Example: The City of Toronto 2023 budget using the ‘cash allocation basis’ of budget accounting

For the background to the ‘cash allocation basis’ see the companion article Why Toronto should transition to a new ‘cash allocation basis’ of accounting for budgets.

This is a demonstration of what the application of the ‘cash allocation basis’ would look like when applied to a real Toronto budget. I took the Operating Budget Program Summary by Expenditure Category spreadsheet for 2023 from Toronto’s open data portal (about 20,000 line items), and applied the ‘cash allocation basis’ to summarize it. Here are the results.

It turns out the 2023 budget is closer to $15.1B, with $13.4B spent on expenses, and $1.7B (net) transferred to corporate accounts for reserves, capital investments, and repayment of debt principal. (But note the fully corrected revenue and expense figures could be even lower — see Note 1 below).

Figure 1. The two methods of creating budgets compared.

By contrast, the City’s budget figures, based on the ‘modified cash basis’, show both Revenue and Expenses (called ‘Expenditures’) at $16.4B. In my opinion these numbers are unhelpful. They are incomplete, overstated, misleading, confusing, and inaccurate.

The real budget figure of $15.1B is $1.3B lower than the overstated City figure, and the City version of expenses (called ‘expenditures’) is overstated by $3B.

Here is a bit more detail. First using the ‘cash allocation basis’:

Figure 2. Budget summary by category using the ‘cash allocation basis’.

You can see that the revenues, expenses, and capital allocations are quite clear in the above ‘cash allocation basis’ formulation.

By contrast, the City’s formulation, based on the ‘modified cash basis’, is, in my opinion, incomplete, confusing and misleading. The cash transfers are neither revenues nor expenses; the inter-divisional charges and recoveries are double-counted; the totals are overstated; and net internal cash transfers are not clear.

Figure 3. Budget summary by category using the ‘modified casg basis’.

Please note that both formulations use the same line items! Nothing is lost with the ‘cash allocation basis’. Much is gained.

For the curious, see links to spreadsheets below showing the 2023 budget at the familiar program level, according to the City open portal dataset, for both the ‘cash allocation basis’ (CAB) and the ‘modified cash basis’ (MCB). You may be particularly interested in the 2023.CAB-NetOperatingReconciliation.pdf report, as it reconciles operating surplus, internal cash transfers, and additional revenue requirements for the ‘cash allocation basis’.

So to summarize, after eight years of studying the Toronto budget, I’ve found a serious problem at the core of budget design — the ‘modified cash basis’ of budget accounting. I believe the modified cash basis of budget accounting should be abandoned. In my opinion it’s really the core design problem of the budget. Fortunately, there’s a dead simple solution:

Stop conflating internal cash transfers with external revenues and expenses.

Implementation of this solution, using the ‘cash allocation basis’ of budget accounting, would, I believe, offer major improvements to the accessibility, accuracy, and meaningfulness of Toronto budgets and variance reports.

Obviously a group of champions within Toronto City Hall has to take up this transition to the ‘cash allocation basis’ if it is going to happen. This hopefully includes some of you, dear readers.

Links:

• The spreadsheet I used for this analysis is here.
• The City of Toronto’s final 2023 program budget summary spreadsheets are here.

Notes:

Note 1: In the 2022 process of adapting the Toronto budget for the audited statements (see note 20), the external auditor found $340M of “Reclassification between revenue and expense ($340 — decrease)” to numerically reduce both revenue and expense budgets. I was only able to find ~$75M of these adjustments in the 2023 listing I used — moving waste rebates from expenses (incorrect) to revenue as a contra item. But if the pattern is the same as last year, that would leave at least an additional $250M by which both the revenues and expenses should be reduced, ie. corrected.

Note 2: The City Manager’s initial presentation showed a 2023 operating budget figure of ~16.2B (see here, page 10). But the open dataset shows a total of ~$16.5. I have not made an effort to reconcile these figures, because the dataset was released after the budget was adopted, and is likely to be the source of truth in the matter.

Note 3. The City’s open dataset only includes one line item for debt charges, combining both interest, and principal repayment amounts. So for prototype purposes, I estimated the interest and principal portions to be half each.

Budgets by program:

• 2023.CAB-BudgetByProgram.pdf. This report contains three spreadsheets for external revenues, external expenses, and internal cash transfers by program, using the ‘cash allocation basis’ of accounting.
• 2023.CAB-NetOperatingReconciliation.pdf. This spreadsheet lists cash allocation basis operating deficits (surpluses) by program, with additional columns to show net transfers to (from) corporate accounts by program, and implied additional revenue requirements (contributions).
• 2023.MCB-RevenuesExpenditures.pdf. Standard modified cash basis budget revenues and expenditures from the Toronto open portal dataset.
• 2023.MCB-NetExpenditures.pdf. Standard modified cash basis budget net expenditures from the Toronto open portal dataset.

Henrik Bechmann is a retired software developer with an interest in all things related to the Toronto budget. From 2015 to 2018 he was the lead of the budgetpedia.ca project. Twitter: ‘@HenrikBechmann’