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HomeMy WebLinkAboutFIN 02-17 cdy a Report to PiCKERING Council Report Number: FIN 02-17 Date: February 27, 2017 From: Stan Karwowski Director, Finance & Treasurer Subject: 2017 Current Budget and Financial Statements Excluded Expenses Reporting as Required by Ontario Regulation 284/09 Recommendation: It is recommended that Report FIN 02-17 of the Director, Finance & Treasurer regarding the exclusion of certain expenses from the 2017 Budget be adopted in accordance with the provisions of Ontario Regulation 284/09 of the Municipal Act, 2001. Executive Summary: Under Ontario Regulation 284/09, municipalities are required to report on whether amortization expenses, post-employment benefits and other expenses are included in their annual Current Budget. This Regulation allows a municipality to exclude estimated expenses for these items from the 2017 annual budget, however, the municipality is required to report on the financial effects. The required reporting provides a reconciliation between the budget preparation method (cash flow) and the Public Sector Accounting Board (PSAB) standards for financial statement reporting purposes. Adoption of this report by Council fulfills the reporting requirements of the Regulation. Financial Implications: There is no financial impact from the exclusion of these expenses as the annual budget is prepared on a cash flow basis. This document provides an accounting reconciliation between the two reporting methods employed in the annual Current and Capital Budgets and the 2017 Audited Financial Statements. Discussion: Ontario Regulation 284/09 under the Municipal Act, 2001, S.O. 2001, C. 25 as amended, allows a municipality to exclude expenses from the 2017 Budget for the following: • Amortization expenses • Post-employment benefit expenses FIN 02-17 February 27, 2017 Subject: 2017 Current Budget and Financial Statements Page 2 Excluded Expenses Reporting as Required by Ontario Regulation 284/09 In 2009, public sectior accounting standards and reporting requirements changed dramatically, with the most significant change being the introduction of tangible capital asset accounting. The new accounting standards, however, do not require budgets to be prepared on the same basis. The City of Pickering, like most municipalities, continues to prepare budgets on the traditional cash basis, which provides a clear and concise understanding of critical budget information. The annual budget process is an important municipal exercise that considers plans for the current and future activities of the City. One of the main outcomes of this process is to set the tax rate which Council is asked to approve. The tax rate is determined by the cash basis of accounting and does not include PSAB reporting requirements or accrual accounting and accounting for non-financial assets and liabilities such as amortization (depreciation) and post-employment benefits. Ontario Regulation 284/09 requires municipalities to prepare a report regarding the excluded expenses and adopt the report by resolution prior to the approval of the annual budget. The report must contain the impact of the excluded expenses on the City's accumulated surplus. The equity of a municipality is defined as "accumulated surplus". The accumulated surplus consists mainly of: • Any operating fund surpluses • Equity in Tangible Capital Assets • Reserves and Reserve Funds • Equity in Veridian Corporation • Capital Funds The City's accumulated surplus, which is largely comprised of equity in tangible capital assets, as at December 31, 2015 was $331.2 million. Amortization Expenses Amortization expense (frequently referred to as depreciation) is defined as the annual expense or use of the asset over its estimated useful life. Amortization expense is a tool used by financial professionals to predict the future annual financial commitment required for asset replacements. For 2017, the estimated amortization expense is $10.1 million, based upon net assets of$215.7 million, which will reduce the City's accumulated surplus. However, offsetting amortization is $9.6 million in estimated additions to tangible capital assets for 2017. The net impact of tangible capital asset adjustments will result in a decrease of approximately $536,000 to the City's accumulated surplus. Post-Employment Benefit Expense Post-Employment Benefit expense represents the change in the accrued benefit liability for both post-retirement extended healthcare benefits and accrued sick leave entitlement. Since the City is self-insured for the purpose of workplace injury claims, it FIN 02-17 February 27, 2017 Subject: 2017 Current Budget and Financial Statements Page 3 Excluded Expenses Reporting as Required by Ontario Regulation 284/09 also represents the accrued liability for Workplace Safety and Insurance Act Benefits. PSAB standards do not require liabilities associated with these benefits to be fully funded, however, actuarial reviews are conducted to estimate these unfunded liabilities. The projected increase in the post-employment benefits liability is estimated to reduce . the City's accumulated surplus by approximately $358,400 for 2017. Debt Principal Repayment The current budget, prepared using the cash method, includes a provision for the annual repayment of debt including both interest and principal. Under the accrual method, debt principal repayments are a repayment of a long-term liability and not an expense. The debt principal repayments are for external debentured debt held at the Region of Durham. The estimated debt principal repayment in 2017 is $2.9 million, which will increase the City's accumulated surplus by the same amount. Financial Summary The estimated change in the accumulated surplus of the City for 2017 resulting from the exclusion of these expenses from the budget is summarized below. PSAB Additions to 2017 Budget (Reduces Surplus) Amortization ($10,119,677) Post-Employment Benefits (358,400) Total PSAB Additions $(10,478,077) PSAB Reduction to 2017 Budget (Increases Surplus) Tangible Capital Asset Acquisition $9,583,607 Debt Principal Payments 2,949,103 Total PSAB Reductions $12,532,710 Net Increase in Accumulated Surplus $2,054,633 The changes to accounting and reporting requirements under PSAB are a financial accounting treatment only and do not affect operating surpluses. This difference is one of financial statement presentation only. Attachments: Not Applicable FIN 02-17 February 27, 2017 Subject: 2017 Current Budget and Financial Statements Page 4 Excluded Expenses Reporting as Required by Ontario Regulation 284/09 Prepared By: Approved/Endorsed By: ir/vot/ 71/4A-0-6( James Halsall Stan Karwowski c ^ Manager, Budgets & Internal Audit Director, Finance & Treasurer Recommended for the consideration of Pickering City Council J� /1 Tony re , ,y. ng. Chief Administrative Officer 1 , • • • I I • I i • I 1 • •