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HomeMy WebLinkAboutCAO 06-13 elf c1 =`, Report to = Executive Committee PICKERING Report Number: CAO 06-13 Date: November 11, 2013 From: Tony Prevedel Chief Administrative Officer Subject: 2014 Base Budget Guideline - File: A 1400-001 Recommendation: 1. That Report CAO 06-13 of the Chief Administrative Officer be received; 2. That staff be directed to prepare and submit a 2014 base budget with the increase not to exceed 3.9%; and 3. That the appropriate officials be authorized to take the necessary actions to give effect thereto. Executive Summary: The purpose of this report is to seek Council endorsement of the proposed budget guidelines for the development of the 2014 base budget. The recommended guideline provides staff direction that in turn will facilitate the budget development process. (The base budget being defined as prior year's budget adjusted for known or anticipated revenue and cost pressures). A budget increase of 3.9% represents a continuation of 2013 service levels without any significant increases or decreases. The increase of 3.9% represents a refinement and updating of the increase of 3.5 —4.5% estimated by staff in Spring during the 2013 budget deliberations. The draft 2014 Capital Budget includes a provision for constructing the Operations Centre. The proposed 3.9% budget increase noted above will place the City in a position of financial sustainability in 2015 and beyond as the project is completed. If Council wishes to reduce the proposed guideline increase, serious consideration would have to be given to deferring construction of the Operations Centre, or changing service levels. The 3.9% proposed tax increase translates into an increase of 1.12% on a resident's total tax bill. This compares favourably to other municipalities, especially given that Pickering has had the lowest tax rate among its Durham Region lakeshore neighbours for over sixteen years. Adding the Region's proposed tax increase of 2.35% and the School Board's estimated 0% increase, the total increase for a Pickering residential ratepayer will be approximately 2.39%. 371 Report CAO 06-13 November 11, 2013 Subject: 2014 Base Budget Guideline Page 2 Financial Implications: The proposed 2014 budget guidelines will form the basis of the 2014 current and capital budget. The City's municipal budget represents_the City's fiscal plan for the upcoming year and lays the foundation for the next five years regarding capital and financing strategies. Discussion: The CAO and the Senior Management Team initiated the 2014 budget process early in July of this year. This was done to ensure that enough time is available throughout the budget process for review and analysis of all departmental budgets. The first preliminary draft of the 2014 and multi-year capital forecast has been received from the various departments and reviewed. In addition, other cost and revenue adjustments have been defined and included in the base budget. In order to provide services at 2013 levels, staff are projecting a budget base increase of 3.9% in 2014. If the draft base budget guideline estimate is deemed too high, staff anticipate that there may be a need for service level changes. The table below provides a summary of the anticipated base budget changes for 2014. 2014 Preliminary Base Budget Changes % Change Salary/Wage Compensation 2.2 Benefits 0.8 Energy (fuel and utilities) 0.4 Debt Charges 0.9 Total Estimated Cost Pressures 4.3 Less: Net Assessment Growth -0.6 Increase Use of Reserve/Reserve Funds -0.3 Building Permit Rev. Decrease 0.5 Base Budget Guideline 3.9% Based on the 2013 residential property tax allocation, the 3.9% base budget increase would translate into a 1.12% increase on the total tax bill. 372 Report CAO 06-13 November 11, 2013 Subject: 2014 Base Budget Guideline Page 3 Table One below provides a summary of the financial impact of the proposed 2014 base budget levy based on various assessed values. Table One Financial Impact of Budget Increases City Share Only Residential Assessment $200,000 $300,000 $400,000 $500,000 Annual Increase (Over 2013) $29.08 $43.61 $58.15 $72.69 The average sales home price in September for Pickering was $418,900. Using this figure, the preliminary levy increase translates into an additional charge of $60.90 annually. Taxpayer affordability is a key consideration when considering tax levy changes. There are basically two components regarding taxpayer affordability: household income and forecasted economic environment. Pickering has the highest average household income among Durham lakeshore neighbours as reported by BMA Consulting. Over the last sixteen years, Pickering residents have enjoyed having the lowest (lower tier) tax rate among its Durham lakeshore municipalities. The 3.9% projected levy increase will still maintain Pickering's competitive position with its lakeshore neighbours. The current economic environment can be described as sluggish. Ontario's gross Domestic Product (GDP) is projected to be 1.4% for 2013. A strengthening US recovery should provide much-needed support through 2014, translating into a projected Ontario GDP of 2.2%. With stronger projected GDP growth, Ontario's unemployment rate is forecast to decrease from its current 7.5% to 7.2%. These two factors — a stronger economy and lower unemployment - provide a more positive economic picture for 2014. Salary/Wage Compensation The above salary/wage compensation pressures include a provision for non-settled contracts and an estimated increase for non-union staff. Identified benefits pressures are mainly due to the increase in health-related benefit costs. The City and its benefit carrier are in a multi-year agreement and, for 2014, the rate freeze provided for in that agreement for Long Term Disability coverage has expired. Energy and Utility Pressures (Fuel, Natural Gas, Water & Electricity) Currently, energy pressures of approximately $194,000 have been identified. Staff will continue to review and monitor these cost pressures to ensure that the submitted budget reflects up-to-date rates and consumption patterns 373 Report CAO 06-13 November 11, 2013 Subject: 2014 Base Budget Guideline Page 4 As the graph below indicates, there can be wide swings from year to year regarding fuel costs resulting in an unpredictable cost pattern. Fuel and Oil Actuals $700,000 $600,000. I I I $500,000 I m $ OQ,Qa° :::: IiIuuIIuIII tia43''L�© 1►�p 4�ti��*14 I" '0©, 14 1„0 There are two components to fuel cost: price and consumption. Fuel consumption for the City can vary mainly due to the level of winter snow clearing activity. In addition, fuel prices can easily change based on weather-related events and International politics. Staff will continue to review its energy cost pressures to provide Council with the best possible budget estimate. Reduction in Rate Stabilization Draw During the current term of Council, the rate stabilization draw for current City operations has been reduced from $3,317,000 (2010 Budget) to $2,082,000 (2013 Budget) —a decrease of$1,235,000. The 2014 base budget plan does not include any further reductions. This draw reduction amount is at the discretion of Council. There is some flexibility regarding the reduction amount, however it is in the best interest of the City to continue to reduce its reliance on this reserve. Council can continue to reduce its reliance on this reserve by either making service level reductions resulting in budget dollars being available or by increasing the budget levy above 3.9%. Debt Charges - 2014 In 2013, the City budgeted for $4.37 million in interest and principal payments to service the City's debt. The preliminary forecast for 2014 is that$4.80 million will be required to service the City's debt. The preliminary forecast will be "fine tuned” over the next few months to reflect current and future market interest rate trends, timing of debt issuance . and capital projects. The timing of capital projects has a major impact on the timing of debt charges. In other words, if a capital project is going to be delayed.for a year, then there will be no requirement for the City to issue debt for the upcoming budget year. The result would be a deferral of the budgeted debt charges. 374 Report CAO 06-13 November 11, 2013 Subject:-2014 Base Budget Guideline Page 5 Financing of New Operations Centre and 2014 & 2015 Financial Impact The 2014 draft capital budget includes the new Operations Centre. The financing for this project is presented below. ($ Millions) Debt 10.0 Federal Gas Tax 4.0 Development Charges 8.7 Rate Stabilization Reserve 3.3 Total $26.0 The current jroected construction cost of$26.0 million excludes land, architect and p project management costs. It is anticipated that these additional costs will be funded through land sales in the Duffin Heights Development Area. As stated above, the new Operations Centre is being funded by $4.0 million in FGT funds. As a result, other infrastructure projects such as road resurfacing and energy efficiencies will be reduced in scope during this time period. The Operations Centre financing strategy includes borrowing $10.0 million over twenty years. For financial planning purposes, City staff have assumed an interest rate of 4.0%. Long term debt interest rates are still attractive and staff are recommending that this project proceed in order to take advantage of these rates. Should the project be deferred, interest rates and corresponding costs will increase. When external debt is issued, the first payment is due in six months and is on account of interest only. The remaining payments consist of principal and interest. Therefore, assuming one interest payment for 2014 and two interest and principal payments for 2015, the levy impact is presented below. 2014 2015 Debt Charges Budget Levy 0.4% 1.0% Impact (%) The 0.4% or $200,000 interest payment is included in the City's 2014 base budget. For 2015, an additional 1.0% levy will be required to service the Operations Centre debt charges (two payments of principal and interest). Net Assessment Growth (0.6%) Preliminary reports from MPAC indicate that net assessment growth is projected to be 0.6% for 2014. It is anticipated that this low rate of growth will continue until Seaton development occurs. Building Permit Revenue 375 Report CAO 06-13 November 11, 2013 Subject: 2014 Base Budget Guideline Page 6 Building Permit Revenues ($) 2011 to 2014 Draft Actual Actual Budget Projection Budget 2011 2012 2013 2013 2014 $1,494,487 $1,636,117 $1,350,000 $1,025,000 $1,100,000 The 2014 draft building permit fees budget has been adjusted downwards to reflect the 2013 projected revenues. The revenue decrease (budget to budget) is $250,000 and equates to a budget levy increase of 0.5%. Unfortunately, the decrease in building permit activity is an indicator of future assessment growth until development begins in Seaton. Budget Estimates As in previous years, the City budget includes revenue and cost estimates that are based on the best known information. These estimates will continue to be reviewed and refined as additional information becomes available. Long Term Major Capital Projects The following major multi-year capital projects are proposed for the years 2014 to 2018. Major Funding Sources Gross (Millions) Operating Cost Debt DC Other Costs Operations Centre $26.0 $10.0 $8.7 $7.3 TBD Next Term of Council Seaton Fire Station & Equip. 6.8 6.4 0.4 TBD Central Library Expansion 15.0 9.1 5.3 0.6 TBD Community Park 6.5 3.6 2.9 Museum Visitor Services Buildinc 7.25 2.5 5.0 TBD Senior Centre 18.8 3.6 15.2 0.0 TBD Total $80.3 $28.7 $38.5 $13.1 The debt charges above represent a forecasted budgetary levy increase of approximately 4.2% (assuming a twenty year amortization period). In addition, the operating costs associated with these capital projects are in addition to the 4.2% debt charges levy. (Operating costs include expenses such as staffing, energy and maintenance). Council will have to determine the timing and priority of these projects in future years. 376 Report CAO 06-13 November 11, 2013 Subject: 2014 Base Budget Guideline Page 7 Asset Management Plan or AMP In October of this year, the Provincial government announced their newest grant funding program for small, rural and northern municipalities. This grant funding program is for roads, bridges, water and wastewater projects. Municipalities who have a population of less than 100,000 may apply regardless of their location. A key component of this program is for the municipality to have in place an "Asset Management Program," by December 31, 2013. An asset management plan ("AMP") as defined by the Province is: "The process of making the best possible decisions regarding the building, operating, maintaining, renewing, replacing and disposing of infrastructure assets." An AMP requires a thorough understanding of the characteristics and conditions of infrastructure assets as well as the service levels expected from them. An AMP also requires a financial plan or strategy that will address the replacement and/or maintenance of the financial assets. Staff have engaged consultants to complete the City's AMP for roads and bridges. It is staff's intention to present this plan at the December 9, 2013 Council meeting. A few municipalities have already completed their AMP, resulting in recommendations to increase infrastructure funding. It is anticipated that Pickering's AMP will have similar recommendations to be considered in 2015. • Development Charges The proposed 2013 Development Charges Study includes gross capital costs of approximately $353.4 million, of which $221.2 million is planned to be funded from development charges. The residual balance is the City's share of$132.2 million. Growth-related capital costs can be funded either through development charges or the property tax base. Currently, the City contributes $580,000 (every year) to the City Share DC reserve to fund the City's proportional cost of the growth-related capital projects. Beginning in 2015, the annual contribution will have to be increased using a cumulative step approach. Employing this strategy will reduce future year's debt costs. 377 Report CAO 06-13 November 11, 2013 Subject: 2014 Base Budget Guideline Page 8 Preliminary Draft Budget High Level Levy Forecast The preliminary draft base budget levy forecast for the next three years is presented below. 2014 2015 2016 Base Budget Levy 3.9% 2.9% 2.9% Debt Charges New Ops Centre 1.0% Decrease in Draw Rate Stabilization 1.0% 1.0% Infrastructure Investment Step Increase TBD TBD City Share DC Funding Step Increase TBD TBD Revised Base Budget 3.9% Council will be able to control to some degree the base budget levy increase through service level adjustments and approval/deferral of capital projects. The use and level of debt financing over the next three years can change the projected base budget levy forecast. Next Steps Over the next few months, the City's Senior Management Team will continue to review budgets from the perspective of trying to find efficiencies and/or operational savings. However, given that Departments have significantly tightened their operating budgets over the past few years and financial mitigation measures have been explored and employed, it is likely that further reducing the base budget levy increase may require a reduction to service levels. The 2014 base budget levy increase already includes anticipated user fee increases. Staff are currently exploring new fees in order to maximize revenues that in turn will • create potential taxation room. Staff are cognizant of the fact that some fees are demand sensitive and, by increasing these fees, the City may have fewer participants, resulting in lower revenues. In addition, certain City fees have to be competitive with other municipalities or service providers or the City will lose revenues 378 Report CAO 06-13 November 11, 2013 Subject: 2014 Base Budget Guideline Page 9 Attachments: None Prepared By: Approved / Endorsed By: Stan Karwowski Paul Bigion- Division Head, Finance & Treasurer Director, C•rpo :te `ervices & City Solicitor Approved / Endorsed By: Approved / Endorsed By: b Tom Mely uk Richafd Holbo i Director, ity Development Director, Engineering & Public Works Approved / Endorsed By: Marisa Care•'"'o Director, !ul ure & Recreation SK:mld 1 Recommended for the consideration of Pickering City Council Cd: ZS, ZO8 Tony Prevedel, P.Eng. Chief Administrative Officer 379