November 26, 1999

To: Policy and Finance Committee

From: Chief Financial Officer and Treasurer

Subject: June 1999 Operating Variance - Supplementary Report

Purpose:

To provide details of the increase in projected 1999 expenditures as compared to 1998 expenditures for the Works and Emergency Services ($60.2 million) and Finance ($3.2 million) Departments. This report also includes an analysis of the basis for an increase of $38.2 million in 1999 over 1998 in Water revenues and explains the prior year surplus amount recorded in the City's accounts as at June 30, 1999.

Financial Implications and Impact Statement:

There are no financial implications arising from this report.

Recommendations:

It is recommended that this report be received.

Background:

The Finance and Policy Committee at its meeting on October 14, 1999, had before it two reports (October 5, 1999) and (October 8, 1999) from the Chief Financial Officer and Treasurer respecting the City of Toronto's financial performance for the year ended December 31, 1998 and an overview of the gross and net expenditures for the first six months of operation ending June 30, 1999 and year-end projections.

During consideration of the foregoing reports, the Chief Financial Officer and Treasurer was requested to report back to the Policy and Finance Committee on the factors behind the increase in projected 1999 expenditures versus 1998 actuals related to the Works and Emergency Services ($60.2 million) and Finance ($3.2 million) Departments. The City Auditor was also requested to report on the basis for expecting an increase of $38.2 million in 1999 over 1998 in Water Revenues and on why the prior year surplus is only recovered to the extent of $69,000 by June 1999, against an estimate of $45.0 million.

Comments:

Works and Emergency Services

For 1999, Works and Emergency Services is projecting gross expenditures of $695.7 million (based on June 30, 1999 actuals) as compared to a budget of $$657.0 million for a variance of $38.6 million. As noted previously, this variance is mainly attributed to the unbudgeted January 1999 snow-clearing operation of $38.0 million in Transportation and a $2.5 million over-expenditure in Fire Services mainly due to unrealized gapping and the recruitment of additional fire fighters in November as approved by City Council. These over expenditures are partially offset by net under expenditures of $1.2 million in Solid Waste Management.

The projected 1999 gross expenditure of $695.7 million reflects an increase of $60.2 million over the 1998 actual. The following table summarizes the increase by Program:

The year over year variance is a result of:

(i) $10.1 million increase in Ambulance Services resulting from the allocation of corporate charges ($5.9 million), addition of 65 FTE paramedics ($2.7 million), critical care transportation program ($0.4 million), Provincial downloading of medical supplies ($0.4 million), contribution to vehicle reserve ($0.3 million) and other service priorities ($0.3 million).

(ii) $.8 million increase in Fire Services resulting from new fire fighter recruits authorized for November 1999 ($.3 million) and increased salary costs for wage step increases not offset by anticipated gapping ($.5 million).

(iii) $19.7 million increase in Transportation Services resulting from the unbudgeted January 1999 snow clearing operation ($38.0 million) that is partially offset by projected savings from restructuring ($10.9 million), a general reduction in provision for road resurfacing and maintenance ($4.0 million), the transfer of major maintenance from the operating budget to the capital budget ($4.5 million), and other service delivery adjustment increase associated with snow removal, etc. ($1.1 million).

(iv) $21.9 million decrease in Solid Waste Management resulting from the elimination of interdepartmental charges ($10.8 million) that were offset by interdepartmental revenues in the 1998 actuals; the reduction in fleet and equipment purchases as the costs for replacements in 1999 are budgeted in Fleet Management Services ($5.3 million); the annualized impact of cost savings from amalgamation related efficiencies/improvements ($5.4 million); lower royalty payments to the Region of York based on decrease in waste tonnages disposed at the Keele Valley landfill ($.4 million).

(v) $51.4 million increase in Works - Support Services and Works Technical Services as a result of establishing separate programs for these services. The gross expenditures related to these activities are fully recovered from the other Works programs. Accordingly, while expenditures are duplicated to cover the contributions to these programs, net expenditures are not impacted.

Finance Department

The projected 1999 gross expenditure of $52.5 million reflects an increase of $3.2 million over the 1998 actual. The year over year variance is mostly due to a change in accounting practice in 1999 with regard to the treatment of expenses and revenues associated with the water operation run by the former Scarborough Public Utility Commission on behalf of the former cities of Scarborough and York (SPUC - now Toronto Hydro - continues to provide water billing and collection services for the City on a fee for service basis.). In 1998, the Revenue Division of the Finance Department budgeted for this service cost on a gross basis. However, actuals were recorded on a net basis, ie. the SPUC deducted its costs from the water proceeds before transferring funds to the City.

In 1999, the Revenue Division changed its accounting practices so that both the actual expenditures and revenues were reflected in its accounts given the pending conversion of water accounts to the City from Toronto Hydro. This change does not impact on the net budget from 1998 to 1999, but on a gross basis there is the increase as noted by the Policy and Finance Committee.

Water Revenues

The 1998 budgeting practice for self-funding programs, such as the Water and Wastewater program, assumed a break-even position at year-end. Likewise, the 1998 practice for year-end variance reporting purposes assumed that expenditures to date are matched by equivalent revenues. The actual results are determined at year-end (subject to audit).

Based on the foregoing practices, Schedules "A and B" attached to the report (October 5, 1999) from the Chief Financial Officer and Treasurer respecting the December 31, 1998 Operating Budget Variance showed 1998 actual expenditures of $401.7 million, and "matching" revenues of $401.7 million, resulting in a break-even position. The actual revenues at year-end for the Water and Wastewater Program were $431.0 million, resulting in a 1998 surplus of $29.3 million.

The current variance reporting practice is being reviewed.

The total 1999 estimated revenue of the Water and Wastewater Program, at $440.0 million, accordingly reflects an increase of only $9.0 million, or 2%, over the 1998 total revenues, as opposed to the $38.2 million increase referred to by the Policy and Finance Committee at its meeting in October. This increase is mainly attributed to the annualization of last year's rate increase, a marginal volume increase resulting in additional revenues, and an increase in revenue from industrial waste agreements.

Audit Services staff have reviewed this matter and are in agreement with the explanation provided.

Non-Program Revenues

The Policy and Finance Committee requested that the City Auditor report on why the prior year surplus is only recovered to the extent of $869.2 thousand by June, 1999, against the estimate of $45.0 million. Schedule "B" attached to the report (October 8, 1999) from the Chief Financial Officer and Treasurer reflected a prior year surplus of $869.2 thousand as at June 30, 1999. This amount represents that portion of the 1998 surplus of $43.6 million that had been recorded in the accounts as at June 30, 1999. The remaining 1998 surplus has been recorded in the accounts subsequent to June 30, 1999 and will be reflected in the September 30, 1999 operating variance report.

Audit Services staff have confirmed that the balance in the prior year surplus account is now $43.6 million and are in agreement with the explanation provided above.

Conclusion:

This report identified the main reasons for variances in gross expenditures from 1998 actual experience and the 1999 projected expenditures for the Works and Emergency Services and the Finance Departments. The report also explains why the 1999 water revenues are projected to be higher than the 1998 level shown in the December 31, 1998 Operating Budget Variance Report. Finally, the amount of total 1998 surplus posted as at June 30, 1999 is explained.

Contact:

Carmine Bruno, Manager, Budget Services

Telephone: 397-4218; Fax: 392-3649; E-mail: cbruno@mta1.metrodesk.metrotor.on.ca

Glenn Vollebregt, Director, Budget Services

Telephone: 392-8095; Fax: 397-4465; E-mail: gavolleb@mta1.metrodesk.metrotor.on.ca

W. A. Liczyk

Chief Financial Officer and Treasurer