To All Commissioners
Re: Status of Reserves & Reserve Funds – December 31, 2017
Recommendation
The report be NOTED and FILED.
Background
The Commission maintains six reserves and/or reserve funds, which are integral to the Commission’s financial plan which in-turn is a key element of the approved 2015-2018 Business Plan.
A summary of the six reserves and reserve funds are set out in the following table, noting the Provincial Gas Tax Reserve Fund is a requirement under the Provincial Gas Tax program. The provisional estimates provided in this report are based on the Commission’s 2015-2018 Business Plan and related strategies, combined with the forecasts included in the Commission’s multi-year budgets (operating and capital).
Reserve and Reserve Fund Balances at December 31 (millions)
| Actual | Provisional Estimates | ||||
| Description | 2015 | 2016 | 2017 | 2018 | 2019 |
| Reserve Funds | |||||
| Provincial gas tax reserve fund | $28.471 | $28.889 | $ 22.538 | $11.529 | $ 14.321 |
| Capital program reserve fund | 4.658 | 5.154 | 4.548 | 4.048 | 3.861 |
| Public liability reserve fund | 3.890 | 3.598 | 3.398 | 3.243 | 3.088 |
| $37.018 | $37.640 | $ 30.484 | $18.821 | $ 21.271 | |
| Reserves | |||||
| Energy management reserve | $ 3.203 | $ 3.203 | $ 3.203 | $ 3.203 | $ 3.203 |
| General operating reserve | 2.999 | 2.999 | 2.999 | 2.999 | 2.999 |
| Health care management reserve | 2.648 | 2.669 | 2.595 | 2.735 | 2.875 |
| $ 8.850 | $ 8.871 | $ 8.797 | $ 8.937 | $ 9.077 | |
| $45.868 | $46.512 | $ 39.281 | $27.758 | $ 30.349 | |
The reserves and reserve funds, particularly over the last number of years when City of London investment has been subject to substantial constraints, have been critical in supporting:
- the maintenance of transit infrastructure in a state of good repair, attaining an overall ranking of “very good – fit for the future”;
- the maintenance of ridership gains, while supporting some service hour growth leading to ridership growth;
- the leveling of City of London operating investment share at between 38% and 39% of total operating expenditure (conventional and specialized); and
- limiting the nature and extent of fare adjustments. Since December 2008, fare adjustments have applied to the tuition-based pass programs only, with the objective of improving fare equity between the various fare programs. Limiting fare adjustments has been critical to maintaining ridership given the extent of the service deficit and related service quality issues.
Reserves and reserve funds, as indicated in the following table, currently provide investment support of approximately 14% of total operating expenditure investment and remains fairly constant through 2019 which, as discussed below, is influenced by the extent provincial gas tax moneys are used to support operating investment expenditure.
The reserves and reserve funds investment in capital expenditures have seen a recent and projected increase due to the additional Public Transit Infrastructure Fund (PTIF) projects but will see a steady decline after completion as a direct result of the shift in use of provincial gas tax moneys from capital to operating investment.
Percent Funding Provided by Reserves and Reserve Funds
| Actual | Provisional Estimates | ||||
| Description | 2015 | 2016 | 2017 | 2018 | 2019 |
| Percent of operating expenditure investment | 9.3% | 11.1% | 13.5% | 14.0% | 12.2% |
| Percent of capital expenditure investment | 36.6% | 34.7% | 36.0% | 45.2% | 25.1% |
Reserves do not have identified assets – the reserves represent the Commission’s working capital supporting current operations. In 2017, investment returns on working capital largely accounted for the $158,100 in interest income applied to current operations.
Reserve funds have dedicated assets which are only used for the purpose defined by the reserve fund. Investment returns generated from reserve fund assets stay vested with the reserve fund. In 2017, investment returns on reserve funds totaled approximately $545,400.
The investment of working capital and reserve fund assets is limited by policy to highly secured, liquid interest bearing instruments such as all Commission bank accounts (all set up as paying 30 day term deposit rates) and term deposit certificates sought by request for quotations.
On balance, all of the reserves and reserve funds are considered to be in good standing and maintained consistent with the respective administrative guidelines.
Provincial Gas Tax Reserve Fund
In 2004, the Province of Ontario announced the establishment of the Provincial Gas Tax Program (PGT) dedicated specifically for public transit services (conventional and specialized transit services). PGT funding supports operating and capital expenditure investment related to the maintenance and growth of services and ridership. The PGT program is a performance based program, with the annual moneys received by respective transit systems being based upon the transit service’s position in terms of population and ridership in relation to total population and total ridership for all Ontario public transit services. The amount of PGT moneys available is fixed at $0.02 per litre of gasoline sales in a given year. Annual allocations are placed in a reserve fund maintained by the transit service with the reserve fund being subject to annual reporting and audit to/by the Province.
In January 2017, the Provincial Government announced changes to the program, which would see the current $0.02 per litre allocation double to $0.04 per litre by 2021/2022. These funding updates have been reflected in the provincial contributions to the fund in 2019.
Initially, the Commission largely focused PGT funding on capital investment needs, on average 70% went to capital with 30% being applied to operating investment needs. The allocation recognized the significant infrastructure deficit in existence at the time and the need for growth capital investment in smart bus technology, smart card system and the construction of the satellite facility. As capital needs were/are addressed, annual PGT receipts will migrate to a 65% operating and 35% capital investment split.
The use of PGT is approved via the annual (multi-year) budget process, noting the extent of use is impacted by an LTC administrative guideline, which sets a minimum unallocated balance in the reserve fund at the end of each year. Initially, the administrative guideline called for the PGT reserve fund balance at the end of any one year to be sufficient to support three years of projected PGT share of approved capital and operating investment needs. The three year balance guideline recognized:
- the continuance of the PGT program was subject to approval by the Province each year;
- the amount to be received in any one year was variable in that it was subject to London’s ridership and population performance in comparison to all Ontario municipalities with public transit services. Further, the amount of money subject to allocation is predicated on annual gasoline sales which is considered variable given the sensitivity of oil pricing; and
- given the growing dependency on PGT funding to support operations (capital and operating) sufficient time was required to adjust capital and operating budget expectations should the PGT program be discontinued or London’s share of annual allocation decline.
The three year administrative guideline was modified in 2014 moving to a reserve fund balance at the end of any one year equal to 1.5 years of planned use. The change coincided with the Ontario Government announcement that the PGT was being made permanent vs. a year over year budget decision. It also recognized the need to invest in service growth, recognizing service deficits, to maintain and grow ridership, which in turn impacts the amount of PGT to be received.
The following table sets out the actual reserve fund activity for 2015-2017 and provisional estimates for 2018-2019.
As noted earlier in this report, the higher than normal capital expenditures funded from this reserve fund are related to the need for the offsetting 50% funding for capital programs approved for 50% funding under PTIF.
Provincial Gas Tax Reserve Fund (millions)
| Actual | Provisional Estimates | ||||
| Description | 2015 | 2016 | 2017 | 2018 | 2019 |
| Opening balance | $27.483 | $28.471 | $ 28.889 | $22.538 | $ 11.529 |
| Provincial contributions | 9.415 | 9.702 | 9.357 | 9.999 | 12.100 |
| Investment income | 0.496 | 0.443 | 0.443 | 0.400 | 0.450 |
| Approved expenditure | |||||
| capital | (3.606) | (3.117) | (7.578) | (11.464) | (1.042) |
| operating – conventional | (4.204) | (5.394) | (7.336) | (7.833) | (7.034) |
| operating – specialized | (1.113) | (1.215) | (1.236) | (2.111) | (1.682) |
| Closing balance | $28.471 | $28.889 | $ 22.538 | $11.529 | $ 14.321 |
| Budget expenditure investment – funded by PGT | $ 9.726 | $16.151 | $ 21.407 | $ 9.758 | $ 11.407 |
| Years available at December 31 | 2.9 | 1.8 | 1.1 | 1.2 | 1.3 |
While the balances in the reserve fall slightly below the guideline of 1.5 years, it is anticipated this will be made up by the 2021 full roll-out of the increased annual allocations.
The reserve fund is considered to be in good standing.
Capital Program Reserve Fund
The capital program reserve fund is used to fund:
- information system hardware and software costs, maximum cost per any one asset of $100,000;
- bus maintenance and servicing tools – average cost of $100,000 per year;
- purchase of shop and garage equipment, maximum cost per any one asset of $100,000;
- purchase of replacement and expansion service fleet;
- stop upgrades and expansion re: signs, landing pads, and shelters – maximum any one year $100,000; and
- other such capital related projects as approved by a specific resolution of the Commission from time to time or as part of the annual budget program approval (i.e. approved program where no other funding is available or when same is limited).
The capital program reserve fund supports capital investment needs that are not supported by capital investment from the City of London. Without the fund, the LTC would need to seek additional capital funding in the area of $500,000 per year from the City. On average the capital program reserve fund supports approximately 4.3% of annual capital expenditure investment needs.
The annual contribution to the capital program reserve fund from operations consists of:
- annual contributions based upon the amortized cost (total cost depreciated over useful life of the asset) of the identified assets funded from the reserve fund;
- proceeds from disposal of assets (largely buses); and
- additional contributions as may be necessary from time to time given demands on the reserve fund to support capital investment needs ensuring that the fund balance at the end of any one year is sufficient to cover, as a minimum, seven years of planned capital expenditure to a maximum of 10 years. Any additional contributions are generated from net favourable operating performance and/or the restructuring between reserves and reserve funds.
Actual reserve fund activity for 2015-2017 and provisional estimates for 2018-2019 are summarized in the following table.
As noted earlier in this report, the higher than normal capital expenditures funded from this reserve fund are related to the need for the offsetting 50% funding for capital programs approved for 50% funding under PTIF.
Capital Program Reserve Fund (millions)
| Actual | Provisional Estimates | ||||
| Description | 2015 | 2016 | 2017 | 2018 | 2019 |
| Opening balance | $ 4.753 | $ 4.658 | $ 5.154 | $ 4.548 | $ 4.048 |
| Contributions – capital cost amortization | 0.259 | 0.719 | 0.320 | 0.250 | 0.250 |
| Investment income | 0.044 | 0.043 | 0.058 | 0.040 | 0.040 |
| Capital expenditure | (0.398) | (0.266) | (0.983) | (0.790) | (0.477) |
| Closing balance | $ 4.658 | $ 5.154 | $ 4.548 | $ 4.048 | $ 3.861 |
| Budget allocation (new expenditure investment) | $ 0.266 | $ 0.983 | $ 0.790 | $ 0.477 | $ 0.517 |
| Years available at December 31 | 17.5 | 5.2 | 5.8 | 8.5 | 7.5 |
The administrative guidelines for the reserve fund calls for the fund to have, at a minimum, a balance at the end of any one year sufficient assets to support seven years of planned capital investment. The maximum balance is 10 years. As evidenced in the table, the guideline indicates underfunding in 2016-2017 given the additional requirements for PTIF funding related to additional capital projects. The guideline however is satisfied going forward and as such, the reserve fund is considered to be in good standing.
Public Liability Reserve Fund
The public liability reserve fund is used to fund:
- annual public liability claims costs up to the established deductible amount, which for pre-1998 claims, is $100,000 and for post-1998 claims, is $50,000 per incident; and
- annual post-2003 accident benefit claims costs up to the established deductible amount of $10,000 per accident. Effective January 1, 2006 the deductible was increased to $50,000.
In addition, the reserve fund would be used to support other property and liability claims costs, not covered by an insurance policy and/or as part of the policy deductible program.
Actual reserve fund activity for 2015-2017 and provisional estimates for 2018-2019 are summarized in the following table.
Public Liability Reserve Fund (millions)
| Actual | Provisional Estimates | ||||
| Description | 2015 | 2016 | 2017 | 2018 | 2019 |
| Opening balance | $ 3.992 | $ 3.890 | $ 3.598 | $ 3.398 | $ 3.243 |
| Contributions – current operations | 0.380 | 0.400 | 0.400 | 0.400 | 0.400 |
| Investment income | 0.040 | 0.035 | 0.045 | 0.045 | 0.045 |
| Insurance claims costs | |||||
| – accident benefits | (0.414) | (0.444) | (0.510) | (0.400) | (0.400) |
| – public liability | (0.108) | (0.283) | (0.134) | (0.200) | (0.200) |
| Closing balance | $ 3.890 | $ 3.598 | $ 3.398 | $ 3.243 | $ 3.088 |
| Outstanding – deductible claims cost at Dec. 31 | $ 1.671 | $ 2.283 | $ 2.414 | $ 1.500 | $ 1.500 |
| Unencumbered | 2.219 | 1.315 | 0.985 | 1.743 | 1.588 |
| $ 3.890 | $ 3.598 | $ 3.399 | $ 3.243 | $ 3.088 | |
| Percent unencumbered | 57.0% | 36.5% | 29.0% | 53.8% | 51.4% |
The administrative guideline applying to the reserve fund calls for the reserve fund balance at December 31 of each year to have an unencumbered balance of between 55% and 65%. As observed above, the balance was significantly below target at the end of both 2016 and 2017. We have projected this to stabilize going forward in 2018 as 2016 and 2017 had a high number of claims that closed, and is not expected to become a trend. It should also be noted that the outstanding claims are based on estimates. Claims will continue to be monitored in 2018 and as warranted, adjustments to the reserve may be required. Should the claims return to estimated levels, the fund will return to a level considered to be in good standing.
General Operating Reserve
The general operating reserve is primarily intended to fund, as a short-term measure, net unfavourable operating budget performance, where the opportunity exists to defer, in whole or in part, fare adjustments, expenditure cuts and/or requests for additional funding from the City of London within a budget year.
Using the reserve for such purpose is decided upon either at the annual re-costing of the current operating budget or as recommendation via the ongoing monitoring of the annual operating budget to address any net unfavourable operating budget performance.
The reserve is considered critical given the challenges associated with predicting such budget components as ridership, related average fare, energy prices etc. The reserve guidelines provide the basis for maintaining a reasonable reserve balance. Actual reserve fund activity for 2015-2017 and provisional estimates for 2018-2019 are summarized in the following table.
General Operating Reserve (millions)
| Actual | Provisional Estimates | ||||
| Description | 2015 | 2016 | 2017 | 2018 | 2019 |
| Opening balance | $ 2.999 | $ 2.999 | $ 2.999 | $ 2.999 | $ 2.999 |
| Contribution from/(to) operations | – | – | – | – | – |
| Closing balance | $ 2.999 | $ 2.999 | $ 2.999 | $ 2.999 | $ 2.999 |
| Total expenditure | $64.045 | $67.348 | $ 71.689 | $76.866 | $ 77.862 |
| Reserve as % of operating expenditure | 4.7% | 4.5% | 4.2% | 3.9% | 3.9% |
As noted in the table, the balance in the reserve at December 31, 2017 and that projected for 2018 through 2019 are consistent with the administrative guideline of maintaining a reserve balance of between 2.5% and 5.0% of total direct operating expenditure and as such the reserve is considered to be in good standing.
Energy Management Reserve
Contributions to and from the energy management reserve relate, for the most part, to actual vs. budget performance for consumption and pricing of energy (diesel fuel, natural gas and hydro). There are no scheduled (budgeted) contributions to, or draws from the reserve. Such activity is performance based i.e. determined based upon overall actual to budget operating performance.
Actual reserve fund activity for 2015-2017 and provisional estimates for 2018-2019 is summarized in the following table.
Energy Management Reserve (millions)
| Actual | Provisional Estimates | ||||
| Description | 2015 | 2016 | 2017 | 2018 | 2019 |
| Opening balance | $ 3.203 | $ 3.203 | $ 3.203 | $ 3.203 | $ 3.203 |
| Contribution – current operating surplus | – | – | – | – | – |
| Closing balance | $ 3.203 | $ 3.203 | $ 3.203 | $ 3.203 | $ 3.203 |
| Estimated total energy costs (diesel, hydro) | $ 7.073 | $ 6.430 | $ 7.339 | $ 8.500 | $ 9.583 |
| Reserve balance as a % of energy cost | 45.3% | 49.8% | 43.6% | 37.7% | 33.4% |
As set out in the table, the reserve balance at December 31, 2017 and expression as a percentage of energy costs have slightly fallen outside the administrative guideline of maintaining a reserve balance of between 25% and 35% of annual energy costs. The higher placement at the end of 2015-2017 is a reflection of significantly lower diesel fuel prices experienced over the past two years. Given the diesel fuel costs are expected to increase by approximately five cents per liter in each of the next two years as a result of the provincial Cap and Trade program, the percentage is expected to decline.
The reserve is considered to be in good standing.
Health Care Management Reserve
The health care management reserve is used to:
- fund, in whole or in part, a progressive return to work program for both work and non-work related injuries and illnesses;
- fund unfavourable retrospective Workplace Safety Insurance Board (WSIB) assessment for years of poor claims experience; and
- fund, in part retrospectively, the impact of any significant increase in premiums relating to non-insured extended health care, vision and dental plan employment benefits noting such adjustments augment the deposit account, held by the carrier, on LTC’s behalf which is targeted to be sufficient to cover up to one year of premium payments.
The use of the reserve to support a progressive Return to Work program (RTW) is a critical component of LTC’s attendance and disability management program, both in terms of managing the amount of time lost and the related short and long-term claims cost.
Without an effective RTW, London Transit would face substantive increases in disability costs particularly with respect to WSIB. In terms of WSIB, if an employee is off work and unable to return to work in any capacity the Commission faces a maximum claim cost of $ 440,000. To effectively support an employee, comply with legislative requirements and reduce potential financial impacts it is essential to have a robust and effective RTW program. Refer to Staff Report #4 2017 Attendance and Disability management Programs
Contributions to the reserve are performance based, that is, they are largely based upon WSIB premium rebates. LTC is a Schedule II Employer, meaning WSIB costs are premium based (rated). Rebates are reflective of favourable claims and loss experience for the respective years which in part is as a result of having a progressive RTW program coupled with significant work in health and safety training including ergonomic assessments.
As noted in the following table, net of Neer rebates represent a premium reduction of 17% providing approximately $1.2 million over the period being applied to the reserve to support the RTW program and other reserve purposes.
Summary of WSIB Premiums, Neer Rebates and RTW Costs (millions)
| Year | Gross WSIB Premiums | Premium Rebate (NEER) | Net WSIB Cost | RTW Program Direct Cost |
| 2014 | $ 1,572,946 | $ (371,378) | $ 1,201,568 | $ 195,000 |
| 2015 | $ 1,636,471 | $ (344,971) | $ 1,291,500 | $ 247,000 |
| 2016 | $ 1,711,610 | $ (384,152) | $ 1,327,458 | $ 360,000 |
| 2017 | $ 1,870,487 | $ (100,000) | $ 1,770,487 | $ 450,000 |
| Total | $ 6,791,514 | $ (1,200,501) | $ 5,591,013 | $ 1,252,000 |
| Percent Reduction of Rebate | 17.7% | |||
| Percentage of Rebates Reinvested | 100% | |||
As indicated, 100% of the premium rebates have been applied to the RTW program. Other contributions have been made to reserve from operations from time to time based upon a net overall favourable operating budget performance and the need to maintain a reserve balance within the established administrative guidelines.
Actual reserve fund activity for 2015-2017 and provisional estimates for 2018-2019 are summarized in the following table.
Health Care Management Reserve (millions)
| Actual | Provisional Estimates | ||||
| Description | 2015 | 2016 | 2017 | 2018 | 2019 |
| Opening balance | $ 2.441 | $ 2.648 | $ 2.669 | $ 2.595 | $ 2.735 |
| Contributions – Neer rebate | 0.455 | 0.387 | 0.376 | 0.320 | 0.320 |
| Return to work program cost | (0.248) | (0.366) | (0.450) | (0.180) | (0.180) |
| Closing balance | $ 2.648 | $ 2.669 | $ 2.595 | $ 2.735 | $ 2.875 |
| Employment benefit cost (excl. Neer rebate) | $10.353 | $10.774 | $ 11.834 | $12.859 | $ 12.494 |
| Reserve as percent of employment benefit cost | 25.6% | 24.8% | 21.9% | 21.3% | 23.0% |
Budgets for the years 2018 through 2019 were established as part of the multi-year budget, and as such, are not reflective of current trends. Should the trends experienced in 2015-2017 continue, an alternative or supportive strategy for funding the reserve and/or return to work program may have to be identified.
The administrative guidelines call for the reserve to have a balance at the end of any one fiscal year of between 20% and 30% of employment benefit costs. As noted in the above schedule, the balances are projected to satisfy the administrative guideline and as such the reserve is considered to be in good standing.
Recommended by:
Mike Gregor – Director of Finance
Concurred in by:
Kelly S. Paleczny – General Manager