April 23, 1998

 To:Mayor and Members of Strategic Policies and Priorities Committee

 From:Budget Committee

 Subject:The 1998 Capital Budget and Financing Authorizations

  Purpose:

 To summarize the 1998 capital budget and financing authorizations as recommended by the Budget Committee.

 Financial Implications:

 The recommendations contained in this report would result in a slight decrease in operating expenditures relating to debt charges of approximately $700 thousand in 1998. This amount is reflected within the Operating Budget being recommended by the Budget Committee.

 The 1998 gross Capital Budget as recommended by the Budget Committee totals $1,054 million, of which $86 million relates to anticipated 1998 transition related costs. Of the total recommended budget, there is previously approved financing of $730 million from prior years= approvals and the 1998 Interim Capital Budget approved by Council on February 4, 1998. The recommendations of the Budget Committee would approve the balance of $324 million for 1998, along with an additional $134 million in gross commitments required beyond 1998.

 Recommendations:

 It is recommended that:

 (1)the 1998 gross Capital Budget as recommended by the Budget Committee totaling $1,054 million, of which $86 million relates to anticipated 1998 transition related costs, be adopted;

 (2)the report dated April 16, 1998 from the Chief Financial Officer and Treasurer, ARecommended 1998 Capital Budget and Financing Authorizations@, as amended by the Budget Committee at its meeting of April 20, 1998 be adopted; and

 (3)Community Councils be requested to commit to a full review of capital programs for Parks and Recreation, Facilities and Transportation in their jurisdictions and recommend five year capital priorities for 1999-2003 for the consideration of the Budget Committee by no later than September, 1998.

 Council Reference:

 Budget Committee at its meeting of April 20, 1998, recommended a 1998 capital budget and financing for each service area. This report summarizes the results of decisions made at that meeting.

  Discussion:

 Summary of Recommended 1998 Capital Budget

 Below is the 1998 recommended capital program for property tax supported and user rate supported capital projects:

 The largest category of expenditure is for major maintenance and rehabilitation, almost 60 per cent. of the total capital program. The next largest category is growth/expansion, 22 per cent, mainly related to construction of the Sheppard Subway.

 Following are other specific projects included in the 1998 capital budget:

• purchase of replacement subway cars
• bridge reconstruction, for example, the Gardner Expressway bridges over the Humber River
• water treatment plant upgrades
• watermain relinings
• upgrades to more than 40 recreation and community centres, arenas and pools
• parkland acquisition
• renovations to home for the aged
• demolition of Exhibition Stadium
• upgrades to Casa Loma
• new and upgraded fire stations
• technology and facility upgrades for the police
• ongoing maintenance of landfill sites
• upgrades to the Toronto Zoo
• costs of transition to the new City

 A summary of the 1998 Capital Budget and recommended financing for each service area as recommended by the Budget Committee is attached to this report as Appendix A.

 Funding of the 1998 Capital Program:

 The following graph highlights the funding sources for the recommended tax supported program, excluding one-time transition costs (user rate supported programs and funding for Rapid Transit Expansion including the Sheppard Subway are also excluded since these do not affect the property tax in 1998):

 In a typical year, the City can borrow $110 million for capital purposes without causing higher carrying costs of debt in future operating budgets. The required borrowing of $123 million as shown above is made up of two components:

• $93 million required for the City=s base program, which is lower than the $110 million level; and
• $30 million as a net result of Provincial downloading to the Toronto Transit Commission in 1998.

 Additional borrowing of up to $75.5 million will be required for transition related capital projects, as discussed below.

 Had the traditional Provincial support of 75 per cent. of capital expenditures been maintained, the TTC would have received $45 million more in 1998 from the Province. To partially offset this loss, the recommended 1998 operating budget contains an increase in the capital from current, or Apay as you go@ funding, of $15 million. This reduces the full impact of the Provincial reductions to $30 million.

 By the year 2001, the complete elimination of all Provincial support to the TTC will mean an annual loss of $180 million required to maintain the TTC=s subways, vehicles and other assets in a state of good repair. Over the next few years, the City will have to continue to deal with that loss in some manner.

 A full corporate review of the TTC=s five year funding requirements will be brought back before the Budget Committee in September, 1998. As well a comprehensive corporate debt management plan will be developed which takes into consideration possible funding sources, financing strategies and other initiatives, as a way of reducing the Corporation=s reliance on debt.

 Although the recommended borrowing level is slightly above the $110 million longer term stable borrowing level, net debt charges will drop by about $700 thousand in 1998 due to a combination of projected interest rates, redemption of old debt issued in prior years, borrowing required for prior year=s expenditures, and the timing of debt issues in 1998.

 Transition Costs

 The Budget Committee has recommended a 1998 funding envelope of $85.5 million for transition related costs. This is made up of an estimated $45 million for 1998 staff related costs of transition and $40.5 million in other costs, for example, harmonization of computer systems, office moves and studies to effect amalgamation of a number of service areas. At this point, funding of $10 million has been approved for the staff transition costs, which reduces the net requirements to $75.5 million. However, the Committee directed that other funding sources be explored to minimize the issuance of debt for transition costs. Further, the Committee indicated that financing will only be approved for those projects with a sound business plan and identifiable cost savings. Individual reports seeking specific authority to proceed on transition projects will come forward as required during the year through standing committees to the Budget Committee for consideration.

 Previously Approved Capital Projects:

 Previous Councils in prior years approved a variety of capital projects, which are in varying states of completion. The Budget Committee reviewed the projects shown in Appendices B and C for tax supported and rated supported capital programs, and recommended the cancellation of some (shown with a AC@) and the reallocation against borrowing requirements of funding of $506 thousand. The Committee further recommended the deferral of a number of projects (denoted with a AD@), for consideration during the 1999-2003 Capital Budget process. These projects are more fully described in the report dated April 16, 1998 from the Chief Financial Officer and Treasurer, entitled APreviously Approved but Unstarted Capital Projects Further Report).

 Summary of Budget Committee Review of 1998 Capital Requests:

 The Budget Committee was presented with detailed capital budget requests which were consolidated from information prepared by each of the former seven municipalities. The Committee reviewed the requests, met with and received input from Community Councils, and also received input from the various Standing Committees of Council.

 Below is a summary of the requests and changes recommended by the Budget Committee:

The major sources of change are as follows:

 Impacts of Capital Budget on Operating Budget:

 The capital budget impacts operating budgets in three ways:

 1) direct contributions to the capital program to reduce annual borrowing requirements (Acapital from current@);

2) principal and interest payments on debt issued for capital purposes; and

3)direct operating impacts of operating new or expanded facilities, e.g. salaries, maintenance costs, heat and hydro.

 If the recommended capital program is adopted, then net 1998 debt charges will decrease by approximately $700 thousand from the 1997 aggregate level. Recommended increases to capital from current funding is addressed in a separate report dated April 16, 1998 from the Chief Financial Officer and Treasurer entitled AProposed Capital Financing Management Plan and Other Capital Funding Issues@, including an increase of $15 million recommended for 1998.

 Preliminary figures indicate that the capital program will increase direct operating costs by approximately $1.5 million in 1998. This amount is included within the recommended Operating Budget.

 Longer Term Capital Issues:

 Challenges facing the City in the future will centre around funding strategies to offset the impact of Provincial downloading on the TTC, the increasing need to maintain aging infrastructure such as roads, bridges and buildings, and the potential but unknown capital needs of the following:

• GO Transit, the cost of which is being transferred to municipalities in the Greater Toronto Area from the Province
• costs of upgrading and maintaining social housing, which is being transferred to the City from the Province and
• possible capital costs for a replacement landfill site, once the existing Keele Valley site is closed.

 To address these and other capital funding pressures, the City is continuing to closely examine all of its capital expenditures, and is also embarking on a review of available revenue sources. These may include the use of development charges across the City, sale of surplus City owned property and other assets, and alternative financing approaches.

 Although there are factors which will increase the pressure on future capital budgets, the City is well positioned to deal with these problems. Debt levels are comparatively low, as confirmed independently through various organizations, and the City has at its disposal a variety of options to manage its capital program. The challenges will be to limit the level of capital borrowing to maintain the flexibility in the operating budget, address the TTC downloading issue, and maintain the City=s sizeable investment in its assets for the future enjoyment of its residents, visitors and businesses.

 Conclusions:

 The information contained above summarizes the 1998 Capital Budget as recommended by the Budget Committee.

 Contact Name:

 W. A. Liczyk, Chief Financial Officer and Treasurer, 392-8773

  Councillor Tom Jakobek, ChairCouncillor Bas Balkissoon

  Councillor Olivia ChowCouncillor Blake Kinahan

  Councillor Case OotesCouncillor David Shiner

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