Staff Report #3
April 29, 2020
To All Commissioners
Re: Status of Reserves & Reserve Funds – December 31, 2019
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. Consistent with past practice this report is being presented as part of the annual year-end reporting. As part of the year-end process, the Commission’s reserves and reserve funds are assessed in an effort to determine whether the respective balances are within the associated administrative guidelines. If reserve or reserve fund balances are found to be outside of administrative guidelines, adjustments are made, either between reserves/reserve funds, or contributions from any available year-end operating budget surplus are made where warranted. The table below sets out the adjustments made to the reserves and reserve funds as part of the year-end process noting the balances provided in the specific tables following are all inclusive of the adjustments.
Reserve and Reserve Fund Adjustments – December 31, 2019
| Preliminary Year End (Before) | Add’l Contrib. to / (from) | Final Year End (After) | ||||
| Description | Guideline Indicator | Balance | Indicator | Balance | Indicator | |
| Reserve Funds: | ||||||
| Provincial gas tax | Years available | $11.393 | 0.7 | $ – | $11.393 | 0.7 |
| Capital program | Years available | 4.228 | 5.0 | 1.000 | 5.228 | 7.0 |
| Public liability | Percent unencumbered | 2.800 | 40.2% | 1.000 | 3.800 | 55.9% |
| 18.421 | 2.000 | 20.421 | ||||
| Reserves: | ||||||
| Energy management | % of energy costs | 3.203 | 39.9 | (0.800) | 2.403 | 29.9% |
| General operating | % of expenditures | 2.999 | 3.7% | – | 2.999 | 3.7% |
| Health care management | % of benefit costs | 3.403 | 26.4% | – | 3.403 | 26.4% |
| 9.605 | (0.800) | 8.806 | ||||
| $28.026 | $1.200 | $29.226 | ||||
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 2020-2023 approved multi-year budget.
Reserve and Reserve Fund Balances at December 31, 2019 (millions)
| Actual | Estimate | ||||
| Description | 2019 | 2020 | 2021 | 2022 | 2023 |
| Reserve Funds | |||||
| Provincial gas tax reserve fund | $11.393 | $6.290 | $4.839 | $3.772 | $2.590 |
| Capital program reserve fund | 5.228 | 4.394 | 3.601 | 3.338 | 2.732 |
| Public liability reserve fund | 3.800 | 3.638 | 3.477 | 3.315 | 3.154 |
| $20.421 | $14.323 | $11.917 | $10.425 | $8.475 | |
| Reserves | |||||
| Energy management reserve | $2.403 | $2.403 | $2.403 | $2.403 | $2.403 |
| General operating reserve | 2.999 | 2.999 | 2.999 | 2.999 | 2.999 |
| Health care management reserve | 3.403 | 3.403 | 3.403 | 3.403 | 3.403 |
| $8.806 | $8.806 | $8.806 | $8.806 | 8.806 | |
| $29.226 | $23.128 | $20.723 | $19.231 | $17.281 | |
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 ability to take advantage of senior level government funding programs that required matching or a portion of local funding;
- the increase in expenditures not included in the initial 2016-2019 multi-year budget and not eligible for increases to the City funding allocation; and
- limiting the nature and extent of fare adjustments. The 2016-2019 multi-year budget had a series of planned fare increases that were deferred until 2020, thus aligning the increase with the completion of an aggressive service deficit reduction and improvements in overall service quality.
Reserves and reserve funds, as indicated in the following table, currently provide investment support of approximately 19.1% of total operating expenditure investment. This level is set to drop and remain fairly constant through 2023 at approximately 11%. This is mainly influenced by the planned reduction in Provincial Gas Tax available to support operations on a go forward basis.
The reserve and reserve fund investments in capital expenditures as a percentage of the total have been fairly consistent in recent years with a planned bump in 2020 given the planned carry-forward of not yet initiated reserve supported capital projects. This is estimated to see a decline given the increased level of provincial and federal capital funding available through Phase II of the Public Infrastructure Funding.
Percent Funding Provided by Reserves and Reserve Funds
| Actual | Estimate | ||||
| Description | 2019 | 2020 | 2021 | 2022 | 2023 |
| Percent of operating expenditure investment | 19.1% | 11.7% | 11.1% | 10.9% | 10.6% |
| Percent of capital expenditure investment | 32.2% | 48.5% | 26.7% | 23.1% | 26.5% |
Reserves do not have identified assets – the reserves represent the Commission’s working capital supporting current operations. In 2019, investment returns on working capital largely accounted for the $222,400 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 2019, investment returns on reserve funds totaled approximately $595,900.
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.
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 previous 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. The current Government has not followed through with this commitment and a general review of the program was concluded with few changes resulting. The 2019-2020 funding commitment was recently announced by the Transportation Minister with London Transit set to receive $10,656,850.
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 are planned to migrate to a 75% operating and 25% 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 2019 and provisional estimates for 2020-2023. It should be noted that the provincial contributions for 2020/2021 are estimates based on current allocations, however given the ongoing COVID-19 pandemic emergency provisions and the significant declines in travel, the available amount of funding available next year based on a two cent per litre of fuel sales will be significantly lower. As set out in Staff Report #8 (dated April 29, 2020), ongoing advocacy efforts with the Provincial government are stressing the need for this anticipated shortfall to addressed given this funding has already been incorporated in base budgets going forward.
Provincial Gas Tax Reserve Fund (millions)
| Actual | Estimate | ||||
| Description | 2019 | 2020 | 2021 | 2022 | 2023 |
| Opening balance | $16.946 | $11.393 | $6.290 | $4.839 | $3.772 |
| Provincial contributions | 10.342 | 10.657 | 10.870 | 11.087 | 11.309 |
| Investment income | 0.424 | 0.268 | 0.268 | 0.268 | 0.268 |
| Approved expenditure | |||||
| capital | (1.668) | (6.796) | (3.378) | (3.025) | (3.171) |
| operating – conventional | (11.546) | (7.501) | (7.488) | (7.638) | (7.791) |
| operating – specialized | (3.105) | (1.731) | (1.724) | (1.761) | (1.798) |
| Closing balance | $11.393 | $6.290 | $4.839 | $3.772 | $2.590 |
| Budget expenditure investment – funded by PGT | $16.028 | $12.589 | $12.423 | $12.759 | $12.759 |
| Years available at December 31 | 0.7 | 0.5 | 0.4 | 0.3 | 0.2 |
2017 through 2019 saw increased pressure on the Provincial Gas Tax Reserve Fund from the operating and capital side which has led to a significant reduction in the reserve fund balance compared to historical levels. Participation in 33 infrastructure projects under the federal Public Transit Infrastructure Fund program would not have been possible to the extent it was had the balance not been as healthy. Further, planned fare increases were deferred from the 2016-2019 multi-year budget until service levels and overall quality were improved and increases in operating expenses attributed to the minimum wage increase were absorbed, eliminating the need to request additional funding from the City through the annual budget review process. These decisions at the time were supported by the government’s announcement of the plan to double the Provincial Gas Tax program, as noted above.
Given the current balance and recent uncertainty with respect to whether future year’s contributions will grow or remain static, use of Provincial Gas Tax was reduced to sustainable levels for operating expenditures with the residual amounts available for ongoing capital requirements. The capital projects included in the multi-year budget will result in a net depletion of the reserve and is expected to reduce the balance to nearly nil by the end of the current multi-year budget timeframe.
Consistent with the direction provided by the Commission with the approval of the multi-year budgets, the administrative guideline for this reserve will not be met over the next four years, and is anticipated to be virtually depleted by 2023.
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 to $1,000,000 per year from the City. On average the capital program reserve fund supports approximately 5.5% 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 2019 and provisional estimates for 2020-2023 are summarized in the following table.
Capital Program Reserve Fund (millions)
| Actual | Estimate | ||||
| Description | 2019 | 2020 | 2021 | 2022 | 2023 |
| Opening balance | $4.307 | $5.228 | $4.394 | $3.601 | $3.338 |
| Contributions – capital cost amortization | 1.315 | 0.250 | 0.250 | 0.250 | 0.250 |
| Investment income | 0.100 | 0.060 | 0.060 | 0.060 | 0.060 |
| Capital expenditure | (0.494) | (1.144) | (1.103) | (0.573) | (0.916) |
| Closing balance | $5.228 | $4.394 | $3.601 | $3.338 | $2.732 |
| Budget allocation (new expenditure investment) | $1.144 | $1.144 | $1.103 | $0.573 | $0.916 |
| Years available at December 31 | 7.0 | 6.6 | 6.2 | 5.8 | 5.5 |
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. In 2019, an additional contribution from operations was made to the reserve to improve its standing and thus at year end the reserve fund is in good standing at 7.0 years. From 2020-2023 the reserve falls slightly below the guideline.
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 2019 and provisional estimates for 2020-2023 are summarized in the following table.
Public Liability Reserve Fund (millions)
| Actual | Estimate | ||||
| Description | 2019 | 2020 | 2021 | 2022 | 2023 |
| Opening balance | $3.011 | $3.800 | $3.638 | $3.477 | $3.315 |
| Contributions – current operations | 1.400 | 0.400 | 0.400 | 0.400 | 0.400 |
| Investment income | 0.073 | 0.060 | 0.060 | 0.060 | 0.060 |
| Insurance claims costs | |||||
| – accident benefits | (0.604) | (0.456) | (0.456) | (0.456) | (0.456) |
| – public liability | (0.080) | (0.166) | (0.166) | (0.166) | (0.166) |
| Closing balance | $3.800 | $3.638 | $3.477 | $3.315 | $3.154 |
| Outstanding – deductible claims cost at Dec. 31 | $1.674 | $ 1.674 | $1.674 | $1.674 | $1.674 |
| Unencumbered | 2.126 | 1.964 | 1.803 | 1.641 | 1.480 |
| $3.800 | $3.638 | $3.477 | $3.315 | $3.154 | |
| Percent unencumbered | 55.9% | 54.0% | 51.9% | 49.5% | 46.9% |
The administrative guideline applying to the reserve fund calls for an unencumbered balance of between 55% and 65%. In prior years this balance had been reducing with the increased trend of outstanding claims from 2016 to 2018. In 2019 an additional contribution from operations of $1.0 million to the reserve fund, along with a reduction in the level of outstanding claims as compared to previous years has put the reserve in a satisfactory position with estimates to fall slightly below the guideline in 2020-2023 which should be monitored.
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 2019 and provisional estimates for 2020-2023 are summarized in the following table.
General Operating Reserve (millions)
| Actual | Estimate | ||||
| Description | 2019 | 2020 | 2021 | 2022 | 2023 |
| 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 | $81.815 | $87.210 | $91.507 | $95.285 | $99.324 |
| Reserve as % of operating expenditure | 3.7% | 3.4% | 3.3% | 3.1% | 3.0% |
As noted in the table, the balance in the reserve at December 31, 2019 and that projected for 2020-2023 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 2019 and provisional estimates for 2020-2023 is summarized in the following table.
Energy Management Reserve (millions)
| Actual | Estimate | ||||
| Description | 2019 | 2020 | 2021 | 2022 | 2023 |
| Opening balance | $3.203 | $2.403 | $2.403 | $2.403 | $2.403 |
| Contribution – current operating surplus | (0.800) | – | – | – | – |
| Closing balance | $2.403 | $2.403 | 2.403 | $2.403 | $2.403 |
| Estimated total energy costs (diesel, hydro) | $8.029 | $8.769 | $9.064 | $9.395 | $9.737 |
| Reserve balance as a % of energy cost | 29.9% | 27.4% | 26.5% | 25.6% | 24.7% |
As set out in the table, the reserve balance at December 31, 2019 and expression as a percentage of energy costs falls within administrative guideline of maintaining a reserve balance of between 25% and 35% of annual energy costs. In prior years this percentage had been exceeding the guideline, meaning the reserve had a higher balance than required. In order to help adjust other reserves at year end, a transfer of $0.8 million to operations was made resulting in the reserve falling within administrative guidelines as at December 31, 2019 and through 2023.
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.
Historically contributions to the reserve have been performance based, that is, they were largely based upon WSIB’s NEER rebates. LTC has been a Schedule I 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, NEER rebates have represented a premium reduction of 21.8% providing approximately $2.0 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 | Net Premium Rate (per $100 payroll) | RTW Program Direct Cost |
| 2014 | $1,572,946 | $(371,378) | $1,201,568 | $3.09 | $180,980 |
| 2015 | 1,636,471 | (347,425) | 1,289,047 | 4.03 | 247,614 |
| 2016 | 1,711,610 | (73,740) | 1,637,870 | 4.89 | 366,188 |
| 2017 | 1,806,427 | (300,127) | 1,506,300 | 4.26 | 449,795 |
| 2018 | 1,929,832 | (605,567) | 1,324,265 | 3.60 | 310,874 |
| 2019 | 1,357,307 | (485,355) | 871,952 | 2.23 | 455,794 |
| Total | $10,014,594 | $(2,183,593) | $7,831,002 | $3.77 | $2,011,245 |
| Percent Reduction of Rebate | 21.8% | ||||
| Percentage of Rebates Reinvested | 92% | ||||
As indicated, 92% of the premium rebates have been applied to the RTW program with the difference remaining in the reserve. Other contributions have been made to the 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.
Changes to the current WSIB program have been introduced for 2020 and will impact the manner in which contributions can made to the reserve. 2019 will be the last year of the NEER program with the final settlements for 2016 to 2019 taking place in December 2020. The purpose of the program change is to eliminate the uncertainty of the rebate process and commit to a consistent premium level on an annualized basis for employers. As performance fluctuates, so will the rates on a graduated scale, meant to soften the impacts to employers. The introduction of a lower rate for WSIB premiums in 2020 will reduce the premiums but at the same time, the rebate will be eliminated and thus the source as a contribution to the reserve. In preparation for this change, the multi-year budget was established with no net changes in premiums and as such, the savings in actual premiums can be used to support contributions to the reserve directly from operations. In other words, the previous contribution from NEER rebates will now be supported by the savings due to lower premiums.
Actual reserve fund activity for 2019 and provisional estimates for 2020-2023 are summarized in the following table.
Health Care Management Reserve (millions)
| Actual | Estimate | ||||
| Description | 2019 | 2020 | 2021 | 2022 | 2023 |
| Opening balance | $2.363 | $3.403 | $3.403 | $3.403 | $3.403 |
| Contributions – Neer rebate | 1.040 | – | – | – | – |
| Contribution from Operations | – | 0.455 | 0.464 | 0.474 | 0.483 |
| Return to work program cost | – | (0.455) | (0.464) | (0.474) | (0.483) |
| Closing balance | $3.403 | $3.403 | $3.403 | $3.403 | $3.403 |
| Employment benefit cost (excl. Neer rebate) | $12.895 | $13.443 | $14.134 | $14.800 | $15.522 |
| Reserve as percent of employment benefit cost | 26.4% | 25.3% | 24.1% | 23.0% | 21.9% |
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. The reserve is considered to be in good standing.
Recommended by:
Mike Gregor, Director of Finance
Concurred in by:
Kelly S. Paleczny, General Manager