1999 Operating Budget - Follow Up Items

The Strategic Policies and Priorities Committee recommends the adoption of the following report (May 27, 1999) from the Chief Financial Officer and Treasurer:

Purpose:

To provide follow up information to the 1999 Operating Budget, specifically, the payment of interest on assessment appeals, options for the use of the estimated $46.2 million OMERS surplus to be received by the City in 1999 and 2000 and in-year capital approvals.

Financial Implications:

Funding in the amount of $3.6 million is currently provided in the 1999 Operating Budget under Non-Program Expenditures for the payment of interest on assessment appeals.

The funds originating from the deferral of the OMERS premium that resulted from the above-average performance of their investment portfolio, will impact either the City's reserve fund or debt position, depending upon the disposition of these funds.

Recommendations:

It is recommended that:

1(a)the recommendations as contained in Recommendation No. 214 of Strategic Policies and Priorities Committee Report No. 8, Clause 1 (April 26 and 27, 1999), regarding payment of interest on assessment appeal refunds, be adopted with an amendment to Recommendation No. (ii) to delete the words "six major Canadian chartered banks" and replace with "banks as listed on Schedule 1 of the Bank Act";

1(b)if Council adopts the motion of Councillor Adams, and the revised recommendations as outlined in this report, Recommendation No. (ii) should be revised to delete the words "six major Canadian chartered banks" and replace with "banks as listed on Schedule 1 of the Bank Act"; and recommendation (v) be revised to read:

"(v)that the former City of Toronto's Municipal Code be amended to provide that any overpayments made on, or after January 1, 1998, which are eligible for assessment appeal refunds, shall have interest applied from one month from the date that the Notice of Decision is received from the Assessment Review Board by the City;"

(2)the recommendations as contained in Recommendation No. 213 of Strategic Policies and Priorities Committee Report No. 8, Clause 1 (April 26 and 27, 1999), regarding financing of the 1999 capital works program, be adopted; and

(3)prior to consideration of any in-year changes following Council approval of the capital works program for new or expanded initiatives, such requests be referred to the Chief Administrative Officer and the Chief Financial Officer and Treasurer for report thereon to the Policy and Finance Committee on the full cost and source of funds for such initiatives.

Background:

At its meeting of April 26 and 27, 1999, City Council adopted, as amended, Strategic Policies and Priorities Report No. 8, Clause 1 (1999 Operating Budget and 1999 Capital Financing Plan - Tax Supported Program) and in doing so, Council adopted Recommendations 213 and 214, subject to a further report from the Chief Financial Officer and Treasurer to Council for its next meeting on May 11, 1999, through the Strategic Policies and Priorities Committee, on the following motions:

Moved by Councillor Adams:

"That the Clause be amended by striking out Parts (ii), (iii), (iv) and (v) embodied in Recommendation No. (214) of the Strategic Policies and Priorities Committee and inserting in lieu thereof the following new Parts (ii) and (iii), and renumbering the remaining Parts accordingly:

(ii)that the rate of interest to be paid by the City of Toronto on assessment appeal refunds relating to the 1998 tax year and onward, from one month from the date the Notice of Decision from the Assessment Review Board is received by the City, to the date of refund, be set at the average rate paid by the six major Canadian chartered banks on one-year GICs as determined by the Chief Financial Officer and Treasurer, from time to time;

(iii)that the Province of Ontario be requested to pay interest on assessment appeal refunds from 1998 and onward, from the date of overpayment to the date of the Notice of Decision from the Assessment Review Board, and that the rate of interest to be paid at the same rate of interest set by the City;"

so that the clause will read:

(i)the interest on assessment appeal refunds for 1997 and prior tax years be calculated based on the policies and rates that existed in each of the former area municipalities at that time;

(ii)that the rate of interest to be paid by the City of Toronto on assessment appeal refunds relating to the 1998 tax year and onward, from one month from the date the Notice of decision from the Assessment Review Board is received by the City, to the date of refund, be set at the average rate paid by the six major Canadian chartered banks on one-year GICs as determined by the Chief Financial Officer and Treasurer, from time to time;

(iii)that the Province of Ontario be requested to pay interest on assessment appeal refunds from 1998 and onward, from the date of overpayment to the date of the Notice of Decision from the Assessment Review board, and that the rate of interest to be paid at the same rate of interest set by the City;"

(iv)that By-law No. 29097 of the former City of North York, which allows for the payment of interest on assessment appeal refunds for properties in the former City of North York, be amended to reflect the changes as set out in Recommendations Nos. (2) and (3) above;

(v)that the former City of Toronto's Municipal Code be amended to provide that any overpayments made on, or after, January 1, 1998, which are eligible for assessment appeal refunds, shall have the interest applied from the day the overpayment is made; and

(vi)hat the City Solicitor be authorized to submit the necessary by-law to give effect to these recommendations.

Moved by Councillor Moscoe:

'That the Clause be amended by deleting Part (v) of Recommendation No. (213) of the Strategic Policies and Priorities Committee the words "capital program and thereafter revert to being transferred to the", so that such recommendation shall now read as follows:

"(v)effective January 1, 1999 to December 31, 2000, the estimated tax supported operating budget savings of $46.2 million due to the continued suspension of the OMERS premium in 1999 and 2000 be applied to the Employee Benefit Reserve."'

The original recommendation relating to OMERS as contained in the report "1999 Capital Financing Plan - Tax Supported Program" was:

"(v)effective January 1, 1999 to December 31, 2000, the estimated tax supported operating budget savings of $46.2 million due to the continued suspension of the OMERS premium in 1999 and 2000 be applied to the capital program and thereafter revert to being transferred to the Employee Benefit Reserve."

Moved by Councillor Sgro:

"It is further recommended that, prior to final approval of any in-year changes to approved or new initiatives, the recommendation be referred to the Chief Administrative Officer for report thereon to the first subsequent meeting of the Policy and Finance Committee, and Council, on the full cost and source of funds for such initiative."

Comments:

(1)Interest Paid on Assessment Appeal Refunds

The amendments as contained in the motion from Councillor Adams impact the amount of interest the City would pay on assessment appeals as compared to the recommendations contained in the report dated April 8, 1999 from the Chief Financial Officer and Treasurer. Both relate to assessment appeals from 1998 onward as the practices existing in the former municipalities for tax years prior to 1998 are recommended for grandfathering. The major difference for payment of interest is:

(a)April 8, 1999 report of the Chief Financial Officer and Treasurer: interest is paid at a rate of 1 percent (average rate of major banks savings account balances or 1 percent minimum) from date of overpayment to date of refund, and that the Province be requested to pay the interest due to the delay between the filing of the appeal until its final disposition by the Assessment Review Board;

(b)Councillor Adams Motion: interest is paid at the average rate of 1-year GIC of major banks (currently it is 3.5 percent) which is split between the Province paying interest from the date of overpayment to the date the Notice of Decision is received by the City; and, the City paying interest from one month after the Notice of Decision to date of refund. The Province would have to be requested to pay their portion being from the date of overpayment to the date of Notice of Decision being received by the City. Under current legislation, the City has the authority to split the interest between the Province and itself (as noted above) but staff are not aware of any other Ontario municipality currently using this process.

The table below is from a sampling of 1998 appeals processed to date and illustrates the impact of a $1,000.00 refund based on the two different scenarios for payment of interest as discussed above. The Provincial share is based on the average delay from the date of overpayment to the date the decision is received by the City (286 days) and the City share is based on the length of time from receipt of the decision to date of refund. For the Adams motion, the City period is 93 days less a 30 day grace period for a total of 63 days. For the CFO's recommendation, the City's period is the full 93 days.

Notes:

* If Province agrees to pay interest.

** Total interest paid by City even if Province refuses to reimburse City.

Based on a sampling of 1998 appeals processed to date, in general, there is a longer time lag for the decision to be received from the Province than for the City to provide a refund. The table shows that the interest cost to the City under the Adams motion for each $1,000.00 of refund would be $6.04 and the Provincial share of $27.42 would not be provided unless the Province agrees to share the cost. Under the Chief Financial Officer's recommendation, the cost to the City is $10.39 which represents the total cost. The City would pay the entire interest but would request the Province to pay its share. The difference is that under the Adams motion, the taxpayer would only receive the $6.04 unless the Province agrees to share whereas under the Chief Financial Officer recommendation, the taxpayer would receive the full amount of $10.39 even if the province refuses to share the cost.

Under both scenarios, 82 percent of the total interest as calculated, relates to the Provincial share but as stated, under the Chief Financial Officer recommendation, the City would still pay the full amount and then request reimbursement from the Province. The Province may be reluctant to agree given the precedent across the Province it might set.

To ensure that taxpayers do receive interest from the date of overpayment to refund, the recommendations in the April 8, 1999, report should be adopted. Those recommendations, although paying interest at 1 percent, would ensure interest is paid for the entire period of overpayment to refund. If the Province does not agree to pay the interest for its portion, the City would still pay interest at the 1 percent rate. Under the Adams motion, taxpayers would only receive the full interest if the Province agrees to pay as the City would not pay interest for the Provincial portion. For the City to pay interest for the full period at 3.5 percent rate, the costs increase significantly as outlined in the report dated April 8, 1999 which showed the cost of paying interest at 3.5 percent from the date of overpayment to refund at $12.85 million or $9.25 million over the 1999 budgeted amount.

If Councillor Adams motion is adopted, a technical amendment to Recommendation (v) regarding to the former City of Toronto Municipal Code would be required to change the period that interest would be applied. It would change so that interest would be paid from the date the Notice of Decision is received by the City to the date of refund and not from the date of the overpayment.

Whichever option is adopted, it is recommended that instead of including a reference to a rate set by the six Canadian chartered banks, any recommendation should refer to the eight banks as listed on Schedule 1 of the Bank Act. The banks listed include: Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Canadian Western Bank, Laurentian Bank, National Bank of Canada, Royal Bank of Canada and the Toronto-Dominion Bank.

(2)Year 1999 and 2000 OMERS Surplus

The amended clause, contained in the motion of Councillor Moscoe, is recommending that the contribution of the OMERS savings to the Employee Benefits Reserve Fund continue in 1999 and 2000 instead of waiting to 2001 as contained in the recommendation as adopted by Council. In discussions with credit rating agencies, it was determined that they would be impartial to either option since the reserve fund contribution would increase the City's assets by the same amount that offsetting debenture requirements would decrease its long-term liabilities. It was emphasized that as long as the OMERS surplus is applied in either manner, as opposed to using the funds to finance operating budget expenditures, the City's financial position would be strengthened. While the report which will provide a current actuarial valuation of the City's unfunded employee liabilities is not yet available, we have received preliminary indications that these amounts will be significant and will require a long-term funding strategy. However, if the projected amount of $46.2 million is allocated to the Employee Benefit Reserve Fund in 1999 and 2000 instead of offsetting the City's debt requirements resulting from the capital budget, the operating budget will have to accommodate an additional $1.3 million in debt charges in 1999, $7.8 million in 2000 and $13.0 million each year from 2001 to 2009, given a 10 year term-to-maturity. While the Employee Benefit Reserve Fund would generate additional interest earnings estimated at $1.2 million during 1999, $3.5 million in 2000 and $4.6 million in 2001 and onwards, these amounts would be retained in the Reserve Fund and would not be available to partially offset the increased debt charges.

It is therefore recommended that the original recommendation stand. Our immediate pressure is capital, particularly one-time expenditures such as transition projects, Y2K reconversions and the purchase of subway cars.

(3)In-Year Capital Approvals

Following annual Council approval of the capital works program, there may be requests for adjustments for new initiatives from time to time. The recommendation made by Councillor Sgro would allow control over the borrowing impacts of in-year changes to the approved capital works program, while allowing a degree of flexibility for necessary or justified changes to the program. It is therefore recommended that, prior to consideration of any in-year changes following Council approval of the capital works program for new or expanded initiatives, such requests be referred to the Chief Administrative Officer and the Chief Financial Officer and Treasurer for report thereon to the Policy and Finance Committee on the full cost and source of funds for such initiatives.

Conclusion:

With respect to interest on assessment refunds, it is recommended that the rate of interest be set at the the average rate for savings accounts of the banks as listed on Schedule 1 of the Bank Act and it be paid from the date of overpayment to the date of refund. The recommendation of the Chief Financial Officer and Treasurer ensures that interest is paid from the date of overpayment to the date of refund. The Province would be requested to pay its share as outlined in the proposal, but even if it refuses, the full interest would be paid to the taxpayer. Under the Adams motion, taxpayers would only receive the full interest if the Province agrees to pay as the City would not pay interest for the Provincial portion. For the City to pay interest for the full period at 3.5 percent rate, the costs increase significantly.

The recommendations as contained in Recommendation 214 of Strategic Policies and Priorities Committee Report No. 8, Clause 1 (April 26 and 27, 1999), regarding payment of interest on assessment appeal refunds, should be adopted unless it is clear that the Province will pay for its share of interest as outlined in this report.

If the recommendation contained in the 1999 Capital Financing Plan-Tax Supported Program pertaining to the use of the estimated OMERS surplus is modified to accelerate the contribution to the Employee Benefit Reserve Fund to 1999 from 2001 instead of being used to offset debt issuance requirements, there will be an increase in debt charges as contained in the operating budget of approximately $1.3 million in 1999, $7.8 million in 2000 and $13.0 million each year from 2001 to 2009 inclusive.

The recommended process for the Chief Administrative Officer and Chief Financial Officer and Treasurer to review in-year capital funding requests will improve the City's financial controls.

Contact Names:

Paul Wealleans, Manager, Tax Policy, Appeals and Assessment397-4208

Martin Willschick, Manager, Treasury 392-8072

Len Brittain, Director, Treasury and Financial Services392-5380