Toronto Atmospheric Fund

The Audit Committee recommends the adoption of the following joint report (September 17, 1999) from the City Auditor and City Solicitor.

The Audit Committee reports, for the information of Council, having requested the City Solicitor and the Chief Financial Officer and Treasurer to report further to Council on Recommendation No.(6) contained in the joint report (September 17, 1999) from the City Auditor and the City Solicitor, including any legislative amendments necessary to enact the TAF proposal respecting investment of funds.

The Audit Committee submits the following joint report (September 17, 1999) from the City Auditor and City Solicitor:

Recommendations:

It is recommended that:

(1)as part of the City's 2000 operating budget process, the Toronto Atmospheric Fund Board clarify the role and responsibilities of other City departments and programs involved in improving air quality, relative to the mandate and objectives of TAF, and include in the report the funds expended annually by these program areas on air quality improvement and awareness;

(2)in view of the significant funds spent by the Fund to date, the Toronto Atmospheric Fund Board submit a status report to City Council by November 30, 1999, outlining the benefits and returns received to date, as well as the progress towards achieving the goal of reducing greenhouse gas emissions by 20 percent by 2005;

(3)the Toronto Atmospheric Fund establish appropriate performance indicators against which the activities and performance of the Fund can be measured, both annually and in the longer term;

(4)the Toronto Atmospheric Fund's annual operating budget, as approved by its Board of Directors, be submitted to City Council for review and approval;

(5)the Toronto Atmospheric Fund Board include in its annual financial statements provided to the City or in a separate report to Council, a summary of the grants and loans approved in the year, as well as a listing of consulting expenditures incurred;

(6)the Toronto Atmospheric Fund Board obtain City Council approval for any proposed changes to the investment of TAF funds as well as for any requests to amend the Trustee Act in this regard;

(7)the Toronto Atmospheric Fund submit to City Council for approval, any loans, guarantees or security on loans, or lines of credit in excess of $500,000, following a review by City Finance;

(8)the procurement of consulting and other goods and services by the Toronto Atmospheric Fund be conducted through the Purchasing and Materials Management Division of City Finance, and in accordance with the City's purchasing policies;

(9)expenditures incurred by the Toronto Atmospheric Fund be properly classified in its annual financial statements and segregated into grant and administrative expenses; and

(10)staff take the necessary action to implement the above recommendations, including the introduction of bills to Council.

Background:

At its meeting on June 9, 10, 11, 1999, City Council adopted Clause No. 3 of Report No. 4 of the Audit Committee which recommended that with respect to the Toronto Atmospheric Fund (TAF/the Fund), the City Auditor review and report thereon to the Audit Committee on the issuance of grants, consulting fees, legal costs and any other identified concerns, including whether TAF can be considered an agency, board or commission. The Audit Committee also recommended that the City Solicitor report to the Audit Committee on the legal status of the Toronto Atmospheric Fund and its relationship to the City, particularly with respect to the Fund's $24 million in assets and the City's obligations and abilities to make decisions respecting the fund.

Comments:

The Toronto Atmospheric Fund and the Toronto Atmospheric Fund Foundation (TAF Foundation/TAFF) are statutory corporations created by the Toronto Atmospheric Fund Act, 1992 (the TAF Act), at the request of the former City of Toronto. The Toronto Atmospheric Fund Foundation is a registered charity to which donations can be made.

The objectives of TAF are to assist the City and the community to reach their climate change goals and reduce carbon emissions by 20 percent of 1990 levels by 2005. TAF provides grants and financing to organizations that promote energy efficiency, renewable energy, sustainable transportation, improved urban planning and greening of the City. It is managed by a Board of Directors, appointed by Council, comprised of City councillors, staff and citizens.

Legal Status of Toronto Atmospheric Fund:

TAF is a statutory corporation created by the Province at the request of the former City of Toronto. Despite section 10 of the TAF Act (enacted in 1992) which states that TAF was deemed not to be a local board of the City, the Municipal Act, subsection 210.4(7), which was enacted in 1996, stipulates that the Minister of Municipal Affairs and Housing may make regulations providing that any body performing any public function is a local board. Subsection 2(c) of Ontario Regulation 214/96 provides that for the purposes of that Regulation, TAF and the TAF Foundation are local boards of the City. In addition to the financial controls set out below, the Regulation also allows a municipality to take powers from a local board so that those powers can be exercised by the municipality, in which case the municipality then stands in the place of the local board, with all the attendant liabilities and obligations with respect to those powers.

The City provided a grant of approximately $23 million to TAF in 1993, under subsection 9(1) of the TAF Act. The TAF operating budget is based on the investment income generated on the amount of the City grant, plus any surplus from the preceding year, under former City of Toronto Council imposed guidelines (Executive Committee Report No. 27, Clause 15, as amended and adopted December 18 and 19, 1995, as amended by Executive Committee Report No. 7, Clause 3, adopted February 3, 1997). Under subsection 6(1) of the TAF Act, the City holds TAF funds not immediately required for TAF's objects, and under subsection 6(3), the City Treasurer may invest those funds in securities authorized under the Trustee Act for trustees.

As such, TAF is different from other local boards which submit their estimates for both Council approval and funding. TAF currently submits its annual estimates for its own Board approval. If the recommendations contained in this report are adopted, these estimates would then also be subject to Council approval.

It appears that although the City's ability to require TAF to submit its budget for City approval was not intended by the financial reporting structure contained in the TAF Act, this requirement can now be imposed on TAF under the provisions of Municipal Act, section 210.4 and Ontario Regulation 214/96, passed under the authority of section 210.4.

In order to be able to draft a stand-alone by-law to implement the recommendations contained in this report, if approved by Council, the appropriate consultation will have to be undertaken with TAF staff and its outside counsel, to ensure that any TAF internal accounting measures or TAF by-laws which may conflict with the proposed course of action are considered and addressed in the by-law.

In the event that the City were to dissolve TAF, under subsection 12(3) of the TAF Act, the remaining TAF property, after all of its debts and liabilities are paid, would be distributed to the City.

Issuance of Grants:

The Toronto Atmospheric Fund makes grants and loans to applicants that meet various criteria and guidelines, and whose goals and objectives are consistent with those of TAF. In 1998, TAF issued grants totalling $596,745. The screening process for grants involves the review and consideration of applications by TAF staff and TAF's Grants and Loans Committee. Recommended applications are then forwarded to the TAF Board for final consideration and approval. Under the TAF Act, City Council approval of the grants and loans is not required unless the proposed grants and loans extend over the term of the current Council.

In its annual report, TAF includes a summary of the grants and loans approved in the fiscal year. However, this information is not included in TAF's financial statements which are forwarded to the City for information. In order to ensure Council is aware of TAF's activities in a given year, it would be appropriate for TAF to include, in its financial statements or in a separate report to Council, information with respect to grants and loans approved by the TAF Board.

Consulting Fees:

TAF staff indicate that consulting expenditures in 1998, which totalled $144,654, included some grants approved by the Board that are classified as consulting because they are implemented via contracts with the applicant, rather than through a straight grant. TAF uses contracts when it wishes to more directly manage an applicant's performance. Projects initiated by TAF to obtain a specific service or deliverable are appropriately categorized as consulting. However, any funds received by an organization on the basis of their application for support should be categorized as a grant, regardless of whether a contract is used to manage the applicant's performance.

The procurement of consulting services should be done through City Purchasing and in accordance with the City's purchasing policies. It would also be appropriate for TAF to provide City Council with a summary of consulting expenditures in its annual report and include the name of the individual or organization, service or deliverable provided and the amount of the contract.

Legal Costs:

TAF incurred $32,733 in legal costs in 1998. Outside legal counsel is contracted to provide legal advice relating to TAF's grants and loans as well as general legal advice required by TAF staff and Board in managing its operation. The increase in TAF's loan activity in the last few years has required additional legal services in order to ensure that necessary due diligence is exercised by TAF on its loan portfolio. In 1999, TAF has implemented a new policy which will require applicants for loans to pay associated legal costs in negotiating loan agreements. TAF staff indicate that as a result, TAF's legal costs are expected to decrease by up to 80 percent in 1999.

Relationship With Other City Programs or Departments:

Other program areas in the City such as the Healthy City Office, Environmental Services (Works Department) and Public Health are involved to some extent or have some interest in the City's air quality and greenhouse gas emissions. While the Works Department and Public Health have representation on the TAF board, it would be appropriate to clarify the role of these program areas relative to the mandate of TAF and to provide Council with information on the amount expended annually by these program areas on air quality and greenhouse gas initiatives. This will provide Council with a complete picture of air quality improvement activities in the City and the total annual cost thereof, and identify any duplication of activities among these program areas and TAF.

Annual Budget:

TAF is a separate legal entity with its own board, appointed by Council. City Council can at any time, by resolution, dissolve TAF. Therefore, while TAF is a separate entity, it is still very much accountable to the City. As such, it is appropriate that TAF's annual budget, including revenue, grants and operating expenditures be approved by the City. The budget submitted to the City should also include performance indicators and a report on how well TAF is meeting its goals.

Guarantee on Loans:

In addition to making grants, TAF lends money to organizations, which through their initiatives, will assist TAF in meeting its objectives. TAF also provides a line of credit to organizations, and guarantees and secures loans to assist organizations in obtaining financing for projects. Any default on the above noted transactions become expenditures of TAF and could compromise the $23 million endowment the City is required to maintain in TAF. City Council should therefore approve any loans, guarantees or security on loans or lines of credit greater than $500 thousand.

Status of Performance to Date:

From 1993 to 1998, TAF has made grants totalling over $3.5 million to various organizations. This is a significant investment on the part of the City. It would therefore be useful that TAF staff prepare a status report on the benefits and returns received to date as well as on the progress to date towards achieving the City's goal of a 20 percent reduction in greenhouse gas emissions, and whether in fact the 20 percent reduction will be achieved by the Corporation by 2005.

Relationship With the City:

On October 1 and 2, 1998, City Council adopted the recommendations of the Budget Committee contained in Clause No. 12 of Strategic Policies and Priorities Report No. 18, with respect to accessing TAF's capital reserves. This clause also contained a report (dated August 28, 1998) from the Chief Administrative Officer and the Chief Financial Officer and Treasurer which presented various options respecting TAF. These options included: the complete liquidation of the Fund and instead establishing a specific budget in the City's annual operating estimates to fund grants related to air quality improvements; partial liquidation of the fund; and the City accessing the fund for initiatives and projects within TAF's mandate. Council did not act on any of these options and maintained the status quo. It did, however, adopt the Budget Committee's recommendations in the clause, which would make TAF more efficient and accountable to the City. These recommendations included having TAF:

- establish a process so that TAF's annual expenditures are subject to the same scrutiny as other departments, agencies, boards or commissions that the City is responsible for;

-provide a detailed annual report to Council on its spending, through the Works Committee;

-seek ways to reduce its administration costs;

-review its granting policies and criteria with a view to increasing support for City-initiated projects and ensuring that funding for communities is distributed to organizations across the new City; and

-attempt to document and quantify the economic and health benefits that flow from energy efficiency and other TAF initiatives.

TAF staff advise that most of the above recommendations have or are in the process of being acted upon and that a separate status report will be issued to the Budget Advisory Committee in this regard.

Toronto Atmospheric Fund Investments:

The investments of the Toronto Atmospheric Fund are currently managed by the City's Finance Department in accordance with the City's investment policies and the Municipal Act. Under the City's investment policies, safety of principal and the ability to liquidate investments to meet operational requirements take precedence over return on investment. TAF is proposing that these funds be invested more broadly in accordance with the TAF and Trustee Acts in order to potentially increase investment income. This whole issue is currently being reviewed by the City Solicitor.

Classification of Expenditures:

A review of the 1998 financial statements with TAF staff indicated that certain expenditures incurred were not properly classified in the statements. For example, some salaries paid in the year were reported as administration charges or as communication expenses. In addition, certain grants were reported as consulting fees. It is important that all revenue and expenses are properly classified so that readers of the financial statements have a clear picture of the various sources and uses of funds in a given year. It would also be useful to segregate expenditures into grant and administration sub-categories, so that the total amount spent annually by the Fund on administration is provided.

Toronto Atmospheric Fund Foundation:

The TAF Foundation is a registered charity incorporated under the same provincial act as TAF. There had been no activity in the TAF Foundation until the spring of this year when the TAF Board endorsed the start-up of this foundation, authorized a $12,000 grant to it for legal and administrative costs and approved a grant of $50,000 for fundraising and communications expenses related to the start-up.

The goal of the TAF Foundation is to raise up to $500,000 by next spring to help finance and leverage the work and initiatives of TAF.

Conclusions:

By operating as an arms length corporation to the City, the Toronto Atmospheric Fund achieves a certain level of independence to carry out its objectives without intervention from the City. TAF staff advise that the arms length relationship also offers some other unique opportunities such as the ability to provide and structure financing for private and public institutions involved in energy savings and air quality improvement initiatives as well as securitise and leverage private capital to these type of institutions, which cannot obtain financing from conventional sources.

In October 1998, City Council was presented with various options respecting TAF, which included dissolving the Fund. It decided at that time to maintain the existing structure whereby TAF would continue to operate as a separate legal entity. Nonetheless, the TAF Board is still accountable to the City and the recommendations in this report and the October 1998 Budget Committee recommendations will strengthen that accountability.

In order for certain recommendations in this report to be implemented, a by-law must be enacted by Council under the authority of Ontario Regulations 214/96 which requires further consultation between City staff, TAF staff and TAF's solicitor.

Contact Name and Telephone Number:

Tony Veneziano, Senior Audit Manager, 392-8353

Lorraine Searles-Kelly, Solicitor, 392-7240