMENDATION: WHEREAS the City of Kitchener has established Strategic Directions for Financial Management that, when setting direction for property tax increases, require the City consider: comparison to other municipalities; inflationary factors, including those unique to municipalities; and balance of service levels versus affordability AND WHEREAS Kitchener has the lowest tax burden of cities in the Waterloo region and is well below the average of similar Ontario cities based on an independent study conducted annually by BMA Management Consultants Inc.; AND WHEREAS inflation projections for 2013 range between 1.3% to 1.5%; AND WHEREAS Kitchener citizens and City Council have indicated a preference towards inflationary tax rate increases that maintain services; THEREFORE IT BE RESOLVED THAT staff be directed to submit the 2014 tax-supported budget with a levy increase not exceeding 1.25%. BACKGROUND: The budget is the City of Kitchener’s annual financial plan and is the primary basis of financial decision making. The budget process allows Council to prioritize the programs and services delivered by the City and sets direction for the work to be completed over the upcoming year as well as future years referenced in the budget forecast. When preparing the budget, the following factors must be considered: The budget is a long-term plan that is revisited each year. As such, it should not be viewed in isolation, but as a long-range policy document that is reviewed and refined on an annual basis. The budget pressures facing each municipality vary based on factors such as size, services provided, geography, local economic conditions and even previous Council decisions. The budget must be viewed within the context of all the factors impacting that individual municipality. 5 - 1 The purpose of this report is to: Set the context within which the 2014 budget will be developed relative to the Strategic Directions for Financial Management; Summarize the major issues impacting the 2014 budget; Describe the approach proposed by the Corporate Leadership Team for developing the 2014 budget; Summarize budget timelines; and Outline the public input plan. The proposed budget plan for 2014 meets the expectation of Council and the community to deliver a budget that approximates inflation and maintains existing service levels. REPORT: 2014 Budget Context As with any budget process, there are a number of competing factors that must be considered when Kitchener Council adopts an annual budget. The City of Kitchener Strategic Plan provides guidance in this regard as it outlines the considerations which must be taken into account in order to arrive at “competitive, rational and affordable taxation levels”. The Strategic Directions for Financial Management require that the following factors be considered when making decisions with respect to property taxation levels: comparison to other municipalities; inflationary factors, including those unique to municipalities; and balance of service levels versus affordability The following sections will explore these considerations in more detail. Comparison to Other Municipalities The City of Kitchener enjoys competitive property tax rates compared to other large municipalities, and has the lowest tax burden amongst cities in the Region of Waterloo. The graph below shows the results of BMA’s annual tax burden analysis (based on the 2011 FIR) for the same bungalow property in each of Ontario’s largest municipalities. Kitchener now holds the fifth lowest ranking in the province, meaning it is one of the most affordable cities in Ontario. Annual Tax Burden of a Bungalow in the Large Ontario Municipalities (>100,000 people) 5 - 2 Note : This comparison does not adjust for storm water costs which are not included in the tax base for Kitchener, along with any other municipalities utilizing some form of storm water rate. Adding in the storm water costs for Kitchener would increase it to eighth lowest (between Barrie and Kingston). Even with a favourable ranking against comparator municipalities, Kitchener City Council approved the lowest 2013 tax increase locally, and has the lowest anticipated tax rate increase for 2014 as shown below, based on information currently available. Tax Rate Increase Comparison of Large Local Municipalities Municipality2013 Tax Levy Increase 2014 Projected Tax Levy Increase Cambridge 1.84% *See note below Kitchener1.39% 1.25% Waterloo 1.55% (before SWM phase in) 2.46% (before SWM phase in) Region 2.74% 2.80% * The Cambridge guideline for 2014 is to prepare the budget based on 2013 service levels (inflationary increase) while adding another 1% for growth. Inflationary Factors, Including Those Unique to Municipalities In its 2013 budget, the Federal government projected an inflation rate of 1.3% nationally, while the Provincial government projected an inflation rate of 1.5% for Ontario. The most recent monthly figure for June is 1.3% and the cumulative actual Consumer Price Index (CPI) inflation rate in Ontario from January to June is 0.8%. All of this is summarized in the table below. CPI Inflation Government 20132014-2016 Federal Budget CPI Projection 1.3% 2.0% (projection for Canada) Provincial Budget CPI Projection 1.5% 2.0% (projection for Ontario) Most Recent Actual CPI for Jun 2013 1.3% (actual for Ontario) Cumulative Actual CPI for Jan-Jun 2013 0.8% (actual for Ontario) In addition to CPI inflation, the City of Kitchener calculates a municipal price index (MPI), which accounts for the fact that the “basket of goods” the City purchases is considerably different than the basket of goods used to calculate CPI inflation figures. For instance, the top three components of the CPI calculation are shelter, transportation and food which do not apply the same way to a municipality as they do an individual. The MPI calculation accounts for the different costs of a municipality such as staffing, operating supplies, and capital construction. In the past two years, MPI has been approximately 0.25% higher than Ontario CPI, meaning that inflation pressures on the City of Kitchener budget have been slightly higher than on the typical Ontario household budget. 5 - 3 Balance of Service Levels versus Affordability As part of the 2013 budget process, the City commissioned a telephone survey of Kitchener residents regarding their opinions on tax rate increases and service levels. The survey questions regarding Kitchener’s budget were included in a broader survey called the Waterloo Region Area Survey which was conducted in the early summer by the Survey Research Centre at the University of Waterloo. The Survey Research Centre used best practices to ensure the citizens randomly selected to complete the survey were representative of the Region based on the 2006 Census data. As well, the Survey Research Centre actively supervised interviewers to ensure quality control throughout the survey process. Based on the methodology used to select respondents and the measures in place to maintain quality control, the Survey Research Centre “is confident the sample based on telephone data collection continues to represent Waterloo Region residents reasonably well and that weights could be applied based on age and sex within cities if needed.” The majority of respondents to the survey said they prefer an inflationary tax rate increase that maintains current service levels as shown in the chart below. Results of 2012 Phone Survey Regarding Taxes and Service Levels What is your preference regarding tax rate increases and service levels? No tax rate increase, reduction to services 29% Inflationary tax rate increase, maintain services 62% Beyond inflationary tax rate increase, improve services 8% This result is consistent with the findings of a demographically representative, statistically significant 2009 citizen survey conducted by Environics Research Group, which and found that citizens prefer high service levels over low taxes by a ratio of more than 2 to 1. Major Issues Impacting the 2014 Budget The following section outlines some of the major factors and issues that are impacting the 2014 budget. This section should be read in conjunction with Appendix A which provides a summary financial projection. Fire Arbitration The Kitchener Professional Fire Fighters Association has been without an employment contract since the start of 2012 and the matter is currently in a binding arbitration process due to the inability of the City and the Association to freely negotiate an agreement. The Fire budget consists largely of staffing costs and comprises nearly 30% of the City’s net tax levy. While many other public sector collective agreements are being settled at rates that approximate inflation (i.e. 2% or less), emergency service contracts (including Fire) are being settled at rates that exceed inflation (i.e. 2% or more). On the assumption that the arbitrated settlement for Fire will exceed inflation, and based on the relative size of the Fire budget compared to the overall tax supported budget, there will be upward pressure on the tax rate. 5 - 4 Utility Costs Incurred at City-Owned Facilities The annual increase in the cost of utilities (primarily electricity, water and sewer surcharge) has exceeded the rate of inflation in the recent past, and this is also the expectation for 2014. This increased cost impacts a number of city facilities (e.g. community centres, pools, arenas) and causes upward pressure on the tax rate. Assessment Growth Assessment growth provides new property tax revenue to the City from new development and reduces the need to increase property taxes to service the costs of growth. As shown in the chart below, assessment growth has declined between 2010 and 2012 and this trend is expected to continue in 2013. The forecast of 1% being used to develop the 2014 budget is based on information from the Municipal Property Assessment Corporation (MPAC), which oversees property assessment in Ontario, and based on year-to-date activity this presents an optimistic forecast. City of Kitchener Assessment Growth 2013 20082009201020112012 (est.) 1.27% 1.34% 2.08% 1.81% 1.68% 1.00% Year to date assessment growth at the end of July is 0.03% (last year for the same time frame was 0.79%). In light of the low result for assessment growth in 2013, staff are working directly with MPAC to ensure that all new development is captured in the assessment roll for 2013. Economic Development Investment Fund (EDIF) EDIF was a 10-year investment program that included funding between 2004 and 2013. Funding for EDIF was in the form of a direct transfer from the tax levy and an annual debt issue. The direct levy transfer portion of EDIF is no longer required in 2014 and will be removed from the tax levy. The costs of paying the principal and interest related to EDIF debt are still required as part of the tax levy until the debt matures between 2020 and 2029. The reduction in funding in 2014 is somewhat offset by the ongoing costs for items that have previously been funded through EDIF, such as Arts Sustainability and physician recruitment funding. Tax Stabilization Reserve Fund (TSRF) For many years, the TSRF has been used to offset property tax increases, but this reserve fund has become depleted through over-reliance and can no longer be used to subsidize property taxes. The transfer from the TSRF to the tax base will need to be completely eliminated in 2014, causing upward pressure on the tax rate. Unfunded Items in the Operating Budget During the 2013 budget process, staff outlined a number of items that have regularly produced negative variances within the tax supported budget. Some of these items were addressed as part of the 2013 budget process, but three significant items remain (Bylaw fine revenues, water & electricity costs, and Operations division shortfall). Based on the proposed budget guideline, there will be no capacity to correct these areas of chronic deficit and meet the targeted tax rate increase of 1.25%. Instead, staff propose that, should assessment growth exceed the projection of 1%, the additional assessment growth revenues could be used by Council to correct a portion of these unfunded items. 5 - 5 Strategic Initiatives Funding for strategic initiatives is meant to be used to invest in enhancements to existing services, provide new services, or implement recommendations from master plans and audit reviews. Strategic initiatives have not been brought forward during the budget process during this term of Council, as in all previous years the original budget submission has exceeded the rate of inflation. On the assumption that the 2014 budget submission will approximate inflation, staff will bring forward a prioritized list of strategic initiatives for Council’s consideration. This list will be provided to Council as part of the Budget Overview scheduled for October 21, 2013 to allow Council and the public to review the potential options and provide their input in advance of considering the Operating budget in December. As is the case with the unfunded items above, staff propose that if assessment growth exceeds the projection of 1%, the additional assessment growth revenues could be used by Council to invest in some or all of these strategic initiatives. Corporate Leadership Team’s Approach to Preparing the 2014 Budget Submission to Council Overall Target In proposing the overall direction for budget development, the Corporate Leadership Team considered all of the information provided in the previous sections of the report and gave special attention to the previously expressed desire of Council and the community to have a tax rate that approximates inflation while maintaining service levels. After much discussion, the Corporate Leadership Team established a working guideline for staff to develop a tax supported budget increase not to exceed 1.25%. This is below the 2013 Federal and Provincial projections for CPI inflation and is a substantial reduction from the original forecasted increase for 2014 of 3.32%. It is also significantly lower than the initial tax rate projections/targets for the Cambridge, Waterloo and the Region of Waterloo as noted earlier in the report. Reductions and Efficiencies Recent budget submissions from staff have exceeded the rate of inflation and been accompanied by a listing of potential reductions in order that the increase may be brought closer to the rate of inflation. As the 2014 budget submission from staff will approximate inflation, no listing of potential service level reductions will be provided. Instead, to meet the budget target of 1.25%, efficiency reductions within all divisional budgets will be required as inflationary increases will be allocated only to items such as compensation and utilities, and will not be allocated for other purchased goods or contracted services. A recent example of a significant efficiency was within Operations Winter Control where scheduling changes reduced the need of overtime call-ins as well as weekend overtime. All divisions across the City will again be asked to deliver the same services while receiving no additional funding for items other than collectively bargained compensation increases and utility costs. Restricting inflationary increases to the base budget has been used the past number of years and is causing significant pressure in many areas as costs continue to rise but budgets are held flat. If additional efficiencies cannot be found, this will lead to negative variances to maintain existing service levels or require a reduction to service level in order to meet budget. 5 - 6 Options for Additional Assessment Growth As outlined previously, staff have assumed that assessment growth will be 1% based on MPAC’s advice. If assessment growth exceeds 1%, there are three options available to Council as outlined below. Option 1 – Invest in Strategic Initiatives Outcome Enhancements to existing services, new services, or implementation of master plans and audit reviews. Staff will provide Council with a prioritized list of proposals based on previous Council discussions/direction to be considered during the Budget Overview scheduled for October 21, 2013. Tax Rate Impact None. Additional costs covered by additional assessment growth. Option 2 – Correct Unfunded Operating Budget Deficits Outcome Less likely to have an operating budget deficit due to more realistic budgets for areas of chronic deficit (Bylaw fine revenues, water & electricity costs, Operations division shortfall). This would also increase the likelihood of an operating budget surplus, which would build up the Tax Stabilization Reserve Fund to the minimum target balance. Tax Rate Impact None. Additional costs covered by additional assessment growth. Option 3 – Reduce the Net Tax Levy Outcome Lower property tax increase below 1.25%. Tax Rate Impact Reduction from proposed tax rate increase. Enterprise Budgets With respect to Enterprise budgets, the Corporate Leadership Team’s objective will be to limit controllable costs at inflationary amounts in the submission to Council. Certain portions of the Enterprise budgets are non-controllable (e.g., Regional water and wastewater wholesale charges, gas supply costs, etc.) and these amounts are treated as flow-through costs in rate- setting. Summary Budget Schedule The budget schedule for 2014 is outlined below. The bolded dates are Committee or Council meetings and are already included in Council’s approved meeting schedule. Budget Call distributed to Departments June Operating and Capital Budget preparation July-August Budget Process report to Council August 12 Capital Administrative Review Mid September Operating Administrative Review Mid October Budget Overview Presented to Council October 21 User Fees Presented to Council November 18 Capital Budget Presented to Council November 21 Operating Budget Presented to Council December 12 Public Input Session January (TBD) Final Budget Approval January (TBD) 5 - 7 Public Input Plan The City of Kitchener’s budget is presented by staff and discussed by Council in a forum that is open for the public to attend. The City has a long-standing track record of employing traditional citizen engagement methods such as advertising budget meetings in City facilities and community newspapers, receiving citizen feedback by mail or phone message, as well as holding a dedicated public input session where citizens can directly address Council about the proposed budget. More recently, the City has leveraged its investment in various electronic media such as the City website (www.kitchener.ca), Facebook, and Twitter to provide timely information regarding the budget. For the 2014 budget process, staff will employ a suite of traditional and electronic engagement methods in an effort to effectively inform and consult citizens. Staff will again receive feedback through mail or phone call, advertise the budget meeting schedule in City facilities and online, establish a dedicated budget web page which will contain all public budget information, and post budget updates on the City’s Facebook page and Twitter feed. As well, two new initiatives piloted during the 2013 budget process will be continued for the 2014 budget process in an effort to further engage the public. These two methods are: An interactive budget website which allows citizens to vote for various budget options and provide written feedback. An “Ask An Expert” session on Facebook dedicated specifically to the 2014 budget Based on the array of public input opportunities, citizens will be able to provide their input by: Writing/phoning City Hall Attending the public input session planned for January 2014 Attending the virtual Ask An Expert Facebook event dedicated to the 2014 budget Responding to the City’s Facebook/Twitter posts about the 2014 budget Completing the questions on the interactive budget website Contacting their ward councillor ALIGNMENT WITH CITY OF KITCHENER STRATEGIC PLAN: Foundation: Efficient and Effective Government Goal: Financial Management Strategic Direction: Strive for competitive, rational and affordable taxation levels FINANCIAL IMPLICATIONS: Financial implications are outlined throughout the report. COMMUNITY ENGAGEMENT: As outlined above in the Public Input Plan, the public has multiple avenues to stay informed and provide their input on the 2014 budget. ACKNOWLEDGED BY: Dan Chapman, Deputy CAO (Finance and Corporate Services) 5 - 8 APPENDIX A 2014 B UDGET SUMMARY The table below shows the breakdown of the projected 2014 tax levy increase as at the conclusion of the 2013 budget process. The bottom line of the table (F) shows the original projected tax levy increase of 3.32%. Subtotal 1 (D) shows the items that will be included in the budget submission to Council as well as the required reduction of 0.67% required to meet the tax rate increase target of 1.25%. Subtotal 2 (E) shows the items for Council to consider if assessment growth revenues exceed the projected increase of 1%. ProjectedProjectedRequiredProposed $’s Levy% LevyReduction% Levy 2014 Budget IncreaseIncreaseIncrease Base Base Inflation$2,615,000 2.50% Assessment Growth($1,046,000)-1.00% Capital Policy Growth$107,000 0.10% Operations Service Growth$340,000 0.33% Base Subtotal$2,016,000 1.93% A EDIF EDIF Levy($1,715,000)-1.64% New Main Library Growth$511,000 0.49% Arts Sustainability$220,000 0.21% Physician Recruitment$10,000 0.01% Specialist Recruitment$10,000 0.01% EDIF Subtotal($964,000)-0.92% B Tax Stabilization Reserve Fund$955,000 0.91% C SUBTOTAL 1$2,007,000 1.92%-0.67%1.25% D Items to be Considered if Assessment Exceeds 1% Strategic Initiatives$523,000 0.50% Unfunded Items$943,500 0.90% Net Levy Reduction$0 0.00% SUBTOTAL 2$1,466,500 1.40% E TOTAL$3,473,500 3.32% F 5 - 9