Tracing the City of Toronto expenditure budget to the audited expense budget (2023)

11 min readJul 8, 2024

Note: See also Clarification of the “How we reconcile our budget” section of the City of Toronto 2023 Financial Report

This is the story of how the City of Toronto external auditor transforms the City budgets to be directly comparable to audited actuals (for that comparison, see the Consolidated statement of operations and accumulated surplus of the 2023 consolidated financial statements, p.6). The story also reveals how City budgets could be improved to make the comparison with audited budgets easier. I’ve limited the discussion to the expense side for simplicity.

The budget lifecycle

First, let’s consider why this is important.

The annual budget lifecycle consists of

Formulation
Deliberation
Authorization
Monitoring and control
Evaluation

The last part, evaluation, is important, because it provides the opportunity to learn from the lifecycle, to improve future lifecycles. There is no more authentic, credible, basis for evaluation than that of carefully audited results.

Note that for 2023 there was a quite a large audited ~$1.8B spending (expense) shortfall, budget to actual (~11%), which itself should be motivation to understand where we could make improvements to the budget lifecycle.

Summary

There are 4 avoidable, and 2 manageable differences between the City operating expenditure budgets ($16,467M) and the audited operating expense budgets ($16,912).

Avoidable differences:

addition of consolidated entity budgets not included in the City budget (mostly a portion of the TCHC budget): $316M
removal of internal cash transfers that don’t belong in expenses (contributions to reserves and capital): ($2,390M)
removal of debt principal repayments (not an expense): ($495M)
standardization of accounting allocations (standard allocations are by definition clearer than the non-standard versions used by the City): ($648M)

Manageable differences:

allocation of portions of the City capital budget to the audited operating budget (about half being a portion of the City State of Good Repair budget; about half being expensed capital grants and contributions to external organizations) : $1,919M
addition of amortization (not included in the cash-based City budget): $1,743M

The avoidable differences could (and in my opinion should) be avoided simply by adopting them for the City budgets. See my writings about normalizing the City budget here. There would be many benefits to this.

The allocation of a portion of the City capital budgets to audited expense budgets could be better explained by recasting the City capital budgets as asset management budgets which disclose the difference between the operating expense portion and the true capital investment portion.

The amortization difference is legitimate, because the City budget is (rightly I think) a cash basis budget, while the audited budget is rightly an accrual basis budget.

The baselines

The City if Toronto 2023 approved expenditure budget (including the levy based budget of $14,430M and non-levy based budget — Water, Waste, and Parking — of $2,037M) was $16,467M.

In note 22 of the 2023 City of Toronto consolidated financial statements, the auditor summarizes his budget transformations in a table (see Appendix 1 below). The table reveals that he expands the expense budget baseline from the noted City expenditure budgets (titled operating and non-levy in his table) to include the entire City capital budget of $5,578M (because much of that belongs in the operating budget), and consolidated entities of $339M (notably TCHC) that are left out of the Toronto budget. This provides an expense budget baseline of $22,384M. The auditor then reduces that baseline with $5,472M of adjustments to reach the final audited expense budget of $16,912M.

We’ll trace those inclusions and adjustments.

Inclusions

Here is a quick validity check of the auditor’s baseline City expenditure budget inclusions (see columns in Appendix 1).

Operating budget column: From the 2023 budget book, page 101 ($000), $14,420,772 (from the line Total levy including Scarborough subway extension levy and City Building Fund). This rounds to $14,421M, $9M short of the auditor’s baseline of $14,430M (which shortage I’ll treat as immaterial for our purposes). This is taken from the City’s gross expenditures summary. The “expenses” aggregate of the levy based programs from the Toronto open data approved operating budget spreadsheet however (apparently more up to date) agrees with the $14,430M auditor’s figure.

Non-levy budget column: From the 2023 budget book, page 103 ($000) $2,037,790 (from the line Total non levy operating budget). This rounds to $2,038M, which is within $1M of the auditor’s baseline. This figure is matched to the City’s revenue summary, as the City considers the included ~$1B revenue surplus from Water, Waste, and Parking as expenditures to capital contributions. The “expenses” aggregate of the non-levy based programs from the Toronto open data approved operating budget spreadsheet agrees with the budget book’s $2,037,790 ($000) figure (but with corrections I made to the spreadsheet — see Appendix 3).

Capital budget column: From the 2023 budget book, page 109 ($000), $4,446,132 (from the line 2023 capital program total) + $1,131,702 (carry forward total) = $5,577,834. This rounds to $5,578M, which agrees with the auditor summary table.

Consolidated entities column: The auditor’s transformation lists $417M as a social housing line item, presumably TCHC. The TCHC budget lists Total Gross Expenditures at $700M (p.9). But $273M of that is already listed in the Toronto budget (2023 budget book, page 100), leaving $427M. Subtracting $11M net expenditures listed in the TCHC budget leaves $416M, but that last may be coincidence. I’ve never investigated the other items in the auditor’s consolidated entities transformation column, as they’re not particularly material.

Adjustments

This section is a substantial look at the nature of the adjustments the auditor makes to the City budgets. It should also serve to support the credibility of the characterizations that I give them. This section is not a formal reconciliation, as I do not have access to the data to accomplish that.

Taking the auditor’s adjustments from Note 22b of the consolidated statements in turn ($M; see Appendix 2):

Withdrawals from City’s operating fund, capital fund and reserve and discretionary reserve funds ($2,390 — decrease)

Note: this section was updated August 24, 2024 to include FOI data.

I obtained the following breakdown of this figure from the City through an FOI request:

These are mostly the internal cash transfers included in the City’s “expenditures” that don’t belong in expenses. For comparison, when I aggregate Contribution To Capital (as corrected — see Appendix 3), and Contribution To Reserves/Reserve Funds in the open data approved operating budget spreadsheet, I get a total of $2,200,041,537.87 (see the Pivot Table 1 tab), but that is ~$190M less than the auditor’s number. This is pretty close to the breakdown provided by the City.

The auditor calls these “withdrawals”, while the City uses the term “contributions”. That’s just a matter of the perspective taken — “withdrawals from” vs. “contributions to”.

Capitalization of tangible capital assets and recognition of amortization ($1,916 — decrease)

The auditor adds amortization to the City budget to balance the amortization added to the actual figures. The 2023 amortization figure is $1,743M (see the consolidated financial statements, p.8). Thus adding this back to the adjustment figure gives a capitalization of tangible assets of $3,659M. This leaves the net of $5,578M (the City capital budget) less $3,659M capitalization = $1,919M (~34%) of the City capital budget in the audited operating budget. In 2022 about half of the amount left in the audited operating budget was State of Good Repair/SOGR (amounts dedicated to short-term repair, one presumes). The remainder was allocated to expensing capital grants and contributions to “external organizations”. Applying this ratio to 2023 would mean ~$1B of the ~$2B 2023 SOGR capital budget was allocated to operating, with the remaining $1B allocated to expensed capital grants and contributions. I’m still investigating this. See Appendix 4 for more detail.

Debt principal repayments ($495 — decrease)

The City combines principal and interest in a single Debt Service Charges line item in the expenditure budget. But principal payments are different from interest, and should be listed separately from expenses. I’ve tried to convince the City many times to report the interest and principal payments separately in the budget (see Appendix 5).

Consolidated entities’ budgets — expenditures ($23 — decrease)

I haven’t investigated this in detail, as it’s not particularly material. I accept it at face value. The $339M expenditure addition in the consolidated entities column and the $23M adjustment decrease leaves a net $316M addition to the audited expense budget.

Other adjustments required for accrual accounting ($648 — decrease)

These are the remaining standardizations of the non-standard accounting practices of the City budget. Unfortunately, this item is quite vague. See Appendix 6 for my basis for analyzing this item.

Using aggregates from the open data approved operating budget spreadsheet, I get the following reduction of expenses:

Internal charges: $320M
Tax write-offs: $40M
Parking authority user fees: $136M
Waste collection rebates: $75M
Child care user fees: $32M

Total reductions: $603M, which I take to be a credible approximation of the auditor’s figure.

Findings

From the above, the following is the summary list of adjustments made by the auditor to arrive at the audited expense budget:

Baseline city operating budget: $16,467M.

Changes:

addition of consolidated entity budgets not included in the City budget (mostly a portion of the TCHC budget): $316M
removal of internal cash transfers that don’t belong in expenses (contributions to reserves and capital): ($2,390M)
removal of debt principal repayments (not an expense): ($495M)
standardization of accounting allocations (standard allocations are by definition clearer than the non-standard versions used by the City): ($648M)
allocation of portions of the City capital budget to the audited operating budget (about half being a portion of the City State of Good Repair budget; about half being expensed capital grants and contributions to external organizations) : $1,919M
addition of amortization (not included in the cash-based City budget): $1,743M

Net changes to the City operating budget: $445M

Audited expense budget: $16,912

Recommendations

The first 4 differences between the City and audited expense budget could, and in my opinion should be eliminated.

Item 1 should be eliminated simply by including the entire TCHC (and other minor consolidated entity) budgets in the City budget. This has already started, with the City contribution to TCHC included, and with the annual publishing of the TCHC budget in standard City format.

Items 2, 3, and 4 should be eliminated by normalizing (standardizing) City of Toronto budget accounting practices. I’ve written about this here, here, and here. This can be done fairly easily, and would have many many many benefits, including better accuracy, less obscuration, and much better variance reporting.

Item 2: internal cash transfers should be isolated
Item 3: debt principal repayments should not be included in expenses, but rather treated as an internal cash transfers (for later payment)
Item 4: this is mostly corrected allocation of recoveries. Standardized accounting practices are standard for a reason: they’re more accurate and meaningful than the non-standard practices employed by the City.

Item 5 could be clarified for budget users by recasting the City capital budget as an asset management budget. The asset management budget could be clearly divided into two parts: the operating expenses portion, and the true capital investment portion.

Item 6 is a legitimate difference, as it is the only truly accrual difference (as commonly understood). I think it makes sense to organize the City budget on a cash basis, and interpreting this difference in the City and audited budgets is mentally easy.

Appendices

Appendix 1

The auditor’s budget transformation table

Source: 2023 audited consolidated financial statements (preliminary), note 22

Appendix 2

The auditor’s budget baseline adjustments

Source: 2023 audited consolidated financial statements (preliminary), notes 22a and 22b

Appendix 3

Corrections to the open data portal approved operating budget spreadsheet

The City publishes detailed and valuable approved operating budget spreadsheets (~20k line items) here. They’re called Operating Budget Program Summary by Expenditure Category. The 2022, 2023, and 2024 spreadsheets are out of balance by about $1B each. Thus the integrity of these spreadsheets is in jeopardy. The reason for the imbalance is that the authors neglected to add the Contribution to Capital line items for Water, Waste, and Parking. Three line items. I’ve repeatedly notified the City about this, and I find it exasperating that over a three year period they have not been able to fix a simple error. Simple though the error is, it undermines the credibilty of the open data, and I fear that in the long run, if not addressed, this valuable public resource may be lost. See my prototype budget dashboard for one possible application.

Appendix 4

Removals from the capital budget baseline

I obtained a response to an FOI about Capitalization of tangible capital assets and recognition of amortization for 2022 which confirmed that the capitalization of tangible assets could be derived by adding back the amortization. I have applied this principle to the 2023 budget. After calculating the capitalization figure, the amount left in the operating budget from the capital budget baseline is a simple matter of subtracting the capitalization from the baseline capital budget figure.

The City of Toronto Director of Financial Planning and Budgeting sent me an explanation of the $2,482M amount left from the $5,520M City capital budget in the 2022 operating budget:

In 2022, the City budgeted for $5,520M for capital expenditures. $2,482M of the City’s budgeted expenditures were earmarked both for the City’s SOGR-related activities ($1,142M) as well as capital grants and contributions for external organizations, including the City’s Agencies and Corporations ($1,340M). For capital grants and contributions provided to City Agencies and Corporations, these respective entities would have recognized the accounting impacts, such as the recognition of tangible capital assets, on their standalone financial statements for fiscal 2023.

Again, I have applied this analysis to estimate the 2023 figures.

Here’s a copy of the FOI:

Appendix 5

Attempts to convince the City to report debt interest and principal payments separately in the budget

I have repeatedly, for years, asked that the City report interest and principal separately in its budgets, to no avail. I even tried an FOI to get the breakdown. The response was that they could not find records of the separate budgeted interest and principal amounts. They even admonished me with “we don’t do things that way”. Sorry, I find it preposterous that they don’t separately calculate budget amounts for interest and principal amounts (in the hundreds of millions of dollars each).