With Vancouver expecting a $60 million revenue shortfall for its first budget in the age of COVID-19, council will consider dipping deep into reserve funds to balance the books while limiting property tax increases.
Balancing the 2021 budget through property tax increases alone would require a 12 per cent hike, more than three times the 10-year average, says a staff report to council this week. But with a significant withdrawal from the city’s reserve fund, that tax increase could be limited to five per cent or less.
The staff report looks at plugging the revenue gap with $57 million from the city’s general revenue stabilization fund. That’s a significant chunk considering the fund’s balance sat at $146 million at the end of last year, and $121 million the previous year.
The city has a few reserve funds with different purposes and commitments, including utilities and payroll, but the revenue stabilization fund is intended to help the city through unexpected financial shocks. The proposed $57 million drawdown for 2020 would be the largest withdrawal from the reserve in recent memory. For comparison, the largest recent withdrawal from the fund was $9 million for 2017’s record-setting snow and ice storm.
These reserve funds should only be “one-time funding sources,” this week’s report cautions, and the city needs to maintain a healthy balance for future unforeseen emergencies like extreme weather events.
“If revenue declines continue in 2022 and beyond,” the report says, “it will be necessary to adjust service levels and/or raise taxes.”
The report emphasizes this point about drawing from reserve funds, declaring in all capitals: “NOT SUSTAINABLE.”
This week’s report also outlines three different “scenarios” where the property tax increase could be limited to five, 4.3 or three per cent — “each of which requires some trade-offs” — responding to council’s July directive requesting options for limiting the property tax increase to five per cent or less. Vancouver relies on property taxes for slightly more than half of its operating budget.
The most draconian scenario — the three per cent option, which staff recommend against because of impacts on public safety — includes reductions of 106 police officers, 25 fire staff, 20 park board positions and 19 library jobs, among other cuts.
This week’s presentation to council is the latest in an unusually high number of budget briefings for 2020, in part responding to council’s desire to be more involved in the process earlier, and partly because of the rapidly shifting situation brought on by COVID-19.
While the $60 million shortfall currently projected is large, it’s actually less than staff’s earlier, more severe predictions. In April, a month after the new coronavirus effectively shut down much of Vancouver and the world, staff estimated that, depending on how long restrictive public health measures remained in place, the city could face a gap of $61 million to $189 million.
Vancouver is far from the only city grappling with financial challenges brought on by the pandemic. Municipalities around the world have seen unprecedented and abrupt drops in usual revenue streams like parking, user fees and taxes. Seattle, where the local economy has enjoyed a tech-fuelled boom in recent years, is now considering big cuts to staffing, policing, road work and more, The Seattle Times reported this week . In September , the mayor of Los Angeles instructed department heads to prepare for layoffs, after staff reduction programs already implemented earlier in the year in response to COVID-19.
But while revenues have contracted, demand for core services has not. As this week’s report notes, Vancouver has seen increased service demand this year, citing street disorder, homelessness and the opioid crisis, pre-existing problems compounded by the pandemic.
A June report from RBC Economics described COVID-19’s “severe blow” to municipal finances, noting: “Canadian cities’ unique fiscal structure — they can’t plan for operating deficits — has long affected their ability to smooth revenue shocks between years. Now, they’re in an especially tough position.”
“The options are bleak: draconian spending cuts, steep property-tax increases or both. That puts municipal services, and the businesses they support, on the chopping block,” the RBC report said. “Cities’ inability to bounce back quickly could weigh on Canada’s broader economic recovery.”
In another report before council this week, Vancouver staff recommend reducing staffing costs in the city’s building department and increasing permit fees, noting “steep declines” in building and rezoning applications, and corresponding falling fee revenues.
Vancouver’s operating budget for 2020 was $1.6 billion, with public safety representing the largest portion, at about 30 per cent (21 per cent for police and nine per cent for fire), followed by engineering and utilities.
The budget presentation on the agenda for this Wednesday’s council meeting is for information only and doesn’t include any staff recommendations seeking council approval. Council will, however, have the option to put forward motions with additional direction to staff.
Council is set to receive the full 2021 draft budget in early December, followed by debate and decision.
The proposal before Vancouver council this year would take the reserve balance down substantially below the level that municipal finance experts recommend in normal times. The current times, of course, are far from normal.
Unfortunately, Vancouver staff — like many others around the world — expect COVID-19’s impacts will not be limited to a single fiscal year.