Six Easy Steps to Normalize Toronto’s Operating Budgets
Note: for a quick summary, see Quick Summary: Six Changes to Normalize the City of Toronto 2023 Operating Budget.
After eight years of being a “student” of City of Toronto budgets, I have, with high confidence, created a “normalized” 2023 budget layout from published Toronto open portal budget data. It turns out the accounting changes required for this are quite straightforward. Basically, isolate internal cash transfers, and resolve a few accounting anomalies. The goal is to have a budget that easily makes sense; where the meaning of “revenues” and “expenses” is simple and clear.
The Problem
The widely and well understood (normalized) definition of an operating budget is: planned revenues, less planned expenses, leaving a planned operating surplus, which is distributed internally as needed (ie internal transfers).
But the City of Toronto budget consists of only “revenues” and “expenditures”, which balance to zero. I use quotes around those terms because they are non-standard from a basic accounting perspective. They are non-standard because they conflate internal cash transfers with external revenues and expenses, and integrate multiple large accounting anomalies.
First, here’s a summary of the normalized City budget.
For comparison, here is the currently used non-normalized version.
All figures are summarized from the City’s open data portal budget dataset.
It turns out that the City non-normalized “revenue” figures are overstated by about 9% (~$1.4B for 2023), and actual expenses are only about 75% of “expenditures” (~$3.3B less). So I think it’s fair to say that the City’s current non-normalized budget reporting is highly distorted, and should be abandoned in favour of the normalized approach. No information is lost with the normalized approach, and much information is gained.
My experience as a (retired) software developer is — if the underlying data model of a complex system is accurate and meaningful, then users will learn to appreciate and understand applications built on top. So my aim here is to put forward an accurate and meaningful underlying model of the Toronto operating budget.
The Solution
Here are some basic definitions to guide the steps toward a normalized budget.
- Revenues: external transactions which increase the monetary value of an organization (earning money)
- Expenses: external transactions which decrease the monetary value of an organization (spending money)
- Capital transactions: external transactions which do not change the monetary value of an organization (trading money — often a trade of cash for a tangible asset, or a trade of cash for an equal increase or decrease of a liability)
- Internal cash transfers: (moving money) internal transfers, such as to and from reserves, obviously cause no change to the monetary value of an organization; the transfers just move cash around
Guided by those definitions, here’s what a normalized budget looks like for 2023. This budget, again, is based on Toronto open data operating budget line items (see the working spreadsheet for details). The green numbers indicate the normalization steps that are described below.
(For the equivalent view of the non-normalized modified cash basis for comparison, see here).
Here are the six steps, in two groups, to arrive at this normalized budget.
The first three steps use a simple “cash allocation basis” (see article) for budget accounting to replace the City’s “modified cash basis”. The cash allocation basis creates a third grouping — internal transfers — after revenues and expenses, for accounting of internal cash transfers and debt principal repayments.
Step 1. Isolate internal cash transfers to and from reserves and reserve funds, by re-assigning them from revenues and expenses to a third grouping: internal transfers
Step 2. Re-assign Contributions to Capital (which are also internal cash transfers) from expenses to internal transfers
Step 3. Re-assign Debt Principal Repayments from expenses to internal transfers (this resolves an anomaly — only Debt Interest is an expense)
The final three steps are corrections of accounting anomalies (why these anomalies are used by the City in the first place is a bit of a head-scratcher):
Step 4. Re-assign Inter-Divisional Recoveries from revenues to expenses as offsets to Inter-Divisional Charges (to avoid double counting!). I rename this as Offsets from Inter-Divisional Recoveries for clarity.
Step 5. Re-assign Transfers From Capital from revenues to expenses as offsets (they’re actually expenses that are transferred to capital budgets, so I call them Offsets From Capital Budgets, for clarity).
Step 6. Re-assign Rebates and Write Offs: Re-assign Waste Rebate amounts, and Tax Write Offs from expenses to revenues as offsets.
That’s it! Internally this only changes the order and grouping of line items. The details remain the same. But there are major benefits.
Sidebar: Notes About Figure 3, the Normalized Budget
Other Revenue of $8.7B includes ~0.9B of Municipal Land Transfer Tax, ~$1.4B of Sale of Water, and ~$5.3B of Tax Levy (property taxes), plus minor revenues.
In Expenses, note that Inter-Divisional Charges and Offsets from Inter-Divisional Recoveries balance out perfectly.
Note that Internal Transfers and Operating Surplus match perfectly.
In Internal Transfers, Contribution to Capital includes surpluses from Water, Waste, Parking (~$1B, mostly applied to water projects), and what is commonly called Capital from Current in City budgets (the latter applied to general capital projects).
Benefits of a Normalized Budget
- It’s clear. Easier to think about, thanks to the clean underlying concepts. That should make it more engaging.
- It’s accurate. Loses the distortions.
- It’s meaningful. The terms revenues, expenses, and operating surplus are easy to understand, if they’re used as intended.
- It’s consistent with widely understood ideas.
- It’s useful, since it forms a solid basis for analytics — doing comparisons and time-based trends. That should support improved outcomes.
- It’s comparable, at least more so, to audited statements. That broadens the range of information available for deliberation.
Some Use Cases
Here are some examples of applications of the normalized budget.
Interactive dashboard
With the clarity provided by this normalized budget it’s now possible to create a meaningful interactive dashboard of the Toronto budget, based on the open data operating budget detail. I’ve created such a dashboard here. It finally makes sense (because revenues = actual revenues and expenses = actual expenses), and allows the user to drill down as far as the 20,000 or so detailed “commitment items” that the City provides in its dataset. Lots of interesting stuff to explore.
There’s quite a lot of detail available in this dashboard. As a random example, here is a listing of materials purchased for the Instructional Recreational Programs activity of the Community Recreation service, of Parks, Recreation & Forestry. These are real expenses, not a mixture of “expenditures”.
Here is a list of energy purchases for the same activity.
Report of net operations and support from savings
Since the normalized budget separates internal cash transfers from external transactions, we can now see net operating results separate from internal cash support. In fact thanks to the normalization of the budget, this report is quite clear about where money comes from, and where it goes.
Note that the cash shortage of the Cash Negative Activities is covered by the cash surplus of the Cash Positive Activities, and that support from savings isn’t all that much, relatively speaking. That $75M in rate supported service shortfall is the Waste Rebates.
(For a version of this report showing program-by-program detail, see here).
This report could also be organized by other taxonomies, such as Functional Domains.
Here is a bit of detail, from the budget dashboard, of that $950M Corporate Accounts net capital transfer to savings. This would take some work to fully understand, but about half would be paid out as repayment of debt, and the rest would (on a net basis) contribute to capital and reserve funds.
Standard program reports
Standard program reports would be another application of the normalized budgets, now being new Revenues, Expenses, and Internal Transfers reports. The above Net Operations and Support From Savings would be a fourth standard report.
Here are fragment samples.
Revenues…
Expenses…
Internal Transfers…
For the full normalized standard reports see this worksheet. For comparison, see the non-normalized standard revenues, expenditures, and net expenditures reports.
Future applications
There are many positive directions that applications of a normalized operating budget could take.
Perhaps the most obvious is to pair budget data with actual results at the same level of detail, leading to performance and variance reports (the current City variance report is so distorted, in my opinion, it barely merits any time or attention).
In addition, standard analytic comparisons and timelines at various levels, with data visualizations, would be interesting, and useful to both staff and civil society.
Finally, the holy grail, would be the ability to drill down further from this baseline, into individual cost centres (there are about 13 thousand), and all related documentation.
But the first step is to transition from non-normalized to normalized operating budgets.
Supporting Information
The following information supports the design of normalized budgets.
Support inferred from similar City auditor budget transformations
Note 20 of the 2022 City of Toronto audited statements references the routine transformations that the auditor undertakes to align the adopted City budgets with the consolidated financial statements. These are consistent with all six of the modifications that I am making to normalize the Toronto operating budget.
Note that these highlighted modifications have nothing to do with accruals (an oft-cited difference between the audited statements and the budgets). They are simply consistent with good, basic accounting principles. (I have presumed the location of step 5 in these adjustments).
Note also that the auditor does more than the six steps presented here for the normalized budgets, in particular including State of Good Repair in the operating budget, adding amortization, and adding the full TCHC budget. I think the normalization proposed here is sufficient for a very strong baseline budget, without the additional steps taken by the auditor. In any case Toronto seems to have been tentatively moving toward integrating the full TCHC budget for the Council approved version over the past few years.
For more detail, see my article which traces most of the transformations of the City adopted budgets undertaken by the auditor.
Support from Freedom of Information returns
I tried to obtain clarity at the edges of this normalized model from Freedom of Information requests, with some good results, and some mixed results.
Regarding Step 3. Re-assign Debt Principal Repayments: on August 28, 2023, I received the following denial in response to an FOI request that I made to clarify this point:
The budgeted Debt Service figure is about $833M. It seems unlikely that they did not specifically take interest into account in arriving at this figure. But in the absence of better information from the City, for demonstration purposes I’ve just split that amount in half for each of interest and principal repayment.
Regarding Step 5. Re-assign Transfers From Capital: on August 21, 2023, I received the following denial in response to an FOI request that I made to clarify this point:
As you can see City staff say they were unable to find the budget records allocating operating budget items to capital budgets (though I assume there must be some records of working background calculations).
However, the clerk was kind enough to forward a followup question to their internal correspondent on the matter.
Thankfully, the response was satisfactory:
I think it’s fair to say that response can be summarized as “Yes”. (See the emails here).
Regarding Step 6. Re-assign Rebates and Write Offs, I had better luck, and thanks to the staff for that.
The response was specific and helpful.
These are adjustments from 2022, which I presume would be applied similarly for the 2023 budget. I applied the two highlighted items (with different numbers for 2023 of course), but ignored the rest as the budget uses gross, not net figures.
Support by basic accounting principles
The main purpose of a budget (or for that matter any financial report) is to report information fairly and clearly to its audiences. That means the underlying design must be clear, sensible, consistent, and above all, understandable. So let’s look at these six steps in that light.
Step 1. Isolate internal cash transfers: Internal cash transfers are literally moving cash from point A to point B. That’s all there is to it. There is usually a shift in responsibility with that, but it does nothing to change the value of an organization. Yet in its current non-normalized budget Toronto lists transfers from reserves as revenue, and transfers to reserves as expenses (in the open data set) or expenditures (in the published budgets). This makes no sense, and in fact causes confusion.
This is the main reason for the distortions of Toronto’s non-normalized budget, and is the main reason for needing to abandon Toronto’s “modified cash basis” of budget accounting in favour of my proposed “cash allocation basis”.
Internal cash transfers need to be assigned to inernal transfers.
Step 2. Re-assign Contributions to Capital: Contributions to capital are another form of internal cash transfer. These contributions make cash available for various parts of the Toronto “capital” budget. Again it’s just moving cash from point A to point B, and shifting some responsibility with it. Yet Toronto’s non-normalized budget lists Contributions to Capital as an expense in the open dataset, and as an expenditure in the published budgets. Again, non-sensical, and contributing to distortion and confusion.
The solution is simply to isolate these internal transfers from expenses by placing them in the neutral internal transfers section of the normalized budget.
Step 3. Re-assign Debt Principal Repayments: Debt service charges are the combination of principal and interest payments made to service debt. Both are required to be in municipal operating budgets by Ontario regulation. Recall that municipal operating budgets may not be funded by debt. Fair enough. But it’s a large amount (~$833M in the 2023 budget), and listing a single line item in expenses (in the open dataset) or expenditures (in Toronto’s non-normalized budget), including the large principal portion, is another major source of distortion and confusion.
The solution is simple. List interest in the expense section, and principal repayments in the capital section. Interest is money out the door. Principal repayment is a swap of cash in return for a reduction in liability, so doesn’t change the value of an organization. And everyone who has ever had a loan clearly understands the difference between interest and principal.
Step 4. Re-assign Inter-Divisional Recoveries: This is an interesting one. City Divisions charge each other for services, recorded as Inter-Divisional Charges by the Division being charged, with balancing entries as Inter-Divisional Recoveries by the charging division. Fair enough. This records shifting of responsibility for substantial portions of the budget, running into hundreds of millions of dollars.
But Inter-Divisional Recoveries are recorded as revenue. There are a couple of problems with this. One is that these recoveries are just book-keeping entries, and don’t represent any kind of actual revenues that the City receives. So it substantially over-states City revenues. The other is that this leaves the costs represented in the Inter-Divisional Charges located in two places in expenses at the same time — one at the source of the cost, and the other at the location which is also charged for those same costs. In other words Inter-Divisional Charges are double counted. This over-states expenses by hundreds of millions of dollars every year, year after year.
Again, the solution is simple. Place balancing Inter-Divisional Recoveries in expenses as matching offsets to the charges. The result is a clear accounting of shifts in costing responsibility, without the distortions.
Step 5. Re-assign Transfers From Capital: Toronto locates over $200M of costs in the operating budget which are actually used for its “capital” budgets. I presume this is done for some kind of staff convenience, or perhaps it gives managers some kind of fudge factor when allocating costs throughout the year. In any case the City budget compensates for this by recording Transfer from Capital amounts equalling the amount of resources that are applied to capital budgets. Unfortunately, this transfer is recorded as a City revenue. There is no universe in which a transfer of responsibility from one budget to another directly leads to revenue for the organization doing this. So this is another major source of distortion and confusion, over-stating revenues, and leaving expenses over-stated.
Again, the solution is simple. The normalized version posts the transfers from capital to expenses as offsets (I’ve renamed these Offsets from Capital Budgets for clarity), as it should.
Here for example (from the budget dashboard) is the normalized version of expenses for the City’s Engineering & Construction Services division.
You can see that the offsets from the capital budgets happen to match the salaries of the engineering staff. That makes sense, as engineers are involved mainly in capital projects. (One has to wonder why they stopped there with the offsets though; one would think that the office costs would follow the personnel costs).
I tried through an FOI to determine what the exact offsets from the Capital Budgets were, but was told that staff “couldn’t find the records”.
Step 6. Re-assign Rebates and Write Offs: Finally, Toronto’s non-normalized budgets list waste rebates and tax write offs as expenses, when they should be offsets against (reduction of) revenue. So the normalized version does that.
Compliance with Ontario Regulations
There may be some concern that the normalized budget formats takes Toronto out of compliance with Ontario regulations. I don’t think so.
The Province of Ontario mandates the “modified cash basis” (they call it the “modified accrual basis”) that the City uses for budget accounting. See here for the guiding document. I think the motivation is to ensure that municipalities in Ontario do not borrow money for day-to-day operations (which is reasonable). Hence Ontario insists that municipal operating budgets must balance, according to their rules (notably debt principal repayments must be included in this budget).
Below is the layout that the Province offers for the modified accrual basis, and the transformation of that, as I suggest, for the more rational “cash allocation basis” used in normalizing Toronto’s budgets. Note that this transformation is simply re-sorting and regrouping line items. Nothing is lost; the zero balance at the bottom is maintained.
Therefore I argue that the better normalized format (“cash allocation basis”) is in full compliance with Ontario regulations.
For the record, I think someone at the Province simply made a mistake with that “modified accrual basis” layout — they didn’t think it through. Mistakes happen. Time to fix it and move on.
See my article on Why Toronto should transition to a new ‘cash allocation basis’ of accounting for budgets for more detail.
More work to do
I believe that the model I’ve suggested here is a good baseline. Still, there may be more work to do in terms of refinements.
For example there are large (9 figure) aggregate amounts posted to revenues as “recoveries” (reduction of costs) — see commitment items of miscellaneous revenue in the 2023 budget dashboard for examples. I gather that recoveries should be posted to revenues if they are unexpected, but posted to expenses as offsets if they are expected. If they are included in the budget, then by definition they are expected.
This and other issues will no doubt emerge and should be considered.
But overall, I think that implementing the six steps I suggest here would represent a positive sea change, and a shift to solid ground, both in the perception and the usage of Toronto operating budgets. Hopefully a virtuous cycle of continuous improvements would follow.
Note: this article was modified on Sept 9, 2023 to replace the term “capital allocations” with “internal transfers”.
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’
