A naturalized view of Toronto’s 2017 operating budget

I refer to this proposal as a naturalized budget as it relies on common conventions of financial presentation (I’ve had lots of exposure to these conventions through my software development career). The goal is to make the Toronto budget as meaningful as possible to the average knowledgeable reader, and to set the stage for more helpful analytics. My purpose with this blog is to invite discussion and critique of this naturalized view of the budget.

Sources

I’ve used three main data sources for this research:

1. The Toronto Open Data Portal’s operating budget files, specifically the spreadsheet file identified as Approved Operating Budget Summary 2017 See the contents here
2. A Freedom Of Information request confirming that capital staffing costs (except TTC) are included in both the operating and capital budgets. See the request, the clarification, the response, the followup question and answer (see here for my blog about this)
3. A Freedom Of Information request for a list of adjustments used (for 2016) to arrive at the expense budget shown in the audited 2016 financial statement (page 38) from the 2016 Council approved budget. FOI returned what appears to be an auditor’s worksheet. See the request, the response, the followup question and answer

The Naturalized Budget: Clarifications

This view of the Toronto budget isolates six main financial activities which together make up the Toronto operating budget. They are:

1. Current revenues before local tax levies: transfers from higher orders of government, and local revenues other than direct tax levies
2. Direct subsidies and transfers to persons: these are pass-through amounts (like income support), not purchased goods or services
3. Current expenses: these are the staff costs, and purchased goods and services that are consumed to operate the City’s day-to-day activities
4. Inter-divisional adjustments: these are internal book-keeping entries of charges and recoveries among divisions and agencies, and in aggregate should net to zero
5. Contributions to and from capital accounts: these are cash transfers to and from capital accounts including reserves, mainly to smooth annual cash flows for current requirements
6. Local tax levies: tax levies are calculated to collect the cash required to bring the annual net cash budget to zero

Here it is, with bold red reference numbers in the figure corresponding to item numbers in the list above:

Figure 1. The Naturalized Budget. Source: Henrik Bechmann

This view shows a core operating budget of $8.5B. This is the portion of the budget to which most attention is normally paid for management purposes; it’s the execution of plans. The referenced notes in Figure 1 can be seen in the Detailed Notes to the Naturalized Budget section below.

Here’s the cash summary of this naturalized budget:

Figure 2. The Naturalized Budget Summary. Source: Henrik Bechmann

Note that this helpfully separates Direct Subsidies and Transfers and Net Contributions to Capital Accounts from purchased Core Operating Budget expenses. The total cash budget is $11.4B (estimated), not $12.4B as reported by the City.

And here’s the reconciliation of the above naturalized budget summary to the City’s published 2017 budget:

Figure 3. Reconciliation of the Naturalized Budget to the City Budget. Source: Henrik Bechmann

The reconciliation highlights the main presentation policy changes used in the naturalized budget. Details can be seen in the comments to the detailed notes for the naturalized budget below. Note that a couple of major items in this reconciliation are only placeholders (very approximate), coming from a 2016 auditor worksheet. We need better, more detailed budget data from the City to resolve this ambiguity.

My contention is that this naturalized view has some important benefits:

• The parts are individually relatively easy to understand
• The parts are familiar to people already using the budget, as they are substantially a re-ordering of existing components
• This arrangement allows for drill-down to lower budget levels using the same layout, promoting budget literacy
• The naturalized segmentation should allow for more effective analysis, argumentation, and policy development

By contrast, in my view, the City’s budget tends to conflate and therefore obfuscate the separate components, making them difficult if not impossible to understand, and certainly making formal analytics difficult if not impossible to apply.

Corrections

There are two practices in the City’s current operating budget presentation which I believe are errors: inclusion of capital staffing costs in operating expenses (offset by Transfers from Capital on the “revenue” side), and inclusion of contra-revenues in expenses rather than revenues.

Omissions

There appears to be one substantial omission in the City’s operating budget: some housing costs; social housing cost budgets are reversed and then inserted with a much higher number in the auditor’s worksheet. See cells K52 and L52 in the auditor’s worksheet.

Main Recommendations

1. align the City Council budget with the audited budget. Specifically, isolate capital transactions, post contra-revenues in the revenues (not expenses) section, and include major items from all agencies (such as housing) to match audited budget figures
2. provide separate cost categories in open data portal operating budget spreadsheets for contra-revenues, and direct subsidies and transfers to persons, so that these can be isolated
3. provide separate cost categories in open data portal operating budget spreadsheets for local tax levies
4. do not include capital staffing costs in the operating budget
5. isolate operating costs (staffing costs and consumable goods and services purchased for the purpose of day-to-day operations) from other groupings in the budget
6. isolate current revenues (transfers from higher orders of government, and local revenues) from other forms of receipt (like capital transfers)
7. isolate inter-divisional charges and recoveries from revenues and expenses in the budget
8. isolate capital transfers, including those involving reserve funds
9. generally, make more detailed information readily available to the public and civil society

Detailed Notes to the Naturalized Budget

Here are detailed notes to Figure 1 above, the naturalized budget:

Figure 4. Detailed Notes to Figure 1, the Naturalized Budget. Source: Henrik Bechmann

See the links in the source spreadsheet for more information.

More Research

I have just covered some macro items, as I have been able to identify them, in this research. There is still the task of examining items in the budget in more detail. For example Transfers from Capital does not apparently contain just capital staffing costs to offset their double-listing in the operating budget expenses (as well as in the capital budget). Another is the practice of gapping which reduces the cost of budgeted staffing complements by anticipated delays in hiring. This conflates planning with budgeting (and should probably be removed from the budget), and causes a mismatch between staffing complement and cost figures. Of course we need to obtain more granular information from the City on an ongoing basis. There are many others.

Conclusion: please critique

This re-organization of the City budget has taken me some months of research. But now it is time for professional accountants to provide critical commentary. The main question is whether the approach I have presented will indeed ultimately improve understanding of the budget, and therefore raise the quality of debate around the budget. In addition all proposed changes should be scrutinized in detail in relation to well-accepted accounting practices. I also of course welcome commentary from City staff. In addition anyone from the Toronto community with any experience with this who would like to forward comments or concerns is very welcome to get in touch. Please email any comments to henrik at bechmann.ca.

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