TOWNSHIP OF ESQUIMALT STAFF REPORT
MEETING DATE: March 11, 2024 Report No. FIN-24-005
TO: Committee of the Whole
FROM: Ian Irvine, Director of Financial Services and Dan Horan, Chief Administrative Officer
SUBJECT: Budget 2024 Options Analysis
RECOMMENDATION:
Recommendation
That the Committee of the Whole recommends to Council that staff be directed to prepare the financial plan bylaw that reflects a revenue increase of 7.72%, aligning with the priorities, initiatives and levels of service articulated by Council.
Body
EXECUTIVE SUMMARY:
This report provides Council with further information related to preparation of the 2024 budget. The 2024 draft budget was first published in late January with materials to support Council’s deliberations, including a summary of the proposed Capital program, a summary of the Supplemental Requests (proposed increases to the core budget, or one-time project-related funding requests), and a summary of the staffing changes required to support Council’s program. This report includes discussion of risks and impacts for different scenarios connected to desired levels of service, Council priorities and the changes in revenue required to achieve Council’s desired outcomes.
BACKGROUND:
On January 29, 2024, staff provided a budget overview, including a presentation and a summary of the 2024 Capital and Supplemental Requests. On February 5, 2024, staff followed up with a report on Staffing Proposals to facilitate budget deliberations. The minutes of the February 5th meeting reflect broad discussion, including Council’s desire to achieve long-term sustainability, acknowledgement of infrastructure funding challenges, and confirmation that requests for additional staff are supportable. However, Council also communicated that the current draft budget’s impact on property taxes is high enough that staff should provide further information to better inform a Council discussion about budget options. Council passed the following resolution:
“That Council direct staff to report back with the following: what the budget would look like with less, including the resulting risks and impacts that would occur, what the budget looked like with more included, and rationale for why staff removed or reduced their budgets resulting in the proposed 7.65% tax increase.”
Since the presentation on February 5, the baseline budget for 2024 has been adjusted to reflect an increase of 7.72% (instead of 7.65%) due to the increased costs of property insurance renewal.
The Township’s annual budget process formally starts in the fall each year with all departments quantifying their operational and capital requirements to sustain existing service levels and identifying potential areas where service levels should be adjusted. When performing these assessments, they consider several factors including adopted Council resolutions, the Council Priorities Plan 2023-2026, and their departmental capacity. Senior management use their experience, research and external resources when assembling their budgets, looking for efficiencies wherever possible to avoid unnecessary requests for further resources or to mitigate any potential tax increase.
The Director of Financial Services consolidates all departmental submissions to calculate the initial revenue requirement. Each departmental budget is scrutinized, and discussions are held about core budget costs, supplemental operating requests, and whether other funding sources might be available. For capital requests, a review is performed to ensure they align with the available funding and staffing resources. The result is a budget which represents the most likely scenario for aligning costs and service levels.
The Township is unique in the region given its size and the full range of services that it provides including a dedicated police force, a full time, unionized fire department, as well as fully owned library and recreation facilities. In addition, residents and businesses benefit from garbage and kitchen scrap collection, bylaw enforcement, and various maintenance activities. All these services are funded through the property tax amount levied each year without imposing any additional utility costs or user fees. The Township is one of only two municipalities in the region to take this approach.
As part of the new Chief Administrative Officer’s (CAO) organizational assessment conducted in late 2022 and early 2023, the senior leadership team (Directors and Senior Managers) completed an efficiency review of the Township’s core operating budget measured against the levels of service generally defined by Council. As a result of this efficiency review, a reduction of approximately $450,000 was implemented in the operating budget (with no impact to levels of service). These reductions were enacted before the budget was brought forward to Council. The draft budget prepared for Council for 2023 had a proposed increase of 7.41% over 2022 numbers, which would have been at 8.82% if the efficiency review had not been conducted by staff.
Once the efficiency review was completed and the 2023 budget was adopted by Council, staff considered the budget as a baseline or starting point to measure capability and capacity against levels of service going forward. The 2023 budget was developed such that future reductions contemplated to the operating budget would likely require a drop in levels of service in the municipality and would need to be brought to Council for consideration. Some examples of potential changes to levels of service include reducing opening hours of certain facilities, reduction of staff, performing less preventative/corrective maintenance in parks or on public works assets, cancelling capital improvement projects, reducing response times to resident calls or emails, lengthening building permit turnaround times, lengthening land use application processing times, eliminating Council Priorities Plan projects, and reducing the number of Council meetings.
Further results of the CAO’s organizational assessment were incorporated into Council’s development of strategic priorities and the Council Priorities Plan 2023-2026. Esquimalt has, in recent years, completed an ambitious program of projects and initiatives - including an adopted Climate Action Plan, an Active Transportation Network Plan, and an endorsed Council Priorities Plan - which indicate that the demands for resources in the coming years are increasing. One of the key challenges for Council during their priority selection process was that the full list of Council’s commitments (projects, initiatives and adopted resolutions) represented more than staff could deliver before the end of their term in 2026. Council recognized that the municipality’s capacity and resources were such that a prioritization exercise was required to create focus and align expectations, and more importantly, provide staff with the direction and the resources to deliver on Council’s most important outcomes.
ANALYSIS:
The Township’s budget is impacted by several cost drivers. Some cost drivers are perennial and historically well-understood, while other pressures have only recently been felt. The provisional police budget and the collective agreements, negotiated during high inflationary times with the Township’s two unions, significantly impact the required increase each year. Adding to these pressures are the urgent need to manage the Township’s infrastructure assets, the cumulative inflationary impact on municipal operations and the increased pressure to respond to service needs such as affordability and climate change.
Capital projects form a part of the annual financial plan with costs typically being funded from the Township’s capital reserve funds. Recently, construction and project costs have escalated due to such factors as inflation, supply chain issues, and workforce shortages which have resulted in additional pressure on existing Township reserves. In addition, the Township’s level of capital renewal (upgrading of old infrastructure) has been consistently low for many years. While the capital program is currently sustainable in the short term, the annual contribution levels, combined with the increasing costs, require a shift to a longer-term focus. If the funding for the capital program (and consequently the rate of infrastructure renewal) is reduced or remains the same, the Township will experience increased failures or service level reductions related to recreation facilities, roads, sewer service, solid waste services, storm water management, and sidewalks.
A report on the Township’s long-term financial status related to infrastructure levels of service was presented to Council on December 18, 2023 (see Report ADM-23-048 Asset Management Program & Long Term Financial Plan). Staff provided Council with an update on the Township’s infrastructure and the important role asset management plays in long term infrastructure planning. The report detailed current reserve balances and contributions and, when compared to the anticipated asset renewal requirements, it highlighted significant funding deficits. In addition to discussing the need for increased fleet renewal funding, the report quantified the estimated annual replacement value and a total estimated value of overdue replacement for storm drain and sanitary sewer infrastructure. The key recommendation in the report was that the reserve contributions be increased immediately and on a cumulative basis annually. Council unanimously endorsed the updated approach to asset management described in the report, including the cumulative increase of a 1% (approximately $320,000) transfer to the Infrastructure and Revitalization Reserve each year.
As requested by Council, several budget options are presented below for discussion and analysis by Council. Option 1 represents the budget prepared by staff and presented to Council on February 5, 2024. Option 2 represents the initial consolidated draft budget prepared by staff in response to their analysis of current levels of service and the long-term needs of the municipality. Option 3 represents what a budget could look like if the non-discretionary core budget is maintained but supplemental requests related to Council Priorities Plan projects or sustaining current service levels are removed. Finally, Option 4 describes an approach that would take more drastic measures to reduce the Township’s levels of service and the corresponding funding levels.
Option 1: Proposed Budget Presented - 7.72% Increase
|
Total Supplemental Requests |
$2,486,001 |
|
Internally Funded (offset by revenues from grants, etc.) |
(349,278) |
|
Supplemental Items Requiring Taxation @ 7.72% |
$2,136,723 |
|
|
|
|
Police Budget Increases |
(638,272) |
|
FTE Staff Costs (Sustainable Service Delivery) |
(252,947) |
|
Long Term Infrastructure Planning (Facilities and Storm Sewer Sustainability) |
(500,000) |
|
Library |
(48,438) |
|
Total Remaining Supplemental Items |
$697,066 |
This budget is the baseline budget, including non-discretionary increases, as well as the supplementals that staff consider necessary to sustain levels of service. Every item in the Supplemental Operating Requests - the requested increases to the 2023 operating budget - are tied to a specific rationale. The full list of Supplemental Operating Requests is outlined in Attachment 1. In many cases, the increases are non-discretionary or “forced growth”, for items such as negotiated wage increases, inflation or increased costs for services. The remaining requests are related either to sustaining current levels of service, increasing staff efficiencies (to achieve more but with current staffing levels) or delivering on approved Council Priorities Plan initiatives.
To fund this budget, the average household in Esquimalt would see an increase of $234 to their annual tax bill.
Option 2: Initial Proposed Budget - 11.77% Increase
The draft budget as presented to Council in February is based on required costs to achieve Council’s desired service levels. While the current proposed revenue increase (of 7.72%) is higher than historical values, it represents an amount which is lower than originally proposed by staff during the budget consolidation. Senior management, while considering the various cost drivers and service level requirements, assessed the Township’s financial, infrastructure and operational risks and believed that a funding increase of 11.77% was most appropriate to address outstanding issues.
The current state of the Township’s capital infrastructure and reserves has been previously communicated to Council and reiterated in this report. While Council has directed that a cumulative annual contribution of 1% ($320,000) be made starting in 2024, the evidence presented by staff in December’s Asset Management Program & Long-Term Financial Planning report indicates that an acceleration of funding is necessary. The 2024 draft budget initially included a 2% ($640,000) transfer to the infrastructure reserve, as well as an increased transfer to the fleet replacement reserve to address the shortfall described in the staff report. Though there are sufficient funds for the current year’s fleet acquisitions, the required replacements of end-of-life vehicles during the next five years will see this fund fully depleted unless contributions are increased.
The draft budget included full funding for any proposed FTEs. Previous practice in the Township was to split the funding for any new FTEs, providing partial funding for current year costs and deferring the remainder until the following year. Staff’s initial budget proposal for 2024 included full funding for proposed FTEs, as this increases transparency related to expected costs tied to staffing changes.
As the future of the Township’s policing model is being considered, there will be future transition costs involved. While the total estimated amount is unknown, staff had initially included a reasonable amount to help offset a portion of the expected costs. Separately, the potential exists for the Township being required to submit payment for policing based on any decisions related to the 2023 funding denied by Council; a decision by the Provincial government on the Section 27 of the Police Act appeal by the Police Board has not yet been made. In the past, these types of costs would have come from the Township’s contingency. Including these potential costs in the financial plan would keep the contingency in place for other unforeseen expenditures.
|
Current Proposed Budget |
Revenue Requirement |
$2,471,481 |
7.72% |
|
|
|
|
|
|
Infrastructure Reserve Contributions |
Shift from 1% annual cumulative to 2% annual cumulative |
$320,000 |
1.00% |
|
Fleet Reserve Contributions |
Begin addressing shortfall identified in Dec 18, 2024 Asset Management Report |
$320,000 |
1.00% |
|
Police Transition Costs |
Half of year 1 funding for new Esquimalt Police Department Model |
$250,000 |
0.78% |
|
Section 27 Police Costs |
Potential costs of Provincial imposition of 2023 VicPD costs |
$200,000 |
0.62% |
|
Full Costs - FTE Additions |
Fully fund proposed FTEs instead of spreading costs over two budget years |
$208,176 |
0.65% |
|
Total Additional Increases |
|
$1,298,176 |
4.05% |
|
|
|
|
|
|
Initial Draft Budget |
|
|
11.77% |
After considering the various factors and pressures affecting budgetary needs for Esquimalt, staff removed all the discretionary funding increases presented in this option. The funding increases are considered by staff to be necessary, however they could be removed, deferred or spread over the next 2 years without an immediate impact. It is important to note that the related financial, operational and infrastructure risks will remain with Council to accept, manage or mitigate.
To fund this budget, the average household in Esquimalt would see an increase of $357 in their annual taxes. This would represent an additional increase of $123 from the amount required to fund the current draft budget increase of 7.72%.
Option 3: Proposed Budget with Deferred Supplementals - 5.72% Increase
In accordance with Council’s direction, staff have attempted to provide an impact assessment on a proposed budget that results in an increase less than the 7.72% initially recommended by staff. As a starting point for this analysis, staff began looking for savings of up to 2% ($640,000) to bring the tax increase down to 5.72% from 7.72%.
Before proceeding with an analysis of this option, staff assumed that any potential reductions to the budget would have to come from the Supplemental Operating Requests. Based on the information provided in this report, any reductions to the Core Operating Budget would represent service level reductions and would require more staff effort to present to Council than there is time in this year’s budget process. These ideas are explored in Option 4 outlined below. The Capital Requests (see Attachment 2) and the associated annual transfers to the reserves that fund the capital program were also not examined for savings. As described previously in this report, the Township’s capital program is currently underfunded. Consequently, current levels of service cannot be sustained; reductions in the capital program related to infrastructure renewal are not recommended. Additional capital requests related to new infrastructure are tied directly to the Council Priorities Plan and are not considered for deferral or cancellation without further direction from Council.
Before coming forward to Council with the proposed budget of 7.72%, every line item in the Supplemental Operating Requests was examined and tied to a clearly identified need: a non-discretionary increase, a sustainable service issue, or a Council Priorities Plan item. Considering the full scope of Council direction already received, staff could not provide any specific recommendation of areas that should not be funded without Council providing direction on where to defer, delay or cancel work. Council could consider deferring some expenses but, based on the needs articulated by staff and the direction already provided by Council, any deferrals would still need to be funded within this 5-year financial plan. Deferrals would mean a reduced tax increase in 2024, but without further direction related to changing Council Priorities or levels of service, this funding would be required either in 2025 or 2026.
Option 4: Adopt a Budget with Reduced Core Operating Budget
A final option to reduce the budget could be explored but would require more time for analysis than is available prior to the statutory Financial Plan approval deadlines. Should Council feel that reductions in the Core Operating Budget are needed, the staff recommendation is that Council provide the funding to engage a third-party to conduct a service assessment and governance review. To initiate this process, staff recommend that Council direct staff to prepare an impact assessment and project proposal, bringing this back to Council consideration within 2-3 months. This impact assessment would provide likely cost and schedule estimates for completion of this work. Some indication from Council about which areas should be examined would be helpful to narrow the scope of the potential service level review.
•
OPTIONS:
The following options are presented for consideration by the Committee of the Whole:
• Option 1: direct staff to prepare the financial plan bylaw that reflects a revenue increase of 7.72%, aligning with the priorities, initiatives and levels of service articulated by Council. (Recommended)
• Option 2: direct staff to prepare a budget that incorporates the full financial, operational and infrastructure risk management recommendations of staff, including an increase of 11.77%.
• Option 3: direct staff to defer or cancel items in the Supplemental Operating Requests tied to initiatives or levels of service that Council wishes to defer, reduce or eliminate.
• Option 4: direct staff to prepare an impact assessment to initiate a governance review and service assessment to find reductions in the core operating budget.
COUNCIL PRIORITY:
This budget-related report is focussed on providing Council with the full range of options to deliver on their priorities.
FINANCIAL IMPACT:
Any direction received from Council during the deliberations on this report will directly impact the preparation of the 2024-2028 Financial Plan.
COMMUNICATIONS/ENGAGEMENT:
Material to communicate Council’s 2024-2028 Financial Plan will continue to be prepared to support the budget approvals and Council Priorities Plan process.
TIMELINES & NEXT STEPS:
Should Council select the recommended option, staff’s next steps would be to prepare the appropriate financial plan and tax rates bylaws for review and adoption prior to the May 15th statutory deadline.
REPORT REVIEWED BY:
1. Deb Hopkins, Director of Corporate Services, Reviewed
LIST OF ATTACHMENTS:
1. 2024 Budget - Supplemental Operating Requests
2. 2024 Budget - Capital Requests
3. Budget Options Analysis Presentation
.