Fall 2017 roundup of Toronto budget core issues

Purpose of this commentary

The purpose of this commentary is to summarize the various threads of research that have taken place to date within Budgetpedia (budgetpedia.ca), related to the City of Toronto budget. This list is a rough survey, not a prescription. Each of the items listed requires further research. The list is still very much under development, and is not final.

The commentary is divided into the following sections:

• budget design goals
• budget design issues
• budget administration issues
• fiscal options

Background

I have been looking deeply into Toronto’s budget since founding the Budgetpedia project in July of 2015. This is a summary of what I have found so far. Although I have consulted with many people on this journey, the outline and opinions are mine. All feedback is welcome!

Budget design goals

The operating budget should

• have at its core the day to day budget of staffing costs and direct purchase of consumable goods and services, used to provide mandated services to the people of Toronto
• be clear and transparent to a reasonably literate person
• provide contextual links to detailed supporting and contextual source documents
• provide authorship information for components, to allow for enquiry

Budget Design Issues

Should use more conventional accounting methods

• conventional accounting methods produce a clearer presentation
• revenue should be isolated from capital transactions (transfers from capital) and inter-divisional charges, and should include transfers from higher orders of government and local revenues
• Property taxes can be isolated in a separate section, as they are designed to be set after net cash flow is calculated, to bring the annual cash flow to zero
• direct subsidies and transfers to persons (need supporting data) should be isolated from expenses
• expenses (operating staffing costs and purchases of consumed goods and services) should be isolated from direct subsidies and transfers to capital
• inter-divisional adjustments should be isolated
• transfers to and from capital should be isolated
• language should be consistent and well documented. eg. revenue vs receipts; expenses vs expenditures; cash budget vs operating budget

Unconventional accounting methods in some cases require corrections

1. interdivisional adjustment is double counted
2. contra-revenues should be applied to revenues not expenses (need isolated supporting data in toronto.ca/open operating budget dataset)
3. Transfers from Capital (the “expenditure” category from the open data portal dataset; needs supporting breakdown) should ideally be eliminated from operating; certainly the portion offsetting staff capital costs included in operating costs
4. contributions to/from capital should be isolated
5. housing net costs that are included in budget of audited statements should be included in budget; principle of alignment with operating budget used by auditors
6. capital staffing costs should be removed from operating budget (see Medium article)
7. practice of gapping should be eliminated in budgets; moved to supporting documentation; interferes with comparisons of staffing complements and costs

See this Medium article about unconventional accounting practices.

Related reports should be aligned

…to allow for comparisons. Reconciliations between reports should be simple.

• audited and internal reports (eg. 2016 audited budget variance (8%), vs variance report variance (0.7%) )
• staffing and financial budget reports
• central and division/agency budgets

Routine reconciliation and accuracy

• interdivisional adjustments imbalances should be eliminated
• summary and detailed budgets should agree
• budgets and variance reports should agree
• variance reports and audited statements should be easily reconcilable
• central reports and division/agency reports should agree
• identified errors should routinely be corrected

Full disclosure

• staffing complement allocations of operating vs capital should be disclosed
• actuals should be available for detailed budgets, on a timely basis
• timely release of detailed toronto open data budgets, prior to fall finalization round
• direct subsidies and transfers details should be available in open data portal programs by expenditure categories
• contra-revenue amounts details should be available in open data portal programs by expenditure categories
• transfer from capital components should be available in open data portal programs by expenditure categories
• equipment components — capital vs operating components should be available in open data portal programs by expenditure categories
• operating budget program summary by expenditure category need refined categories in some cases; see above
• operating budget program summary dataset needs matching operating staff dataset — complement and cost, without capital staffing values
• 2016 audited statement $1.2B surplus; $800M un-budgeted — what happened to it? See the surplus study for more information (for more years as well). $3.4B unbudgeted surplus from 2009

Clear classification

• parking tags operations and enforcement doesn’t belong in capital accounts; should be in agencies; affiliated with police
• office of the chief transformation officer doesn’t belong in capital accounts; should be affiliated with City Manager’s office
• replace “Citizen Services A” and “Citizen Services B” with meaningful names

Budget Administration Issues

More collaboration

Address the following deficiencies in process:

• suppression of standing committee input (see Medium article)
• suppression of public input (see Medium article)
• exclusion of front-line staff budget input (general knowledge)

Management improvements

• staff vacancies are rising (plus there’s still estimated increased net cost of $1b on raises) see Medium article
• capital budget continually about ⅓ underspent (see Medium article)
• FPARS unable to deliver basic actual/budget comparisons for published program budgets by expense categories (see foi response and my followup)

Better records management

• common, consistent repositories — receipts, expenditures, staffing, variance reports
• common formal, documented formats
• historical data
• accountability
• collaboration with open data portal

Fiscal options for consideration

These are very rough estimates, and require further research

For operations

• un-budgeted surpluses = ~$400M/year, could be re-allocated
• savings of annual staffing costs in raises — 5% of $1B = $200M
• efficiencies from unnecessary red tape removal, at least 2% of $5B = $100M
• 10% property tax rise ~ $400M

Total ~$1.1B/year

Capital

Following are rough estimates that should be checked by specialists. They do not take into account the possibility of debt interest rate hikes (though one would think now would be a good time to lock in debt payments, before interest rates rise).

Provincial legislation allows repayments (principal and interest) on long term debt up to 25% of local income (see Ontario’s Annual Repayment Limit for municipalities here). The City restricts this to 15% of property tax revenue (cannot find source; see reference here — search for “self-imposed”). Therefore as a rough estimate, long term debt could increase by ⅔ of current for property tax portion, and roughly double again to take into account other local revenue.

Current long term debt is about $5B. So this could increase (step 1) by $3.3B to $8.8B and then double to (say) $17B, for an increase in debt of $12B, an increase of 2.4x

According to a chart here (page 11), the debt service was anticipated to be ~13% of $4.1B in 2017 ~ $533M. The new debt service would be $533M x 2.4 = $1.279B. The debt increase would lead to service charge increase of about $1.279B - $533B = $746M, which would be a property tax increase (if that’s how it’s paid) of (.746/4.1) ~18%. This would be a stretch, but do-able.

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