The Coming St. John's Budget Challenge

Remember the budget of 2016? The one that raised taxes and cut programs without warning?

Well, there’s another tough budget coming down the pike, and this time Council wants to make better decisions. In other words, we have to learn the lessons of 2016 and get residents involved in the process.

So today, with several months ahead of us to think this through, I’d like to discuss the challenge that lies before us in 2019 and how we can spend our tax dollars wisely.

[Note: check out the "infographic" version of this post here!]

To begin, let’s talk about why the City’s budget is so important. The obvious answer is that it represents how Council spends your money. In budget speak, it means there’s a “line item” for everything you want the City to do.

Budget Challenge 01 Why Important

Line 2491? That’s your fire protection services. 3231? That’s snow clearing (including sidewalks!). The City also provides us with clean drinking water and treats it once we’re finished with it (lines 4120, 4121, 4122, 4123, 4131, and 4225).

Keep going down the budget (you can read 2018’s here), and you’ll get a good picture of what the City provides for your dollar. What you’ll also see is how many programs there are, and why it can be hard it to decide which programs get funded and which ones don’t. (Seriously, take a quick review.)

But before we start picking winners and losers, let’s talk about how that $294,591,088 budget gets funded. Where does that money come from? Well, lots of places.

The budget’s not just taxpayer dollars. ...but it’s mostly taxpayer dollars.

Budget Challenge 02 Revenue Sources

About 25% of the budget ($74 million) is covered by government grants as well as fees, fines, and sales for other City services. For example, parking permits and user fees at our recreation centres.

The other 75% ($220 million) comes from taxpayers, specifically property owners. $49 million of this is actually a water tax, which directly covers the cost to provide drinking and sanitary treatment services. That leaves about $161 million, which is known as property tax.

Now, there are two types of property owner we can bill: commercial and residential. The first one is made up of businesses who together pay $70 million. The second is who most people generally think of when we say “taxpayers”: our homeowners.

Homeowners together pay about $91 million in taxes. To figure out what portion of this amount each homeowner pays, the City assesses all the properties in the city (which this year totaled $12.5 billion!) and comes up with a “mill rate” or multiplier.

Budget Challenge 03 Assess All Homes

This year the residential mill rate is 7.3 because $91m out of $12.5b = 0.0073 (approximately). To determine your tax bill, we multiply the assessed value of your home by the mill rate. And if, for example, your property value is twice as high as your neighbour's, you will pay twice as much tax as your neighbour.

Budget Challenge 06 Tax Equation

Ok, so that was a lot of math, but here’s the point: we collect most of our taxes by assessing the value of properties and charging their owners an amount based on a mill rate.

A very important point is that we’re required by law to only have two mill rates: one for commercial properties and another for residential properties, no matter what level of service that property receives nor the owner’s ability to pay for it.

"We collect most of our taxes by assessing the value of properties and charging their owners an amount based on a mill rate."

There’s a lot of debate as to whether this is a fair system, and I’ll discuss this debate in another blog post. But for now it’s the system we have to use, and that’s a big deal for our upcoming 2019 budget. Let me explain.

Assessed Values Are All We Have

We calculate (assess) the values of properties throughout the city every three years. It’s a big job, which is part of the reason we don’t do it every single year. For the past three years, we’ve been basing our budgets on property values from the year 2014 –- January 1, 2014 to be exact! Our upcoming budgets for 2019 to 2021 are going to be based on values from January 1, 2017.

Budget Challenge 04 Three Year Cycle

Now, a lot changed in the economy between 2014 and 2017, and house prices have gone down. In fact, based on the data we’re seeing so far, we believe that prices have gone down an average of 5%. That means that at our current mill rate the City would receive 5% less revenue from residential properties.

Budget Challenge 07 Coming Challenge

Remember all those “line items” I mentioned earlier, like snow clearing, fire protection, and water treatment? Well, less revenue means less money to pay for those and other services we’ve come to know and love (and expect). And if we assume a 5% drop in commercial property as well, plus other unavoidable costs like inflation and debt payments, we’re looking at a pretty large shortfall in 2019.

So, in order to keep providing all the things residents expect from City Hall, we have to either increase the mil rate to make up the difference, or cut costs by millions of dollars. That is very hard to do.

"In order to maintain service levels, we have to either increase the mil rate or cut costs."

And here’s the absolute kicker, folks: not everyone’s property values have gone down. The properties at the higher end of the spectrum (like new homes that were purchased for $600,000) are in less demand these days and their market prices are dropping. But lower cost homes -- the ones that a majority of people in our city live in -- have largely either stayed the same price or gone up in value.

Budget Challenge 08 Changing Values Not Shared

What I’m trying to say is that even if we make the hard decisions required to cut the millions of dollars (in other words, programs and services) to cover the shortfall, there will still be people receiving a higher tax bill in 2019. Furthermore, homeowners on the lower end of the market may take the brunt of the hit.

And that’s the challenge we have before us as a Council and as a community. It’s a tough challenge, but we’ve already started the work to tackle it head on.

Budget Challenge 09 Costs Higher Than Revenue

After the 2016 budget, we found significant savings (over $13 million per year going forward) through a comprehensive Program Review. Since then we have implemented an ongoing Continuous Improvement program to continuously find ways to reduce waste and improve service delivery.

But if we’re going to ensure we are all paying reasonable levels of taxation for a great level of service, we’re going to have to make difficult choices. And that will involve all of us coming together and making those choices together.

Where do you think cost cutting should take place? Are you comfortable with a tax increase if we can maintain or improve service levels? How do you think can the City improve how it delivers these services in ways that minimize costs?

Please make comments and pose questions below. I’ll have more posts in the weeks ahead to help keep this conversation going.

Written by Dave Lane, Luke Callanan at 08:22

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