Budget 2019: Revenue and Cashflow

Often talks about the City budget revolve around residential property rates. This is important to discuss. But I would suggest we also need to have a much larger conversation.

Earlier this week, I wrote about how spending can be better controlled. Our spending has a very big and obvious effect on property tax rates. But it isn’t the only thing that effects them.

In 2018, residential properties only accounted for a little over 50% of the total tax levies in Grande Prairie. Residential properties funded about 25% of the total capital and operating budgets. While it is very important for Council to be aware of residential tax rates, there are many other sources of revenue and factors which effect cash flow. All of these need to be considered when creating the budget.

Below are descriptions of some revenue and cash flow options available to Council. I’ll be discussing some of the potential benefits and risks of raising particular revenue sources. As I do so, I am assuming that an increase would be revenue neutral: it would be completely offset by a decrease in property taxes rather than consumed by increased spending.

I’d love to hear your thoughts. Should Council be adjusting any of these to change the degree to which property taxes fund the budget? Are there any benefits or risks I am missing below? Are there other levers we should consider adjusting?

As always, this blog is meant to express my personal opinion, not the opinion of Council. Furthermore, any mistakes belong to me alone.

Below I will refer to a quick survey of Alberta municipalities I conducted. I picked a few fees and charges and looked them up in Grande Prairie, Lethbridge, Red Deer, Wood Buffalo, Calgary, and Edmonton. Here is my spreadsheet- I welcome fact checking and corrections.

User Fees

There are many municipal services which users pay for. These include everything from swimming at the Eastlink Centre to riding on transit to registering a dog. It is rare for the user fees charged to completely cover services- most of them are subsidized by tax payers. Council can lower tax rates by increasing these fees.

Potential benefits to increasing: It is equitable for people to pay a higher proportion of the costs of the services they access.

Risks to increasing: People of lower financial means may not access services as readily or may be unable to access some services (this is especially troubling if these people are children). Many residents will need to think more about using municipal services instead of being able to just go out and enjoy them.

In my survey, I looked at three user fees. Grande Prairie residents pay about the average for dog registrations. They also pay about the average for swim passes, but the Eastlink Centre appears to have more to do than most pools surveyed and not all passes in other cities bought access to an entire facility. Grande Prairie transit riders pay ~25% less than the average for a monthly adult pass.

Should Council consider raising some of our user fees? If so, which ones? Is there a general percentage of costs we should aim to recover from subsidized services?

Development and Inspection Fees

As land is developed and buildings are constructed or renovated, there is work for the City to do. Planners, engineers, inspectors, and other staff are involved. To compensate for this staff work, fees are charged. These fees do not recover the full costs of staff time.

Most development leads to a gain for the City in the long-term due to increased property taxes. But it often uses an up-front subsidy from taxpayers.

Potential benefits of increasing: it is equitable for people to bear the cost of developing their own property.

Risks to increasing: business and development could be driven outside of City limits. This would mean that the City’s tax base is eroded so remaining property owners need to pay more. It can also lead to poor land use planning if development happens where it is cheap rather than logical.

If you want to see how Grande Prairie stacks up to other municipalities, this might give you an idea. It is a 2017 survey of fees charged by municipalities- the green column is the fees adopted by Grande Prairie in May 2017. Grande Prairie charges less than the comparable municipalities.

Should Council increase its development and inspection fees or leave them alone?

Business Fees

Just like residents, businesses rely on municipal services (such as roads and police). Most municipalities charge business license fees. Recognizing that many businesses also pay significant property tax, “Resident Businesses” with owned or leased property in municipal limits usually pay significantly less than “Non-Resident Businesses.”

Potential benefits of increasing: property development may be encouraged if property taxes decrease due to revenue from business licenses. Raising business taxes can alleviate the burden of residential property owners.

Risks of increasing: businesses may be discouraged from starting or relocating into the City. This can damage the economy, cost our community jobs, and lead to decreased services for residents.

Grande Prairie was the only midsize City surveyed which does not charge a license fee for Resident Businesses. At 30% below the average, Grande Prairie had the lowest Non-Resident Business Fee surveyed.

Should Grande Prairie charge an extra fee for Resident Businesses, or continue to just tax them through property taxes? Should it consider raising the fees for Non-Resident Businesses?

Debt Financing Length

Almost every municipality carries debt created to build infrastructure or facilities. Grande Prairie is no exception. Servicing debt accounts for ~10% of our operating budget.

An important consideration with debt: how long should it be financed over? Paying it off quickly means that less money is spent on interest. However, being more aggressive on debt restricts cash flow until it is paid off.

Additionally, some would argue that paying off debt quickly is unfair to today’s tax payers. They would suggest that debt should last for the entire life-cycle of whatever it financed. Their argument: people should pay for the services they enjoy. This includes future taxpayers. If you spread debt out over the lifetime of a facility, all taxpayers who use it pay the same amount. If you pay it off quickly, today’s tax payers arguably pay more than their “fair share.” Shorter terms means that future taxpayers get to enjoy that facility for free between the time the debt is fully paid and before the facility is at the end of its life

A strategy Council could use to increase our cashflow and therefore decrease taxes today: refinancing our various loans so that they last as long as the facilities they were taken out to pay for. Is this something that deserves thought? Or should it be rejected out of hand?

Utility Franchise Fees

Public utilities (water, electricity, and gas) use municipal property to run pipes and wires, and they are given exclusive right to do so. In return they pay a franchise fee. This is meant to cover the expenses and lost revenue a municipality incurs by owning land. It also compensates for the risks and restrictions on planning and development that utilities create. Municipalities set the franchise fees and they are then passed directly onto utility users based on how much water, gas, or electricity those users consume.

Potential benefits of increasing: there are many organisations (schools, non-profits, and government departments) which have property in the City but are exempt from taxes. Franchise fees are a way to ensure they pay for a portion of the municipal services they use. Franchise fees can also have environmental benefit as they encourage energy and water conservation. Industries that use little energy or water (and therefore are minimally impacted by increase franchise fees) may have more incentive to move to Grande Prairie as their property taxes decline.

Risks of increasing: schools and non-profits may be challenged as their costs for utilities increase. Industries and businesses which consume large amounts of water or energy may be discouraged from operating in the City.

Grande Prairie’s electricity franchise fee is 7.75%. Not all municipalities charge a franchise fee. However, of the ones that do and were surveyed, Grande Prairie had the lowest fee. The average franchise fee was 12.9%.

Are franchise fees something we should consider increasing? If so, by how much?

Corporate Sponsorship

The City has marketing opportunities which could be sold. This includes everything from the naming of the new Outdoor Pool to having screens on our digital billboards to putting up small signs in City facilities. Selling marketing space means that we do not need to collect as much from taxpayers. However, many dislike private advertising in public spaces.

What is your take on corporate sponsorship? Should we pursue it at every opportunity, only when we get a very large payment, or not at all? Compared to what we have now: should we be pursuing more sponsorship, less, or about the same? Are there potential sponsorship opportunties that we should be marketing? Is there anything that is currently sponsored and which the City should not look to sell again after the current contract expires?

Fines

I’m including a section on fines because many consider them a significant source of revenue. However, I’m hesitant to include them at all here. I did because I wanted to be crystal clear on my view of them.

Fines should not be viewed as a source of revenue to be manipulated. They exist to make our community safer and more pleasant to live in. They do not exist to lower taxes or increase funding for services.

I’m against treating fines as a revenue source to be manipulated. I don’t think it is moral to do so. In many jurisdictions, this leads to fines being arbitrarily and unfairly handed out. Furthermore, fines are less equitable than other funding sources- they are much more economically damaging to people of lower financial means than those of higher means, and people of lower means are often targeted in jurisdictions with aggressive fine policies.

Even if I was morally okay with treating fines as potential increased revenue, they would be an incredibly poor source. The City has limited control on how many it can issue and convict. And fines are very inefficient: the province keeps a large portion of them, and they are expensive to collect- the General Bylaw Enforcement and Traffic Safety Programs only net a little over $1 million (equivalent to less than 1% of our tax levy and 0.5% of our total budget).

I am completely opposed to raising fines with the purpose of increasing revenue.

Regional Revenue

This was another section I questioned adding, but am doing so because some will expect it.

The City serves many residents that live in the County and elsewhere. The services these people access while in our limits are subsidized by City property taxes. A logical question some ask: “is there potential to get them to pay more of a fair share?”

There is potential for this through Intermunicipal Collaboration Frameworks (ICFs). These are agreements that the province is mandating we sign with the County by April 1, 2020 (every municipality has to sign them with all their neighbours). We also are allowed to sign them with other regional municipalities. The intent of ICFs is to "provide for integrated and strategic planning, delivery and funding of intermunicipal services." There are a wide range of service areas where you need to agree with your neighbours on 1) how they are currently being delivered, 2) how they would best be delivered, and 3) how you will deliver them going forward (it is interesting that you can have different ways to do 2 and 3).

This process might lead to the City generating more revenue from our regional neighbours. But it is also highly unpredictable.

This is a process that Council needs to and is putting a lot of attention and energy into. But it is also one that we don’t have full control over that. Because we don’t control this, we shouldn’t view it as a solution to budget problems. We need to make sure we are fiscally healthy and responsible through the revenue sources we do control.

Grants

Municipalities are responsible for the services citizens access the most. They also own most public infrastructure (I’ve seen estimates ranging from 60% - 70%). At the same time, they collect a small portion of total taxes (estimates I’ve seen range from 4% - 12%).

This means that every municipality in Canada relies on grants from senior levels of government. There are very big, flexible grants that are given to communities based on formulas that consider factors such as their population. There are also smaller project-specific grants which are application based- they go to everything from environmental initiatives to affordable housing projects. Finally, there are some grants which are given to the City on the condition that they get passed through us to local community groups.

Council does not directly control what the City receives in grants. However, we do spend time and resources advocating for them. They also make up a very large part of our budget. For those reasons, they should be mentioned here.

TANGENT AHEAD:

Something worth mentioning as we head into a provincial election: one grant crucial to our infrastructure is the provincial Municipal Sustainability Initiative (MSI). In 2018 Grande Prairie received $9,605,774 from it. Every municipality in Alberta relies on MSI for infrastructure spending. It is set to expire in 2022 with no replacement currently planned. That may seem like a long time away, but it isn’t when it comes to capital planning. For example, the province requires municipalities to create capital budgets up until 2023. Without knowing what our funding looks like after 2022, it is impossible for Council to make fully informed decisions about capital spending today. And it is absurd to expect us to plan until 2023. We are advocating for a solution. I’d encourage you to bring this up with our current MLAs and with candidates in the provincial election.

Property Tax Ratio

It isn’t enough to consider how much of our budget should be paid for through property taxes and what should be funded by other sources. We also need to consider how tax levies should be divided up by different classes of property.

Below is a table showing how taxes were divided between classes for the 2018 year.

Across Alberta, Residential tax rates are lower than Non-Residential rates. In my survey, on average Residential rates were 44% of Non-Residential. In the County of Grande Prairie, they are 30%. The City has a considerably narrower gap between the rates: our Residential rate is 62% of our Non-Residential rate.

Council could bring the City more inline with the rest of the province by widening the gap. As we find savings, we could apply more of them to Residential rates than we apply to Non-Residential rates. This would make it cheaper to live in Grande Prairie. But it would also do less to incentivize business inside the City.

What should we do with this ratio? Should we leave it where it is by applying any future decreases or increases to all property classes equally? Or should we try to lower one of the rates over the other?

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In its oversight of finances, Council can’t just pay attention to expenditures. It also needs to consider to revenue and cash flow.

I’m paying close attention to both sides of the balance sheet. I have four goals that include increasing a few areas of service while also having a tax freeze or cut. I listed some initiatives underway to help us control spending. But there are also significant challenges to holding the status quo, never mind to cutting taxes and/or increasing service.

If Council wants to deliver on the four goals I’ve heard from the community, it needs to be incredibly disciplined in its spending. But that won’t be enough. Council also needs to work hard to increase City revenue and cash flow.

So I’d love to hear from you. Listed above are a number of possible strategies. Which ones should we definitely undertake? Which ones deserve consideration? Are there any that we shouldn’t even consider?

Comment below. Send me an email (dbressey@cityofgp.com) or give me a phone call (780-402-4166). Or come to my Coffee and Budget conversation next Sunday.

I’m also going to be posting a poll about this post on the GP Round Table Facebook group. Please pop on over and cast your vote.

Thanks for reading!

-Dylan

NOTE: This is a fourth post in a four part series about Budget 2019. I’d encourage you to read them all by going to www.bressey.ca/blog

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