Staff Report #3
March 30, 2022
To All Commissioners
Re: Status of Reserves & Reserve Funds – December 31, 2021
The report be NOTED and FILED.
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 2021 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, 2021
|Description||Guideline Indicator||Preliminary Year End (Before)||Adjust to / (from)||Final Year End (After)|
|Provincial Gas Tax||Years available||$13.901||0.7||$ –||$13.901||0.7|
|Capital program||Years available||6.337||8.7||1.500||7.837||11.7|
|Public liability||% unencumbered||4.587||73.1%||1.000||5.587||77.9%|
|Energy management||% of energy costs||3.203||42.2%||–||3.203||42.2%|
|General operating||% of expenditures||2.999||3.7%||–||2.999||3.7%|
|Health Care management||% of benefit costs||4.283||30.8%||–||4.283||30.8%|
A summary of the seven reserves and reserve funds are set out in the following table, noting the Provincial Gas Tax Reserve Fund and Safe Restart Reserve Fund are both requirements under their respective program guidelines. The provisional estimates provided in this report are based on the Commission’s 2022 Recosted Operating and Capital budgets as well as the remaining years of the 2020-2023 approved multi-year budget.
Reserve and Reserve Fund Balances at December 31, 2021 (millions)
|Provincial Gas Tax reserve fund||$11.393||$13.261||$13.901||$ 6.480||$ 4.920|
|Capital program reserve fund||5.228||6.205||7.837||6.300||5.614|
|Public liability reserve fund||3.800||4.669||5.587||4.925||4.764|
|Safe Restart reserve fund||–||5.753||11.057||7.252|
|Energy management reserve||$ 2.403||$ 3.203||$3.203||$ 1.665||$ 1.665|
|General operating reserve||2.999||2.999||2.999||2.999||2.999|
|Health Care management reserve||3.403||4.283||4.283||4.283||4.283|
|$ 8.805||$10.485||$10.486||$ 8.948||$ 8.948|
The reserves and reserve funds, particularly over the last number of years when City of London investment has been subject to substantial constraints as well as the ongoing pandemic, 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 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 25.7% of total operating expenditure investment. In 2022 it is projected to require a lower proportion of reserve funding to support operations due to lessening impacts of the pandemic, and is set to stabilize around 10% through the end of the current multi-year budget.
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 2022 given the planned carry-forward of not yet initiated reserve supported capital projects.
Percent Funding Provided by Reserves and Reserve Funds
|Percent of operating expenditure investment||20.1%||25.1%||25.7%||17.1%||10.3%|
|Percent of capital expenditure investment||32.2%||30.2%||28.2%||39.2%||28.0%|
Reserves do not have identified assets – the reserves represent the Commission’s working capital supporting current operations. In 2021, investment returns on working capital largely accounted for the $110,500 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 2021, investment returns on reserve funds totaled approximately $215,300. Given the steep decline in interest rates in 2020, interest returns were much less than in prior years.
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.
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 equal to 1.5 years of planned use.
In the 2021/2022 PGT funding letter received by the Ministry, they recognized that COVID-19 impacted gasoline sales in 2020-21. As a result, the Provincial government committed $120 million in one-time additional funding to address the impacts of COVID-19 on the 2021-22 Gas Tax program. The one-time additional funding maintains the funding envelope at the level of the 2020-21 program year and will help stabilize 2021-22 program allocations as the province continues its COVID-19 recovery and transit systems begin to build back their ridership levels.
In order to further mitigate the impact of COVID-19, the ministry is using 2019 ridership instead of 2020, and will be using municipal spending figures from either 2019 or 2020, whichever is higher, when calculating municipal allocations. These actions will stabilize allocations, ensure that all municipalities can receive their largest allocation possible under the program, and ensure that no municipality is unduly penalized as the result of the COVID-19 pandemic and related impacts on their operations.
The following table sets out the actual reserve fund activity for 2021 and provisional estimates for 2022-2023.
Provincial Gas Tax Reserve Fund (millions)
|operating – conventional||(11.546)||(5.700)||(6.563)||(9.585)||(7.791)|
|operating – specialized||(3.105)||(1.428)||(1.597)||(1.769)||(1.798)|
|Budget expenditure investment – funded by PGT||$8.961||$10.636||$18.743||$13.199||$13.199|
|Years available at December 31||1.3||1.2||0.7||0.5||0.4|
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. The fund was somewhat depleted to support the additional capital projects funded by the federal Public Transit Infrastructure Fund program, to cover the deferral of planned fare increases (until service levels and overall quality were improved) and increases in operating expenses attributed to minimum wage increases, 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 annual Provincial Gas Tax program from $0.02 per litre to $0.04 per litre.
Given this reduction in balance, use of Provincial Gas Tax was reduced to sustainable levels for operating expenditures planned in the multi-year budget with the residual amounts available for ongoing capital requirements. The capital projects included in the multi-year budget had resulted in a planned net depletion of the reserve and was expected to reduce the balance to nearly nil by the end of the current multi-year budget timeframe.
2021 saw a reduction in planned funding for both operating and capital expenditures, primarily as the result of the ongoing pandemic. Safe Restart Funding was utilized to support additional COVID-19 related capital projects (Bus Purification System) as well as revenue shortfalls and expenditure increases.
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 two years.
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 6.0% 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 2021 and provisional estimates for 2022-2023 are summarized in the following table.
Capital Program Reserve Fund (millions)
|Contributions – capital cost amortization||0.315||0.328||0.488||0.250||0.250|
|Contributions – from operating||1.000||1.000||1.500||–||–|
|Budget allocation (new expenditure investment)||$0.494||$0.407||$0.401||$1.847||$0.996|
|Years available at December 31||7.0||8.7||11.7||11.4||11.0|
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 2021, an additional contribution from operations was made to the reserve to improve its standing and sits slightly above the 10-year threshold given the anticipated IT software upgrade projects that will need to be undertaken in the next few years. The projections for 2022-2023 have the balance sitting slightly above the guideline noting the IT project expenditures are not known at this time and have not been included in the projected spending.
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, 1999 to 2020 is $50,000 per incident, and 2020 forward is $100,000; and
- annual accident benefit claims costs up to the established deductible amount, which for pre-2006 claims, is $10,000 per accident, 2006 to 2020 is $50,000 per incident, and 2020 forward is $100,000.
As noted above, the deductible during the 2020-2021 renewal (as at July 1, 2020), increased to $100,000 for both public liability and accident benefit claims. Pressure during this the prior year’s renewal had been increasing to renew with a higher deductible as the insurance company was looking to reduce its risks. Impacts of this increase in deductible have yet to be felt, given the often delay in claims to develop, coupled with the reduction in claims witnessed due most likely to the reduction in ridership during the pandemic.
In addition, the reserve fund is available 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 2021 and provisional estimates for 2022-2023 are summarized in the following table.
Public Liability Reserve Fund (millions)
|Contributions – current operations||1.400||1.400||1.400||0.400||0.400|
|Insurance claims costs|
|– accident benefits||(0.604)||(0.456)||(0.362)||(0.856)||(0.456)|
|– public liability||(0.080)||(0.116)||(0.156)||(0.266)||(0.166)|
|Outstanding – deductible claims cost at Dec. 31||$1.674||$ 1.186||$1.233||$1.765||$1.765|
The administrative guideline applying to the reserve fund calls for an unencumbered balance of between 55% and 65%. Prior to the onset of the pandemic in 2020, claims had been steadily rising placing pressure on the reserve and thus the need for additional contributions to keep within guidelines. As noted above, after the onset of the pandemic, claims have somewhat reduced, in turn reducing pressure on the reserve (likely due to significant declines in ridership during the pandemic period). A contribution at yearend of $1.0 million was made to the reserve, pushing the reserve above the guideline of 65%. However, given the anticipation for claims to increase as ridership returns and new claims require a higher deductible, this 2021 contribution is required to maintain the reserve within its guidelines going forward. As a result, the reserve fund is considered to be in good standing.
Safe Restart Reserve Fund
The COVID-19 pandemic has created an unprecedented need for financial support for municipal transit. The Government of Canada entered into the Safe Restart Agreement with the Province of Ontario delivering up to $2 billion to help Ontario municipalities keep their transit systems running and relieve financial pressures created by COVID-19. Through the Safe Restart Agreement (SRA), the Government of Ontario and the Government of Canada are responding to municipalities’ needs for transit support.
Given the requirements of the agreement with the Province, the Safe Restart Agreement Reserve Fund was established with a separate bank account required to track the funding and expenditures. The following table sets out the actual reserve fund activity for 2020-201 and provisional estimates 2022.
Safe Restart Agreement Reserve Fund (millions)
|Opening balance||$ –||$ –||$5.753||$ 11.057|
|Phase 1/2 Top-Up||–||–||0.214|
|operating – conventional||–||(12.278)||(14.029)||(4.476)|
|operating – specialized||–||0.906||1.791||0.671|
|Closing balance||$ –||$5.753||$11.057||$ 7.252|
As noted in the above table, $18.524 million was received in 2020 relating to Phase 1 funding (covering the period of April through September 2020). Funding for Phase 2 (October 2020 through March 2021) was somewhat combined with Phase 1, with the Phase 2 contribution equating to either a top-up or refund in order to balance funding for Phase 1 and Phase 2. LTC required a top-up of $0.214 million. Phase 3 saw a funding contribution of $18.105 million, received in 2021, approved to cover the period of April through December 2021. It was subsequently confirmed by the Ministry of Transportation that remaining Phase 3 funding can be applied to shortfalls through December 2022.
To date, SRA funding has been applied to support both capital and operating COVID related expenditures and operating revenue shortfalls, broken out as follows:
- Capital – Operator Barriers ($1.427 million), installed in 2020,
- Capital – Bus Air Purification System ($0.897 million), installed in 2021,
- Operating – Conventional net losses due mainly to revenue shortfalls, offset by reduced service hours (2020 – $12.278 million, 2021 – $14.029 million); and
- Operating – Specialized net savings due mainly to reduced service hours (2020 – $0.906 million, 2021 – $1.791 million).
As noted above, and consistent with the Phase 3 funding guidelines, LTC requested an extension to utilize unused SRA funding to cover eligible expenditures and revenue shortfalls for the period January 1, 2022 through December 31, 2022. The 2022 Recosted Operating Budget has estimated the need to apply $4.476 million to cover anticipated conventional transit shortfalls, offset by $0.671 million in specialized transit savings (service hours).
The reserve is in good standing to cover the impacts of 2022, but at this point, the use of any remaining Phase 3 funding beyond 2022 has not been confirmed and as such, it is being assumed that any remaining funding in the Safe Restart Reserve would need to be returned to the Province consistent with the funding guidelines for the Program.
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 2021 and provisional estimates for 2022-2023 are summarized in the following table.
General Operating Reserve (millions)
|Contribution from/(to) operations||–||–||–||–||–|
|Reserve as % of operating expenditure||3.7%||3.9%||3.7%||3.2%||3.0%|
As noted in the table, the balance in the reserve at December 31, 2021 and that projected for 2022-2023 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 generally no scheduled (budgeted) contributions to, or draws from the reserve, as such activity is performance based (i.e. determined based upon overall actual to budget operating performance), as required during the budget recosting or yearend processes.
Actual reserve fund activity for 2021 and provisional estimates for 2022-2023 is summarized in the following table.
Energy Management Reserve (millions)
|Opening balance||$ 3.203||$ 2.403||$ 3.203||$ 3.203||$ 1.665|
|Contribution – current op. surplus||(0.800)||0.800||–||–||–|
|Fuel costs – unfunded increases||–||–||–||(1.538)|
|Closing balance||$ 2.403||$ 3.203||$ 3.203||$ 1.665||$1.665|
|Estimated total energy costs (diesel, hydro)||$ 8.029||$ 6.019||$ 7.588||$ 10.535||$ 9.737|
|Reserve balance as a % of energy cost||29.9%||53.2%||42.2%||15.8%||17.1%|
As set out in the table above, the reserve balance as at December 31, 2021, and expression as a percentage of energy exceeds the administrative guideline of maintaining a reserve balance of between 25% and 35% of energy costs, currently placing the reserve beyond good standing. However, the 2022 Recosted Operating Budget has reflected a significant increase in estimated diesel fuel rates, resulting in a corresponding fuel expenditure increase of $1.538 million beyond what was initially planned and funded for.
Given the continuing strain on other funding sources, including ridership’s impact on transportation revenue, the depletion within the PGT Reserve Fund, as well as the fixed funding from the City of London, options to offset this shortfall were limited. Noting that during the last multi-year budget cycle, LTC deferred any opportunities to request additional City funding through the annual budget process. Given the Energy Management Reserve is designed to offset uncertainties, such as those being witnessed currently, not only with fuel prices, but potentially other areas within the energy sector, a one-time funding contribution from the Energy Management Reserve was included. The contribution of $1.538 million equates to the price impact on the 2022 budgeted diesel fuel expenditure.
Thus in 2022-2023, the reserve is anticipated to fall below administrative guidelines and is not 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 is a Schedule I Employer, meaning WSIB costs are premium based (rated). Rebates through the NEER program were 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.
Changes to the WSIB program were introduced in 2020 and have impacted the manner in which contributions have been made to the reserve since. 2019 was the last calendar year of the NEER program with the final settlement for 2016-2019 completed in December 2020. The purpose of the program change was 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 has reduced WSIB costs, but at the same time has eliminated the NEER rebate and thus the source as a contribution to the reserve.
Since the change in the program, the reserve has continued to support and fund the RTW program, however, with the reserve funded through operations, made possible by the now lower WSIB premiums. Earlier this year, WSIB indicated that, given a surplus in their reserve due to strong operational, financial and investment management, they will be refunding Schedule 1 employers up to $1.5 billion. Based on the information available at time of report writing, London Transit has met all of the criteria for a refund, however this has not been confirmed, nor has the amount of the refund. Any refund received would be applied to this reserve and utilized to continue to fund the Return to Work Program, however given no confirmation has been received with the details of a refund, nothing has been reflected in the table below.
Actual reserve fund activity for 2021 and provisional estimates for 2022-2023 are summarized in the following table.
Health Care Management Reserve (millions)
|Contributions – Neer rebate||1.040||0.380||–||–||–|
|Contributions – Operations||–||0.500|
|Contributions – WSIB premium savings||0.456||0.423||0.257||0.474||0.483|
|Return to work program cost||(0.456)||(0.423)||(0.257)||(0.474)||(0.483)|
|Employment benefit cost||$12.895||$12.688||$13.925||$14.745||$15.522|
|Reserve as percent of employment benefit cost||26.4%||33.8%||30.8%||29.0%||27.6%|
As set out in the table above, the RTW program continues to be supported through the funding of this reserve. 2021 saw a slight decline in expenditures for the program due mainly to the reduction in rehab work opportunities due to the ongoing pandemic and work related restrictions.
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.
Mike Gregor, Director of Finance
Concurred in by:
Kelly S. Paleczny, General Manager