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Staff Report
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Report To: Joint Committees
Date of Meeting: September 12, 2022
Submitted By: Trevor Pinn, Deputy CAO/Treasurer
Reviewed By: Mary -Anne Dempster, CAO
File Number:
Report Subject: 2023 Budget Guidelines
Recommendations:
Report Number: FSD-034-22
Resolution#: JC-056-22, C-192-22
By-law Number:
1. That Report FSD-034-22 and any related delegations or communication items, be
received;
2. That Staff prepare a draft budget maintaining existing, pre-COVID levels of service
and provide Council with service level adjustment options;
3. That Staff include requests from external agencies maintaining existing service
levels, and any changes to service levels be submitted separately for consideration;
4. That the 2023 budget schedule, as outlined within Report FSD-034-22, be approved;
and
5. That all interested parties listed in Report FSD-034-22 and any delegations be
advised of Council's decision.
Municipality of Clarington
Report FSD-034-22
Report Overview
Page 2
Council adopted a budget policy in 2019 that guides the preparation of the annual operating
and capital budgets process. The budget policy requires an annual report to Council to
determine the target municipal levy change for the following year. This report meets that
policy requirement.
1. Background
Budget Policy
1.1 On June 10, 2019, Council approved a new Budget Policy which provides guidance on
creating and preparing the annual operating and capital budgets.
1.2 As part of the policy, the Deputy CAO/Treasurer is required to report to Council in
September of each year with a report seeking guidance on the target municipal levy
increase for the upcoming budget year. This report meets this policy requirement.
2. Economic Factors
2.1 The Municipality of Clarington's budget must consider economic factors impacting the
Municipality and local region and the broader economic factors affecting all of Ontario
and Canada. This section provides highlights on the economic factors influencing the
development of the 2023 budget.
Canadian Economy
2.2 In its June 2022 forecast, TD Economics is forecasting an annual change in CPI of 6.7
percent for 2022, lowering to a 2.2 percent increase in 2023. This follows a 2021 yearly
CPI increase of 4.7 percent.
2.3 TD is forecasting the Overnight Target Rate (the Bank of Canada Rate) to increase to
3.25 percent by the end of 2022 and remain at that level until the end of 2023. This rate
had been at 0.25 percent before 2021 and is the key rate for debt rates and a factor in
determining returns for certain fixed -income investments.
2.4 According to Statistics Canada, the Building Construction Price Index (BCPI) for non-
residential builds for Toronto increased 17.0 percent from June 2021 to June 2022. The
index was set in 2017 as the baseline, therefore, goods costing $100 in 2017 have risen
to a cost $140.30 over the five years. Given our geographic proximity to Toronto, this is
the most reasonable index.
Municipality of Clarington
Report FSD-034-22
Page 3
2.5 Similarly, the BCPI for residential buildings in the Toronto area increased 26.5 percent
from June 2021 to June 2022. For clarity, if costs in 2017 were $100, they would now be
$173 due to the increase to the BCPI over the past five years.
2.6 According to Statistics Canada, the Raw Materials Price Index (RMPI) increased 32.4
percent from June 2021 to June 2022. Within this number, crude energy products saw a
72.4 percent increase. Similarly, wood, pulpwood, natural rubber and other forestry
products saw a rise of 25.6 percent over the same period. These costs would impact our
road repair costs (through asphalt and other sealants), building repair costs (wood,
drywall), and operating costs.
2.7 The following chart highlights the inflationary impact over the past five years using the
2017 base year for Statistics Canada. Goods on average costing $100 in 2017 would
now cost on average $157 (or a 57 percent increase). Most of this increase is in the
past two years.
$200.00
$180.00
$160.00
$140.00
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
Inflationary Impact Based on Statistics Canada Base Year
(2017)
2017 2018 2019 2020 2021 2022
■ BCPI - Residential a BCPI - Non -Residential
2.8 The following chart shows the annual change as a percentage for 2018 to 2022 for the
BCPI, the Raw Materials Price Index (RMPI), and the CPI. While the average change
for the four indices is 9.2 percent, the average levy increase has been 2.3 percent.
Municipality of Clarington
Report FSD-034-22
Annual Inflationary Index Year over Year Change
June 2018 to June 2022
50.00%
40.00%
Page 4
30.00%
20.00%
10.00% • . •
i • r.: 0.00 aft is . •L P%Z •'ram .. . — . — . —
2018 019 20 2021 2022
-10.00%
-20.00%
• • • • BCPI - Residential — — — BCPI - Non -Residential RMPI
— — CPI- All Items Municipal Levy Change
2.9 In its July 2022 Monetary Policy, the Bank of Canada stated that it expects to see
inflation fall from 8 percent in the third quarter of 2022 to roughly 3 percent by the end of
2023. A decline in oil prices and lower housing prices in the second half of 2022 will
mitigate inflationary pressures.
2.10 The Bank of Canada is anticipating inflation to return to the 2 percent target by the end
of 2024, and global price pressures and domestic demand ease. Higher interest rates
will soften demand, reducing domestic inflationary pressures.
2.11 There is no anticipation of deflation in the Bank of Canada's Monetary Report nor the
TD Economics forecast; therefore, the inflationary impact of the last two years will
create higher costs that are not anticipated to decrease. While the inflation rate will
slow, the current prices are not expected to return to pre -pandemic levels.
Ontario Economy
2.12 In their June Provincial Economic Forecast, TD Economics noted that while the first half
of 2022 was slower for Ontario compared to the rest of Canada, the second quarter
appeared to have significant growth due to the Omicron variant as the economy
reopened.
2.13 Ontario's job growth outpaced the rest of Canada in the second quarter due to re -
openings, professional services and the public sector.
Municipality of Clarington
Report FSD-034-22
Page 5
2.14 Ontario is expected to slow down in the economy due to higher interest rates impacting
spending and housing activity. There is expected to be a reduction in the housing
market, particularly in the GTA suburbs (such as Clarington), as the housing market
corrects itself. The suburbs and exurbs had seen a notable increase in housing prices
during the Pandemic.
2.15 It is expected that housing starts will slow in the remainder of 2022; however, the
recently elected Conservative Government has announced several initiatives to
increase housing starts and reduce red tape.
2.16 In its 2022 Budget, the Government of Ontario projected GDP to increase 3.7 percent in
2022 and 3.1 percent in 2023, before decreasing to approximately 2.0 percent in 2024
and 2025.
2.17 The Province expected inflation of 4.7 percent in 2022, decreasing to 2.5 percent in
2023 and 2.1 percent in both 2024 and 2025. Through the first half of 2022, this
projection appears to be low; however, the stated target by the Bank of Canada
continues to be 2.0 percent (within a range of 1.0 to 3.0 percent).
Historical Economic Information
2.18 The following chart shows the Bank Rate for the past ten years. The Bank Rate sets the
tone for the Municipality's debt cost; if the rate increases, our cost of borrowing will also
increase.
Municipality of Clarington
Report FSD-034-22
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Page 6
Bank of Canada Bank Rate
(Monthly Rate 2012 to 2022)
N N M M M �t Ln N l0 W W n n W W W M M O O -1 N
a --I a --I c-I c-I ci ci ci a --I a --I a --I c-I ci ci a-i c-I c-I ci ci ci N N N N N N
Q va)i i O Q Z Q (Ai i 0 2 O Q Z Q
Bank Rate
2.19 The above chart impacts the Municipality's borrowing costs. As the bank rate changes,
the cost of debt will also change. Over the past ten years, the cost of debt has been
relatively low, seeing an increase from 2017 to 2019 before the COVID-19 Pandemic
resulted in the Bank of Canada reducing rates to protect the economy. Interest rates
have increased significantly in the second quarter of 2022; however, rates are
anticipated to decrease again in 2023. The Municipality's 2022 debenture was issued
before the July Bank of Canada surprise announcement of a 100 basis point increase in
the bank rate.
2.20 The following chart shows the 1-month and 1-year treasury bill rates. These are the
rates for relatively low -risk investments. This would represent a base level return on
investment.
Municipality of Clarington
Report FSD-034-22
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Page 7
Bank of Canada Treasury Rates
(Monthly Rates 2012 to 2022)
ci ci ci ci ci ci ci ci ci ci ci ci ci ci ci ci ci ci ci N N N N N N
a a V)� zU) Lo 2 o a z° a
• 1 Month Treasury 1 Year Treasury
2.21 As noted above, the Municipality is entering a time of increased interest rates, which
should provide additional investment income, following almost ten years of low -interest
rates. The ability to earn potentially higher returns on investment can be used to
mitigate tax levy increases; however, the interest return is still significantly lower than
the increase in inflation that the Municipality is seeing on the expense side. Improved
investments can mitigate the inflationary pressures, but they will not completely offset
them.
3. 2023 Budget Target
Range Per Budget Policy
3.1 The Budget Policy outlined a range for tax levy increases based on a combination of the
Consumer Price Index (CPI) and asset management requirements.
3.2 The low end of the range is set at 75 percent of the CPI value plus 1.5 percent, as
indicated in the asset management plan.
3.3 The high end of the range is set at 125 percent of the CPI value plus 2.0 percent, as
indicated in the asset management plan.
Municipality of Clarington Page 8
Report FSD-034-22
3.4 The July 2022 all items CPI was 7.60 percent for Ontario. The following table outlines
the Municipal Tax Levy increase range:
3.5 The July CPI reflects the increase in costs from July 2021 to July 2022. Part of the
increase in CPI relates to COVID-19 recovery as well as global political implications
from the Russian invasion of Ukraine.
3.6 The midpoint, which would be the target, is 9.35 percent.
3.7 Based on the 2022 municipal levy of $68,174,213 the policy target would provide
approximately $5.2 million for operating expenses (including transfers to reserves and
reserve funds, and debt servicing payments) and $1.2 million for capital expenses; this
would be in addition to new growth in assessment (NOT market growth which does not
have an effect on the tax levy).
3.8 The advantage of this approach is that it takes into account the increased pricing for
goods and services which occurred in 2022. This would mitigate the risk of service level
decreases as budgets could be adjusted to reflect the inflationary pressures that are
currently happening.
Alternative Calculation — Bank of Canada CPI Forecast for 2023
3.9 As in 2021 and 2022, an alternative to a historical CPI is looking at the Bank of
Canada's forecast for CPI in the following year. The Bank of Canada uses monetary
tools to attempt to keep inflation within a stated target of 1 to 3 percent, with a 2 percent
target.
3.10 The July 2022 Monetary Policy Report by the Bank of Canada forecasts a year -over -
year CPI change of 3.2 percent for 2023. Using this number as a proxy for the July 2022
CPI, the Budget Policy would have a target range as follows:
Municipality of Clarington
Report FSD-034-22
Page 9
3.11 The midpoint of this range would be a target of 4.95 percent. This would provide
approximately $3.4 million in additional revenue (with $1.2 million for capital). The
external agency target would be 4.8 percent.
3.12 The downside with this approach is that it does not account for the fact that 2022's
inflation was significantly higher than anticipated in 2021. Therefore, the Municipality
would still lose purchasing power as there is no recognition of the price escalation
during the 2022 year. Further, this still relies on the consumer basket of goods, which is
not reflective of the items that the Municipality purchases.
Alternative Calculation — Municipal Price Index
3.13 Municipalities are not like typical consumers; the "basket" of goods we purchase are
significantly different and may not follow CPI trends. Municipalities have various
services and deliver them in different ways. Municipalities in a Regional government
may provide other services than those in a County structure, and each municipality may
outsource different services versus providing them in-house. No two municipalities are
the same; therefore, there is no standard MPI that Statistics Canada calculates.
3.14 This year, Staff have developed an MPI estimate based on the weighting of the
Municipal "basket" and estimated inflation factors. The largest items in the "basket" are
Wages and Salaries (49.83%) and Benefits (15.17%); both of these factors are currently
being confirmed and are not yet set. The third highest weighting is materials and
commodities (9.02%).
3.15 Staff have estimated the MPI based on the municipal weighting to be approximately
7.39% for operating expenses. The advantage with this approach is that the inflationary
factor more closely resembles the "basket of goods" that the Municipality purchases.
There is better alignment then using the CPI, which is based on a consumer basket of
goods.
Municipality of Clarington
Report FSD-034-22
Page 10
3.16 There are several downsides. The first is that this calculation is for the operating
inflationary pressures. Capital costs have been rising, in some cases doubling, over the
past year. The capital inflation is not included in the above. As well, our Asset
Management Plan has highlighted that we have an infrastructure deficit which needs to
be funded. The 2019 policy used 1.50 percent to 2.00 percent to account for the deficit,
that number would be added to the MPI for a target; the 2022 AMP highlighted that this
estimate is low and a higher amount would be required.
3.17 Similar to the other alternatives, there is no reflection of the increase in costs that
occurred during 2022 that are not anticipated to correct in 2023.
Recommended Target
3.18 Each of the approaches above has advantages and disadvantages. Setting a target to a
specific number is arbitrary and does not reflect the services and goods that the
Municipality needs to provide service to residents.
3.19 The economic environment has been quickly changing over the year, and Staff continue
to monitor and adjust forecasts in response to the changes in costs, service availability,
technological changes, and legislative environments.
3.20 It is recommended that Staff prepare an operating budget based on the existing levels
of service, adjusted to remove any COVID-19 service restrictions included in 2022,
without a percentage target. The capital budget should be prepared based on
maintaining service levels from our infrastructure assets and prioritizing repairs and
maintenance to ensure assets meet the service level expectations.
3.21 It is recommended that external agencies be requested to submit requests without
service level enhancements and separately submit proposals for funding service
improvements for consideration.
3.22 This approach allows Staff to reset the budget for 2023 in the current economic
environment while maintaining service levels. Staff will provide Council with service level
changes as separate decision options during the 2023 budget deliberations.
Municipality of Clarington
Report FSD-034-22
4. Budget Calendar
Overview
Page 11
4.1 The budget sets spending guidelines and priorities for the Municipality's operating year
of January 1 to December 31. It is beneficial to pass the budget early in the year to
allow Staff sufficient time to complete the capital plan and adjust operating priorities.
4.2 Historically, the Municipality has passed its budget between late January and mid -
March. In September 2019, Council amended the Budget Policy to include that the
budget ratification shall be targeted for the second Council meeting of any given year.
4.3 The 2021 budget process saw the need to have additional time for both the Special
GGC deliberation day and the Council ratification. In setting the 2022 dates, Staff from
Financial Services and Legislative Services discussed having "spill -over" days already
established to ensure that calendars for both Members of Council and Staff could be
set. This approach appeared to work well from a planning and meeting perspective and
will be carried forward to future years.
2023 Key Dates
4.4 Based on the above, the 2023 budget calendar is as follows:
January 13, 2023 Draft Budget released
January 27, 2023 Special GGC Meeting — Presentation and external
agency delegations
January 30, 2023 and Special GGC Meeting — Budget deliberations
February 3, 2023
February 13, 2023 and Special Council Meeting
February 17, 2023
Municipality of Clarington Page 12
Report FSD-034-22
5. Key Assumptions for 2023
Levels of Service
5.1 Unless otherwise directed by Council, Staff are not anticipating changes in the level of
service to taxpayers and stakeholders of the Municipality of Clarington. There are no
new services anticipated and no planned service eliminations.
5.2 While levels of service will remain the same, the Municipality has seen and is expected
to continue to see development growth within our borders. This growth will be assumed
to require the same level of service. Staff will be highlighting in the 2023 budget the
growth -related impacts on operating budgets more clearly so that Council is aware of
the increased pressure growth has on our operations.
5.3 Over the past two years, the Municipality has approved three secondary plans, with five
expected to be approved in 2023. These secondary plans will facilitate significant
growth in the Municipality that will require resources and ongoing infrastructure
investment in the Planning and Development Services Department and future
maintenance by the Operations Division of Public Works. Additional resources for
engineering and parks planning will also be necessary to continue with the expected
growth levels in the Municipality in the future.
5.4 In March 2022, the Province of Ontario introduced new legislation requiring
municipalities to meet certain timeframes for developer approvals. Failure to meet these
timeframes would result in the Municipality refunding fees to the developers. The More
Homes for Everyone Act, 2022 received royal assent on April 14, 2022 and these
regulations will be in force for January 1, 2023. Staff will also propose additional
resources to ensure that the Municipality meets its timeframe requirements and
maintains current service levels in the Planning and Development Services Department.
5.5 Requests for additional resources, such as those identified above, will be included in the
2023 Budget through business plans and will include, where practicable, data to support
the proposed resourcing.
COVID-19 Impact
5.6 Over the past two years, the significant impact on our budget due to COVID-19 has
been related to the Community Services Department. Facility and program capacity has
been reduced, and resident demand may have been lower than prior to the Pandemic.
Staff are currently predicting that 2023 will be a return to pre -pandemic operations. We
are not anticipating reductions in capacity or demand on the revenue overall; changes in
consumer demands may change the mix of programs offered.
Municipality of Clarington
Report FSD-034-22
Page 13
5.7 As we had prior to COVID-19, we have seen difficulty retaining part-time aquatic Staff
(lifeguards and instructors). Based on the current labour shortage documented in the
news and by Statistics Canada, staffing availability may impact our ability to provide
certain recreational services. The current assumption is that staffing levels will meet
demand.
5.8 On the expense side, we anticipate that cleaning our facilities will be at standards not in
place prior to COVID-19 and require personal protective equipment that may not have
been standard prior to the Pandemic. These are expected to become the new standard
going forward.
5.9 It is not anticipated that COVID-19 will significantly impact other departments into 2022.
6. Financial Considerations
6.1 The annual budget process determines the resources available for the Corporation to
provide services and invest in the infrastructure required to provide services to
taxpayers in Clarington.
6.2 In 2022, the Municipality, businesses, and individuals in Clarington have seen the cost
of goods and services increase through inflationary pressures. It is currently too early to
determine the long-term cost impact of COVID-19 and the Russian invasion of Ukraine.
6.3 With a new Council coming in 2023, it is prudent to base a draft budget on existing
service levels, adjusted for inflation, and provide the new Council with information and
options for service changes.
7. Concurrence
Not Applicable.
8. Conclusion
It is respectfully recommended that Council approve the direction to Staff to develop a
draft budget maintaining current levels of service, adjusted for COVID-19, for the 2023
fiscal year.
Staff Contact: Trevor Pinn, CPA, CA, Deputy CAO/Treasurer, 905-623-3379 ext.2602 or
tpinn@clarington.net.
Attachments:
Not Applicable
Municipality of Clarington
Report FSD-034-22
Interested Parties:
There following interested parties will be notified of Council's decision:
• Clarington Public Library and Museums
. Visual Arts Centre of Clarington
. Downtown Bowmanville BIA
• Orono BIA
• Newcastle BIA
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• Clarington Board of Trade
• Community Care Durham
• Grandview Children's Centre
• John Howard Society of Durham Region
• Newcastle Hall Board
Page 14