December 8, 1999

To: Budget Advisory Committee

From Chief Financial Officer and Treasurer

Subject: Toronto Police Service

Analysis of 1999 Operating Budget Shortfall

Purpose:

To provide an analysis of the projected 1999 operating budget shortfall of Toronto Police Services.

Financial Implications:

Toronto Police Services reported operating budget shortfall as at September 30, 1999 is $7.7 million. There are no specific financial reductions for the current 1999 estimate at this time as a result of the recommendations contained in this report.

Recommendations:

It is recommended:

(1) With respect to financial management information:

(a) Toronto Police Services forward to the Chief Financial Officer and Treasurer each month a copy of the variance report currently sent to the Toronto Police Services Board which includes projected full year operating budget estimates and at the same time provide year-to-date actual expenditure data as compared to year-to-date budgets to allow more time to react to significant variances,

(b) Toronto Police Services provide the Chief Financial Officer and Treasurer with regular, periodic operating and capital budget variance reports in the format prescribed by the Chief Financial Officer for all City departments, agencies, boards and commissions;

(c) Toronto Police Services provide full time equivalent (FTE) as well as position requirements when submitting budget requests in future years;

(d) Toronto Police Services provide the 'Managed Savings Program' and the 'Staff Deployment and costs related to overtime/premium pay allocations' reports to Policy and Finance Committee as requested at the City of Toronto Council Meeting of July 6, 7 and 8, 1999;

(2) With respect to the costs resulting from step rate progressions in the Toronto Police Services:

(a) The Chief Financial Officer and Treasurer be authorized to create a reserve (Reserve for the Stabilization of Step Rate Progressions in Toronto Police Services) as at January 1, 2000, such reserve to be held in the City's books and be under the jurisdiction of the Chief Financial Officer and Treasurer;

(b) The reserve at January 1, 2000 be $2 million, funded from the City's Employee Benefit Reserve Fund;

(c) Subsequent allocations to the reserve be part of the City's annual budget process, with in-year adjustments as recommended for Council's consideration by the Chief Financial Officer and Treasurer;

(d) Draws from the reserve be subject to a report from Toronto Police Services to the Chief Financial Officer and Treasurer, and the Chief Financial Officer and Treasurer's recommendation for Council's consideration;

(e) The continuing need for and adequacy of the reserve be reviewed by the Chief Financial Officer on a regular basis in the context of corporate requirements.

(3) With respect to future year budget requirements of the Toronto Police Services:

(a) The hiring target for the Year 2000 be reviewed in the 2000 Operating Budget process;

(b) Toronto Police Services develop performance measures for vehicle maintenance, premium pay and training programs for comparative purposes to other Canadian and United States municipal police forces and report back to the Budget Advisory Committee in March 2000 and thereafter on a quarterly basis; and,

(c) Toronto Police Services approved hiring targets be met only if the Council approved net budget is not exceeded and that the Toronto Police Services Board report on the status of meeting hiring targets as part of the variance reporting process.

Council Reference/Background/History:

At its April 13, 1999 meeting, Strategic Policies and Priorities Committee approved Budget Committee's recommended net 1999 Operating Budget for Toronto Police Services at $522.9 million which included $12 million in additional expenditures to accommodate the 1998 wage settlement. This total represented gross expenditures of $535.9 million and revenues of $13.0 million. A total of $15.0 million in additional pressures that Toronto Police Services identified were to be absorbed in their 1999 Operating Budget. At its meeting of April 26, 27 and 28, 1999, Council approved the Budget Committee recommended budget with a number of recommendations which mostly centred around Toronto Police Services reporting on its deployment strategies, but did not call for any amendment to the $522.9 million net budget.

At its meeting of September 16, 1999 Policy and Finance Committee had before it Toronto Police Services May 31, 1999 variance report which showed a projected 1999 year-end budget shortfall of approximately $10.1 million. At its meeting of October 14, 1999 the Policy and Finance Committee received the City's June 30, 1999 variance report. This report indicated a year-end projected shortfall for Toronto Police Services of $7.9 million. In receiving the variance report, the Policy and Finance Committee requested that those areas showing significant variances be revisited to determine opportunities for reducing the shortfall.

Discussion:

At the time the June 1999 Variance Report was finalized, the reported shortfall had been reduced to $7.9 million and is now estimated at $7.7 million as at October 22, 1999. The variance explanations relating to this estimate can be found in Appendix A, and are reported by Police Services as including:

a) "mandatory pressures", which include inflationary increases to benefits, net impacts of separations and hirings as well as Use of Force initiatives; and,

b) other "unforeseen pressures", which include the Kosovo Crisis, Coroners' inquests, net attrition and other items.

As part of the 1999 Budget process, Toronto Police Services was requested to investigate savings and/or efficiencies that would offset the increases described in a) above. It was noted at the time that limited opportunity existed in the non-salary items of Toronto Police Services Budget to make these reductions. The significant shortfall continuing to be reported needed to be addressed. Over the past two months, therefore, several internal and committee meetings have been conducted in an attempt to address the significant budget shortfall being reported by Toronto Police Services for 1999. Specific discussions focussed on budgeting practices related to:

· Reclassifications

· Separations/Hirings Targets

· Premium Pay (including court appearance, overtime, shift, holiday and other pay)

· Vehicle Maintenance Costs

· Revenues

· Contingency Items

As a means of tackling these concerns the following provides some insights to each of the items noted above and makes recommendations.

A) Reclassifications

Each year Toronto Police Services is faced with working to a hiring target and making assumptions about the number of separations versus the number of new hires. Although it is not done in quite so simple terms, once the separations/new hire totals are established, the budgeted expenditures related to these positions are derived. The separations are shown as a reduction using the top wage rate classification and new hires coming on board are conversely calculated using the lowest wage rate.

As illustrated in Appendix B (attached), if Toronto Police Services had budgeted at the top rate or included the step rate increments as is done by Toronto Fire and Ambulance Services, their base budget request would have averaged 7.4% higher than was actually submitted. Fire and Ambulance Services each budget positions at the known progression increment level and reduce their budget for gapping allowance.

For 1999, providing for the reclassification components alone would appear to translate into a $14 million addition to Toronto Police Services budget (see Appendix B). This figure is misleading, however, in that gapping, attrition, separations and new hires are all interrelated and are not easily detailed by individual components; that is, an impact on one component may be offset by decreases in another. A more appropriate measure of the impact would be found in this example. Assume that the average number of separations and new hires equals 200 FTEs each year. It is known that the difference in salary between a new recruit and a First Class Constable is approximately $23,000 a year. Therefore it would be reasonable to expect that the 1999 budget should be at least $2 million above the base step level in 1999. This has been identified as an issue in previous years, but has not materialized as an expenditure pressure since high fluctuations in staffing levels have offset the increases. In short, significant staffing reductions as budgeted at the top rate exceeded the incremental progression rate costs being incurred and it was a while for a "catch up" to be seen.

Corporately, the City is currently working towards establishing a guideline that would ensure equal budget treatment of wage progressions for all Programs, Agencies, Boards and Commissions. However, implementation is constrained by the City's financial position. The difficulty in the case of Toronto Police Services has been a financial one where the City has not been in the position to afford increases to operating expenses. Three options are available to address this issue: a) change hiring targets to meet budget requirements; b) establish a reserve to smooth fluctuating expenditures; or, c) budget for the staffing complement at the known progression rate in each and every year. Option a) ensures that budgeted expenditures can be met, but at the expense of maintaining service levels. Option b) provides for a smoothing out of expenses over time, but is cumbersome to manage and can distort financial reporting. Option c) provides for actual costs as they incur, but is impacted where monies are not available to pay for increases.

Of the three, option c) is the most favourable option for it allows decision making to be made based on consideration of data that has not been adjusted or "smoothed". Unfortunately, this could result in significant fluctuations in budget requirements from year to year that the City may not be able to address financially. As an interim measure therefore, it is recommended that option b) be adopted for Toronto Police Services.

B) Separations/Hirings Targets

Another component of the budgeting process currently in place at Toronto Police Services is the means through which attrition is considered in the context of staffing targets. It is understood that any approved hiring plan includes informed assumptions on retirement and other separations through time as well as training and/or other hiring restrictions. This is described in section A) above as planned gapping. Toronto Police Services provides this information with each year's operating budget submission as seen in Appendix C. Adjusting hiring plans becomes problematic once the year commences since the Ontario Police College provides only three classes per year and limits Toronto based enrolment to specific recruit levels. Thus, there is a timing delay involved in reacting to changes to the hiring plan such as the attrition target not being met or conversely being exceeded. Some attempts have been made to address this issue as evidenced by the reduction of 32 recruits from the October class of 1999. Unfortunately, there are difficulties in making these changes in light of competing Council objectives (i.e. meet hiring targets and meet budget).

The 1999 experience is an example of the above. Toronto Police Services did not realize the number of separations anticipated. Essentially this resulted in unrealized savings for top wage officers assumed and budgeted to be leaving. To act prudently in response to this shortfall, a significant reduction in the early class sizes for recruits was recommended by Toronto Police Services staff but rejected by Toronto Police Services Board which was concerned over the associated reduced recruiting levels.

One solution for this issue would be to establish targets, but manage the hiring within the Council approved net Toronto Police Services Operating Budget. In this scenario, Toronto Police Services would attempt to adhere to target but remain within Council approved spending limits. This way Toronto Police Services can reassess their attrition assumptions on an on-going basis relative to budgeted positions as well as full time equivalents. Toronto Police Services should report through Policy and Finance on revisions to their FTE targets in addition to their expenditure results through the City's Operating Budget Variance reports.

C) Premium Pay (including court appearance, overtime, shift, holiday and other pay)

Concern has been expressed with respect to overtime and premium pay related to officer duties. The premium pay category consists of payments for court attendance, overtime, callback and other items contained in the collective agreement (e.g. Statutory Holiday Pay, Shift Premium, Acting Pay, etc.). Approximately 50% of total premium pay is related to court attendance which represents almost $14.7 million in 1999. As outlined in Appendix D, overtime is approximately $6.2 million or 20% of the overall premium pay account and savings in this area are therefore limited in scope. As well, given that Senior Officers are not eligible for overtime, the actual overtime per officer is approximately $1,050 annually or about $20 per week. As a result, all components of premium pay should be examined and not just overtime.

There are several factors that contribute to premium pay. These can all be summarized as being a function of the level of enforcement (i.e. staffing) in place at any given time. Toronto Police Services contends that higher staffing levels result in increased enforcement activity that ultimately results in increased premium costs. On this basis, the opportunity to address premium pay costs should be related to a review of the level of policing.

D) Vehicle Maintenance Costs

Appendix E shows vehicle maintenance activities over time. It is evident that strictly in terms of labour costs, reductions of $64,700 or 1% have been realized in the period of 1993 to 1999 before adjusting for wage increases. The difficulty is that previous years' budgets have sometimes reflected greater improvements than actually realized based on fleet replacement plans and are therefore not readily apparent when making budget to budget comparisons. Further complicating the issue is the reality that marked vehicles used by the force have a real life of just over two years. This means that the maintenance savings would not be as discernible as may occur in other services (e.g. Fire) where vehicles are driven less often and maintenance plans can be stretched out or managed over longer time periods.

E) Revenues

Appendix F provides a breakdown of the revenue sources assumed for 1999 as compared to projected actual experience for the current year. In summary, it is apparent that the assumptions used in establishing the 1999 target have been optimistic. When establishing the revenue estimates for the 1999 Operating Budget, Toronto Police Services examined historical levels of revenue generation where continued increases were evident. This trend was assumed for all revenue categories in 1999 while attention was also paid to the corporate initiative to allow for a 10% increase to fees and other revenue sources where possible. Rather than pro-rate these increases across all revenue categories the total increase was budgeted in the miscellaneous revenue feature group. In total, the projected actual has fallen approximately $800 thousand short of the 1999 estimate as seen in Appendix F.

F) "Contingency Items"

In addition to the key items discussed above, Toronto Police Services was significantly impacted in 1999 by the Serbian Demonstrations and extraordinary legal expenses related to Coroners' inquests. The Kosovo Crisis is expected to top $1.3 million in additional direct costs in 1999, and may include as much as $400,000 in additional expenditures for indirect costs related to court time and other incremental expenses related to the Kosovo arrests (See Appendix H). The Coroners' inquests are estimated at approximately $700,000, but this estimate includes a one-time expense of $520,000 for counsel representation at the Coroner's Inquest into the Death of Edmund Wai-Kong Yu. While both these items could be viewed as anomalies, it is not unreasonable to expect that these type of expenses would recur in future years.

Two options are available for dealing with these "one-time" items: budget for them based on historical experience, i.e. increase the budget by approximately $500 thousand, or make no provision at all. The latter is the most desirable in a time of financial constraint; however, it is understood that Toronto Police Services would seek recognition in their variance reporting of these as contingency expenses.

General Observations

Toronto Police Services expends over 92% of its operating budget on wages, salaries and benefits. Any significant reduction can therefore only be viewed in terms of workforce changes be it reductions in number of officers, alterations of collective agreements or otherwise. This understanding is consistently found in the requests made by Council, as well as, the Budget Advisory and the Policy and Finance Committees' requests for staff deployment and management savings reports from Toronto Police Services that are now expected at the next Council Meeting of November 23, 24 and 25, 1999. Any further reductions to the presently reported $7.7 million shortfall will be difficult as workforce expenditures have already been incurred and the last class of Police recruits for 1999 has been started.

This leaves only the Year 2000 and future budget years available to pursue future staff deployment issues. Key issues that need to be addressed therefore include:

a) reassessment of the 2000 staffing hires; and,

b) re-evaluation of revenue targets.

Conclusion:

Toronto Police Services currently projects a 1999 Operating Budget shortfall of $7.7 million for year-end which is $2.4 million below its preliminary estimate of $10.1 million. Reducing this figure significantly at this time when expenditures have already been incurred is difficult. Efforts to address the problem are therefore more aptly dealt with through the 2000 and future year Operating Budget requirements of Toronto Police Services. As part of this examination, a review of workforce deployment practises is required to help gain an understanding of the pressures under which Toronto Police Services operates as well as to insure that Council's financial pressures are addressed in an informed and responsible manner.

Wanda Liczyk,

Chief Financial Officer and Treasurer

Contact Names:

Al Horsman 397-4532

Glenn Vollebregt 392-8095

Attachments:

Appendix A - Toronto Police Services Operating Variance from May 31, 1999 to October 22, 1999

Appendix B - Analysis of Reclassifications for Uniform Staffing

Appendix C - Uniform Staffing Forecasts 1998 - 2003

Appendix D - Premium Pay Accounts for 1999 Actual and Budget Expenditures

Appendix E - Vehicle Maintenance and Fleet Costs 1993-2000

Appendix F - Revenue Accounts for 1999 Actual and Budget Totals

Appendix G - Cost of Serbian Demonstrations