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April 21, 1998



To:Strategic Policies and Priorities Committee

From:City Clerk

Subject:Adjustments to 1997 Surplus and Offsetting 1998 Budget Adjustments

Recommendation:

The Budget Committee on April 20, 1998, recommended to the Strategic Policies and Priorities Committee, and Council, that the loan in the amount of $14.8 million be repaid, using cash generated from the Toronto Transit Commission 1997 unbudgeted revenue, pursuant to the understanding that existed with the former Municipality of Metropolitan Toronto and that it be approved on nunc proctunt basis.

Background:

The Budget Committee on April 20, 1998, had before it a report (April 20, 1998) from the Chief Financial Officer and Treasurer regarding adjustments to 1997 surplus and offsetting 1998 Budget adjustments.

Mr. David Gunn, Chief General Manager, and Mr. Vince Rodo, General Secretary of the Toronto Transit Commission appeared before the Budget Committee in connection with the foregoing matter.

City Clerk

 Barbara Liddiard/rc/cp

Item No. 23

Attachment

 c.Chief Financial Officer and Treasurer

Chief Administrative Officer

General Secretary, Toronto Transit Commission

Mr. Rob Hatton, Finance Department



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

Purpose:

To seek authority to apply an extraordinary 1997 operating surplus of $14.8 million to fund one time 1998 operating budget items consisting of transitional costs of $8.4 million and partial forgiveness of a loan to the Toronto Transit Commission in the amount of $6.4 million.

Funding Sources, Financial Implications and Impact Statement:

The increase in 1997 surplus of $14.8 million due to unapplied TTC operating revenues would reduce the City's 1998 budget requirements but cause a corresponding increase in 1999 if not repeated. Current forecasts from the TTC indicate that this surplus will not be repeated.

The recommended one time provision to corporate amalgamation/transition costs would partially offset the impact of the surplus on the 1998 budget, and cause a corresponding reduction in the need to rely on debt financing for transitional items not currently provided for in the 1998 budget.

The recommended reduction or repayment of $6.4 million of a TTC loan obligation to the former Metro is in lieu of the TTC's planned 1997 loan payment to the City, and recognizes the valuation of the asset securing the debt, specifically the bus terminal property owned by the TTC subsidiary, Metro Toronto Coach Terminal Inc. (MTCTI). In conjunction with the provision to transitional costs, the loan forgiveness eliminates the impact of the 1997 surplus on the 1998 budget requirements.

Recommendations:

It is recommended that:

(i)the TTC debt to the City, currently estimated at $20 million, be reduced by repayment in the amount of $6.4 million, corresponding to the value of the TTC's 1996 write down of assets securing the debt; and,

(ii)an $8.4 million transfer to the ATransition Project Reserve Fund@ be incorporated in the 1998 operating budget.

Council Reference/Background/History:

In 1991 the former Metro Toronto Council approved a loan of $13.6 million to the Toronto Transit Commission to facilitate a cash dividend to the TTC from its wholly owned subsidiary, the Metro Toronto Coach Terminal Inc., and the creation of the Transit Improvement Fund, a reserve intended primarily to provide additional funding for TTC's capital initiatives. The fund was totally depleted in 1995.

The loan amount was based on a valuation of MTCTI's primary asset, the bus terminal building. The MTCTI had borrowed the funds from the TTC, against the value of the terminal, to fund the dividend. The accumulated debt and interest on the loan drew into question the liquidated value of the MTCTI terminal. A 1996 valuation of MTCTI at $12.6 million led the TTC to include an unbudgeted $6.4 million write down of the book value of its loan to the MTCTI, funded from accumulated earnings. Metro did not reduce the value of the TTC loan at that time.

In operating variance reports to Metro Council provided for information, the intention to use 1997 surplus TTC revenues of $14.8 million to facilitate the reduction of the loan obligation to Metro was indicated. However, at no time was explicit Council approval for application of surplus revenue sought or received.

Comments and/or Discussion and/or Justification:

The $14.8 million increase in the 1997 surplus arises from surplus operating and extraordinary revenues accrued by the TTC. In 1997, it had been planned that these funds would be retained by the TTC, facilitating a corresponding loan payment to the former Metro. These intentions were never formally approved by Metro Council. As a consequence, the Metro operating subsidy to the TTC must be reduced by $14.8 million, as confirmed by the City Auditor, increasing the Metro 1997 surplus, and eliminating the TTC's planned loan repayment option.

The increase in surplus would reduce the 1998 net taxation requirements directly. However, since the surplus is deemed unsustainable, it would result in a budget pressure in the 1999 budget year.

Two options can be considered in dealing with these $14.8 million surplus funds.

Option 1 (the previously planned use) would see the entire $14.8 million be applied to reduce the outstanding loan on the City=s books. This would restore the City=s cash position and allow the funds to be invested.

Option 2 would be to apply $6.4 million towards the outstanding loan to bring the outstanding loan down to the value of the asset with the balance of $8.4 million to be used by the City to fund transition projects. At this point in time, the City is financially strapped and these funds could provide much needed funding for transition projects.

It is therefore recommended that the City approve a partial offset to the impact of the surplus, and reduce $6.4 million of the TTC loan obligation to the City. TTC staff indicate that, even with the recommended repayment, it is unlikely that liquidation of the MTCTI would derive sufficient funds to repay the remaining outstanding debt obligation of approximately $13.5 million to the City, suggesting that forgiveness of the loan may be necessary in the future.

A separate report to Budget Committee details the anticipated capital and operating funding requirements for one time transitional costs for the City to deal with amalgamation and related restructuring. The $8.4 million provision to corporate amalgamation/transition costs recommended in this report would offset the remaining impact of the surplus on the 1998 and 1999 budgets, and cause a corresponding reduction in the need to rely on debt financing for transitional items not currently provided for in the 1998 budget.

Conclusion:

The increased 1997 surplus of $14.8 million results from surplus TTC operating and extraordinary revenues. It is recommended that because of the City=s financial pressures with respect to transition funding that the City's 1998 operating budget be adjusted to offset the one-time impact of the surplus through a $6.4 million repayment of a portion of the outstanding debt owed to the City by the TTC and furthermore, that the 1998 budget include a one time provision to corporate amalgamation/ transitional costs, offsetting the remaining portion of the 1998 TTC surplus.

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

 

   
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