How is the City's budget structured?

Four business units

The City of Medicine Hat's finances are split into four distinct business units:

1. Municipal:

   • The Municipal unit is in the business of improving the “quality of life” for its residents by providing governance, safety, roads, amenities, and facilities that residents rely upon for their daily lives
   • Primary funding source is property taxes
   • Cost-recovery model

2. Land Development & Real Estate

   • Purchases land and develops it within the City for sale
   • Revenues are primarily driven by real estate market

3. Rate-Based Utilities

   • Operating Segments: Water, Sewer, Solid Waste, Electric Distribution, and Gas Distribution
   • Rates are set using AUC rate making principles that establish the formula for calculating utility rates

4. Energy Production

   • Operating Segments: Electric Generation and Gas Production
   • This is the group that generates electricity and supplies gas.
   • Rates are driven by market forces and therefore have a greater degree of risk and reward for the City.

Two types of budgets for each

Each business unit above will include two different types of budgets:

1. Operating - like your traditional income statement highlighting the City's annual revenues and expenses. When we refer to 'budget gap' we are referring exclusively to the Municipal operating budget. The approved operating budget authorizes spending which has an expiration at the end of the budget cycle.
2. Capital - identifies capital and infrastructure projects like rehabilitation of existing roads or the purchase of a new rec facility. Unlike the municipal operating budget capital budgets do not expire at the end of the year but carry on to the end of the project. In addition, a funding source must be identified for the capital project.

The City further classifies those budgets as follows:

Tier 1: Base Operating and Sustaining Capital

• Maintain status quo services and infrastructure
• Established by reviewing prior year budgets and spending trends and applying inflation

Tier 2: Operating Initiatives and Growth

• How the City intends to invest its time and finances to introduce new services, programs or capital infrastructure for the City
• Tied to Council’s Strategic Plan and thus the primary focus of deliberations with Council

Tier 3: Other Items

• Amortization, interest on debt, etc.,
• Driven by tier 1 and 2 as well as other assumptions
• Typically a supporting act for other discussions thus are typically not highlighted individually

Reserves

It is important to understand why we need to keep reserves:

1. Future asset planning
   • The City of Medicine Hat invests an average of $110M every year in capital projects, but that investment can vary greatly by year depending on the needs each year. It is prudent management to store funds away every year to help pay for capital when it arises as opposed to expecting residents to pay as these expenses arise.
   • For example, if you lived in a condo, your condo board may expect to have to replace the roof 20 years from now, instead of making the condo residents pay the whole cost of the expensive roof repair all in the same year, they may decide to start collecting now and spread the cost over 20 years. The city does the same thing with its reserves.
2. Help the City to grow
   • Beyond asset planning, the reserves also provide an opportunity for the City to expand services, amenities, neighbourhoods and much more to improve the quality of life of its residents. Reserves afford the ability of council to designate funds for future projects.
3. Contingency
   • Municipalities are not allowed to run deficits (governed by the Municipal Government Act). In years where the City doesn't collect enough revenue to cover costs, we use reserves to cover the gap.
   • In the City of Medicine Hat we have been working hard to close the budget gap, however, even with a closed gap, there is still the possibility that the City could reach an operational deficit in a given year due to things like an unusually bad investment year, damages from a storm, flood or drought, or even an unusually snowy winter resulting in more snow removal than planned.
4. Offset liabilities
   • Reserves are only one half of the balance sheet. The City also has liabilities.
   • At the end of 2023, the City had over $770 million dollars in financial liabilities. And the that only includes the liabilities that the City is legally liable for. It does not include costs like: The future costs to replace our aging infrastructure, or energy transition.
   • One way that the City tries to communicate its future liabilities is by restricting funds for future use. As a part of this years budget we will be recommending the designation of reserve funds to help pay for some large future costs that the City needs to consider to fund the requirements of tomorrow.
5. Reduce debt
   • Debt is a lot more expensive than it was four years ago during the last budget cycle.
   • When the cost of debt is high, utilizing reserve funding can help reduce the burden on future generations for debt principle and interest payments.
6. Steady, predictable tax increases
   • Reserves provide the ability for the City to plan for steady predictable tax increases by allowing the city to weather some of the impacts of inflation and to catch up its revenues over a more steady time period.
7. Reduce the budget gap
   • Reserves reduce the budget gap by providing a base for investment income. Interest on investments can be funneled back into the regular budgets without having to draw on the principle.