The City of Thunder
Bay’s final 2017 budget surplus is apparently
now double what was originally projected. Whereas a $2.8 million year-end
surplus had been forecast in January, it has now apparently grown to $5.6
million dollars. Note that when the budget
was approved last year, there would not have been a projected surplus as
at the municipal level projected revenues need to match projected expenditures.
Moreover, it should be
noted that this is not an overall operating surplus but a “tax-supported”
surplus meaning that there is a surplus on the tax supported side of municipal expenditures. This is an important distinction because while
it is a “tax reported” surplus, the variance is being reported as a percentage
of the total net operating budget (2.3% of $240.1 million) and the total gross
operating budget (1.6% of $358.7 million).
Given that municipal tax revenues in 2017 were $183.987 million, the
variance can also be reported as a percent share of that which comes out to 3 .04
percent – a much larger number. Indeed,
I would argue that this is the correct variance number.
Several points come to
my mind with respect to this good news. It can be considered good news in that it
seems the City is living within its means when it comes to the difference
between tax supported revenues and expenditures. Municipal governments of course are not
allowed to run deficits on operating expenditures by the provincial government,
so deficits are covered out of reserve funds while surpluses can be used to
augment reserve funds. This surplus is
apparently a function of lower than anticipated police, legal and insurance
costs as well as other savings from staff turnover, reduced overtime and other
cost containment.
Where is the surplus
going this year? Well, according to the
recommendations from Administration:
“Generally, the annual surplus of $5.6 million would be transferred to
the Stabilization Reserve Fund (Corporate Report 2004.235 (Finance –
Accounting)), however Administration is recommending that the favourable
variance in legal fees of $0.5 million be transferred to the Legal Fees Reserve
Fund and the favourable variance of $0.9 million in insurance claims be
transferred to the Insurance Reserve Fund. Both of these reserve funds were
created to offset unfavourable variances. Transferring the favourable variance
would result in an estimated uncommitted balance at December 31, 2017 of $1.1
million in the Insurance Reserve Fund and $1.8 million in the Legal Fees
Reserve Fund. Administration is also recommending that of the remaining $4.2
million surplus, $1.1 million be transferred to the Stabilization Reserve Fund
to replenish the amount used to lower the 2018 tax levy and the balance of $3.1
million be transferred to the Renew Thunder Bay Reserve Fund. On March 14, 2018
Ontario and the federal government signed an agreement to provide funding to
municipalities for public transit, green infrastructure, community cultural and
recreational infrastructure and rural and northern communities infrastructure.
Transferring funds to the Renew Thunder Bay Reserve Fund will provide a source
of financing to leverage these funding programs”
In other words, the
money is going to replenish assorted reserve funds including the main
Stabilization Reserve Funds in order to deal with proverbial rainy days when it
comes to municipal finance. This is
prudent.
However, reporting the
variance as a percentage of the total budget which includes both tax and grant
supported spending understates the variance.
A 3.04 percent variance basically says the City collected about 3 percent
more in tax revenues than in spent. Given that tax revenues in 2017 grew by 3.3
percent, it means the final property tax rates that were imposed did not need
to be as high as they were. A variance
of 1 percent is certainly reasonable as one cannot predict legal costs or
snowfalls, but three percent seems excessive.
We could easily have gotten away with a two percent increase in tax
revenue growth last year and probably still managed a small surplus to augment
reserve.
Indeed, if one looks
at the last few years, there was a $2.7 million dollar tax supported surplus in
2016 and a $1 million dollar tax supported surplus in 2015 which as a share of
tax revenue come out to a variance of 1.5 and 0.6 percent respectively - both
numbers that are much lower compared to 3 percent this year. While one does not want municipalities to
become spendthrifts and run down their reserves, at the same time having very
large positive variances means that the tax rate levy that was imposed was higher
than it needed to be in 2017.
You might argue
hindsight is 100 percent and you cannot predict the size of operating deficits
and it is better to be safe than sorry.
On the other hand, you can also argue that it is easy to be prudent if the
ultimate municipal budgetary insurance is simply raising tax rates higher than they need to
be and banking the surplus. I would argue that as a rule of
thumb, the tax supported tax levy should not be growing faster than the rate of
inflation and population growth. Given
that population growth in Thunder Bay has been approximately zero for decades
now while inflation as measured by the CPI is about 2 percent, this means that municipal
property tax rate increases above 2 percent require a lot more justification
than they have been getting in recent council budget debates.
