To:Audit Committee
From:Chief Financial Officer & Treasurer
Subject:1998 City of Toronto Consolidated Financial Statements
Purpose:
To present the City's consolidated 1998 Financial Statements.
Financial Implications:
Under current accounting rules, the City's financial position as represented in fund balances appears reasonable. However,
these fund balances artificially reflect the unspent TTC capital subsidy reserves of $453M that will be used in 1999 and
currently do not reflect the funding required to reasonably fund the City's unfunded employee and other liabilities. Future
reports to the Policy & Finance Committee through July to October 1999 will recommend funding approaches to prepare
for the pending changes to accounting rules anticipated to be implemented within the next few years.
Recommendations:
It is recommended that the attached 1998 Consolidated Financial Statements be adopted.
Discussion:
These financial statements consolidate the assets, liabilities, revenues and expenditures of the City, all committees of
Council and a number of boards and municipal enterprises. They do not consolidate the operations of the Metro Toronto
Housing Company Limited, the Toronto Non-Profit Housing Corporation, the Toronto District School Board and the
Toronto Hydro-Electric Commission, nor do these statements include the City's trust funds. Note 2 to these financial
statements identify the consolidated entities. The City's 1999 consolidated financial statements will include the operation
of Toronto Hydro from the date of incorporation - July 1, 1999 onwards.
The 1997 final financial statements of the seven former municipalities presented to Council in July 1998 were prepared
from the seven former financial systems with generally seven independent accounting staff units. During 1998, the City of
Toronto continued to use a number of financial systems. As noted, there were seven operating systems at the beginning of
1998. During 1998, two of these systems were deactivated and a third system was decommissioned at yearend. The number
of financial systems presented challenges during the year for departments to monitor their budgets and particularly for
Finance Accounting Division staff to consolidate seven financial systems in varying degrees of use. Difficulties and delays
in analysis were experienced due to the different account structures and alignment in programs in each system.
The time for the preparation of these financial statements was extended as staff worked to consolidate the financial
information from each of the systems. With the implementation of a single financial system during 1999 and the physical
consolidation of Accounting staff into one accounting unit by September 1999, the time required to produce future annual
statements should be greatly reduced. As of the end of June 1999, the financial operations of five former municipalities
have been consolidated into SAP in our Phase 1 implementation. The balance of the FIS project implementation
representing former Toronto and Metro is scheduled for the end of August 1999.
Balance Sheet Analysis:
Cash - Balances are reduced from 1997 year end balances and are reflected in higher investments and accounts payable
balances in 1998.
Investments - The major items affecting the increase in the balance over the prior year are as follows:
$829M received from the Province in July 1998 and invested in August. The funding was restricted for the TTC and
Sheppard Subway capital projects and consisted of the present value of a 5 year stream of payments that was due from the
Province.
$100M loan received from the Province in 1998. $41M was restricted as funds for transition projects.
$250M of debt was issued in December 1998 and was invested at year end.
The investments are reported at cost and there were no foreign currency investments held at year end.
Taxes Receivable - This includes all outstanding taxes including those items that have been added to the tax roll, such as
utilities arrears, drainage charges, local improvement charges, and the accumulated penalties and interest charges against
such taxes, less any allowance for uncollectible taxes. The provision amount has increased in 1998 for two reasons - i) to
begin to provide for the former Metro portion of tax writeoffs (prior to amalgamation, the former Metro did not make
provisions against taxes receivable and only deducted as an expense their share of tax writeoffs) and ii) to provide for the
various elements of uncertainty regarding the implementation of current value assessment. There will be further review in
1999 on the provision amount required. Business taxes outstanding in 1998 are $93M as compared to $120M in 1997. A
breakdown of the receivable is noted below:
1997
Current year$172M$159M
Prior year$ 89M$ 59M
Previous years$ 56M$ 48M
Interest/penalty$ 41M$ 31M
Less: Allowance ($103M) ($ 23M)
Net receivables$255M $275M
Accounts Receivable and User Charges Receivable - This includes amounts receivable for goods or services during the
normal course of business, less any allowance for uncollectible accounts. This line also includes amounts receivable from
any departments or agency of the Government of Canada or the Province of Ontario for such items as subsidies, payments
in lieu of taxes. User charges receivable includes sewer and water, transit, licenses and permits, rents, and concessions. Of
the $578M, the significant items include:
-$95M from the Province and the Federal governments
-$54M for water and sewer receivables
-$40M for payments in lieu
Other Assets - This includes amounts set up as inventory or prepaid operating expenses. Of the $170M, approximately
$66M is for inventories on hand at year end ($14M - City; $52M - TTC), $46M for prepaid welfare payments and a $30M
loan to TDHC.
Capital Outlay to be recovered in future years - This includes capital expenditures and capital transfers to the extent that
with the approval of the OMB they have been financed from the issue of long term liabilities. A $250M debenture issue in
December 1998 combined with the receipt of the first $100M interest free loan from the Province of Ontario contributed to
the increase in both this line item and long term liabilities.
Accounts payable and accrued liabilities - This includes amounts for trade accounts payable, payroll deductions and
accrued liabilities for goods and services received before the year end. It also includes any amounts payable to the Federal
or Provincial governments, to nonconsolidated local boards, municipal enterprises, utilities, and sinking funds. Accounts
receivable and accounts payable between the consolidated funds and agencies are eliminated in these statements. Of the
total balance of $899M, approximately $178M relates to the TTC.
Deferred Revenue - Of the total $114M in deferred revenue, $24M relates to deferred passenger revenue for the TTC,
$30M for a loan to TDHC.
Other Current Liabilities - $102M of the $143M balance relates to the TTC with the rest representing various deposits on
hand and other miscellaneous amounts.
Fund Balances - Fund balances have increased by approximately $550M. Fund balances with respect to operations have
increased by $30M due mainly to two major elements - i) as a result of an increase in water and sewer operations which
will be used to offset user charges in future years and ii) as a result of $43M of operating or tax rate surplus that has been
incorporated into the 1999 operating tax supported budget. The fund balance in city reserves has increased due mainly to
the creation of a homes for the aged reserve in 1998 and the addition to the winter stabilization reserve. The fund balance
in city reserve funds has increased to reflect the unused portion of the provincial subsidy funds with respect to the five year
TTC capital agreement.
Consolidated Statement of Operations
This statement combines both operating and capital operations. Schedule 1 and 2 are presented to distinguish the impact of
each on the city's operations.
Schedule 1 - This statement demonstrates the impact of the provincial downloading or local services realignment from
operations. Residential education tax room of approximately $695M was created for the city as evidenced by the reduction
in the amounts payable to the school boards while less taxes were billed as a result of reduced education tax rates to
residential and commercial properties leaving a net increase in taxation revenue of $544M. Our 1998 operations show
$400M less in provincial grants while showing the contribution made from pooling revenue of $210M from other GTA
municipalities.
The expenditures are disclosed by the following categories:
General Government - Includes expenditures by the Mayor & Council, Clerks, Finance, Legal, Human Resources,
Information Technology, Audit, Real Estate, Communications, Chief Administrator's Office, Administrative Facilities.
New expenditures for assessment services and the capital financing costs (ie the amount of the provincial loan needed to
balance the 1998 operating budget) account for the increase.
Protection to Persons & Property - Includes Police, Fire Services, Conservation Authority, Licensing Commission, and
expenditures related to by-law enforcement.
Transportation Services - Roadways, bridges and sidewalk maintenance and construction are included in these
expenditures. Street lighting and traffic control devices are also included here. The operations of the Toronto Parking
Authority are also shown here. The loss of TTC operating subsidy from the province in addition to the City's new share of
GO Transit costs are also reported in this category.
Environmental Services - Water purification, sewage treatment, solid waste management as well as environmental
initiatives are included in this category.
Health Services - Expenditures related to public health services including public health inspections and control and
ambulance services are reported under this category.
Social and Family Services - Expenditures for Children's Services, Toronto Housing, Shelters, Housing and Support,
Social Services, Homes for the Aged and Social Development are included here.
Recreation and Cultural Services - Parks & Recreation, theatres and galleries are reported under this caption. This category
also includes Toronto Public Library, Exhibition Place, Arena Boards of Management and Heritage Toronto.
Planning and Development - This expenditure line includes the City's new share of the Housing Costs of $248M
transferred from the province commencing in 1998. Urban Planning and Development, Economic Development and
TEDCO.
Schedule 2 - The consolidated capital operations demonstrate the receipt of the provincial subsidy of $829M for TTC
capital to finance the 1999 capital requirements as well as the proceeds of a $250M debenture issue in December 1998.
Transportation expenditures reflect the need for the increased financing required in 1999. Excess provincial subsidy of
$451M was transferred to reserve funds.
Reserves
Note 8 to the financial statements outlines the City's reserve and reserve funds. City reserves, which earn interest for the
operating budget, have increased by almost $15M. The most significant increases are to two reserves - the winter control
stabilization and the homes for the aged reserve. Funds were available from operations in 1998 to add to the winter control
stabilization and due to the one time nature of the significant snow expenditures in January 1999, it was determined that
this action was prudent. This reserve will likely be utilized in the 1999 operating budget to offset the $30M
overexpenditure in the 1999 Transportation program budget. The increase to the Homes for the Aged reserve was approved
by Council in 1998 to reflect the one time nature of the funds received from the province for transitional purposes. A
current project underway in the Treasury & Financial Services division that will report out in September 1999 will assess
the need and quantum in reserves necessary to provide for the various city's risk exposures.
Reserve funds
City reserve funds, which maintain interest earnings within the funds themselves, increased by $476M over 1997 levels
predominantly due to the OMERS contribution holiday, the unspent TTC capital subsidy and the creation of the welfare
stabilization reserve fund. Reserve funds are represented by investments that are restricted on the balance sheet. Increases
to the Employee Benefits reserve fund a transfer from the 1998 operating budget of the OMERS contribution holiday that
came into effect in August 1998. The Workforce Reduction reserve fund reflects a zero balance after total funding of $19M
from the Employee Benefit reserve fund was transferred to fund employee severances in 1998. Council had previously
approved $11M as an initial contribution, but further funding was required of $8M in order to keep the reserve from being
in a negative year end position.
The reserve funds that relate to capital expenditures increased overall. The reserve funds set up for the residual/unspent
balance of the 5 year TTC capital subsidy amounts account for the significant increase in the transit area. The City's land
acquisition reserve fund has decreased due to the acquisition and development of the Dundas Square project which has
used this fund for $34M in temporary financing.
The category of Social and family services reserves funds reflects Council's decision to provide reserve funding from 1998
operating budget savings from welfare caseload decreases and an element from savings from childcare operations.
The reserve funds also demonstrate the creation of a new reserve for TTC operating surpluses in April 1999 in order to
stabilize their operating budget in future years. The 1998 surplus of $1.2M has been added to this new reserve.
Initiatives for 1999 Financial Statements
A number of initiatives have been identified to improve the timely reporting and the effectiveness of the information in the
statements for 1999 and future years.
i) The current financial statement presentation is aligned closely with the format required by the Province for the Financial
Information Return (FIR) that is filed annually by all Ontario municipalities. This format does not represent the alignment
of programs as delivered by the City of Toronto.
The 1999 Financial Statements will be presented in a manner consistent with the programs administered by City
departments. This will allow the reader to more readily compare the results reflected in the financial statements to the
annual budget. It will also allow in the future for citizens and other readers to determine the costs of providing the various
services offered by City departments. The revised format will follow closely the style used for variance reporting by the
City and will therefore allow a reader to easily compare the two reports.
ii) The implementation of the new financial information system will allow the preparation of the 1999 financial statements
to be expedited. The 1999 financial statements should be presented to Audit Committee at its May 2000 meeting.
iii) In July 1999, Finance's Accounting Services division will prepare a consolidated balance sheet reflecting the City's
financial position as at June 28,1999 in order that any adjustments or problems to accounts from analysis are corrected on a
timely basis. In 1998, attention was focussed on the operating accounts. The analysis of the assets and liabilities was done
at year end only. Because of the number of financial systems, this analysis at year end presented significant challenges in
terms of consolidation and analysis and was a major reason for the delay in finalizing these statements. Preparing a mid
year balance sheet as recommended by both sets of auditors should expedite year end closing.
Future Issues
The Public Sector Accounting Board (PSAB) has been studying standards to improve and harmonize financial reporting in
the public sector. One of the recommendations will require a full accrual basis of accounting. Presently the City is
generally on an accrued basis of accounting as disclosed in Note 2(b)(i) and accrues expenses such as suppliers invoices
that have not been paid and interest charges on long term debt. However, liabilities for certain employee related costs
including sick leave, WSIB liabilities and post retirement costs are not 'booked' in the City's accounts and are shown only
in the notes to the financial statements. Adopting full accrual accounting would book these liabilities. At the end of 1998,
the City of Toronto had approximately $800,000 in unfunded employee benefit liabilities. Since the current level of
funding contained in reserve funds does not match the level of liability, there will be a major drain on the City's fund
balances and reflect in severely depleted fund balances on the balance sheet. It is therefore important that a policy be
adopted to aggressively fund these liabilities. A report on the unfunded employee related liabilities will be presented to the
Policy and Finance Committee in September 1999.
Conclusion:
These statements reflect the financial results for the year 1998. The advent of a single financial system will allow the
preparation of the 1999 financial statements on a more timely basis. The Finance Department will work during 1999 to
develop a reporting format that more closely mirrors the variance reports that will be presented to Council during 1999.
Contacts:
Al Shultz397-5240
Director, Accounting Services
Ken Colley397-4445
Manager, Financial Reporting
W.A. Liczyk
Chief Financial Officer & Treasurer
