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8. REPORT ON BUDGET EXPENSES PURSUANT TO ONTaRIO REGULATION 284/09
Rapport sur les dépenses budgétaires conformément au règlement de l’ONtario 284/09
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That Council receive this report for information.
Recommandation du ComitÉ
Que le Conseil de prenne connaissance de ce rapport à titre d’information.
DOCUMENTATION
1. City Treasurer’s report dated 18 February 2011 (ACS2011-CMR-FIN-0010).
Finance and Economic Development Committee
Comité des finances et du développement économique
and Council / et au Conseil
Submitted by/Soumis par : Marian Simulik, City Treasurer/Trésorière municipale
Contact Person/Personne ressource: Mona Monkman, Deputy City Treasurer – Corporate Finance/ Trésorière municipale adjoint –Finances municipales
Finance Department/ Service des Finances
613-580-2424 ext./poste 41723, Mona.Monkman@ottawa.ca
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Ref N°: ACS2011-CMR-FIN-0010 |
SUBJECT: |
REPORT ON BUDGET EXPENSES PURSUANT TO ONTaRIO REGULATION 284/09 |
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OBJET : |
Rapport sur les dépenses budgétaires conformément au règlement de l’ONtario 284/09
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That the Finance and Economic Development Committee recommend Council receive this report for information.
Que le Comité des finances et du développement économique recommande au Conseil de prendre connaissance de ce rapport à titre d’information.
BACKGROUND
On June 5, 2009, the Province approved legislation which changed the financial reporting and budget requirements of municipalities. Municipalities were required to prepare annual Financial Statements that are in accordance with generally accepted accounting principles for local governments as recommended by the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants (PSAB). These accounting principles include pronouncements on how to account for tangible capital assets; employment liabilities and landfill costs.
The Municipal Act requires that municipalities prepare balanced budgets which include estimates of all sums required during the year for the purposes of the municipality.
With the implementation of these new accounting rules, including those for the recording of tangible capital assets, amortization expense becomes an annual expense of a municipality. However, the Province recognized that the requirement to include amortization expense in municipal budgets could have significant impacts on many municipalities’ tax levies. For many municipalities there would be the potential for a significant variance between the amount raised through the budget process to fund capital asset renewals and the annual amortization expense as reflected in the financial statements.
In recognition of this concern, Ontario Regulation 284/09 permits municipalities to exclude a portion or all of the following expenses from their annual budgets:
• Post employment benefits expenses;
• Solid waste landfill closure and post-closure expenses; and
• Amortization expenses (related to tangible capital assets).
However, the legislation requires staff to prepare an annual report to Council which:
• identifies the expenses that have been included in the Financial Report but excluded from the budget;
• identifies the impact of these differences on the change in the City’s accumulated surplus; and
• analyses the impact of excluding these expenses from the budget on future capital assets funding requirements.
For 2011 and subsequent years, the municipality must prepare this report before adopting a budget for the year. Council must adopt the report by resolution.
The Ministry of Municipal Affairs and Housing will initiate a review of this Regulation on or before December 31, 2012.
DISCUSSION
Overview of the Requirement
Ontario Regulation 284/09 requires that Council consider and adopt a report with respect to non cash items such as fixed asset amortization expenses, employee benefit liabilities, and landfill closure costs, prior to finalizing the budget for the year.
The audited financial statements for the year ended December 31, 2010 are not yet available. Consequently, the financial information provided in this report is based on 2009 actual results and 2010 draft financial results.
Under the Municipal Act, Council is required to prepare and adopt an annual budget that includes estimates of all amounts required during the year. (see sections 289 and 290 of the Municipal Act, 2001).
In light of the new PSAB standards, the Municipal Act, 2001 was amended and a regulation passed to address these changes. Ontario Regulation 284/09 (Budget Matters – Expenses) states that a municipality may exclude certain expenses (amortization expenses, post-employment benefit expenses and solid waste landfill closure and post-closure expenses) from the budgeted amounts for which revenue must be raised during this transitory period. The ministry is to initiate a review of the regulation before the end of 2012.
Employment Liabilities (PS 3255)
Post Employment Benefits
As at December 31, 2009 the City had a total liability of $341.7 million for employee future benefits ($354.1 million estimated liability as at December 31, 2010) and a $29.7 million liability for pension agreements.
Employee future benefits include benefits earned by employees in the current period but not paid for by taxes or rates until a future period. The increase in these liabilities of $15.4 million in 2009 was expensed in the City’s consolidated statement of operations and relates primarily to increased costs for Workplace Safety Insurance Board (WSIB) benefits and health benefits for retirees. The estimated increase in these liabilities in 2010 is approximately $12.4 million.
The City is a schedule 2 employer under the Workplace Safety Insurance Act and, as such, assumes full responsibility for financing its workplace safety insurance costs. The liability represents the present value of future income benefits on existing claims as well as the administration fee charged by WSIB. The actuarial obligation is determined by the WSIB and reported to the City annually. This liability has increased in recent years mainly due to new legislation related to payment of WSIB benefits for fire claims.
Health benefits for retirees cover the City’s portion of the retiree premium costs for life, health, and dental coverage. These costs continue to increase as the health care index is rising more rapidly than the rate of inflation.
In the summer of 2007, the City’s Long Range Financial Planning Committee reviewed the unfunded employee benefit liabilities in order to develop strategies to limit their growth and to eventually fully fund them. The strategies developed and approved by Council on September 26, 2007 require:
a) using any year-end surpluses that arise in the specific benefit accounts within the operating budget to reduce the unfunded and future liabilities; and
b) crediting the liability accounts with interest to further reduce the liability.
Pension agreements
As at December 31, 2009 the City had a liability of $7.7 million for the OC Transpo pension fund and a $22 million liability for the City of Ottawa Superannuation fund (COSF). These amounts represent the difference between the future cost of plan benefits and the value of the assets in the plans at year-end and were fully expensed in the City’s consolidated statement of operations.
Provisions have been made in the 2011 budget to fund solvency plan deficits for the OC Transpo plan. COSF special payments, if any, would not be payable until 2012.
Landfill closure and post-closure liability (PS 3270)
Under the Ontario Environmental Protection Act, the City is required to provide for the closure and post-closure care of solid waste landfill sites. The costs related to these obligations are provided over the estimated remaining life of the landfill sites based on usage. As at December 31, 2009 the City had a liability for landfill closure and post-closure costs of approximately $9.7 million ($11.1 million estimated liability as at December 31, 2010). The resulting 2009 $3.9 million change in this liability was reflected as a reduction of expenses on the consolidated statement of operations. The estimated increase in 2010 of $1.4 million will be expensed on the consolidated statement of operations.
The City is currently budgeting approximately $350,000 per year for this liability and it is anticipated that funds will be sufficient to discharge this liability over the remaining life of the landfill sites.
Amortization (PS 3150)
The City’s 2009 consolidated statement of operations includes $208.2 million expensed for amortization related to the recording of tangible capital assets. This amortization is based on the cost of these assets when they were built or purchased. Although the 2010 Financial Statements have not been finalized at the time of preparing this report, the 2010 amortization amount is not expected to vary significantly from 2009. It should be noted that this is not necessarily an accurate reflection of the costs to repair or replace the asset in today’s dollars and using current standards.
Amortization and Budget Provisions – Existing City Practices
The City’s tax levy and utility rate are calculated to provide for annual operating costs, estimates of amounts required to purchase fixed assets and/or to service debt principal and interest.
For a select number of City assets, an annual depreciation calculation is performed to estimate the amount of tax funds required to be raised in order to fund a reserve that will be used to replace those assets. This practice currently exists for transit and fleet vehicles, as well as for parking structures. To fund all other assets, the City raises an annual amount through its tax and rate levies to provide for fixed asset acquisitions.
For assets such as fleet, the tax levy includes an annual amount equivalent to amortization. These depreciation amounts build up over time to provide sufficient funds when the asset is required to be replaced. For other assets, the tax and rate levies include an amount that is used to fund the new, or replacement asset cost that is not based on any estimate of depreciation.
Provisions of approximately $308 million has been included in the 2011 draft operating budget as contributions to capital and fleet reserve funds to allow for the cash financing of a significant portion of the rehabilitation projects contained in the City’s proposed 2011 draft capital budget. The City’s net financing requirement of the proposed 2011 capital renewal program is $345.3 million (includes both the City’s tax and rate supported program and the Police Service requirements). Capital and Fleet reserve funds are proposed to fund approximately $270.8 million or 78% of the net financing requirement. The remainder of the renewal program is proposed to be funded from Federal / Provincial gas taxes ($42.1 million) Development Charges ($18.5 million) and tax / rate supported debt ($13.9 million).
In addition to the $308 million provided in the 2011 draft budget, $72.5 million is included for the repayment of the principle component on past debt issued on Council authorized projects. In total, $381 million is provided in the draft budget for capital purposes. It is important to note that these funds are required to fund both the replacement of existing assets, as well as capital funding for new assets and growth related assets.
As mentioned, the 2010 Financial Statements have not been finalized at the time of writing this report. In comparing the amount provided in the 2011 draft budget for capital purposes ($381 million) and the estimated amount of amortization (2009 $208 million), it would be incorrect to conclude that the City has addressed its capital funding gap. If the replacement values of the assets are used instead of the book value, it is estimated that the annual amortization requirement would need to be approximately 3 times greater than $208 million.
There are no rural implications associated with this report.
This report is administrative in nature and therefore no consultation was required.
There are no legal or risk management impediments to receiving information in this report.
Financial implications are discussed in the body of this report.
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Staff will implement the directions provided by Council.