6. REPORT ON BUDGET EXPENSES PURSUANT TO ONTaRIO REGULATION 284/09
Rapport sur les dépenses budgétaires conformément au règlement de l’ONtario 284/09
That Council receive this report for information.
RECOMMANDATION DU COMITÉ
Que le Conseil prenne connaissance de ce rapport à titre d’information.
1. City Treasurer’s report dated 27 March 2012 (ACS2012-CMR-FIN-0010).
Report to/Rapport au :
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
Rapport sur les dépenses budgétaires conformément au règlement de l’ONtario 284/09
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.
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.
Overview of the Requirement
Ontario Regulation 284/09 requires that Council consider and adopt a report with respect to noncash items such as fixed assets amortization expenses, employee benefit liabilities, and landfill closure cost, prior to finalizing the budget for the year.
Staff are bringing forward this report prior to finalization of the 2012 tax rates. The financial information provided in this report is based on draft 2011 actual results.
Employment Benefit Liabilities
Employee future benefits
As at December 31, 2011 the City had a total liability of $ 372.7 million for employee future benefits and a $ 27.6 million liability for pension agreements. The yearly cost of the employee benefits and payments is included in the annual budget.
Employee future benefits include benefits earned by employees in the current period but not paid for by taxes or rates until a future period and potential future WSIB payments. The defined benefit plans relating to post-retirement and post-employment provide a variety of benefits to retirees and active and long-term disabled employees. The increase in these liabilities of $ 18.5 million in 2011 was expensed in the City’s consolidated statement of operations.
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 employee benefit liabilities in order to determine which liabilities would only be funded on a year by year basis in the budget, and those where the City would try to fund the liability as it increased and reduce any unfunded portion. The strategies approved fund select liabilities but are not sufficient by themselves to offset any increase. These strategies include:
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 income to further reduce the liability.
As at December 31, 2011 the City had a reported pension asset of $4.5 million for the OC Transpo pension fund and a $32.1 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, reported on an accounting basis. The net increase in the pension liability of $6 million in 2011 was expensed in the City’s consolidated statement of operations.
Provisions have been made in the 2012 budget to fund plan deficits for the OC Transpo plan and the COSF going concern deficit.
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, 2011 the City had a liability for landfill closure and post-closure costs of approximately $8.8 million. The resulting $2.3 million decrease in this liability was reflected as a reduction in expenses 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 2011 consolidated statement of operations includes $239.7 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. It should be noted that this is not necessarily the cost to repair or replace the asset in today’s dollars and using current standards.
The City’s tax levy and utility rates are calculated to provide for annual operating costs, estimates of amounts required to purchase fixed assets and/or to service debt principal and interest.
Provisions of approximately $308 million have been included in the 2012 operating budget as contributions to capital to allow for the cash financing of a significant portion of the rehabilitation projects contained in the City’s 2012 capital budget.
In addition to the $308 million provided in the 2012 budget, $77 million is included for the repayment of the principle component of past debt issued on Council authorized projects. In total, $385 million is provided in the 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.
The amount provided in the 2012 budget for capital purposes ($385 million) can be compared to the draft 2011 estimated amount of amortization (2011 $239.7 million) in order to determine whether the City has adequately provided for its capital needs. However, other factors need to be examined when making this determination. First, as stated earlier, the amortization figure which is based on costs when assets were first acquired, does not necessarily a good reflection of today’s replacement cost. Secondly, a risk based approach is used to prioritize and plan for the City’s investments asset renewal. Assets may need to be replaced before the end of their amortization period. This approach was used in the development of the 2012 rate supported budget which contained a 10 year forecast of the water and wastewater funding strategy.
Budget reflected in the Financial Statement ( Statement of Operations) on an Accrual Basis
Note 19 of the 2011 draft City of Ottawa consolidated statements includes a chart which reconciles the approved 2011 budget to the budget figures reported in the consolidated statements. This chart has been summarized below:
The budget approved by Council shows planned revenues equal to planned expenditures. The budget for financial statement purposes shows a net budgeted surplus (revenues exceed expenses). This difference represents the amount generated from municipal revenue sources, such as taxation, which remains after the charge for amortization and interest on debt. This difference is available for capital formation. Capital formation includes new assets and contributed assets, as well as the payment of principal on debt.
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 impediments to receiving this report. Part VII of the Municipal Act, 2001 and Ontario Resolution 284/09 prescribe the basic financial administration requirements of the municipality.
RISK MANAGEMENT IMPLICATIONS
There are no risk management implications.
Financial implications are discussed in the body of this report.
There are no accessibility implications to receiving this report.
There are no environmental implications to this information report.
There are no technology implications to this information report.
City Strategic Plan
There are no ties to the strategic plan.
Staff will implement the directions provided by Council.