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Weekly UpdatesEditor's note: In 2006, the City of Toronto received GFOA's Award for Excellence in Government Finance in the budgeting and financial planning category for its long-term fiscal plan.
Much has been said about a government's need for a long-term financial plan, particularly in this era of constant political change. In this article the process leading up to the establishment of the City of Toronto's plan will be discussed, along with what the plan entails, the outcomes, and some lessons learned.
FINANCIAL BACKGROUND ON TORONTO
The City of Toronto is Canada's largest municipality with a population of 2.6 million. It is located at the core of a larger urban area in south-central Ontario called the Greater Toronto Area, with a population of 5.7 million people. The city is the capital of the Province of Ontario and the city's CAD$10 billion operating and capital budget is larger than any of Canada's Atlantic provinces. Formed from the amalgamation of seven municipalities in 1998, the city is the nation's political, economic, and cultural center, and a major destination for immigrants.
In the early 1990s, the North American economy went through a recession that financially impacted all levels of government. Transfer payments from the Ontario government to municipalities were reduced significantly, particularly for transit operations and transportation. While the 1998 amalgamation exercise achieved significant savings, the demand for services resulted in financial requirements exceeding the city's revenue base. During the same year the Ontario government, under the "Local Services Realignment" initiative, assigned financial responsibilities for a number of income-distributive programs to the city, such as social assistance and social housing, in exchange for assuming part of the funding responsibility for education, which had previously been on the property tax bill. Although the initiative was intended to be revenue neutral, it turned out that the city was, and still is, burdened with ever-increasing net costs.
Ontario Premier Dalton McGuinty once said: "Toronto is the engine of economic growth in Ontario and much of Canada. Its continued economic prosperity and quality of life has to be a priority for all of us. It's a miracle it has delivered prosperity for so long and to so many despite living in a legislative and fiscal straightjacket that would baffle Houdini."
The following three main issues summarize Toronto's structural financial problems:
1. Expenditure pressures due to aging infrastructure, unique demographic mix associated with being Canada's largest and most diverse city, over-inflationary cost increases for many items, e.g. energy, and continuously increasing demand for services, including a tendency for service levels to be raised following amalgamation to the levels provided in other areas.
2. Insufficient revenue growth to support growth in operating and capital requirements, due to legislatively restricted access to non-tax revenue sources, exacerbated by relatively weak commercial/industrial tax competitiveness and generally low annual assessment growth.
3.Asset degradation due to insufficient funding, and growing liabilities to provide for future costs, particularly in the area of employee benefits.
Despite these financial challenges, Toronto's stable AA credit rating (Aa1 from Moody's) positioned the city well for long-term financial planning.
PLAN DEVELOPMENT
In 2001, the Toronto City Council adopted a strategic plan to set out an overall vision, together with a set of goals and directions, for the new City of Toronto. In 2002, a set of fiscal sustainability principles was added to the council's strategic plan. Further, a number of financial policies and funding strategies have been developed and implemented.
The strategic plan ties all program plans together from the fiscal perspective. They include plans for solid waste management, growth strategy and the expansion of public transit, economic development, culture, biking, and other plans. The establishment of the current Long-Term Fiscal Plan provides not only an overarching plan to link these components with a long-term horizon, but also a coordinated approach towards financial decision making for various stakeholders, including council members and city programs and service managers. With the plan in place, the city council can begin to address structural financial problems and related issues. The plan also helps to demonstrate to other levels of government that the city is vigilant in managing its own financial affairs.
The plan was the culmination of almost two years of plan development. The process involved setting anticipated outcomes, problem identification and research, modeling of a long-term financial forecast, development of options, and establishment of a process for the resolution of specific issues. Staff from corporate finance, with inputs from financial planning and other city programs, developed the plan in 2003 and 2004 under the guidance of a special city council committee. The committee was responsible for developing fiscal policies to guide multi-year financial planning within the context of council's strategic plan and special program plans as previously described. Consultations were conducted on a limited basis internally, with inputs from programs and services that were directly impacted. No external consultants were hired and there was no public engagement. Other than the time devoted by council committee and staff, there were only limited incremental out-of-pocket costs related to the production and printing of the document.
COMPLEX ISSUES STRUCTURED IN SIMPLE CONCEPTS
The success of the Long-Term Fiscal Plan depends on balancing three components to achieve long-term fiscal sustainability. They are the main components of the financial statement: revenues, expenditures, and assets and liabilities. This simplified approach helped council members and the public understand the financial problems and the long-term solutions.
Eight financial issues, falling into the three main components, were identified and then strategies were developed to address each issue, consistent with the goal of fiscal sustainability. Exhibit 2 describes the eight financial issues addressed and the actions the city has taken to date. The outcome of this process is a plan with 24 financial strategies, 17 fiscal principles and five financial policies designed to address the financial issues facing the city.
OUTCOMES OF THE LONG-TERM FISCAL PLAN
While the plan was adopted by the city council just over a year ago, it has already begun to lead directly or indirectly to some notable outcomes:
* The plan demonstrates that the city is determined to have continued vigilance on cost control--productivity increases for items that can be controlled and monitored, e.g., continuous service improvement initiatives, council-approved priorities, program reviews, and restrained discretionary spending.
* The plan sets the framework and provides an opportunity for securing new sources of revenues that grow over time, adjusting service funding responsibility, and reforming property taxes as part of a longer-term competitiveness strategy. This includes identifying specific gaps in funding from other levels of government, and identifying programs that other levels of government could support to offset expenditure pressures.
* The plan provides the basis for ongoing financial support for infrastructure support and reserve funding.
* The plan provides an opportunity for recognition by other levels of governments that Toronto requires solutions that may not fit other municipalities. The city achieved a major milestone in June 2006, when the province passed a new City of Toronto Act to modernize the city's statutory powers. The new City of Toronto Act provides some additional revenue options to balance the city's reliance on the property tax.
* The plan provides a strong basis for credit rating agencies to give the city a positive review. In its April 2006 rating considerations for the City of Toronto, Dominion Bond Rating Service acknowledged it expected the city "to maintain a fairly sound credit profile over the next few years, supported by its large and well-diversified economy, good liquidity position, and increased emphasis on financial planning, as evidenced by the release of a detailed long-range financial plan last year and stated intention to adopt a multi-year capital budget framework in 2007."
The plan is intended to serve as a living document. Staff have put together a work plan to update the long-term forecast every year to inform the annual budget process, as well as to lay out the items that need follow-up and to monitor their progress.
PROFESSIONAL REPORTING STANDARD ADVANCED
Another significant standard advanced by the Long-Term Fiscal Plan for the city is the Public Accounting Standards Board reporting standards for Canadian municipalities. The most significant future accounting change currently under study by PSAB is accounting for capital assets at the local level of government similar to the U.S. GASB Statement No. 34 standards. Under the present rules, local governments essentially expense capital assets such as infrastructure, buildings, and vehicles in the year in which they are purchased or built. The value of these assets is not carried on the local government's books. The Long-Term Fiscal Plan will help expedite the process towards the recognition of capital assets properly and consistently There has already been a change towards more vigorous recognition of the city's debts and liabilities in the consolidated financial statements. Examples include housing mortgages of the city's social housing portfolio, capital leases, post-employment employee benefit liabilities, landfill site liabilities, etc. These changes under PSAB requirements have enabled the city to quantify most of its assets and liabilities, recognize the associated financial risks, and develop funding strategies for these assets and liabilities with better certainty. Conversely, the need to have financial strategies in place for certain assets and liabilities has begun to facilitate the process towards quantification of these items. One example is the building condition study for the city's social housing stock.
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