Understanding the Capital and Operating budgets

The Capital Budget is a multi-year program comprised of a program for the current year and a planned program for the succeeding years. The capital budget covers longer term and one-time expenditures for fixed assets such as buildings, roadways and bridges, and may involve the City assuming debt to cover costs.

Beginning with the 2002 Capital Budget, the process is built upon a report entitled "Implementing Council's Corporate Management Framework: A New Budget Process for 2001 and Beyond".

The principles of the new capital budget process are being implemented on an incremental basis. These principles include the following:

• Adopt an evaluation tool that prioritizes projects across programs and that uses a ranking tool with priority weighting given to categories of projects with emphasis on Health and Safety, Legislated and State of Good Repair projects.
• A five-year capital program, with fully justified business cases reviewed by Standing Committees, be approved in its entirety. Previously approved capital projects will be received and are not subject to further Council review, unless there has been a change in scope in terms of activities or material change in budgetary requirements. In 2003 and future years, only a new fifth year will be added to the Capital Program plus an additional five-year projection.
• Ensure that the five-year capital program remains within the approved fiscal framework. Any acceleration of capital project in the five-year capital program would require a compensating offset through deferral of a project of equal value.
• Future year operating budget impacts of the capital program should be approved in conjunction with the approval of the Capital Program and the full operating budget impacts of any new capital items added to the infrastructure will be reflected in the year of approval of the capital item.
• All capital costs associated with a capital project (including land acquisition, project management and information technology) should be identified and incorporated in the total project cost.

The new process requires that the capital program be re-evaluated in every budget cycle and integrated with the multi-year service plans in each program area. The process assumes that multi-year service plans are linked to Council's Strategic Plan. It also assumes that at the start of each new term, Council will review and prioritize its strategic directions and select a prioritized set of goals and strategies that would then be incorporated in the multi-year service plans to guide the capital budgeting process.

The following categories were established to help focus on Council's priorities:

• Health and Safety - assigned the highest priority, this category includes projects that are urgently required to remediate or rehabilitate projects with health and safety risks.
• Legislated - assigned the second highest priority, this category includes projects that are required by Federal or Provincial legislation or by City Policy.
• State of Good Repair - the third highest priority this category includes capital projects that allow for maintenance, repair or replacement of existing assets. These include asset rehabilitation that extends the useful life of the specific assets by 10 or more years before replacement is necessary.
• Service Improvement & Enhancement - the fourth highest priority, this category includes capital projects with objectives to improve service delivery beyond the Council approved standard or that provide for the introduction of new services.
• Growth Related projects - this category includes projects that support growth and development across the City.

As part of the capital budget process, programs and departments prioritize their projects within the above categories. This assists senior management and Council to allocate scarce resources in an informed manner. As well, all projects approved prior to 2002 will undergo a full review and evaluated for funding based on these categories and prioritization.

The Operating Budget provides funding to Departments and City Agencies for short term expenditures for up to one year in duration. This financial plan outlines the City's financial and operational goals with a cash flow plan to carry out the actions identified.

The City of Toronto's Operating Budget is developed with focus on achieving the corporate goals and strategic directions of Council. Service objectives are developed for each program to demonstrate alignment with Council's strategies. The Operating Budget is developed with the following guiding principles:

• achieve budget savings through efficiencies and continuous improvement initiatives
• review non-tax revenue initiatives to optimize non-tax revenues
• maintain services and service levels Council approved in the previous operating budget
• ensure that the capital program remains within the approved fiscal framework
• incorporate full year operating budget impact of recommended capital projects
• ensure that all stakeholders have an opportunity to participate in the budget process
• have Standing Committees' service level recommendations sent to the Budget Advisory Committee (BAC) to integrate and prioritize between programs
• base affordability levels and targets on service level priorities established by the Standing Committees and BAC