Staff Report #2
August 26, 2020
To All Commissioners
Re: 2020 Operating Budget Forecast
Recommendations
That the report be NOTED and FILED.
Background
At the August 28, 2019 meeting, the Commission approved a multi-year operating budget for both conventional and specialized services, covering the period of 2020 through 2023. The base operating budget for 2020 was approved by Municipal Council as submitted, noting the submission was split between a base budget increase (based on status quo levels of service) and growth budgets, which are split out of the annual budget approval process for consideration for funding from assessment growth. Given the declaration of the pandemic in early March, decisions with respect to any growth-related business cases were put on hold, and as such, the Commission passed a resolution deferring the service plan improvements for 2020 for consideration in 2021 (see Staff Report #4, dated April 29, 2020). The tables below set out the revised 2020 operating budget for Conventional and Specialized transit services inclusive of all of the aforementioned approvals and changes.
Given the significant impacts to the operating budget that have resulted from continuing to deliver public transit services throughout the pandemic period, a key starting point for the preparation of the 2021 Operating Budget exercise was a detailed assessment of the 2020 operating budget, including the calculation of projections through to the end of the calendar year. This data was utilized as the starting point for the 2021 operating budget review.
Conventional Transit Service
From March through July, the Commission has been provided with monthly financial reports that indicated the operating shortfalls accumulated to date, as well as the identification of potential funding sources for same. Estimates throughout this period have been provided as worse-case scenario given a number of uncertainties remained with respect to revenue projections relating to the tuition pass programs. The required reconciliations with both Western and Fanshawe have been undertaken, providing much more clarity with respect to the revenue projections for 2020 relating to these programs.
The table below sets out both the approved 2020 conventional operating budget exclusive of the growth component which was removed as part of the recosting exercise when the 2020 Service Plan was deferred, as well as the projected actual and variances.
2020 Conventional Transit Operating Budget
| 2020 Budget | 2020 Projected | Variance | % Variance | |
| Revenue | ||||
| Transportation Revenue | $37,334,200 | $21,353,900 | $(15,980,300) | (42.8)% |
| Operating Revenue | 1,337,200 | 1,279,900 | (57,300) | (4.3)% |
| Transfer from Reserves | 621,600 | 871,600 | 250,000 | 40.2% |
| Provincial Gas Tax | 7,500,700 | 8,030,000 | 529,300 | 7.1% |
| Total Revenue | $46,793,700 | $31,535,400 | $(15,258,300) | (32.6)% |
| Expenditures | ||||
| Personnel Cost | $52,864,400 | $50,369,500 | $(2,494,900) | (4.7)% |
| Fuel | 7,296,400 | 5,573,900 | (1,722,500) | (23.6)% |
| Direct Bus Maintenance | 6,516,100 | 6,456,300 | (59,800) | (0.9)% |
| Facility | 3,285,300 | 3,136,300 | (149,000) | (4.5)% |
| Insurance | 2,526,300 | 3,078,600 | 552,300 | 21.9% |
| Contributions to reserves | 1,038,400 | 1,288,400 | 250,000 | 24.1% |
| All other material costs | 3,223,700 | 3,402,600 | 178,900 | 5.5% |
| Total Expenditures | $76,750,600 | $73,305,600 | $(3,445,000) | (4.5)% |
| City of London | $29,956,900 | $29,090,900 | $ (866,000) | (2.9)% |
| Operating Shortfall | $ – | $12,679,300 | $12,679,300 |
It is important to recognize that the numbers included in the projections are based on assumptions given what is known today, as has been experienced over the past number of months, and changes with respect to the status of the pandemic have the potential to significantly impact these projections. As such, these numbers should be regarded as a best estimate at the time, noting they are subject to significant shifts through the remainder of the year.
In order to complete the projections for 2020, a number of assumptions were utilized, the key ones being:
- ridership and related revenue in the cash, ticket and monthly pass categories would continue to hover at approximately 55% of what would normally be expected;
- ridership and related revenue in the tuition pass programs is based on the estimated number of students anticipated to attend campus for the 2020/2021 academic year as well as updated for the 2019/2020 academic year based on reconciliations with Western and Fanshawe;
- service levels would remain at approximately 90% of what would normally be in place for the remainder of the year;
- an increase is expected for insurance claims given the recent increase in deductible; and
- additional expenditures for ongoing COVID-related cleaning protocols (bus and facility cleaning), driver protection (masks and hand sanitizer) projected for the remainder of the year.
Revenue Projections
The key assumptions with respect to transportation revenue are set out above. As indicated, reconciliations for the 2019/2020 academic year (covering January through August of 2020), have been completed, and as such, the revenue for these programs has been adjusted. The revenue relating to the cash, ticket and pass categories is based on ridership in each of those categories remaining at the current 55% of what would normally be expected. This assumption is based on the slowing rate of ridership increase experienced in August, coupled with the experience of other transit systems of a slight dip in ridership coincident with the re-introduction of fares. As indicated earlier in this report, these assumptions are subject to significant variations through the remainder of the year dependent upon a number of factors, and as such, will continue to be monitored closely.
Performance to date, coupled with the aforementioned assumptions result in ridership projections being significantly less than the 2020 original budget, details of which are set out in the table below.
2020 Conventional Transit Operating Budget
| 2020 Budget | 2020 Projected | Variance | % Variance | |
| Ridership | 24,192,700 | 16,186,700 | (8,006,000) | (33.1)% |
| Rides per Revenue Service Hour | 36.1 | 27.4 | (8.7) | (24.1)% |
| Rides per Capita | 58.5 | 39.1 | (19.4) | (33.1)% |
The increase in the transfer from reserves included in the projection is related to an anticipated increase in claims costs given the July 1, 2020 increase in deductible from $50,000 to $100,000. Given the LTC utilizes the Public Liability Reserve to fund the insurance claims, a projected increase in expenditures triggers an offsetting increase in funding.
Finally, the Provincial Gas Tax (PGT) allocation has been adjusted to reflect the adjustment in funding sources approved by Municipal Council which increased PGT funding on the operating budget and decreased PGT by the same amount on the capital budget. Additionally, this allocation has been adjusted to keep the PGT allocation to operations consistent with the budgeted 9.8% investment share for 2020.
Expenditure Projections
As indicated above, one of the key assumptions driving the expenditure projections is the assumption that service levels will continue to operate at approximately 90% of normal through the remainder of the year.
The decrease in personnel costs reflected in the projections are the result of the service level assumption. This assumption is based on the anticipated ridership volumes, coupled with the expectations for resource availability through the remainder of the year. Should ridership numbers exceed projections, there may be a need to increase service levels prior to the end of the year, and as such, this projection could be altered significantly as well.
The projections for fuel savings relate to a combination of price and consumption. Actual results to date have witnessed a significant price decrease as well as a reduction in consumption given lower service hours. The projection has been modified to include the reduced consumption anticipated as result of a lower level of service anticipated. As fuel prices have been extremely volatile, no change in price from budget has been projected for the remainder of the year.
As noted above, insurance expenditures are projected to exceed budget due to an anticipated increase in claims. The result is an increase in insurance costs as well as a corresponding increase in a contribution to the reserve to fund the increases. The net impact is projected to be a $250,000 increase for claims as well as a $302,000 increase in premiums associated with the July 1, 2020 insurance program renewal.
The projection also includes the provision for the continuance of increased expenditures to support enhanced cleaning and sanitizing efforts as well as glove and mask protection for operators and staff where required.
Specialized Transit Service
The table below sets out both the approved 2020 Specialized operating budget exclusive of the growth component which was removed as part of the recosting exercise when the 2020 Service Plan was deferred, as well as the projected actual and variances.
2020 Specialized Transit Operating Budget
| 2020 Budget | 2020 Projected | Variance | % Variance | |
| Revenue | ||||
| Transportation Revenue | $ 621,100 | $ 244,800 | $ (376,300) | (60.6)% |
| Provincial Gas Tax | 1,731,100 | 1,487,300 | (243,800) | (14.1)% |
| Total Revenue | $ 2,352,200 | $ 1,732,100 | $ (620,100) | (16.0%) |
| Expenditures | ||||
| Personnel Cost | $ 1,180,400 | $ 1,095,400 | $ (85,000) | (7.2)% |
| Contracted Services | 8,820,000 | 7,460,400 | 1,359,600 | (15.4)% |
| All other material costs | 254,700 | 254,700 | – | 0.0% |
| Total Expenditures | $ 10,255,100 | $ 8,810,500 | $ 1,444,600 | (14.1)% |
| City of London | $ 7,902,900 | $ 7,902,900 | $ – | 0.0% |
| Operating Surplus | $ – | $ 824,500 | $ 824,500 |
It is important to recognize that the numbers included in the projections are based on assumptions given what is known today, as has been experienced over the past number of months, and changes with respect to the status of the pandemic have the potential to significantly impact these projections. As such, these numbers should be regarded as a best estimate at the time, noting they are subject to significant shifts through the remainder of the year.
In order to complete the projections for 2020, a number of assumptions were utilized, the key ones being:
- ridership and related revenue would continue to hover at an average of approximately 40% of what would normally be expected for the remainder of the year; and
- service levels would be slowly adjusted to meet demand through the remainder of the year;
Revenue Projections
The key assumptions with respect to transportation revenue are set out above. As indicated earlier in this report, these assumptions are subject to significant variations through the remainder of the year dependent upon a number of factors, and as such, will continue to be monitored closely.
Performance to date, coupled with the aforementioned assumptions result in ridership projections being significantly less than the 2020 original budget, details of which are set out in the table below.
2020 Specialized Transit Operating Budget
| 2020 Budget | 2020 Projected | Variance | % Variance | |
| Ridership (Trips) | 359,100 | 152,400 | (206,700) | (57.6)% |
| Rides per Revenue Service Hour | 2.33 | 1.17 | (1.16) | (49.9)% |
| Rides per Capita | 0.87 | 0.37 | (0.50) | (57.6)% |
The Provincial Gas Tax (PGT) allocation has been adjusted to reflect the PGT allocation to operations consistent with the budgeted 16.9% investment share for 2020.
Expenditure Projections
As indicated above, one of the key assumptions driving the expenditure projections is the assumption that service levels will operate at an average of approximately 80% of normal through the remainder of the year. The decrease in contracted service costs are the result on the projections for a reduced level of service to continue through the remainder of the year.
Options to Fund the Operating Budget Shortfall
The table below sets out the combined conventional and specialized service operating budgets projected out to the end of the year.
Total Public Transit Services 2020 Operating Budget
| 2020 Budget | 2020 Projected | |
| Revenue | ||
| Transportation Revenue | $ 37,955,300 | $ 21,598,700 |
| Operating Revenue | 1,337,200 | 1,279,900 |
| Transfer from Reserves | 621,600 | 871,600 |
| Provincial Gas Tax | 9,231,800 | 9,517,300 |
| Total Revenue | $ 49,145,900 | $ 33,267,500 |
| Expenditures | ||
| Personnel Cost | $ 54,044,800 | $ 51,464,900 |
| Fuel | 7,296,400 | 5,573,900 |
| Direct Bus Maintenance | 6,516,100 | 6,456,300 |
| Facility | 3,285,300 | 3,136,300 |
| Insurance | 2,526,300 | 3,078,600 |
| Contracted Service costs | 8,820,000 | 7,460,400 |
| Contributions to reserves | 1,038,400 | 1,288,400 |
| All other material costs | 3,478,400 | 3,657,300 |
| Total Expenditures | $ 87,005,700 | $ 82,116,100 |
| City of London | $ 37,859,800 | $ 36,993,800 |
| Operating Shortfall | $ – | $ 11,854,800 |
As the table sets out, a net $11.9 million shortfall is projected for 2020. In previous financial update reports regarding the budget shortfall, a number of options had been identified as potential funding sources available to balance the budget at year end. These options included the following:
- LTC General Operating Reserve ($2.999 million);
- LTC Energy Management Reserve ($2.403 million);
- Assessment growth allocation from the City of London ($1.095 million); and
- Any funding programs made available by the Provincial or Federal governments in response to ongoing advocacy efforts.
As set out in Staff Report #1, dated August 26, 2020, the Municipal Transit Enhanced Cleaning Program and the Federal/Provincial/Territorial Safe Restart Program have both been confirmed, and provide the opportunity for a total of $18,956,683 of funding to be utilized against eligible expenditures, to help offset the impacts of COVID-19, noting the time periods for which expenditures can be covered vary between the programs. These announcements were welcomed news, and provide significant relief for the 2020 operating budget shortfalls; however, given remaining uncertainties with respect to the parameters of the programs, the extent to which this funding can be utilized remains unclear.
While administration will make every effort to utilize the funding from the two aforementioned programs, given some of the budget impacts in 2020 are not directly tied to COVID-19, there remains the potential that funding from the other suggested sources may still be required to some extent in order to balance the 2020 budget.
As a first step, administration will undertake to determine all of the costs that are considered eligible under the Municipal Transit Enhanced Cleaning Program. This program requires the submission of a claims form, with proof of expenses incurred, which will be followed by a payment back. Administration is also working collectively with transit systems across Canada to identify a longer term, and more sustainable option for the sanitization of buses. Over the past several weeks, a number of new products have been introduced; however, none have been assessed to the point where a recommended change in approach can be made. Any consideration of alternative methods, which may require investment in equipment will be undertaken in an effort to ensure this funding program can be utilized to the full extent by the end of December 31, 2020. At this time, it is believed that both operating and capital expenditures relating to COVID-19 cleaning costs can be included in this program, and as such, capital expenditures will also be reviewed as part of this process.
The next step will be to identify all remaining budget impacts that are consistent with the parameters of the Safe Restart Program for inclusion in the required reporting back to the Province. This report will identify the amount of funding from this program that has been applied from April through September of 2020, and also forecast the remaining projected requirements for the period of October 2020 through March 2021. As indicated earlier, given program parameters, there will be 2020 budget impacts that cannot be addressed through this program (e.g. COVID-19 impacts in March 2020 are outside of the program window). At this time, it is believed that both operating and capital expenditures relating to COVID-19 will be eligible expenditures and as such, capital expenditures will also be reviewed as part of this process, noting the funding source for the Operator barrier program has already been amended to rely on the Safe Restart Program funding.
At the end of the year, a source of funding for any remaining budget impacts that have not been addressed through the two aforementioned funding programs will need to be identified. While no specific numbers are known at this time, the three initial funding sources will be reviewed for consideration; LTC reserves and City of London assessment growth.
As previously reported, Municipal Council approved an allocation of $1,095,300 from assessment growth to help offset the budget shortfall in the public transit services operating budgets. Administration has been in discussion with civic administration with respect to this allocation in light of the Safe Restart Program announcement. At time of report writing, no decisions have been made with respect to what will ultimately be done with this funding, and as such, it has not been included in the projections provided, notwithstanding the money has already been flowed to London Transit.
Consistent with practice employed during every year end process, LTC reserves will be considered an option to fund any remaining shortfall after all other options have been exhausted.
Over the coming weeks, administration will be working through the Ontario Public Transit Association (OPTA) to determine the details with respect to the eligible expenditures, and will be able to further refine the manner in which the ultimate year end operating budget shortfall will be funded. While the specific details with respect to the amounts that will be utilized from each funding program or other source, given what is known to date, there is no longer concern that the 2020 operating budget will not be balanced at year end.
Going forward, commentary with respect to the management of operating budget shortfalls will be covered in the monthly financial update reports.
Recommended by:
Mike Gregor, Director of Finance
Shawn Wilson, Director of Operations
Joanne Galloway, Director of Human Resources
Craig Morneau, Director of Fleet & Facilities
Katie Burns, Director of Planning
Concurred in by:
Kelly S. Paleczny, General Manager