Budget 2020 Update
Hi everyone, first I want to start off by saying that the past few days have been really hard for many of us. This has been an unprecedented time that requires us to respond in a variety of ways including additional temporary lay-offs of City of Edmonton staff. While never easy, this has been especially difficult given the impacts of COVID-19 on our city, province, and country as a whole. I can assure you that the health and safety of all Edmontonians is our top priority and will continue to guide all decisions that Council will have to make as we move forward through this. COVID-19 has impacted the finances of most people and organizations, including the City’s budget. Loss in revenues and incurred expenses from managing the pandemic have drastically impacted the City’s operating budget and requires us to find savings elsewhere in order to maintain financial stability.
The Supplemental Operating Budget Adjustment
process allows the City of Edmonton to adjust its multi-year budget in response to emerging issues that affect the City’s finances. The report put forward by City Administration recommends updates to the 2020-2022 Operating Budgets resulting from updated economic and corporate forecasts, administrative changes resulting in no tax-levy impact, Council directed changes and a change to the previously approved First Km/Last Km Transit Service Pilot project and the recommendation to postpone the rollout of the Bus Network Redesign.
With Council’s approval of the recommendations in this report, the overall tax increase for 2020 will be 1.3 percent, which reflect a 1.0 percent increase for Edmonton Police Services 0.8 percent increase for Valley Line LRT (Southeast, West, Metro) and 0.5 percent decrease for municipal services. This year is different than previous years because the 1.3% increase is an average of the residential and non-residential property taxes. I’ll provide a more detailed breakdown of this later in the post.
The impact of the COVID-19 pandemic on the City’s financial position in 2020 will be significant. While the pandemic has resulted in significant disruption, the direct response efforts are anticipated to be within 2020’s budget.
Our administration is managing the 2020 COVID-19 financial impact using a comprehensive funding approach that includes:
expense management
redirection of capital funding to operating
use of the Financial Stabilization Reserve (last resort)
use of the emergent items budget (last resort)
This multi-layered approach addresses revenue and expense impacts without adding to the tax levy.
Did my taxes increase, decrease, or stay the same?
While it would be great to have a simple answer to the question above, things are a bit more complicated due to the fact that we collect municipal taxes and education taxes on the same bill. Therefore instead of answering the question above selecting one option, the answer is actually all three depending on how you look at it. I’ll try to explain why that is the case below.
During the budget discussion on April 27th, council passed the following motion: That Administration prepare two versions of the tax requisition bylaws and return to the April 29, 2020, City Council meeting:
One with the usual division between residential and non-residential (business) tax bases (1.3% each). The overall tax impact in this option is a 0.9% tax decrease for residential and a 1.0% tax decrease for non-residential.
Another version presented shifted the municipal tax from non-residential to residential thereby achieving an overall 0% tax increase for residential and 2% tax decrease for non-residential.
While I personally did not support the second option, a majority of council did. Our property tax bill has two components to it:
The municipal tax. This is what the City of Edmonton collects in order to provide all the programs and services within the city
The provincial education tax. This is what we collect on behalf of the provincial government.
While there are two different lines on our tax bill, the one most of us pay attention to is the “payment due” line. In the future, I’d like to see these collected independently of each other but in the meantime, we will continue to operate with this system. Because of that, the amount we collect on behalf of the provincial government can have an impact on the final amount we pay.
You’ve likely seen different headlines that suggest that municipal taxes are going up 2.5% and other ones that suggest that there will be a 0% increase for residential taxpayers. Technically both statements are true.
The overall net impact to the average residential taxpayer will be no tax increase (0%). But that 0% is made up of a 2.5% municipal tax increase and a 6.3% decrease in the education tax that the City of Edmonton must collect on behalf of the provincial government.
The overall net impact to the average non-residential taxpayers is a 2.0% tax decrease. But that 2.0% tax decrease is made up of a 0% municipal tax increase and a 10.9% decrease in the education tax. By increasing the municipal tax to 2.5% on residential properties, that allowed council to reduce the municipal tax to 0% for non-residential properties.
The 9-4 vote that was referenced changed the ratio of the municipal tax. Had that vote not passed, the municipal tax increase for residential and non-residential taxpayers would have been 1.3% each. The education tax wouldn’t have changed in that option so the overall impact would have been a decrease of residential taxes of 0.9% and a decrease of non-residential taxes of 1.0%.I felt this was a better option because while I do realize the need to support our businesses who are struggling, this change doesn’t benefit every business owner. A business owner who doesn’t operate out of a physical location, would not benefit from the change. In fact, if they operate out of their home, they wouldn’t see the same decrease because they are paying residential taxes. Another factor is the impact on groups like seniors. Many seniors operate on fixed incomes and do not see significant yearly increases. While the market has been stabilizing, many seniors have seen their retirement income drop due to the pandemic. That means a small dollar change in their household income still has a substantial percentage impact on their budget. Knowing that everyone is struggling, I did not feel comfortable with the change.
I know there is a lot of information there but I hope the above explanation gives you a better understanding of the process. As noted above, that overall amount to the payment due line will be the 0% for the average residential taxpayer and -2.0% for the average non-residential taxpayer.
I use the term “average residential taxpayer” because our property tax bills vary based on the change to our property assessment. Every January there is a story in the news about the average change to property assessments. The average change across Edmonton as of January 2020 was a 0.1% decrease. That change is the baseline that we use to help determine how your property taxes will be calculated. If your residential property assessment had a 0.1% decrease year over year, then you are considered the average residential taxpayer and your taxes will be the same as you paid last year. If your assessment change was more than a 0.1% decrease, your property tax bill will be higher than what you paid last year. If your assessment change was less than 0.1% decrease, your property tax bill will be lower than what you paid last year.
There is more information on the City of Edmonton website about how this works but it is important to note that not everyone will experience the same change because property assessments fluctuate from year to year.
The Impacts of COVID-19
The above information explains what the final outcome will be for each of us but I also want to share the specific impacts of COVID-19. Being that we were originally planning a 2.08% municipal tax increase, how did we manage to bring that down to 1.3% considering we have been discussing a large budget shortfall? The information below will help answer that question.
The City of Edmonton’s Approach to COVID-19The City has developed a four stage approach to deal with the pandemic. Respond, Relaunch, Recover, and Reimagine. You can learn more about this on the City of Edmonton COVID-19 page.
As part of the response stage, Council is required to make budget decisions to manage the financial impact of the response. Administration is providing information and recommendations on how to manage the financial impacts of COVID-19 using the following principles:
Safety for Edmontonians
Combination of funding strategies
Long term focus
Stabilize local economy
Fair and respectful workforce strategies
Evaluation of capital projects
Limit property tax increases
Budget Impacts of COVID-19Administration provided a report to council on the COVID-19 Financial Impacts and Funding Strategy that included projections based on the current measures being in place until mid-June and mid-September. As the mid-September scenario is more likely, it was used to estimate the financial impact and related funding plan. The report also provides high level estimates for three different relaunch variations that assume operations return to:
75 percent of normal operations by the end of 2020
50 percent of normal operations by the end of 2020,
and in the worst case, the shutdown is extended until the end of the year.
Revenue Impacts and COVID-19 Costs
The city generates revenue from things like transit fares, facility rental fees, parking fees, and business licensing fees. As a result of measures taken under the State of Local Emergency and pandemic response, as well as costs directly associated with the city’s handling of COVID-19, we’ve seen drastic shortfalls. Based on the updated financial projections, the mid-September scenario reflects a reduction in tax-supported operating revenue of $127.5 million and COVID-19 specific cost increases of $9.7 million, for a total impact of $137.2 million. The estimated total impact to the end of 2020 for each of the relaunch variations is:
$156.2 million assuming operations return to 75 percent
$175.5 million, assuming operations return to 50 percent of normal, and
$212.3 million assuming current measures are extended.
Funding Strategy
To offset this impact, Administration recommended reducing expenditures by $90.7 million through various management strategies and $46.5 million through reduction of operating transfers to fund capital on a pay-as-you-go (PAYG) basis. If property tax was to cover this, that would be around a 10% tax increase, which we know is not a realistic or fair option. There have been some suggestions that municipalities run a deficit but I am not in favour of this option as I feel it places more risk on the city as the money is required to be paid back the following year which we may or may not be able to pay considering the limited revenue tools that municipalities operate with.
Given that staffing makes up about 60% of the total budget, the city has now temporarily laid off close to 3000 City of Edmonton employees. This decision was not made lightly and has weighed heavily on my mind. And yet this still is not enough to cover the shortfall.
Four options are presented in the report referenced above; expense management (ex: staffing levels), reductions in operating budget contributions to the capital budget, using the Financial Stabilization Reserve, and tapping into the Emergent Items Operating Budget.
Ultimately, Administration recommended the following steps be taken:
Recommendation 1. That the 2020 operating budget be adjusted on a one-time basis to reflect the adjustments to individual branch revenue and expenditure budgets as reflected in Attachment 1 of the April 27, 2020 Financial and Corporate Services report CR_8228, as a result of the COVID-19 response.
Recommendation 2. That the 2020 operating budget be adjusted on a one-time basis to decrease expenditures by $46.5 million as a result of a reduced Pay-as-you-go operating transfer to the Pay-as-you-go Capital Reserve as reflected in Attachment 1 of the April 27, 2020 Financial and Corporate Services report CR_8228, to help offset the net financial impacts of the COVID-19 response.
Decisions made
Council voted in favour of both recommendations. There was a desire by Council to also find savings that could be reallocated to use as part of our budget response, so I put forth the following motion as a part 3: That the Common Budget for Office of the Councillors, Mayor’s Office Budget and Ward Councillor budgets be decreased by 10% on a one-time basis, for a total of $695,000 to be reallocated to Corporate Expenditures & Revenues for financial strategies.
This also passed unanimously. I know this was difficult for many offices, including my own, as it’s meant temporarily letting go of excellent staff members. I know this decision was not made lightly. I do have hope that it will be a short term solution to get us back on our feet.
What’s Next?
The changes above only account for the mid-September outcome that is shown in the image above. That means there could be more changes made if the situation doesn’t improve by that point. If this were to continue beyond mid-September, all four options referenced in the Funding Strategy section will need to be used. While I hope that does not occur, we are preparing for that possible reality.
This is an economic crisis like no other. Things will not go back to normal in the exact same way. While that can be a frightening notion, I choose to look at this as an opportunity. If we work together on this relaunch, we have the potential to come out of this stronger than before. It will require thoughtful consideration and an open mind. I look forward to these next steps and will be writing more about what is next in future blogs.
I've also included my April 30th Community Conversation in which I talk for the first half about the budget and it's impacts on residents. Feel free to watch that and follow up with any questions you may have.
Written by A. Knack, K. Machin, and R. Maggay
