A clearer view of the 2017 Toronto operating budget: a cash surplus

The Toronto budget can seem inscrutable, so I want to try an experiment — let’s disassemble it (just at a high level), and re-assemble it in a different way, to see what we can learn. (Spoiler: the operating budget is designed to generate a substantial cash surplus, to be applied to reserves and capital).

We have a good tool to aid us: the version of the Toronto operating budget published on the Toronto open data portal (see “Approved Operating Budget Summary 2017”). Fortunately, this dataset uses, among other things, the most basic accounting classifications used by the City. These are named “categories” in those spreadsheets, and they are a public version of the most basic cost elements used by the City to account for its spending.

So here’s a summary of these categories on the expenditure side:

Figure 1. Source: Henrik Bechmann analysis spreadsheet, pivot tab

… and the revenue side:

Figure 2. Source: Henrik Bechmann analysis spreadsheet, pivot tab

These are simply pivot tables (sums) from the 2017 approved operating budget spreadsheet published by the City.

A couple of quick notes before we get to work:

  • Note that expenses and revenues balance exactly. That’s deliberate. The City budgeteers take the net expenses (expenses less revenues) and create a budget amount for property taxes that bring the net expenses to zero (by increasing the revenues to the same amount as expenses). This property tax figure is then used to create specific bills to taxpayers, by recorded rates based on residential value, business classification, and so on.
  • The separately published summary budget ($12,321,771 in thousands, see here, bottom of page 4 — you have to add the tax supported “Levy” and rate supported “Non-levy” totals) differs from the “Total Result” above by about $60M. Never mind. Separate sources of the same thing from the City rarely agree. They should, but that’s another story. Close enough for now.
  • Sometimes budget “expenses” are referred to as budget “expenditures” in City documents. “Expenditures” is probably more accurate, as we’ll see. Expenses are normally limited to strictly operating (day-to-day) costs, but some capital items are mixed into this budget. Capital costs are incurred when building things (like facilities) that last for a while, like community centres or transit. Operating costs are used to operate those facilities on a day-to-day basis.

Ok, so let’s pick this apart a bit. For expenses:

  • First of all, we can take out Inter-Divisional Charges from expenses altogether, as these represent double-counting of expenses. Here’s an example of how this works. The IT (Information Technology) division may charge PFR (Parks, Forestry & Recreation) for some IT services. Both groups report this expense in their budgets (fair enough, though there may be other ways of dealing with this); PFR reports it as Inter-Divisional Charges, but IT just leaves it on its expense books. So Inter-Divisional Charges are double counted, and can be removed for aggregation purposes.
  • Secondly, Salaries and Benefits expense can be reduced by the Transfers from Capital amount from the revenue side ($177,680,194). This is (approximately — see below) the amount that offsets the cost of staff dedicated to capital projects, which is confusingly (and inappropriately in my opinion) included in operating costs. I’ve verified this practice through an FOI (Freedom of Information) request, though I haven’t yet queried the City as to the why they do this. An added anomaly is this: including capital staff costs applies to all divisions which have such costs, except the TTC which does not include its capital staffing costs in its operating expenses. Also $129,759,301 which is the capital staff cost figure included in operating costs as given to me by the City’s FOI response (not including TTC), differs from the above Transfers from Capital figure by about $48M. This is relatively large, so there my be something else going on. In spite of all the confusion, for the moment let’s assume that the $177M figure for reducing operating staffing costs by the included capital staffing costs is correct for our modelling purposes.
  • Finally, we can move Contribution to Capital, Contribution to Reserves/Reserve Funds, and Equipment (although I’m not really sure about Equipment — depends what’s in it) from expenses because they’re capital transactions. We’ll add them back later in a new Distribution of Surplus section below.

So for current operating expenses, we now have:

Figure 3. Source: Henrik Bechmann, analysis spreadsheet, Expenses tab

For revenues:

  • We just remove Inter-Divisional Recoveries (note that this should agree with Inter-Divisional Charges from expenses, but doesn’t) also double counted, and the aforementioned Transfers from Capital, already accounted for above.
  • For consistency of separating operating from capital transactions, we also move the capital transaction Contribution From Reserves/Reserve Funds from revenue to the Distribution of Surplus section.

This leaves us with the following current operating revenue items:

Figure 4. Source: Henrik Bechmann, analysis spreadsheet, Revenues tab

Note that in this source document property taxes are included by the City in (and are the bulk of) Sundry and Other Revenues. Property taxes are about $4.1B as you can see in the summary budget sheet, bottom of page 2.

Here are the capital transactions grouped back together:

Figure 5. Source: Henrik Bechmann, analysis spreadsheet, Surplus tab

Now we’re in a position to re-assemble the budget pieces in a more natural way (separating current operating and capital elements):

Figure 6. Source: Henrik Bechmann (updated Sept 11, 2017)

I think this is a much more accurate and illuminating way of understanding the budget.

Note that this is a cash budget; Council approval allows cash to be allocated to these activities. This makes the Council approved budget different from the budget figures seen in the audited statements (the accounting budget) which are presented on an accrual basis.

So in conclusion, the 2017 Toronto City Council approved cash operating budget is $11.5B (not $12.4B), and has a current operating cash surplus of $1.2B (not balanced as commonly thought) which is deliberately invested in reserves and capital.

We’re just starting down this road of unravelling Toronto’s budget for publication. So the above interpretations may change as we get more experience and better information. If you have expertise, or more information, in this area and would like to help, please contact the budgetpedia project at mail@budgetpedia.ca.

Post-publication note (August 21, 2017):
Some clarification edits have been made. Also:
I’m told by a reliable source that Equipment in expenses is for equipment that is actually expensed immediately, at least for budget purposes, rather than included in capital. We’ll follow up. If this is the case Equipment should not be moved from expenses to surplus.
The same source indicates that some reserves are a stand-in for amortization. My retort is that this is a cash budget, and amortization is a non-cash item. Trying to include a place-holder just obscures the nature of this budget. Nor am I saying that reserves are bad. I’m just disclosing them accurately (in my opinion) in a the context of a cash budget. Their purpose and value is part of a separate discussion.
Final comment from my source: the inclusion of some capital staff allocation in operating budget may be related to internal liability concerns in relation to union relations. My retort is that if that is the case, this is not the place to pile such things, as it just confuses the presentation. This interpretation needs to be confirmed.
It may be fair to list Contribution from Reserves as revenue, as it some reserves are listed in the audited statements as deferred revenue.

Henrik Bechmann founded the budgetpedia project in 2015, and is currently the project lead (see budgetpedia.ca). The opinions expressed here are his own.

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.