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HomeMy WebLinkAboutFND-002-19Clarington Finance Department Report If this information is required in an alternate accessible format, please contact the Accessibility Coordinator at 905-623-3379 ext. 2131. Report To: General Government Committee Date of Meeting: January 21, 2019 Report Number: FND-002-19 File Number: Report Subject: Budget Poli Recommendations: Resolution: GG -022-19 By-law Number: 1. That Report FND-002-19 be received; and 2. That the draft policy entitled "Budget Policy" be adopted. Municipality of Clarington Report FND-002-19 Report Overview Page 2 The Municipality of Clarington has historically had tax levy increases in line with an inflationary factor and asset management component. The proposed policy formalizes the past practices which were informal and provides guidance to staff and Council on what is an acceptable tax levy increase. 1. Background Financial Policies 1.1 The Government Finance Officers Association of Canada and the United States (GFOA) has listed as a best practice for financial management the adoption of a budget policy. 1.2 The Municipality of Clarington has followed similar practices on a recurring basis, however there is not a formally adopted policy on the preparation of the annual budget. The risk to the Municipality when policy decisions are not formally recognized is that this knowledge is lost when staff leave. Over the past 12 months, the Finance Department has seen several changes in senior management and it is anticipated over the coming five years that there will be significant changes to other departments in the organization whom are responsible for budget preparation. 1.3 The Finance Department will be modernizing fiscal policies and practices over the coming years in order to ensure fiscal sustainability, predictability and effectiveness in the delivery of financial services to other departments, Council and the public. 1.4 Once adopted, fiscal policies will be reviewed with future Councils to ensure alignment with their strategic priorities. Financial policies provides aids in the development of fiscal sustainability and strong financial governance. Importance of a Budget Policy 1.5 The annual budget is a key policy document that sets the priorities for the Municipality for the year. The allocation of resources to provide services to the public is a key outcome of the budget process. 1.6 Establishing a budget policy ensures that this process is predictable and that proper controls are in place for financial outcomes. 1.7 A key part of the draft policy is the annual tax levy increase determination. Historically, there has not been a formal determination of an acceptable increase. A benefit of pre- determining a range is that staff are able to prioritize projects, to bring in a proposed budget which is acceptable to Council. This will allow budget deliberations to focus on strategic decisions as the bulk of cuts have already occurred. 1.8 The policy does not obligate Council to approve the proposed budget, the ultimate decision is with Council. However, by knowing what Council's appetite is, staff are better able to draft the proposed budget for consideration. Municipality of Clarington Page 3 Resort FND-002-19 2. Key Aspects of the Proposed Policy Tax Levy Increases 2.1 The tax levy increase under the draft policy is being split into two components, one for operating budget impact and the other for capital budget impact. 2.2 The operating budget increase is indexed to the Ontario Consumer Price Index all items for the year ending July 31. The low end of the range is established at 75% of the index factor, with the high end being 125% of the index factor. 2.3 It can be argued that the use of Consumer Price Index is inappropriate because a municipality does not purchase the typical basket of goods that is used to establish the CPI. Other municipalities have used a self -identified "Municipal Price Index" (this index is not provided by Statistics Canada), or have used a Statistics Canada Construction Price Index. 2.4 For ease of public understanding, transparency, and predictability, it is suggested that the CPI is an useful index. The range is used to substitute for the fact that there may be years where the costs for municipal services may rise higher than the core CPI. 2.5 The reference month of July has been chosen to provide staff with the ability to know the target range prior to starting the budget process. This will allow Department Heads the ability to prioritize operating and capital projects knowing the allowable increase. While a later month may be chosen, such as October, it would result in the range being determined later in the process and could result in poor decision making. 2.6 As an annual inflationary figure is being used (the 12 months ending July 31), as long as the date is consistent from year to year the economic inflation will be captured. Issues will arise if the date is changed from one year to the other, this could result in manipulation of the inflation factor to either inflate allowable increases or depress the actual cost of inflation. 2.7 The second part of the levy increase calculation relates to the capital budget. Here the proposed range is 1.5% to 2% per year. This range was the proposed range in the 2017 Asset Management Plan which was received by Council. 2.8 The adoption of this policy does not obligate Council to follow the Asset Management Plan as presented, however it does provide for capital funding to bridge the infrastructure gap in the Municipality. 2.9 It should be noted that by 2021 the Municipality will be required to comply with new Asset Management Plan regulations approved by the Province of Ontario. By 2024, the plan requirements will force Council to identify any funding shortfall in the lifecycle activities for their assets, as well as how risks will be managed for not having sufficient funding. In essence, by 2024, Council will have to properly fund the Asset Management Plan or decide and disclose how it will deal with the shortfall. Municipality of Clarington Page 4 Reoort FND-002-19 2.10 By addressing the fiscal gap now for infrastructure replacement, the Municipality is mitigating the risk associated with the infrastructure gap and is actively working towards properly funding the asset management investments required to manage our $728 million (based on cost) in assets. 2.11 From 2008 to 2018 the Municipality has increased its annual contribution from the tax levy to the capital budget from $3.7 million to $7.2 million. An average increase in funding of 8.4% per year. This allows the Municipality to maintain its existing (and increasing) asset base as we continue to grow. 2.12 This policy includes guidance to establish a range for both the operating and capital budgets. This overall increase, out of necessity, is not going to be in line with inflation as there is an infrastructure gap which needs to be closed. This policy is similar to how the Municipality has budgeted over the past 10 years, however it is now clearly defined. 2.13 If the policy had been applied historically, the Municipality would have been within the budget range 7 of the past 10 years. One year the actual increase was slightly below the range and in one year the increase was slightly above the range. In 2010, the increase was significantly higher however this was a year of deflation and was following the market crash of 2009. The following chart shows how the past 10 years tracks against this budget policy: 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Low - July High -July Actual Historical Levy Increase vs Budget Policy Range (Using July CPI) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 4.20% 0.60% 3.68% 3.75% 2.03% 2.70% 3.38% 2.63% 2.63% 2.40% 3.83% 6.50% 0.50% 5.63% 5.75% 2.88% 4.00% 5.13% 3.88% 3.88% 3.50% 5.88% 2.35% 2.97% 3.80% 3.75% 3.75% 3.74% 3.65% 3.89% 3.15% 2.93% Low -July High -July Actual Municipality of Clarington Page 5 Report FND-002-19 External Agencies 2.14 The policy creates a new guideline for the annual ask of external agencies. In the past, there has not been guidance or limits on what may be requested from external agencies. 2.15 The proposed guidance would be increases are limited to 150% of the CPI (same factor used by the Municipality). The rationale behind having a higher limit (150% versus 125% for the rest of the Municipality) is that there is not a capital component. 2.16 There is also a $50,000 limit for the increase in place for those larger agencies. The lower of the CPI figure and the $50,000 limit would be used. 2.17 From time to time, an external agency may have valid reasons to ask for higher increases, such as a new service being provided (e.g. Courtice Youth Centre). These requests will be considered, however the general guidelines will be for recurring operations. Authority for Budget Changes 2.18 The budget is an estimate of the revenues and expenditures of the Municipality for the year. It is possible that these estimates, despite our best efforts, will be wrong although in aggregate the resources are available. 2.19 The section on authority for budget changes is intended to allow Department Heads to continue to provide the services which Council expects us to provide while providing flexibility in how they are provided. 2.20 This section allows for the shift of funds to address shortages provided that the total available funds does not change. For example, in years where there may be higher repairs and maintenance at the Municipal Administration Centre and lower costs at the 132 Church Street funds can be redirected. This ability prevents needed work from being deferred which could result in higher repair costs or service disruptions in the future. 2.21 The key point is that there is no overall increase in costs, any change is a reallocation from one account to another. Other Items of Interest 2.22 The budget also provides for guidance on how long projects may remain outstanding before they must be re -budgeted for. Currently, once an item is budgeted for those funds remain in the capital fund until they are expended or re -allocated. 2.23 The proposed policy will require that if the project has not started within two years of the budget being approved the funds for that project will be returned to the source (a specific reserve fund or the Tax Rate Stabilization Reserve Fund) for future use. Municipality of Clarington Resort FND-002-19 Page 6 2.24 By limiting the length of time that these funds are committed to a project which is not underway, these funds are freed up for use in higher priority or more time sensitive projects. This also ensures that changes in Council priorities are properly considered. 3. Concurrence Not Applicable 4. Conclusion 4.1 It is respectfully recommended that the attached draft policy "Budget Policy" be adopted for the 2019 and subsequent budget years. 4.2 This policy has been reviewed with Department Heads and there is unanimous support for this initiative. 5. Strategic Plan Application Not applicable. Submitted by: Reviewed by: Trevor Pinn, BZom, CPA, CA, for Andrew C. Allison, B. Comm, LL.B Director of Finance / Treasurer CAO Staff Contact: Trevor Pinn, Director of Finance / Treasurer, 905-623-3379 x.2602 or tpinn@clarington.net Attachments: Attachment 1: Draft Budget Policy There are no interested parties to be notified of Council's decision. Corporate Policy ciff;w4on If this information is required in an alternate format, please contact the Accessibility Co- ordinator at 905-623-3379 ext. 2131 POLICY TYPE: Financial SUBSECTION: POLICY TITLE: Budget Policy POLICY #: G14 POLICY APPROVED BY: Council EFFECTIVE DATE: REVISED: APPLICABLE TO: All Employees 1. Purpose The Municipality of Clarington is committed to demonstrating good governance and ensuring value for the tax dollar. The Budget Policy is a framework for the operating and capital budgets, emergency spending and municipal tax rate increases. 2. Scope The Budget Policy pertains to all municipal departments, boards, committees and other agencies within the reporting requirements of the Municipality. 3. Objectives The Budget Policy is intended to ensure that all budget and business plan preparations are made efficiently and effectively while advancing the objectives of the Municipality's Strategic Plan. Financial reporting and analysis for Council, departments, committees and other external agencies will be functional, relevant and predictably timed. Optimally a budget will allow Council and management to forecast revenues and expenditures, use that information to make informed decisions and measure the success of those resolutions. 4. Definitions Annualized Costs are any costs approved in the prior year's budget that were partial year expenditures converted for a twelve month period and included in the Base Level Budget (e.g. personnel hired in -year, municipal service contracts). Assessment is the dollar value assigned to a property by Municipal Property Assessment Corporation (MPAC) for the purpose of measuring applicable taxes. It is the value of a property used by the Municipality of Clarington to calculate property taxes. Assessment Growth is the increase in assessed property values as determined by MPAC. MPAC is responsible for province -wide assessments using current value assessment. Base Level is the amount for the year being budgeted in order to provide the prior budget years' service levels. The base level is calculated from prior budget year figures adjusted for annualized costs, capital impacts on operations (growth) and inflationary increases. Growth Adjustment is accounting for additional expenditures that will occur in the budget year as a result of changes in a prior year. For example, new roads completed in the prior year will require upkeep in the following year and will form part of the growth adjustment. Treasurer is the Director of Finance or any person appointed by the Municipality to fulfill the statutory requirements of the Treasurer under the Municipal Act, 2001. 5. Policy 5.1 Operating Budget and Business Plan Preparation Operating Budget Requests are to be submitted annually by the Director of each department in a format specified by the Treasurer. Each department's budget request is established on the prior year's figures with adjustments highlighting one-time changes, municipal growth and service level increases or decreases. Directors shall identify their department's goals and objectives in their budget request, integrating ties to capital budget requests, Strategic Plans and other corporate initiatives. Forecasting for department revenues and expenditures should be based on known commodity trends, approved studies, reports, by-laws and master plans. Timing significant costs, identifying external funding including grants, subsidies and donations are crucial to efficient use of municipal resources. Finance staff may be available to assist in the preparation of budget request estimates and forecasts with regards to legislative requirements, capital impacts, growth adjustments, cost savings or inherent efficiencies. As required by the Municipal Act, 2001, the budget will be balanced and shortfalls projected by greater expenditures than revenues will comprise the tax levy. The Municipality shall not budget one-time revenues including, grants, subsidies, transfers from Reserves or Reserve Funds and proceeds from the sale of property or other assets to fund ongoing expenditures. G-14 Budget Policy Page 2 of 5 5.2 Operating Budget Spending Prior to Budget Approval Departments are authorized to expend funds at the previous years' service levels, unless specifically directed otherwise by Council until the current operating budget has been approved. New programming or service enhancements are not to be initiated prior to the operating budget being established and approved by Council. 5.3 Emergency Spending When authority has not been granted through the Operating Budget for an expenditure, a department shall not expend funds unless, i. A report was prepared by the Director requiring the funds and approved outside of the budget process by Council. ii. An emergency occurs requiring the immediate use of funds approved by the CAO in accordance with the Municipality's Purchasing By -Law. 5.4 Operating Budget Reporting The Treasurer will provide financial details of the operating budget to Council for every quarter beginning June 30. Detailed financial statements of the operating budget will be provided monthly to each department by the 15th of the following month. Review of financial statements, analysis assistance and preparing forecast changes will be provided by the Finance Department where required. 5.5 Authority for Budget Changes When authority has not been granted through the operating budget and an increase to the approved amount is required, authorization is as follows: i. Increases to any line items are to be offset by a corresponding decrease in another item or through enhanced revenues that will be realized by the additional expenditure. ii. Salary and benefits accounts may only be used to offset another salary and benefit account. iii. Accounts that are used to offset another account must be of a related service either by sub -department or at the discretion of the Treasurer. iv. Notwithstanding the source of funding, all expenditures shall be recorded in their appropriate account for reporting purposes. Budget changes will be summarized and provided along with the quarterly reporting to Council. Exceptions to the above approvals will occur when Section 275 of the Municipal Act, 2001 regarding restricted acts after nomination day is in effect. The upper limit for any approvals shall be as stated in the Act. G-14 Budget Policy Page 3 of 5 5.6 Capital Budget Capital Budget Requests and 5 -year Capital Budget Forecasts are to be submitted annually by the Director in a format specified by the Treasurer. Capital budgeting requires Council and staff to allocate scarce resources for current and future residents, setting priorities in union with strategic documents and master plans. Capital projects will be prioritized by criteria including risk, legislative requirements, growth, timing, fiscal impact and strategic alignment. Departments are only authorized to expend funds for capital projects approved in the prior year's budget until the following year's capital budget has been approved. When authority has not been granted through the Capital Budget for a project, a department shall not expend funds unless: i. A report was prepared by the Director requiring the funds and approved outside of the budget process by Council ii. An emergency occurs requiring the immediate use of funds approved by the CAO in accordance with the Municipality's Purchasing By -Law When authority has not been granted through the capital budget and an increase to the approved amount is required, authorization is provided through the Municipality's Capital Project Over -Expenditure Policy (H17). Any funds budgeted for a capital project that are unexpended at the beginning of the third year following the year in which the project received approval, shall be automatically returned to the appropriate reserve fund. The only exception is if there exists an approved commitment for further expenditures in relation to the capital project in the form of a signed purchase order, contract, or other legal agreement the provisions of which contemplate further mandatory or discretionary expenditures. Projects that receive annual funding may only carry over one year's balance to the following fiscal year. 5.7 External Agencies Boards of Council, Committees and other external agencies are to submit budget requests annually to the Treasurer in the format specified. Budget request increases are limited to maximum increases of 150% of the Consumer Price Index for the Province of Ontario as at July 31 of the prior year or $50,000, whatever is lower. 5.8 Tax Levy Increases Municipal government is the closest to its citizens and has the best opportunity to affect quality of life by delivering local programs and services. The Municipality of Clarington faces legislative limitations in its ability to generate revenue and relies primarily on G-14 Budget Policy Page 4 of 5 property taxation to fund operations. Ensuring that property tax increases are affordable while maintaining the level of service that Council and residents expect, staff will prepare an annual budget where the tax supported levy, after assessment growth increases as follows: Operating Budget: a. increases are at minimum 75% of the Consumer Price Index (all items) for the Province of Ontario 12 month change as at July 31 of the prior year b. increases are at maximum 125% of the Consumer Price Index (all items) for the Province of Ontario 12 month change as at July 31 of the prior year Capital Budget: a. Increases are at minimum 1.5% per year. b. Increases are at maximum 2% per year. 5.9 Policy Review This policy shall be reviewed prior to the initiation of the budget process of the first year of each term of Council, or if deemed necessary. G-14 Budget Policy Page 5 of 5