Staff Report #1
August 31, 2022
To All Commissioners
Re: 2023 Operating Budget Program
i) APPROVE the 2023 operating budget program for public transit services allocated as follows:
|Revenue||$ 49,163,600||$ 2,436,500||$ 51,600,100|
|City of London||$ 36,043,200||$ 9,793,600||$ 45,836,800|
|Budget Shortfall||$ 4,648,000||$ 745,400||$ 5,393,400|
ii) DIRECT administration to report back on options to mitigate the budget shortfall at the March 2023 meeting;
iii) DIRECT administration to submit the approved 2023 public transit services operating budget to the civic administration consistent with the City of London’s reporting format
At the August 28, 2019 meeting, the Commission approved the multi-year operating budget for both conventional and specialized services, covering the period 2020 through 2023. The table below sets out the operating budget estimates for total public transit services for each year that were submitted to municipal council as part of the multi-year budget approval process, inclusive of the growth component.
2020-2023 Public Transit Service Operating Budget Estimates – Inclusive of Growth
|Funding Source (millions)||2020||2021||2022||2023|
|Transportation/Other Revenue||$40.061||$ 41.099||$ 42.241||$ 43.434|
|Provincial Gas Tax||9.232||9.211||9.399||9.589|
|City of London||38.956||42.235||44.683||47.340|
|Total Operating Budget||$ 88.249||$ 92.545||$ 96.323||$ 100.363|
|City of London Increase/Previous Year||8.4%||5.8%||5.9%|
|Provincial Gas Tax||10.5%||10.0%||9.8%||9.6%|
|City of London||44.1%||45.6%||46.4%||47.2%|
The budgets set out in the table above included growth of approximately 18,000 annualized service hours per year for conventional service and 6,000 annualized service hours per year for specialized service, noting when presented to Council, the budget was split between a base budget increase (based on status quo levels of service) and growth budgets, which have traditionally been separated from the annual budget approval process for consideration for funding from assessment growth.
With the onset of the global pandemic in March 2020 the operating budgets in each of the years have been significantly impacted. With the movements in and out of lockdown, and the corresponding impact on a once stable and consistent sector, the ability to provide timely and accurate budgets and forecasts has become increasingly difficult. The confirmation of Safe Restart Funding in August 2020 ensured the balancing of the 2020 and 2021 budgets and further enhancements to the program enabled the funding to be utilized through December 2022 to support the ongoing budgetary impacts in the 2022 fiscal year.
In light of the many uncertainties, the 2021 and 2022 budget reports were broken into two separate components, with separate recommendations. The first component set out the base operating budget for both conventional and specialized services, which provided for status quo levels of service. These budgets represented the costs of continuing to deliver current service levels, with consideration to base program changes, unit price increases and COVID-19 related impacts. The second component of the report presented the budgets associated with implementing the planned service growth on both the Conventional and Specialized services, noting any funding associated with that budget request would be directed to an assessment growth business case. The service growth budgets and accompanying conventional service plans for both 2021 and 2022 have been approved but not yet implemented. The delays in implementation are the result of the challenges in reaching the required Operator complement to be able to deliver the service. The pause in hiring during the peak periods of the pandemic resulted in a significant reduction in complement, primarily related to retirements that were taken during the same period. This shortfall, coupled with the need for an additional 22 Operators to provide the incremental hours associated with the 2021 and 2022 service plans, has resulted in a labour shortfall and deferral of the implementation of the additional hours. A similar situation is ongoing with the specialized service as the contracted service provider continues to struggle to reach the complement levels required to implement the increased service hours associated with the 2021 and 2022 service growth budgets. Given the outstanding service hour improvements yet to be implemented, coupled with the estimated timelines associated with reaching the required employee complement, there is no service growth budget being recommended for the 2023 operating budget. The remainder of 2022 and 2023 will be utilized to implement the outstanding service improvements, and realign services as may be necessary due to changing ridership patterns.
The remainder of this report provides greater detail with respect to the base or ‘status quo’ operating budgets for both the conventional and specialized transit services.
Conventional Transit Service – Base Operating Budget
In order to complete the 2023 budget, a number of key assumptions were applied, most of which are consistent with those utilized to complete the 2022 projected actual (forecast). Key assumptions include:
- ridership and related revenue in the cash, ticket and monthly pass categories to continue the rebounding trend throughout the remainder of 2022 and set to achieve pre-pandemic levels in 2023;
- ridership and related revenue in the tuition pass programs is estimated to be at 100% of pre-pandemic levels for both Western University and Fanshawe College; and
- service levels will be incrementally adjusted to incorporate both 2021 and 2022 service growth hours by the end of 2023.
The conventional transit operating budget accounts for 87% or $89.85 million of the total $102.830 million transit operating investment. The balance applies to the specialized transit service which is discussed later in this report. Summary particulars of the make-up of the Conventional transit operating budget are provided on page 2 of Enclosure I.
The following table sets out the operating investment share breakdown for 2023 as compared to 2022 projected actual results.
2023 Base Operating Budget Summary – Conventional Transit Services
|Category||2022 Projected Actual||2023 Budget||Total Variance||% Variance|
|Transportation revenue||$ 29.584||$ 37.879||$ 8.295||28.0%|
|Transfer from reserves||1.122||1.122||0.000||0.0%|
|Provincial Gas Tax||9.585||8.872||(0.713)||(7.4)%|
|$ 41.474||$ 49.164||$ 7.690||18.5%|
|Personnel cost||$ 54.925||$ 59.178||$ 4.253||7.7%|
|Direct bus maintenance/servicing||7.245||7.493||0.248||3.4%|
|Contributions to reserves||0.960||0.962||0.002||0.2%|
|All other material costs||3.733||3.793||0.060||1.6%|
|Total Expenditure||$ 84.741||$ 89.855||$ 5.114||6.0%|
|City of London||$ 33.879||$ 36.043||$ 2.165||6.4%|
|Safe Restart Funding||$ 6.676||–||$ (6.676)|
|Operating Shortfall||$ 2.712||$ 4.648||$ (1.936)|
|Provincial Gas Tax||11.3%||9.9%||(1.4)%||(12.7)%|
|City of London||40.0%||40.1%||0.1%||0.3%|
|Safe Restart Funding||7.9%||0.0%||(7.9)%||(100.0)%|
Operating Revenue Investment
The approximate $49.164 million in identified operating revenues is comprised of:
- $37.879 million in transportation revenue which is directly related to ridership and fares;
- $1.291 million in operating revenues – primarily associated with advertising contracts for shelters, buses and benches and investment income including interest earned on reserve funds;
- $1.122 million transferred from reserves in support of operating investment; and
- $8.872 million Provincial Gas Tax allocation.
The above sources support 54.7% of budgeted operating expenditure investment in 2023, which is down slightly from the approximate 60% which has been the basis for the funding model over the past number of years. While it is anticipated that the revenue sources above can again grow to reach the traditional levels, it is not deemed possible at this time given the uncertainties with respect to impacts COVID may continue to have throughout 2023.
Transportation revenues traditionally support approximately 48% of operating expenditure investment; however, given the assumptions for 2023 with respect to ridership and related revenue and the lingering impacts of the pandemic, are anticipated to support only 42%.
Operating revenue includes advertising revenue, interest from the Commission’s operating and reserve funds, as well as miscellaneous other revenues. Advertising revenue is slightly higher compared to 2022 due to a previous reduction in bus advertising revenue requested by the vendor due to the impact of the pandemic on the industry in 2021 & 2022.
The funds transferred from reserves include a transfer from the public liability reserve fund offsetting the accident benefit and public liability deductible costs. The level remains unchanged in 2023 as compared to 2022.
In 2023, $8.872 million is the required allocation from the Provincial Gas Tax reserve for the base budget approval as well as additional base program changes.
Operating Expenditure Investment
The overall operating expenditure investment for 2023 is budgeted to increase by 6.0% or approximately $5.114 million vs. 2022 projected actual results. The 6.0% increase is comprised of:
- $1.603 million in unit price and base program increases for such items as fuel, energy, insurance and personnel costs. These increases account for a 1.9% increase in overall investment;
- $2.339 million relating to service levels increasing over those provided in 2022, resulting in the associated costs in personnel, fuel, direct bus maintenance all increasing at a proportionate rate;
- $0.879 million pertaining to the 2022 flow thru service hours set to be implemented in 2023, noting the 2023 budget includes the addition of approximately 36,000 additional service hours as compared to pre-COVID levels; and
- $0.292 million in base program changes, primarily relating to insurance and direct bus maintenance cost increases.
The following provides further discussion with respect to the most significant drivers of the increase in the expenditure budget for the Conventional transit services for 2023 versus 2022 projections.
Personnel costs include salaries, wages and employment benefits for 617.5 budgeted full-time equivalent conventional transit employees. Personnel cost accounts for approximately 66% of the annual operating expenditure investment for conventional transit.
As set out above, personnel cost investment is budgeted to increase by 7.7% or some $4.3 million over 2022 projections. The increase is comprised of the following:
- 2.1% increase or $1.186 million relating to unit price. The unit price respecting salaries, wages, including movement along the pay grid is as provided by the Collective Agreement and Employment Policy Statements as well as new positions. The unit price relating to employment benefits, both Commission-provided and statutory benefits is as determined by supplier contracts, benefit utilization experience or as set by governing authority;
- 4.4% increase or $2.402 million relating to the return to higher service levels in 2023, resulting in increases in payroll hours as well as related employment benefit costs;
- 1.1% increase or $0.628 million relating to the approved 2022 service growth flow through hours slated to be implemented in 2023; and
- 0.1% increase or $0.038 million relating to adjustments in program delivery not included in the previous multi-year budget.
As set out above, fuel expenditures are budgeted to increase by 3.1% or $0.321 million. The increase is comprised of the following:
- 1.1% increase or $0.118 million relating the unit price. Fuel rates in 2022 jumped significantly due to the Russia / Ukraine conflict and have remained somewhat unstable and higher than budget as a result. This trend is anticipated to continue into 2023 and has been budgeted accordingly;
- 2.1% increase or $0.223 million relating to a return to higher service levels, resulting in increase fuel requirements;
- 1.2% increase or $0.128 relating to the approved 2022 service growth hours slated to be implemented in 2023; and
- 1.4% decrease or $0.149 million relating to adjustments in program delivery not included in the previous multi-year budget.
As noted, fuel prices during 2022 were significantly higher than budget and the current level being witnessed has been used to set the price for 2023. It is still unknown whether prices will remain volatile and whether the current prices will remain high in comparison to recent years. Historically, any net annual favourable/unfavourable price performance impacts will be applied to/or funded from the Energy Management Reserve, however it should be noted that the projected shortfall in 2022 due to fuel pricing would essentially deplete the reserve thus an alternative funding source for 2023 shortfalls would be required.
Direct Bus Maintenance and Servicing
Direct bus maintenance and servicing investment for 2023 totals approximately $7.493 million, representing an increase of 3.4%. Similar to personnel and fuel expenditures, direct bus maintenance follows a similar variable expenditure cost model with the $0.248 million increase being comprised of unit price increases (1.6%), increased service levels and resulting increased maintenance (3.2%), approved 2022 service growth (1.5%), and base program changes (3.5%).
Operating Budget Shortfall
Given that municipalities and transit systems by extension are not allowed to operate at a deficit as a requirement of the Municipal Act, the recommendation of a budget with a projected shortfall is not a normal practice; however, the onset of the COVID-19 pandemic has resulted in many aspects of operations being far from normal. As was the method in 2021 and 2022, the 2023 budget is being presented with a shortfall that is attributed to the anticipated impact of the pandemic in 2023.
As noted in the earlier table, the 2022 projected actual is currently estimated to result in an operating shortfall (deficit) of $2.712 million. During the recosting process for the 2022 operating budget completed in March, a shortfall of $1.538 million was identified, with the sole contributor being increased fuel prices as noted above. Continued fuel price increases since that point, together with the assumption of prices remaining at current levels for the remainder of the year, result in an additional shortfall of $1.174 million, or $2.712 million overall. The Energy Management Reserve is the most likely funding source for this shortfall and its current level of $3.2 million is in a position to support this. Many other factors at year end, along with the actual prices paid in August through December, will also impact the decision as to where the most optimal source of funding lies.
The Safe Restart Funding discussed above has been approved to cover approved shortfalls for the period up to December 31, 2022. As a result, current projected COVID impacts in 2022 can be sustained through the level of funding received to date from Safe Restart.
The overall operating budget shortfall for 2023 is currently anticipated to be $4.648 million, or 5.2% of operating investment. This 5.2% shortfall is comprised of the following:
- 1.8% or $1.645 million shortfall due to the ongoing COVID impact on transportation revenue. Anticipated service growth and ongoing increased average fare assumptions within the original multi-year budget have not materialized and are the main contributor to the transportation revenue shortfall;
- 3.0% or $2.712 million shortfall due to higher than previously planned fuel prices. This is essentially the shortfall from 2022, and may require alternative funding sources for 2023 given the limit within the Energy Management Reserve; and
- 3% or $0.291 million shortfall due to higher than previously planned insurance costs as well as other lingering COVID impacts on operating expenditures.
The intent of the report recommendation to approve the 2023 base operating budget is not to end the 2023 fiscal year with an operating deficit, but rather to provide staff with the general direction relating to the service levels that should be planned to be delivered in 2023. From the onset of the pandemic declaration, through shutdowns and re-openings, the need for public transit has been evident across the country. Locally, London Transit continued to provide service to and from work to front-line workers, many of whom were declared essential through the pandemic period. While ridership has not rebounded completely in 2022 and is uncertain as to where things will fall in 2023, it is also not recommended that service levels be reduced below those that were in place pre-pandemic. The investments made over the last number of years to improve public transit services in London have been significant, and have met their objectives. Any significant reductions to service levels has the potential to reverse these gains, and result in further ridership losses above those related to COVID-19.
Consistent with the 2021 and 2022 operating budget shortfall, there are a number of options that can be utilized to address it, including the following:
- Funding from the Safe Restart Program, noting the current parameters of this funding program will only cover budget shortfalls relating to COVID-19 through December 2022;
- Use of Commission reserves, to the extent necessary;
- Reductions in service levels given slower than anticipated ridership rebound;
- Reductions in other expenditure programs;
- Increased investment from the City of London;
- Use of any new funding programs established by senior levels of government noting advocacy efforts continue in earnest given the anticipated longer-term nature of the COVID-19 related budget implications. Both the Provincial and Federal governments have recognized the impacts on public transit to be longer term than the current funding programs provide for, and conversations with respect to this are ongoing.
As set out in report recommendation ii), administration will report back in March 2023 with a recosted budget considering actual experience over the next six months as well as options to address any remaining operating budget shortfall for 2023.
Specialized Transit Services – 2023 Base Operating Budget Program
In order to complete the 2023 budget, a number of key assumptions were applied, including:
- ridership and related revenue to continue the rebounding trend throughout the remainder of 2022 and set to achieve pre-pandemic levels in 2023; and
- service levels would return to 100% of what would normally be in place for the year based on an annualized 2022 service including the 2021 and 2022 growth hours.
The specialized transit operating budget accounts for 13% or $12.976 million of the total $102.830 million transit operating investment. Summary particulars of the make-up of the specialized transit operating budget are set out on page 3 of Enclosure I.
The following table sets out the 2023 Base Operating Budget as compared to 2022 projected actual results.
2023 Base Operating Budget Summary – Specialized Transit Services
|Category||2022 Projected Actual||2023 Budget||Total Variance||% Variance|
|Transportation revenue||$ 0.430||$ 0.631||$ 0.201||46.6%|
|Provincial Gas Tax||1.769||1.806||0.037||2.1%|
|$ 2.199||$ 2.437||$ 0.238||10.8%|
|Personnel cost||$ 1.223||$ 1.344||$ 0.121||9.9%|
|All other material costs||0.261||0.274||0.013||4.8%|
|Total Expenditure||$ 9.523||$ 12.976||$ 3.453||36.3%|
|City of London||$ 9.401||$ 9.794||$ 0.392||4.2%|
|Safe Restart Funding||$ (2.077)||$ –||$ 2.077|
|Operating Deficit||$ –||$ 0.745||$ 0.745|
|Provincial Gas Tax||18.6%||13.9%||(4.7)%||(25.1)%|
|City of London||98.7%||75.5%||(23.2)%||(23.5)%|
Operating Expenditure Investment
As set out above, overall operating expenditure investment for the 2023 specialized transit service is budgeted to increase by 36.3% or $3.453 million versus the 2022 projected actual results bringing the total operating investment to $12.976 million. The 36.3% increase results from:
- $0.248 million in planned unit price increases for contracted service and personnel costs;
- $2.294 million related solely to service level increases over reduced levels provided in 2022;
- $0.195 million pertaining to the 2022 flow thru service hours set to be implemented in 2023, noting the 2023 budget includes the addition of approximately 12,000 additional service hours as compared to pre-COVID levels; and
- $0.716 million increase in base program changes due mainly to the increase in contracted services (price).
The following provides further discussion with respect to the most significant factors in the increase in the expenditure budget for Specialized transit services for 2023 versus 2022 projections.
Personnel costs cover salaries, wages and employment benefits for 13.5 staff. The unit price respecting salaries and wages includes movement along the pay grid is as provided by the respective Employment Policy Statements and benefit contracts. The unit price relating to employee benefits, both Commission-provided and statutory benefits, is as determined by the supplier contracts, benefit utilization experience or as set by governing authority.
The increase in 2023 over 2022 pertains to the increase in labour and benefit rates.
Contracted Service Delivery Costs
The delivery of the specialized service is provided via service contract, which covers the provision of drivers and vehicles. The contract is based on hourly rates for service, and is subject to annual increases based on the change in consumer price index relating to transportation costs. As noted, contract delivery costs are expected to increase by $3.319 million or 41.3%, comprised of the following:
- $0.214 million in approved, multi-year budget, unit price increases as provided by service contracts;
- $2.487 million relating to the increased service levels in 2023 including the additional hours associated with the 2021 and 2022 service growth; and
- $0.617 million increase due to the impact of the annual CPI adjustment to the contracted service rate, updated as of August 1, 2022. This impact is the price impact beyond what was included in the initial multi-year budget amount.
Specialized Operating Budget Shortfall
Similar to the conventional transit operating budget, the specialized transit services operating budget is also presenting with a budget shortfall of $0.745 million. As all base funding and prior growth budgets have been fully funded through the multi-year and assessment growth budget processes, any material deviations from this require attention / funding. Generally, smaller increases have been balanced utilizing either City funding increases, expenditure reductions or an increase in provincial gas tax funding. However, since late 2021, the global economy, with Canada being no exception, has witnessed significant inflationary increases and the impact on specialized transit services is quite material. The contract for specialized services includes an annual increase based on CPI, with the full year impact of the August 1, 2022 price change resulting in a $0.617 million expenditure increase higher than planned.
Although this shortfall isn’t as significant compared to the conventional services one, it has been presented similarly in order to highlight this change and provide for discussion concerning potential sources of funding to cover the increase.
The same options exist for addressing any shortfall in the specialized budget that are set out earlier in this report for the conventional budget shortfall. As set out in report recommendation ii), administration will report back in March 2023 with a recosted budget considering actual experience over the next six months as well as options to address any remaining operating budget shortfall for 2023.
Conventional & Specialized Transit Service – Growth Budget
At the February 27, 2019 meeting, the Commission approved the 5 Year Conventional Service Plan Framework which provides for service improvements and monitoring of same for the period of 2020-2024. The timing and implementation of the recommended service improvements align with the planned move to a rapid transit platform, ensuring the base route structure and service frequencies will be at the required levels to support the future rapid transit corridors, and as importantly, addressing the current service quality issues relating to schedule adherence, demand for expanded services into industrial areas and system-wide frequency improvements.
At the April 29, 2020 meeting, the Commission approved the deferral of the planned 2020 service growth, with a recommendation for reconsideration in 2021 and subsequently approved the implementation of these hours at the January 27, 2021 meeting. Planned service increases for 2022 were also approved at the March 30th, 2022 commission meeting. These annualized hours have been included in the base budgets recommended in this report.
As discussed earlier in this report, given the amount of outstanding service improvements that have been approved to date and not yet implemented (approximately 40,000 hours on conventional and 18,000 on specialized), administration is not recommending any additional growth for either of the services as part of the 2023 operating budget. The remainder of 2022 and 2023 will be utilized to incrementally implement the additional hours on both of the services as resource availability permits.
While there are no growth hours associated with the 2023 operating budget, the conventional transit service planning process will continue to be undertaken in 2023, but with a focus on any realignments of service that is recommended based on changing ridership patterns. Any changes recommended in the 2023 Conventional Transit Service Plan would be implemented within the existing service hours budgeted.
With respect to the specialized service, service bookings and request will continue to be monitored to identify areas where demand is not being met, and service hours will be adjusted accordingly when resource availability permits.
City of London Budget Presentation
Subsequent to Commission approval of the 2023 base operating budget as presented in this report, administration will reformat the presentation to be consistent with the standard presentation format utilized for all civic departments, boards and commissions.
Mike Gregor, Director of Finance
Katie Burns, Director of Planning
Joanne Galloway, Director of Human Resources
Craig Morneau, Director of Fleet & Facilities
Concurred in by:
Kelly S. Paleczny, General Manager