Item - 2016.EX15.1

The City Manager gave a presentation on the City of Toronto's Long-term Financial Direction.

The Executive Committee recommends that:

1.  City Council request the City Manager and the Deputy City Manager and Chief Financial Officer to report in the fall of 2016 on a framework for the City's multi-year financial and budget process.

2.  City Council request the City Manager and the Deputy City Manager and Chief Financial Officer to report in the fall of 2016 on strategies and processes to strengthen the City's strategic decision-making and financial oversight that will:

a.  support Council in setting priorities and outcomes in order to deliver its strategic agenda;

b.  have a multi-year focus;

c.  integrate program planning for City services and the infrastructure delivered by City programs, through divisions and agencies, with the City's financial planning and budgeting to achieve the strategic allocation of resources to meet intended outcomes; and

d.  strengthen the City's financial management and oversight of City programs and agencies.

3.  City Council request the City Manager and the Deputy City Manager and Chief Financial Officer to report in the fall of 2016 on the framework for a multi-year Expenditure Management Plan, which should include short-term and long-term strategies to deliver a business transformation program that:

a.  modernizes processes, improves productivity, embeds efficiencies to achieve excellence in service delivery and maximizes value for residents; and

b.  strategically manages assets to maximize their use in supporting service delivery.

4.  City Council request the City Manager and the Deputy City Manager and Chief Financial Officer to report in the fall of 2016 on multi-year revenue strategy that:

a.  examines ways the City can optimize revenue generation from existing and new sources;

b.  identifies implementation costs, timing, and the sustainability of revenue options;

c.  establishes principles to guide the selection of potential revenues; and

d.  establishes a framework for the further application of both existing and new revenues.

5.  City Council request the City Manager and the Deputy City Manager and Chief Financial Officer to undertake an asset optimization study, including consideration of how possible proceeds could be used to address the City's capital deficit through the City Building Fund and report in the fall of 2016.

6. City Council direct the Deputy City Manager and Chief Financial Officer to prepare a fiscal impact summary for each Council meeting which summarizes the financial and staffing implications of Standing Committee reports on that agenda.

The City Manager and the Deputy City Manager and Chief Financial Officer gave a presentation on the City of Toronto's Long-term Financial Direction.

This is a report on the long-term financial outlook for the City of Toronto.

The City of Toronto is the sixth largest government in Canada, with a total 2016 operating and capital budget of nearly $15 billion. This represents an investment of over $5,200 per resident, supporting services vital to our community and economy.

The budget is decided by City Council on an annual basis. This is a highly transparent process, providing detailed financial data and encouraging public participation.

This report explores the underlying conditions of City finances by reviewing the expense and revenue patterns of recent budgets. The past six years demonstrate a consistent pattern and are the focus of this analysis.

In order to provide the clearest understanding of the total cost and levels of municipal services, the analysis is primarily focused on overall (gross) expenses and revenues. Where appropriate, data are adjusted to ensure comparability over time. The general approach is to broaden discussion from the short-term narratives that typically dominate a single budget cycle.

The basic patterns of the recent past are straightforward. Overall City expenses have been constrained over the past six years, rising much more slowly than earlier periods. Costs have declined slightly when adjusted for the combined effects of inflation and population growth.

This expense constraint has been supported by savings from cost-shared social programs and deferrals of operating and, particularly, capital expense. The practice of deferring necessary expense is most evident in the increased number of unfunded capital projects and priorities, now estimated at up to $29 billion over 15 years.

On the revenue side, reliance on property tax has decreased over the past six years. When adjusted for price inflation, property tax revenues have also actually decreased since 2010. Overall revenue growth has been supported by increases in utility rates for water and solid waste, Toronto Transit Commission (TTC) fares and other user fees and rapid growth in Municipal Land Transfer Tax (MLTT) revenues.

Each of these expense and revenue conditions has been critical in supporting the balanced budgets and selective increases in services achieved over the past six years. The analysis strongly suggests that the positive circumstances of the recent past are unlikely to continue and, at the very least, cannot form the basis for responsible future fiscal planning.

The report also provides a basic forecast of future expense pressures and revenue performance, adopting both a longer time frame and building in key inputs from City agencies. This analysis is necessarily high-level and will be subject to revision as Council provides specific direction and additional data emerges over time.

Quantitative projections confirm notable expense challenges in the future, in addition to typical labour and material cost pressures.

Projected expense pressures include:

-  funding requirements for TTC and Toronto Community Housing Corporation (TCHC)

-  annualized costs related to earlier capital and operating commitments

-  addressing prior year deferrals of employee benefit liabilities and adjustment in response to the loss of the Toronto Pooling Compensation grant.

At the same time, it is anticipated that revenue growth will slow in the absence of policy changes.

Projected overall revenues for future years will be influenced by:

-  continued low growth in property tax revenues

-  leveling off of increases related water and solid waste charges, TTC fares and other user fees

-  anticipated maturity of Municipal Land Transfer Tax revenues.

Looking towards future years, there are unlikely to be quick solutions or shortcuts to achieve balanced budgets as:

-  annual surpluses are falling and are, at any rate, an essential element of the already inadequate capital finance strategy

-  reserve funds are already at relatively low levels compared to other jurisdictions

-  funding from the governments of Ontario and Canada will be essential to City building, but cannot replace long-term gaps in operating funding or fully offset unmet capital needs.

The overall gap between expense and revenue will likely draw attention. The intention is explicitly not to set off a sense of immediate urgency, expense slashing or revenue grab.

It is more important to focus on shifting the underlying structure of both expense and revenue management than to search for short-term measures. In a very real way, decisions over a number of years have made both further expense tightening and revenue increases inevitable. It is no longer appropriate or feasible to defer difficult financial decisions to future years.

The time has come for a direct conversation concerning the City's finances.

Remediation cannot be accomplished in a single step or outlined in a single report. It is not possible or appropriate to jump from diagnosis to solution in the absence of a meaningful engagement with Council and Toronto's residents and businesses. The problems have developed over years, and solutions will take both time and effort.

The report therefore outlines a series of principles and directions to guide the development of new strategies to manage expense and expand revenue.

Many of the principles and potential measures to be considered will be controversial. But real change will be required to ensure the City's financial stability into the future and to support Council's policy direction to invest in and support the growth of our community.

The 2017 Budget cycle will overlap with the long-term considerations described in this report. The pressures expected for 2017 may pose challenges. As the City undertakes the budget process over the coming months, it will be important to ensure consistency between decisions taken in the short-term and the City's emerging long-term priorities.