April 21, 1998

To:Strategic Policies and Priorities Committee

From:City Clerk

Subject:Toronto Atmospheric Fund

Recommendation:

The Budget Committee on April 20, 1998, reports having received the report (April 20, 1998) from the Chief Financial Officer and Treasurer and directed that this matter be considered in July.

Background:

The Budget Committee on April 20, 1998, had before it a report (April 20, 1998) from the Chief Financial Officer and Treasurer regarding the Toronto Atmospheric Fund.

City Clerk

Barbara Liddiard/rc/cp

Item No. 15

Attachment

 c.Chief Financial Officer and Treasurer

Chief Administrative Officer

Mr. Rob Hatton, Finance Department

(Report dated April 20, 1998, addressed to the Budget Committee from the Chief Financial Officer and Treasurer)

Purpose:

To provide background information on the Toronto Atmospheric Fund to assist with budget deliberations.

Funding Sources and Financial Implications:

The Toronto Atmospheric Fund (TAF) funds its operations through returns on investing its equity capital. One such investment is a $15.3 million loan to the City of Toronto. A recommendation to eliminate the interest due on the loan in the amount of $728,000 from the City's 1998 operating budget has been incorporated in the consolidated figures.

Recommendation:

It is recommended that this report be received for information.

History:

The TAF was created by the Toronto Atmospheric Fund Act, 1992, and by the subsequent appropriation of funds in the amount of $23 million by the former City of Toronto from the proceeds of the sale of the Langstaff Jail Farm property, providing the initial equity for the fund's operations.

On December 1, 1994 the TAF loaned the former City of Toronto $15.3 million for a capital energy saving initiative, repayable in blended principal and interest at an imputed rate of 8.76 percent over a term of 8 years. In 1996 and 1997 the TAF waived interest on the loan of $969,021 and $853,613, respectively, at the request of the City, leaving an outstanding principal amount of $9.15 million at year end 1997. The Budget Committee has recommended that the TAF be requested to also waive the 1998 interest of $728,000.

Discussion:

The Toronto Atmospheric Fund (TAF) is an arms length corporation set up to provide funds to promote and give financial support to initiatives contributing to improved atmospheric quality, especially a reduction in the production of Agreenhouse gases@.

A.Operation of the Fund

The TAF Act sets out the rules regarding the Fund's activities, board of directors, legal status, reporting requirements, dissolution, etc. Specifically, the TAF board is comprised of four Council appointed members of the public, three Council members, and three senior City staff, and is authorized to:

(i)promote global climate stabilization through public education, scientific research and technology development;

(ii)promote public understanding of global warming and its implications for the urban environment;

(iii)create and preserve Acarbon sinks@ (trees, for example);

(iv)promote energy conservation and efficiency; and,

(v)provide support and funding for projects related to energy efficiency and global climate stabilization in co-operation with private and/or public entities.

The TAF funds its operations from the proceeds of investing its $23 million equity capital. The bulk of these monies are invested in government bonds as managed by City treasury staff. The largest single investment is a loan to the former City of Toronto for capital street lighting improvements, which at 1997 year-end had an outstanding principal amount of $9.15 million. Combined, the returns on these investments fund annual operating costs such as grants, promotions, consultants fees, and administration, and provide for growth in the Fund's equity at least equal to the increase in the Consumer Price Index (CPI).

The Fund's ability to provide grants is therefore dependent on the Fund's return as compared to the CPI, and accumulated earnings of prior years. This arrangement provides the TAF with a degree of autonomy not available to organizations dependent on annual operating grants. Over the past two years, the TAF has provided grants to outside organizations of about $1.0 million annually (see Appendix A for a list of grants).

However, the last two years also correspond to a period when interest owed by the City of Toronto was waived, at a cost approaching $1 million per year, reducing the Fund's accumulated surplus and constraining future spending activities. While the outstanding principal of the loan to the City remains the Fund's largest investment, continued waiving of interest on the loan may seriously impact the Fund's budgets, unless alternative revenue sources, such as Federal Government sponsorships, are obtained.

The City currently requires financial reserves to meet many challenges, particularly one time capital associated with amalgamation. Given that the TAF originated from City funds, it could be argued that the current arrangement ties up capital ($25.1 million as at year end 1997) which would otherwise be available to the City. Consequently, it was suggested that staff present options to access the capital reserves of TAF.

B.Options to Reclaim TAF Capital Reserves and Continue the Grants

Maintaining TAF: One way for the City to access the capital funds held by TAF without dismantling the Fund is to request additional loans modelled after the previous $15.3 million loan to the former City of Toronto in 1994. By negotiating and committing to an appropriate interest rate the Fund would continue to operate as it does today.

This option was researched and compared to dismantling the Fund by the International Council for Local Environmental Initiatives in a report prepared for the Toronto Transition Team in 1997, entitled AEnsuring Environmental Performance@. The authors identify opportunities within the current structure to invest the TAF's equity reserves in initiatives to reduce the City's energy costs with favourable returns on investment. In this way the City obtains beneficial use of the funds, the Fund generates a return on capital, and the activities of the TAF in promoting and tracking benefits greenhouse gas reductions are maintained.

Arms Length Grant Administration Model: Grants for initiatives deemed to be priorities of the City may be provided in annual budgets to an arm=s length organization (as is the case with the Toronto Arts Council, for example), which then distributes the funds as it deems appropriate. Such organizations may be governed by legislation which specifies the composition of the board of control and the expenditures eligible for funding through such a mechanism, similar to the current legislation governing the Toronto Atmospheric Fund.

In order for the City to recover the capital in the TAF and revert to an annual lump sum grant the TAF may have to be dissolved and reconfigured. Certainly the advantages of operating a revolving investment fund, i.e. perpetual reinvestment in eligible projects, would be foregone. The advantages of this type of arrangement are that the TAF capital reserves would revert to the City with no conditions attached, and the City continues to delegate the grant allocation process, simplifying the budgeting and depoliticizing the specific allocation decisions.

Direct Funding Model: A third method of providing grants is a variation on the above, reclaiming all of the TAF capital reserves, but bringing all decision-making in-house, under the delegated control of the Grants Committee. Each specific grant or initiative may be considered, debated and prioritized as part of the annual budget process. In order to manage the TAF initiatives in this way the Fund would have to be dissolved under the rules in the Act.

A key concern under each of these options is the predictability of program funding, as indicated by the deputants for various grant supported programs at the recent Committee of the Whole budget sessions. Accordingly, a multi-year plan indicating the amount of funding available and the types of grants or investments which would be eligible should be part of any move to restructure the Fund.

Conclusions:

The Toronto Atmospheric Fund as it currently operates is designed to provide a stable funding source for eligible initiatives, but is adversely affected by budget directives in recent years cancelling the interest owed to it by the City. Furthermore, the Fund depends on the access to approximately $25 million in capital. The result is that the capital is unavailable to the City for its identified unfunded employment liabilities and amalgamation related transition costs. Alternative arrangements to maintain a grants program similar to the TAF but gain access to the use of the TAF's capital reserves by the City are described in this report.

Contact Name:

Rob Hatton, telephone: 392-9149, fax: 392-3649

Interim Budget Lead, Urban Environment and Development Committee

Internet: robert_hatton@metrodesk.metrotor.on.ca

W.A. Liczyk

Chief Financial Officer and Treasurer

(A copy of The Toronto Atmospheric Fund Approved Grants for the years 1993 to 1997, is on file in the office of the City Clerk.)