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HomeMy WebLinkAboutFIN 02-18DICKERING (0t/ Report to Council Report Number: FIN 02-18 Date: February 26, 2018 From: Stan Karwowski Director, Finance & Treasurer Subject: 2018 Current Budget and Financial Statements Excluded Expenses Reporting as Required by Ontario Regulation 284/09 Recommendation: It is recommended that Report FIN 02-18 of the Director, Finance & Treasurer regarding the exclusion of certain expenses from the 2018 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 2018 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 2018 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 2018 Budget for the following: • amortization expenses • post -employment benefit expenses FIN 02-18 February 26, 2018 Subject: 2018 Current Budget and Financial Statements Excluded Expenses Reporting as Required by Ontario Regulation 284/09 Page 2 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, 2016 was $342.6 million. Amortization Expenses Amortization expense (frequently referred to as depreciation) is defined as the annual expense or use of an asset over its estimated useful life. The expense is calculated by allocating the cost of the asset over its estimated useful life. For 2018, the estimated amortization expense is $10.4 million, based upon net assets of $223.8 million, which will reduce the City's accumulated surplus. However, offsetting amortization is $7.3 million in estimated additions to tangible capital assets for 2018. The net impact of tangible capital asset adjustments will result in a decrease of approximately $3.1 million 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 also represents the accrued liability for Workplace Safety and Insurance Act Benefits. FIN 02-18 February 26, 2018 Subject: 2018 Current Budget and Financial Statements Excluded Expenses Reporting as Required by Ontario Regulation 284/09 Page 3 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 $380,350 for 2018. Transfers To/From Reserves and Reserve Funds The current budget, prepared using the cash method, includes transfers to/from reserves and reserve funds and is not considered an expense under the accrual method accounting. In 2018, the net transfers to/from reserves and reserve funds is $4 million, which will increase the City's accumulated surplus by the same amount. Debt Principal Repayment The current budget also 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 internal loans and external debentured debt held at the Region of Durham. The estimated debt principal repayment in 2018 is $3.8 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 2018 resulting from the net exclusion of these expenses from the budget is summarized below. PSAB Additions to 2018 Budget (Reduces Surplus) Amortization ($10,392,202) Post -Employment Benefits (380,350) Total PSAB Additions ($10,772,552) PSAB Reduction to 2018 Budget (Increases Surplus) Tangible Capital Asset Acquisition $7,259,328 Net Transfers To/From Reserves and Reserve 4,044,000 Funds Debt Principal Payments 3,825,770 Total PSAB Reductions $15,129,098 Net Increase in Accumulated Surplus $4,356,546 FIN 02-18 Subject: 2018 Current Budget and Financial Statements Excluded Expenses Reporting as Required by Ontario Regulation 284/09 February 26, 2018 Page 4 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 Prepared By: James Halsall Manager, Budgets & Internal Audit Approved/Endorsed By: Stan Karwowski Director, Finance & Treasurer Recommended for the consideration of Pickering City Council of) i°, ZaiB Tony Prevedel, P.Eng. Chief Administrative Officer