Budget Committee, Feb. 5, 2021
Meeting recap (the important stuff):
Today the Budget Committee heard a presentation from the Chief Administrative Officer Jaques Dubé and (unofficial) captain of budget season Chief Financial Officer Jane Fraser explaining how the budget process works. It might be a little boring but it’s critically important, so here we go.
The budget, like any budget, is about figuring out how much the city needs to spend and how much money it needs to bring in to cover those expenses. The HRM’s budget is 88 per cent ($877 million) fixed costs. Fixed costs are things that the city knows it has to pay and knows exactly how much it will cost them. City employee salaries, for example, are a fixed cost. There are also fixed costs that are contractually obligated, like the city’s agreement with the RCMP. The city knows it’s in a contract with the RCMP until 2032 and factors it into the budget. There are also discretionary costs, which are 12 per cent of the budget ($122 million). These are things that change from budget to budget.
Very simplistically, if the city wanted to add a milkshake fountain at the commons for this year, that money would come from the discretionary pool. If the city wanted to turn the milkshake fountain into a permanent thing, it would turn into a fixed cost.
In preparation for ‘budget season’ the CFO and CAO add up all costs the city has and estimate the cost of what the city wants to do. They also figure out how much money the city is likely to pull in from various sources, mainly property taxes. They also try to predict how much more the city will need based on population growth trends, as well as people’s ability to pay their taxes. There’s a lot of legal complexity around cities, but (massively abridged) cities are expected to provide most of the government services we rely on without a way to pay for them, except property tax.
With all of that research done, the CFO and CAO (mostly the CFO) also figure out what they have to do with the property tax rate in order to fund everything.
The HRM is a corporation, and the corporation of the HRM is divided into ‘business units,’ like Halifax Regional Police and Halifax Transit. Once the CFO and CAO do the math described above, they tell the city’s various business units what they’re going to recommend to council as a budget and to come up with a plan on how to spend their allocated money. Anything over their allocated money is called a ‘budget over.’
The business units then come to the Budget Committee and tell the Budget Committee how they’re going to spend the money based on the CFO’s plan. They’ll also include what they want to do above the money they’re given and ask for money for it. If these extras are approved by the budget committee they’re put on something called the ‘budget allocation list.’
As of this writing, this is where the city is in the budget process, right now. (As an aside, our stories for the next couple of weeks about the budget will be about what business units are asking for and what council wants to consider in the final debates NOT what council has officially approved. In case that isn’t clear every time.)
Once council has decided on what extra stuff they think is important to include in the budget they have a final meeting (or series of meetings) where they deal with the budget allocation list. They decide what to cut, what to keep and then tell CFO Jane Fraser to figure out how to pay for it.
Fraser figures out how to pay for it, puts it all together in a final budget and council votes on it. If it passes this step, that’s when the budget is done. Until next year. Or if COVID gets real bad again, maybe another budget recast this summer, like last year.
The big financial problem the city has is there’s a massive amount of money that has to be spent on things like building maintenance. The city is currently not spending enough money for what needs to be done today. Council’s focus in past years on reducing taxes means the services the city provides, like the library, are now as lean as they can be because that’s how the city paid for it previously. Other levels of government have the option of running a deficit budget to ‘pay’ for expenses. The HRM can’t. It legally has to have a balanced budget. It also legally has to repair buildings. So the choice before council, really, is one of three things:
- Cut services. Since the city is pretty lean right now, that means any service cuts will be noticeable. Street repair will take longer than it does already. Cole Harbour’s library hours could be further reduced in the summer. Defunding the police though, would be a service cut.
- Don’t cut services, don’t raise taxes. This just means streets don’t get fixed any faster, and taxes go up more in future years. Or we borrow to pay for it, which means taxes spike in a few year. No matter what this option means taxes will have to go up more than proposed this year, but not until later years.
- Raise taxes. It means taxes don’t skyrocket later and the city can fix more streets and do cool things like build bike lanes while they do it.
Essentially, what this means for you practically, dear reader, is the following: You can complain about potholes not being fixed, or you can complain about taxes going up. But you can’t do both.
Well you can do both, but it’ll just let everyone know you didn’t read this article, and we’ll judge you.
Like this
There’s a lot more detail below, and in the February 5 video in this link.
Who said what (paraphrased):
*Meeting continued from Wednesday* (You can read the Examiner’s coverage of that part here, we didn’t do a recap like usual because Wednesdays aren’t a great day for me and right now we’re a one reporter operation, so if I can’t make a meeting or don’t have time to write up the meeting, well we just can’t cover it.)
Russell: Turning it over to the CAO for a presentation on budget options.
CAO: There’s no better way to kick off Superbowl weekend than the budget options presentation to explain the process of the budget. CFO will also be providing different tax rates as information only. We have three scenarios we’ll show you after the budget tutorial. Tax rate of no increase, a rate increase of 1.9 per cent and a tax increase based on CBI (inflation). This is what a budget is:
CAO: It’s a plan based on a moment of time, it changes, and we report quarterly to reflect that and have an opportunity to do change things then. Budgets are made up of fixed costs (things the city has to pay, about 88 per cent of the budget) discretionary costs (things we can or can not pay for) and one-time costs (exactly what it sounds like). For example:
CAO: The fixed costs can change by changing the contract obligations (for example, if we decided we didn’t want the RCMP, we could decide not to renew the contract when it comes up for renewal, but we have to pay for the RCMP until the contract runs out, we can’t just stop tomorrow). Discretionary costs are the following:
CAO: These are primarily the things that business units are presenting to you, and you’re deciding on in the coming weeks. One time expenses are still exactly what they sound like. The city makes its money primarily from property tax. There is some money coming in from fares, fines and fees, but most of it operates at a loss. Deed transfer tax has been a lot recently, but it’s unpredictable. Most of our revenues were impacted by COVID, we’re not expected to make a full recovery on revenues until 2023-24 at the earliest. Taxes are where we make most of our money.
CAO: When you think about changing tax rates, you have to think about years three and four of your term. What we do here will impact things down the road. We try and be conservative when estimating the amount of revenue we’ll generate with the deed transfer tax, it outperformed our recast budget assumptions though. Capital projects are big projects that have a big impact on budget. They need money, if you don’t have money you can’t do them. It’s okay to take on debt for these, as long as it’s good debt (i.e. the debt of the project will be paid off before the project ends). And without debt, many capital projects wouldn’t happen (how many of us can buy a house without a mortgage?). The most important thing about debt is if it can be paid off (having a mortgage is fine, being house poor is not). In COVID, the province gave municipalities access to a line of credit. We were planning on taking it but got more taxes than we projected. The short version is council has $20.8 million available.
CFO: I’m hoping this answers your budget questions. We are required by legislation to pass a balanced budget. Here’s how we do it:
CFO: Step one, we add up all of our costs. Fixed, like salaries, and discretionary, like training and any new services asked for by council. It’s an estimate. Step two is we estimate what we’re going to bring in through taxes, government transfers, revenues, etc. This estimate is based on economic and growth trends, and then we make a recommendation to council. Step three is “considerations.” Taxes can’t be too high, that it drives people away. We also need to make sure that any changes are sustainable, we’re considering a tax hike today, but what does it mean in four years? 20? We also factor in one-time payments, like federal money to restart after COVID. Step four is we figure out the difference between how much we make and how much we spend. 99 per cent of the time costs are more than revenue. So what do we do? Reduce spending? Raise taxes? Reduce fixed costs (this is where defunding the police fits in, FYI). Based on this year’s gap, we need to raise taxes by 1.9 per cent to close it, so that’s what we recommended. (So the question is raise taxes by ~$38 per household or cut $10.8 million in services). We then show you our work, which is this process. Step six is budget allocation, where you, council, decide if you want to add or remove things from the budget based on presentations from the city’s business units (we are here in the process right now). Once all the business units have presented, and the additions and subtractions are put on a list and then debated. Once the debate is done there will be a final number and we figure out how to fund it based on that final debate. Then you vote on it and we’re done for a year.
CFO: We’ve come up with a few scenarios to give you examples of tax rate changes. As a reminder, this is our current plan:
CFO: The commercial tax rate is actually less this year in real value based on assessed property values. The risks to reducing the tax bill are as follows:
CFO: Our costs keep going up, if our taxes don’t we’ll go broke or have to cut services. We will eventually have to pay for tax cuts this year. If we set our tax rate at last year’s amount we’d lost $10 million in revenue, which we can cover with a loan. If the tax rate would decrease by one cent, commercial taxes would decrease by seven cents. We’d have to cover $41.8 million in the next four years and we’re already projecting a budget gap in the future. That’d just get worse.
CFO: If we set tax at inflation, we lose $7.8 million. Tax rate for households drops by 0.6 cents, and commercial goes down from 81 to 80 cents, same risks as not raising taxes. Here’s what it looks like in a table:
CFO: Thank you, questions?
Mancini: Do we go into a debate about which scenario we want to do? Setting the rate at zero, no increase, what’s the long term impact of that?
CAO: The three scenarios are just for your information when you’re considering the tax rate, and voting for budget additions. Specifically paying for budget additions. The budget will require a certain amount of money, this is just telling you how we would pay for it, based on different tax rates. The risks, really, in lowering taxes is finding money to pay for our services, or cutting services. This year we’re probably going to run a surplus, which is helpful. But what about next year? We’ve been cutting the budget a lot in recent years, there’s not a lot of fat left. If we cut service funding now it’ll have a real impact on service delivered.
CFO: The gap in funding in lower taxes means our budget gaps in future years goes up by $20 million a year.
CAO: These are assumption based, but if you do the math, if you take money out today, you take money out of future years. But if we keep services where they are taxes will spike. Our rate has been down significantly under inflation, and nobody wants to pay more taxes, but we need money.
Outhit: I remember when I got to council in 2008. We’ve frozen taxes a few times and the world didn’t end, we’re still a strong city. The projected surplus of $8-10 million, I think that’s our opportunity. That’s not taking money out of the reserve, or the line of credit. Can we use that or a portion of that to reduce the 1.9 tax increase?
CAO: If you’re going to use something, that’s the portion to use. But, whatever you use from this surplus, you’ll have to make up somewhere somehow in the future. If it’s in the $5-6 million range (this is one cent in taxes for you), we can work around that, it’s easier to replace that in future years.
Outhit: We’re concerned about commercial taxes, but the vacancy rates have gone down, does that provide you with any comfort for future years?
CFO: On the surplus, I’d agree with Dubé, with the caveat of it should be a one-time cost, match the revenue with the expense. For the commercial vacancy rate, it’s positive, but what happens after the tax appeals? I’m cautiously optimistic.
Austin: I agree with Outhit, this is good education. I don’t think our process has ever been laid out like this before. It’s good. The federal restart money, are you splitting it between this year and next year? (CFO nodding offscreen, I assume, Austin nodded back). Transit going back to normal two years from now, yeah? (nodding offscreen) Okay. If a hotel has no customers this year and appeal their assessment, is that next year?
CAO: Two years out, we’re not too concerned about next year, it’s 2022-23 we’re worried about. The net effect is hard to predict, we’ll lose money in tax appeals, but we’ll get new revenue from new buildings. We’re making assumptions, and if they’re true we’ll have a gap to fill. We’ll have a better idea of what the future will look like winter this year.
Austin: Debt. The $20 million in reserves, is it allocated?
CFO: Yes, it’s built into the budget.
Austin: The found money in the budget would be surplus.
CFO: Yes.
Austin: About $8-10 million?
CFO: $6 million we think.
Austin: Debt is future taxes. I think the surplus money would be a good start to our strategic reserve.
Cuttell: The assessment of commercial properties, is it geared toward the income they generate?
CFO: One of the ways is net income, yes. That’s more with shopping centres and office towers.
Cuttell: I’m concerned about the ability for commercial properties to pay for three years of growth this year. The surplus, is this the year to be running a surplus? Why are we projecting a surplus in a year where we’re looking to keep costs down?
CFO: It’s the deed transfer tax, we’re projecting $51 million because the market is red hot and we didn’t see that coming. We assumed it would be $40 million because people wouldn’t be buying houses in COVID (IN THIS ECONOMY!?) that’s where the surplus is coming from. We haven’t seen the impact of winter yet, snow removal often brings extra costs.
Cuttell: For future planning, how are we going to continue to operate in this fiscal uncertainty. I thinking being conservative now is where we need to go. On debt, can we use it now to offset costs down the road? Is it worth it to use debt for maintenance and repairs?
CFO: We used debt for capital projects, that’s it. We have debt policies in place to restrict our borrowing. We shouldn’t be using debt for maintenance. We should only use it for things with a long life. We want the people who are using the facility to be paying for it. The strategic initiatives plan is how we’re planning on using debt to make operational costs cheaper. Is now the time to start growing the debt — appropriately — because debt is cheap right now (yes, we should)?
Savage: We’ve held the line on taxes while helping people who need help. We’d love to be able to help the small businesses that are hurting, and we can. We are doing what we can help to the people who have been hurt the most. We value our employees and the cost of employees is pretty high. We haven’t been hurt as bad as other places, and that’s great. Is 1.9 per cent good enough? We saw a bunch of initiatives this week that we need to spend money on. The deed transfer tax, we’re always underestimating it, which is prudent, so it’s okay. This is not the year we should be running a surplus in operating.
CFO: We’ll be keeping an eye on the surplus.
Smith: Can we make this a one minute video and put it out to the public (or write an explainer in a municipally focused publication? I’m on it, it’s this article.) Is there money in the budget for that? The $19 million shortfall, that requires the 1.9 increase, what is that mostly? Capital? Operating? We have a surplus, and we’ve held the line, when we hold the line we have to pay for it in the end. In the future, we’ll have to catch up if we hold the line. We’re going to be having difficult conversations.
CFO: The $19 million gap is a lot of different things. Restoring COVID cuts, operating costs have gone up, capital spending has gone up. It’s split pretty evenly between operating and capital.
Mason: I think councillors should look at the Halifax partnership COVID update page. We have more people working right now than this time last year. Some industries are still struggling, but some are way better than we anticipated. Personal debt has gone down. Overall the economy is doing well but the distribution has changed. When we’re talking about using surplus and debt, we know we have structural debt. We’re $10 million down on what we should be paving, we should have already replaced some of our trucks. When you add up what we need to spend on buildings and vehicles we already have a huge gap. We’re not adequately budgeting to bring our reserves up. The money we might use to keep the taxes low now will bite us hard later. We’ve already spent the money. I’m concerned because we have ambitions for the future and we don’t want to rob our future now.
Russell: Structural deficit means our debt increases year over year so I (former federal Conservative Party candidate contestant) disagree (shocking, also point of order, can the chair just poo-poo arguments like that, answer, no. He can’t, unless he’s next in the speaker list. Stop pontificating Russell, you’re out of order.)
CFO: I didn’t know there was a question in there?
Mason: I withdraw the term structural deficit, and replace it with the new term, technical deficit, which is being used by economists (ALSO OUT OF ORDER, WHO’S THE CHAIR!? TAKE HIS GAVEL!)
Morse: Borrowing, historic lows, can you explain why this might not be a bad time to borrow?
CFO: Interest rates are low and projected to stay low. We have to borrow through the province, it’s a traditional borrowing structure, so the rate is locked in for the term of the loan. So if you couple low interest rates with our population growth our revenue is projected to go up. (We’ll make more money in the future but borrowing will be more expensive in the future)
Morse: Are these the lowest rates ever?
CFO: They’re low for sure (she’s trying really hard not to say no). Borrowing right now is functionally an increase in revenue (for math reasons that make sense to accountants, but are real).
CAO: We’re not spending enough money on capital right now. We’re not spending enough on maintenance right now. We can’t meet our capital requirements at this level of funding. (It’s almost like the city’s budget is structured in such a way that our deficit will increase in future years if we don’t raise more money, Russell). If we are going to meet our capital needs, we’ll need to add debt.
Deagle-Gammon: Can we make this public? (I’m on it) When we talk about this budget and the target of 1.9 per cent. This is asking business units to meet a target that was a reduction from last year? Will some of them not be able to do what they need to do? Is this the time to use debt? When we look at what we need to do, safe communities, the work people are waiting for inroads, when can we start to address that gap?
CFO: The business units were asked to reduce their budgets by $6 million, and only two business units did it, HRP and Customer relations. Infrastructure investments are going to be in the capital presentation, which I think is next week, but they all have funding built into them.
Outhit: A few minutes ago we called street maintenance capital projects, but we don’t fund them from capital funding. Is there a way to use capital reserves for that?
CFO: I said typically, you can use capital reserves, it really depends on what’s in the mix and what makes the most sense. It just depends on how much it is and how much room we have.
Outhit: The potential is there in theory, but not necessarily advisable?
CFO: Yes.
Russell: I’d like to comment on structural deficit, it was mentioned that it could be seen as a technical deficit, and I agree we have it. I don’t think we should use reserves or debt on it, since it’s an ongoing expense.
*Meeting adjourned*
Present:
Councillor Paul Russell, Chair (District 15)
Deputy Mayor Tim Outhit (District 16)
Councillor Kathy Deagle-Gammon (District 1)
Councillor David Hendsbee (District 2)
Councillor Becky Kent (District 3)
Councillor Trish Purdy (District 4)
Councillor Sam Austin (District 5)
Councillor Tony Mancini (District 6)
Councillor Waye Mason (District 7)
Councillor Lindell Smith (District 8)
Councillor Kathryn Morse (District 10)
Councillor Patty Cuttell (District 11)
Councillor Iona Stoddard (District 12)
Councillor Pam Lovelace (District 13)
Councillor Lisa Blackburn (District 14)
Absent:
Councillor Shawn Cleary (District 9)
Interviews:
N/A – COVID
Previous meeting minutes and current agenda:
A former Naval Officer turned journalist, Matt Stickland is committed to empowering his community to ensure that everyone has access to the information they need to make their city a better place.
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