1 Spruce Grove as a whole operates through the relationships between - - PDF document

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Spruce Grove as a whole operates through the relationships between Council, Administration and our Residents. Residents share their vision with Council who articulate that to Administration through leadership and a strategic plan. The two then work together to determine and implement the strategies required to achieve that vision and our residents rely on Administration to provide value through services. This interwoven relationship is essential in building a successful midsized city. Residents, Council and Administration are working together to create a sustainable city where families thrive alongside business and industry, coming together to make Spruce Grove the Community of Choice. 2

The corporate planning process from January to July involves a strategic retreat with Council, department business planning and the ranking of initiatives and service changes to above/below the line through a prioritization exercise with the Senior Leadership Team. This information is then given to our finance team to analyze funding, which is presented back to the Senior Leadership Team to review and decide which initiatives/service changes are included in the recommended corporate plan. It was at this point in the process that we realized we needed to re‐evaluate how we were making these decisions given our financial position. Understanding our fiscal realities led to this shift in thinking and a greater understanding of the importance of fiscal sustainability. Given the opportunities ahead of us, now is the right time for this shift in thinking to occur. As a leadership team, we identified the need for a Reframing year. 3

Departments were directed to go back to their 2019 budget forecasts, 2020 status quo budgets and 2020 initiatives to determine what could be deferred or removed, and what was critical to continue in the coming year. Through this process we decided that all 2020 FTEs would be pushed back to 2021 and a significant number of initiatives were deferred or put below the line. Doing this allows us to “hold the line” for 2020 as we work through the reframing year’s philosophies and strategies required to make decisions from an

• rganizational perspective. This process also made us realize the need for a touch point

with Council on October 3rd prior to the Recommended Corporate Plan being released so members of Council have the strategic and financial context around the recommendations included in the plan. 4

The City of Spruce Grove is in a time of transition and is shifting to operating as a mid‐size

• city. With this shift comes a variety of opportunities and challenges that need to be

addressed in the coming years. Over the past few years the City has been in the fortunate position of having a significant amount of growth. Investments and decisions were made based on our prosperity and those growth rates, including investing in capital and services that have resulted in a new Protective Services building, a new RCMP facility through a partnership with the Town of Stony Plain, improved underground infrastructure and local transit, along with a variety of service enhancements to our community. However, growth rates have now slowed down and the City’s debt servicing costs, combined with inflation, added staffing requirements to respond to previous years’ growth, and launching a local transit service, have had a significant impact on the financial position. The City’s financial position presents challenges and changes to the current financial trajectory need to be implemented. As a result, Administration recommends that 2020 be a reframing year where Administration will confirm fiscal philosophies, align planning processes and review service delivery in response to Council’s strategic direction. The 2020‐2022 Recommended Corporate Plan was built with this change in strategy and direction in mind and it represents only what Administration believes is critical to proceed in 2020. 5

The outcomes of implementing council’s strategic direction as part of this reframing year include:

• A clearer focus
• Strategies to support and guide problem solving and decision making
• Redefined strategic and corporate planning processes
• Organizational objectives set by the Corporate Leadership Team
• A planning hierarchy established that aligns the organization to those objectives

Our corporate focus will be on strategy, the day to day work, culture, communication and structure. 6

Although we don’t know exactly what the process will be as we work through the reframing year, we do know the high level objectives of what we’re trying to achieve. We’d ask that Council determine their financial strategy as it relates to long term community sustainability, assess and confirm policy direction, and review recommendations from Administration and approve as required. As administration, we’ll work towards:

• developing a fiscal sustainability plan to implement Council’s financial strategy,
• review our current policies and further align them with Council’s strategies,
• streamline processes in an effort to reduce red tape,
• develop recommendations for Council on budget philosophy and strategic planning
• review current department budgeting practices

Once these pieces are in place, it’ll allow for a better alignment between Council’s strategic direction, administration’s policies and philosophies and our department planning processes. We will be scheduling a Council retreat in early 2020 to assess and confirm policy direction. In addition, we’re expecting to have a series of interactions between administration and Council throughout the year to provide guidance to the process. Once administration has recommendations finalized, they will be brought to Council for consideration and approval. 7

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The following initiatives were approved as part of the 2019‐2021 Corporate Plan but as part

• f the 2019 forecast review, it is recommended to delay the projects to 2020. All are listed

in the 2020 Above the Line table of the Recommended Corporate Plan 10

The following initiatives were also approved as part of the 2019‐2021 Corporate Plan but after the 2019 forecast review, some initiatives had a reduction in the 2019 budget (subsequent years may have also changed, which is reflected in the initiative tables of the recommended corporate plan), or have been moved outside of the Recommended Corporate Plan 11

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The goals of this session are:

• To update Council on the City of Spruce Grove’s Financial Condition at the close of 2018

including information on comparator communities and trends over time.

• To present financial picture related to the Recommended Corporate Plan

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Three Financial Indicators we use to monitor the City’s Financial Condition are:

• Net Financial Assets
• Debt Limit
• Municipal Fund Level (previously referred to as Municipal Surplus) – We are going to

refer to this as municipal fund to avoid the impression that these funds are Surplus and available for spending. These three items will be explained more fully as we progress through the presentation. 18

We will initially do a quick update on where we ended 2018 because the closing municipal fund numbers for that year flow into 2019 opening balances and set the stage for the Corporate Plan about to be deliberated 19

The First Financial Indicator we speak about is Net Financial Assets/Net Debt. Net Financial Assets/Net Debt is a measure of the difference between an entity’s financial assets and liabilities at a point in time. The performance measure indicates important information regarding a municipality’s requirement to generate future revenues to fund past services and transactions. If a municipality has a Net Asset position, there are sufficient assets on hand to settle existing liabilities. If a municipality has a Net Debt position, the municipality must generate future revenues to cover the cost of past transactions and events 20

The City of Spruce Grove is in a Net Debt Position. This means the City is incurring expenses today that will rely on the generation of future revenues for repayment. When analyzing Spruce Grove alongside of the comparator communities, Net Assets or Net Debt as a percentage of Financial Assets ranges from ‐45.04% to +39.47%. The City of Spruce Grove has the lowest measure (the greatest Net Debt Position) at ‐45.04%. (Last year was ‐ 14.17%) Three communities have Net Debt (Spruce Grove, Stony Plain, and Leduc) and all

• thers have Net Financial Asset positions. When Net Debt exceeds Long Term Debt
• utstanding then a position will be reached where future revenues are paying for today’s
• perations.

When considering the communities in a Net Financial Asset position, the average percentage of Financial Assets is 28.74%. For Spruce Grove to reach a Net Financial Asset position of 28.74%, it would require a change in cash position of $43,326,278. (Last year to reach the community average of 24.70% would have required a change in cash position of $22,572,000). Net Debt is increased by acquiring inventory and prepaid expenses and purchasing assets. Net Debt is reduced by annual surplus and proceeds on disposal. If the Net Debt position is to be changed into a Net Financial Asset Position, the City must earn more surplus than is being spent on Assets. 21

The second Financial Indicator we speak about is Debt Limit. This reflects the level of the City’s long‐term borrowing in relation to provincial and municipal limits. The City of Spruce Grove self‐imposed debt limits through policy are 50% of the provincial limits. 22

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In 2018, the City of Spruce Grove had Debt that represented 30.71% of the Provincial Debt Limit allowed for by the City’s revenue levels. (2017 – 18.27%) The following graph shows that this level of debt is close to the average of comparator communities. The average Debt percentage in relation to Provincial Limits for all communities was 32.87% in 2018. (30.40% ‐ 2017) The City was in a favorable debt position in 2018 in relation to provincial debt limit. With the planned increases in debt shown in the Corporate Plan, this is expected to change significantly with Spruce Grove approaching debt limits higher than 43% by 2022. (73% by 2024) 24

The third Financial Indicator we look at is the measure of Accumulated Surplus/Deficit. As mentioned earlier we are going to begin referring to the Municipal Surplus as the Municipal Fund in order to avoid the impression that these funds are surplus and not required for

• ngoing operation.

This measure provides the net economic position of the entity from all the years of

• perations at one point in time. When total assets exceed total liabilities, the entity is in an

accumulated surplus position. Accumulated Surpluses in the various segments of the

• rganization as well as the Investment in Tangible Capital Assets make up the overall

Accumulated Surplus. If a segment is in an Accumulated Deficit position (total liabilities exceed total assets) the entity must fund past transactions and events from future revenues. 25

The City’s Policy 3037 ‐ Accumulated Surplus states this. 26

At the close of 2018, the City’s municipal surplus was $16,954,000. This represents 18.26%

• f the City’s expenses so we are currently not meeting our policy for municipal surplus.

The City has three surplus segments within Accumulated Surplus: Municipal; Utility; and

• Developer. The Municipal and Utility surpluses are in an Accumulated Surplus position.

The Developer segment is in an Accumulated Deficit position. Total liabilities funded for developers has exceeded the total assets received from developers to date. The City is funding developer costs upfront and charging those costs to the developer surplus to be paid back with future offsite levy collections. This has resulted in an accumulated deficit for developer monies. The reasoning for having a separate surplus for the Utility is to create a situation where the Utility is completely self‐sustaining. The rates calculated for the delivery of Utility Services are calculated to allow for payment of all operating and capital costs. The number of ratepayers in the Utility exceeds the number of taxpayers in the Tax Base and therefore allows for Utility costs to be more widely spread amongst users. It achieves a User Pay system through this methodology. The Developer Surplus is separate as developer levies are not intended to fund the

• perations of the municipality and the organization must track all developer costs to the

specific levies for which they were created. All costs of development are to be borne by the levies and need to be gathered in a separate “container” to facilitate tracking and compliance with provincial legislation. 27

Why is it important for a municipality to have an Accumulated Surplus? An Accumulated Surplus is maintained for the purposes of financial security in the event of the loss of a revenue source, economic downturn, and unanticipated expenditure demands due to natural disasters, insurance loss, need for large scale capital expenditures, other non‐ recurring expenses, and uneven cash flows. Sufficient cash, or liquidity, refers to the flow

• f cash in and out of the City treasury. The City receives many of its revenues in large

installments at infrequent intervals during the year. It is to the City’s advantage to have a good liquidity position to enable ongoing expenditures regardless of the timing of receipt

• f revenues. The amount of surplus within Accumulated Surplus provides an indication of

the solvency of an organization. It is commonly conjectured that cash flow should typically be within the range of two to three months of operating expenses. For the City of Spruce Grove, operating cash flow would therefore be in the range of $15 – 23 M. The City’s surpluses from Municipal & Utility together only amount to $26 M so only approximately $3 M is available for future asset purchases….this indicates that the surplus percentage being captured each year at 20% is inadequate. 28

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Analysis of the revenues of the City in relation to comparators shows Spruce Grove to be on the lower end of Revenue per Capita and Taxes per Capita as evidenced in this graph. The average Revenue per Capita of all comparator communities in 2018 is $2,660 (2017 is $2,613) and Spruce Grove collects $2,312 per Capita ($2,392 per Capita in 2017). The average Taxes per Capita of all comparator communities in 2018 is $1,353 (2017 ‐ $1,309) and Spruce Grove collects $1,061 in Taxes per Capita. ($1,020 in 2017). ($292 for 35,766 residents is $10,443,672) 30

An analysis of Spruce Grove’s Revenue per Capita over the last six years shows that Revenue per Capita remained steady in the first five years moving from $2,388 to $2,392 but took a drop to $2,312 in 2018 with increased population. When these numbers are adjusted for inflation over that time period however, the truth is that absolute Revenue per Capita has decreased from $2,388 to $2,120. 31

A similar analysis of Taxation per Capita over the last six years reveals an actual increase in Taxation per Capita from $926 to $1061. When adjusted for inflation however, this absolute increase in Taxation per Capita is from $926 to $973….an absolute increase of $47 per capita over six years…..approximately $8 per year. 32

Analysis of the expenses of the City in relation to comparators shows Spruce Grove to be lower than average Expenses per Capita as evidenced in this graph. The average Expenses per Capita of all comparator communities is $2,673 and Spruce Grove spends $2,597 per Capita. When discussing Expenses per Capita, it is wise to remember that municipalities deliver different service mixes that may explain differences. However, it appears that Spruce Grove is not out of line in its spending patterns in relation to similar communities. 33

An analysis of Spruce Grove’s Expenses per Capita over the last six years shows that Expenses per Capita over time have shifted from $2,390 in 2013 to $2,597 in 2018. This increase when adjusted for inflation over that time period however, results in an absolute decrease from $2,390 in 2013 to $2,381 in 2018. 34

Now we will move away from the 2018 update which is based on actual results to a discussion of the City’s future financial state based on forecasts and budget projections. In the 2019 – 2021 Corporate Plan, Council approved the municipal fund being outside of policy at 19.5% of total expenses. Forecasts do not indicate this will be achieved. The current forecast is that the City will end the 2019 year with the municipal fund at 17.7%. This becomes the opening balance for the recommended corporate plan. The Corporate Plan process has revealed that the City’s financial position is challenging and policies and processes must be reviewed. The Administrative team is initiating a slow down or pause of projects, hiring, etc. to allow 2020 to be a reframing year for the

• rganization….a chance to review our fiscal sustainability and work with Council to develop

financial philosophy and policy that will allow the municipality to be sustainable into the

• future. The graphs and commentary on the upcoming slides reflect a deferral of several

projects and most FTE requests into the 2021 year and beyond. This three year plan currently includes tax increases of 3.9% in each year and utility rate increases of 2% in each

• year. 2020 will be a year for completion of previous projects and focus on a review of the

City’s future fiscal sustainability. 35

The First Financial Indicator we’ll review is Net Debt. The City’s Net Debt position (Financial Assets less Financial Liabilities) is expected to reach $79 million in the context of this plan. ($46 million by the end of 2020) In 2021 and 2022 the City’s Net Debt is projected to exceed actual debt which means that future dollars are being used to pay for current

• perations, not just debt. This is a non sustainable position which implies that projected
• perating revenues are not covering projected operating expenses in those years. This is a

key reason for the analysis to be done in 2020 and the reframing proposed. This slide demonstrates that Net Debt is expected to be our position for many years to come based on current project plans, borrowing, etc. 36

Secondly, we’ll review the Financial Indicator of Long Term Debt. The City’s debt is projected to reach $62.5 million by the end of 2022. This will be 43%of the municipal limit and 86% of the provincial limit. As shown in the graph, the City’s debt in 2023 and 2024 is projected to exceed the municipal limit and will reach 73% of the Provincial Debt Limit. From 2015 to 2022, the City’s debt levels range between 9% and 43% of the Provincial Debt limits. Between 2015 and 2022, the City’s debt levels range from 19% to 86% of the Municipal Debt limits. In 2023 and 2024, Spruce Grove Debt levels are 58% and 73% of Provincial Debt limits. In 2023 and 2024, Spruce Grove Debt levels are 116% and 147% of Municipal Debt limits. This graph also demonstrates the breakdown of debt between segments as well as the city debt limit (exceeded in 2023) and the provincial debt limit. The predominant borrowing is for municipal capital, with a small amount for utility capital and the remainder for developer debt. 37

The third Financial Indicator is related to the Municipal Fund policy requiring 20% of expenses to be held in the City’s Accumulated Surplus. The proposed plan is shown in this graphical representation and is inclusive of a 3.9% tax

• increase. The yellow line represents a 20% target as per policy. The percentages being

achieved now are still below the policy requirement of 20% and are as follows: 2019 – 17.7% (19.5 was approved in last corporate plan) 2020 – 16.8% 2021 – 11.2% 2022 – 7.4% 38

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The budget distribution for 2020 is projected to be 20% Capital and 80% Operating. In the five years prior to this, the distribution has averaged 25% Capital. Average capital spend during those years was $29 million and is proposed to drop to $26 million in 2020. 40

The capital spending in 2020 is distributed by type of expenditure as shown in this graph. 41

Capital spending in 2020 is funded through grants, debt, user fees, taxes, and sponsorship as shown in this graph. 42

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As part of the October 3, 2019 Special Council Meeting, Administration introduced the conversation around the various financial strategies Council can use to improve the City’s financial position. The recommended financial strategies presented as part of this recommended corporate plan are a reflection of those conversations to further outline the impacts of each strategy on the 2020 budget and beyond. 44

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