City’s Projected Fiscal Imbalance (A. Bolstad)

Recommendation:
That this report be received for information.

Report Summary

This report provides a response to an Administrative Inquiry requesting a summary of reasons for the City’s fiscal imbalance.

Previous Council/Committee Action

At the June 21, 1999 special meeting of City Council, Councillor Bolstad made the following inquiry:

“That the Administration prepare a report which summarizes the reasons behind the City’s projected fiscal imbalance, namely the significant gaps that have been identified between civic revenues and planned operations and capital expenditures.”

At the June 21, 1999 special meeting of City Council, a public hearing was held on the City of Edmonton 2000-2009 Long Range Financial Plan.

Report

  • One of the main drivers of the fiscal imbalance between civic revenues and operating expenditures is the structural imbalance caused by variable (inflation-sensitive) expenditures being greater than variable revenues. Any increase in the consumer price index will result in widening of the funding gap. Based on the 1999 Operating Budget, every 1.0% inflation results in additional expenditures of $6.2 million, compared to $5.4 million in additional revenues. The infrastructure gap is likewise affected by inflation. With general financing being capped by the Debt Management Fiscal Policy (DMFP), any increase in the construction price index increases capital project costs, and places additional pressure on already limited capital funding.
  • In the short-term, the funding gap is partially caused by growth. An increasing population in Edmonton brings about increased demand for infrastructure and municipal services. Since the City’s assessment base growth lags behind the need to provide increased services to a growing population, the immediate impact is widening of the gap.
  • The extended period of revenue decline during recent years (e.g., provincial/ federal grant cuts; zero property mill rate increases) has resulted in demand for certain municipal services being unmet. This pent up demand places the City in a catch-up position. Such is the case with unmet demand for DATS service, reduced support for preventive social services, reduced turf maintenance, etc. On the capital side, unmet demand has resulted mainly from continuous deferral of capital maintenance to future years due to limited funding. In addition, the City’s aging infrastructure, along with increased demand from suburban growth and reduced per capita provincial grants, had caused capital needs to increasingly exceed the funding available through DMFP. Although federal and provincial infrastructure programs have partly bridged the gap, some conditions placed upon the use of these additional funds have restricted the City’s ability to sufficiently address capital maintenance issues. For example, the change in provincial capital cost sharing rules in 1995, has limited the use of arterial road rehabilitation funding to truck routes only.
  • Regional pressures exacerbate the funding difficulty. Capital Region residents have ongoing access to Edmonton municipal services, e.g., roadways, social programs, health-related services, etc. Edmonton’s ability to sustain this service has been severely limited since the City’s assessment base growth has been consistently lower compared to those of surrounding jurisdictions.
  • Attachment 1 outlines the major drivers of the fiscal imbalance, the reasons for its increase in recent years, and what can be expected in year 2000.

Background Information Attached

1.Major Drivers of Fiscal Imbalance; Where We Have Been and What Lies Ahead

Staff Hours to Prepare Report: 5

Staff Cost: $200

Peripheral Cost: nil

Total Cost of Inquiry Preparation: $200

(Page 1 of 2)

Attachment 1

City’s Projected Fiscal Imbalance (A. Bolstad)

Major Drivers of Fiscal Imbalance (The Gap)

Structural Imbalance:- Variable Expenditures > User Fees and Tax Revenues

- Any increase in CPI contributes to the gap

Growth:- A growing City and regional population requires increased services

- Assessment base growth lags behind provision of increased infrastructure and municipal services

Unmet Service Needs:- Ongoing shortfall in infrastructure maintenance funding could jeopardize
infrastructure integrity

- Continuous cuts in some areas like preventive social services could result in higher expenditures in other areas, e.g., policing

Regional Pressures:- Capital region growth (population and assessment base) > Edmonton
growth

- Ongoing easy access to city services by capital region residents

Attachment 1 - Page 1 of 2

Attachment 1

City’s Projected Fiscal Imbalance (A. Bolstad)

Where We Have Been and What Lies Ahead

The Past

Revenues Significantly Declined due to:

Grants-Provincial Operating Grants reduced:

1992 = $55.1 m; 1999 = $21.1 m

-Provincial Capital Grants reduced from $75 to $25 per capita:

impact in 1999 approximately $30.0 m

-Federal CAP grant eliminated in 1997: impact = $3.9 m

Assessment-Assessment growth lowest in Capital Region (1993-1998):

Edmonton = 3.3%; St. Albert = 17.4%;

Fort Saskatchewan = 29.3%

-Downtown assessments significantly decreased in last 3 years

Property & Business Taxation-Zero business rate and mill rate increases for service needs from 1993 to 1998

User Fees-Traditional user resistance for rate increases

Expenditure Increases partly contained through:

Cost Savings-Absorbed inflation from 1993 to 1998

-Reduced staff complement

Restructuring-City ’97 corporate restructuring

-Ongoing departmental realignments

Demand Management-Increases in demand for service deferred to future years

Policy-Debt Management Fiscal Policy capped capital expenditures

Heading Towards Year 2000

Structural imbalance continues- 1999 Variable Expenditure = $620m; 1% Change = $6.2m

but progress made in reducing gap- 1999 Variable Revenues= $540m; 1% Change = $5.4m

- Expenditure/Revenue Ratios:1998 = 1.2/1; 1999 = 1.15/1

Strong economic growth- 2000 Forecast= 3.5%

Lean & Trim Organization- Productivity & cost savings initiatives implemented continually, particularly in last 6 years;

- Cost savings still sought but further cost reductions likely to affect municipal services

Provincial Funding Allocation- Negotiation with the Province for restoration of grant allocations

Regional Cooperation- Ongoing dialogue with Capital Region jurisdictions

Attachment 1 - Page 2 of 2