Staff Report #3 – Status of Reserves & Reserve Funds – December 31, 2022

Staff Report #3

April 13, 2023

To All Commissioners

Re: Status of Reserves & Reserve Funds – December 31, 2022


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. The table below sets out the adjustments made to the reserves and reserve funds as part of the 2022 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, 2022

Description Guideline Indicator Preliminary Year End (Before) Adjust to / (from) Final Year End (After)
Balance (millions) Indicator Balance (millions) Indicator
Reserve Funds
Provincial Gas Tax Years available $ 9.830 0.5 $ 3.125 $12.955 0.7
Capital program Years available 7.872 11.9 7.872 11.9
Public liability % unencumbered 5.608 75.7% 5.608 75.7%
Safe Restart n/a
23,310 3.125 26.435
Energy management % of energy costs 3.203 27.0% (1.538) 1.665 14.0%
General operating % of expenditures 2.999 3.4% 2.999 3.4%
Health Care management % of benefit costs 4.854 35.1% 4.854 35.1%
11.057 (1.538) 9.519
$34.367 $ 1.587 $35.954

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 2023 Recosted Operating and Capital budgets and does not include years past 2023 given the multi-year budget has neither been completed nor approved.

Reserve and Reserve Fund Balances at December 31, 202 (millions)

Description  Actual Estimate
2019 2020 2021 2022 2023
Reserve Funds
Provincial Gas Tax reserve fund $11.393  $13.261 $13.901 $ 12.955 $ 5.895
Capital program reserve fund 5.228 6.205 7.837 7.872 6.110
Public liability reserve fund 3.800 4.669 5.587 5.608 5.131
Safe Restart reserve fund 5.753 11.057
$20.421  $29.888 $38.382 $26.435 $17.137
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 4.854 4.371
 $ 8.805  $10.485 $10.486 $ 9.519  $ 9.036
 $29.226  $40.373 $40.868 $35.954  $26.173

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 16.9% of total operating expenditure investment. The level of support from reserves hit a new high at the peak of the pandemic, as revenue shortfalls and increased expenditures required additional reserve funding to maintain service at appropriate levels. Key to this additional funding was the one-time availability of Safe Restart funding, used solely to support pandemic related shortfalls.

As set out in Staff Report #5 dated April 13, 2023, the 2023 operating budget will require reserve funding estimated at approximately $6.9 over and above that which is typically utilized in any given year. The determination of which reserves/reserve funds to be utilized will be made at year end with consideration being given to the areas the shortfalls occurred and the alignment of use of funds as per the administrative guidelines associated with each reserve/reserve fund. The detailed usage and balance in each of the reserves and reserve funds in the remainder of this report do not include this required draw down as it has not been determined which reserves/reserve funds will be utilized.

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 2023 given the ongoing carry-forward of not yet initiated reserve supported capital projects.

Percent Funding Provided by Reserves and Reserve Funds

Description Actual Estimate
2019 2020 2021 2022 2023
Percent of operating expenditure investment 20.1% 25.1% 25.7% 16.9% 12.2%
Percent of capital expenditure investment 32.2% 30.2% 28.2% 27.5% 44.7%

Reserves do not have identified assets – the reserves represent the Commission’s working capital supporting current operations. In 2022, investment returns on working capital largely accounted for the $307,900 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 2022, investment returns on reserve funds totaled approximately $847,700, a significant increase over the $215,300 earned in 2021. Interest rate hikes in response to global inflationary pressures are expected to continue at least through 2023, with the 2023 recosted budget assumptions updated to reflect this increase. This increase in interest rates grows the reserve and in turn is available as an additional funding source for planned disbursements.

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 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 2022/2023 PGT funding letter received by the Ministry, they recognized that COVID-19 impacted gasoline sales in 2021-22. As a result, the Provincial government committed $80 million in one-time additional funding to address the impacts of COVID-19 on the 2022-23 Gas Tax program. The one-time additional funding maintains the funding envelope at the level of the 2021-22 program year and will help stabilize 2022-23 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 a five-year average of ridership from 2017 to 2021, and will be using the highest level of reported municipal spending from 2017 to 2021 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 2019-2022 and provisional estimate for 2023.

Provincial Gas Tax Reserve Fund (millions)

 Description  Actual Estimate
2019 2020 2021 2022 2023
Opening balance  $16.946  $11.393  $13.261  $13.901  $12.955
Provincial contributions 10.342 10.657  11.145 11.147 11.052
Investment income 0.424 0.172 0.131 0.317 0.339
Approved expenditure
capital (1.668) (1.833)  (2.476) (4.173) (7.773)
operating – conventional (11.546) (5.700) (6.563) (6.460) (8.872)
operating – specialized (3.105) (1.428) (1.597) (1.777) (1.806)
Closing balance  $11.393  $13.261  $13.901  $12.955  $5.895
Budget expenditure investment – funded by PGT  $8.961  $10.636  $12.410  $18.451  $14.324
Years available at December 31 1.3 1.2 1.1 0.7 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 previous government’s announcement of the plan to double the annual Provincial Gas Tax program from $0.02 per litre to $0.04 per litre, which were subsequently abandoned by the current government.

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 & 2022 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 as well as revenue shortfalls and expenditure increases.

Given the planned use of this reserve in 2023, coupled with the increased reliance on annual allocations for both operating and capital budgets, it is likely this reserve will be depleted and annual allocations utilized in the allocation year going forward. This will place increased pressure on other sources of revenue to continue to balance budgets going forward. In addition, the depletion of this reserve will negatively impact flexibility going forward when responding to unplanned project price increases and/or unplanned projects for which no funding had been identified.

As set out in Staff Report #11, dated April 13, 2023, advocacy efforts will continue with both the Ontario Public Transit Association and the Canadian Urban Transit Association with respect to increasing the Provincial Gas Tax for Transit allocations going forward.

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 2019-2022 and provisional estimate for 2023 is summarized in the following table.

Capital Program Reserve Fund (millions)

 Description  Actual Estimate
2019 2020 2021 2022 2023
Opening balance  $4.307  $5.228  $6.205  $7.837  $7.872
Contributions – capital cost amortization 0.315 0.328 0.488 0.281 0.250
Contributions – from operating 1.000 1.000 1.500
Investment income 0.100 0.057 0.048 0.177 0.313
Capital expenditure (0.494) (0.407) (0.401) (0.423) (2.325)
Closing balance  $5.228  $6.205  $7.837  $7.872  $6.110
Budget allocation (new expenditure investment)  $0.494  $0.407  $0.401  $0.423  $2.325
Years available at December 31 7.0 8.7 11.7 11.9 12.0

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 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 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 2019-2022 and provisional estimate for 2023 is summarized in the following table.

Public Liability Reserve Fund (millions)

 Description  Actual Estimate
2019 2020 2021 2022 2023
Opening balance  $3.011  $3.800  $4.669  $5.587  $5.608
Contributions – current operations 1.400 1.400 1.400 0.400 0.400
Investment income 0.073 0.041 0.036 0.127 0.245
Insurance claims costs
– accident benefits (0.604) (0.456) (0.362) (0.350) (0.856)
– public liability (0.080) (0.116) (0.156) (0.155) (0.266)
 Closing balance  $3.800  $4.669  $5.587  $5.608  $5.131
Outstanding – deductible claims cost at Dec. 31  $1.674  $ 1.186  $1.233  $1.364  $1.364
Unencumbered 2.126 3.483 4.354 4.244 3.768
 $3.800  $4.669  $5.587  $5.608  $5.131
Percent unencumbered 55.9% 74.6% 77.9% 75.7% 73.4%

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. Additional contributions were made in each of 2019, 2020 & 2021. 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 and the lag in claims materializing). However, given the anticipation for claims to increase as ridership returns and new claims require a higher deductible, the level currently above the threshold is not considered to be excessive. As a result, the reserve fund is considered to be in good standing.

Safe Restart Reserve Fund

The COVID-19 pandemic 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 responded to municipalities’ needs for transit support.

Funding was initially provided to support shortfalls related to COVID for the period of April through September 2020 (Phase 1), and then extended through March 2021 (Phase 2). With ongoing challenges still present, the Ministry announced further program funding through December 2021 (Phase 3), that was ultimately extended through 2022 for municipalities still experiencing the impacts of COVID. Later in 2022 it was confirmed that the funding program was not being extended beyond 2022 and any unused funds remaining at December 31, 2022 would be required to be returned to the Ministry as per the program guidelines.

The following table sets out the actual reserve fund activity for the duration of the funding, 2020-2022.

Safe Restart Agreement Reserve Fund (millions)

 Description  Actual
2019 2020 2021 2022
Opening balance  $ –  $ –  $5.753  $ 11.057
Provincial contributions:  –
Phase 1 18.524
Phase 1/2 Top-Up 0.214
Phase 3 18.105
Investment income 0.028 0.120 0.227
Approved expenditure
capital (1.427) (0.897) (0.225)
operating – conventional (12.278) (14.029) (6.547)
operating – specialized 0.906 1.791 2.271
Funding returned to Ministry (6.783)
Closing balance  $ –  $5.753  $11.057  $ –

As noted in the above table, $18.524 million was received in 2020 relating to Phase 1 funding, an additional top up of $0.214 million to balance Phase 1 & 2, and then a final payment of $18.105 million for Phase 3. Over the term of the agreement, additional investment income of $375,000 was earned and available for use. The funding itself was 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;
  • Capital – Operator Barriers & Bus Purification System ($0.227 million), installed in 2022;
  • Operating – Conventional net losses due mainly to revenue shortfalls, offset by reduced service hours (2020 – $12.278 million, 2021 – $14.029 million & 2022 – $6.547 million); and
  • Operating – Specialized net savings due mainly to reduced service hours (2020 – $0.906 million, 2021 – $1.791 million & 2022 – $2.271 million).

As at December 31, 2022, the remaining unutilized funding, including interest earned on the reserve, of $6.783 million is set to be returned to the Ministry consistent with the final report submitted in January.

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 2019-2022 and provisional estimate for 2023 are summarized in the following table.

General Operating Reserve (millions)

 Description  Actual Estimate
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  $76.019  $81.487  $88.075  $100.325
Reserve as % of operating expenditure 3.7% 3.9% 3.7% 3.4% 3.0%

As noted in the table, the balance in the reserve at December 31, 2022 and that projected for 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 2019-2022 and provisional estimate for 2023 is summarized in the following table.

Energy Management Reserve (millions)

 Description  Actual Estimate
2019 2020 2021 2022 2023
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  $ 11.863  $ 12.323
Reserve balance as a % of energy cost 29.9% 53.2% 42.2% 14.0% 13.5%

The 2022 Operating Budget 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. The budget had called for a contribution from the reserve of totalling $1.538 million, and unfortunately at year end, the actual prices witnessed during 2022 required this contribution be made.

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 these shortfalls are limited. 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, additional contributions from this reserve may also be required for 2023.

The reserve balance as at December 31, 2022, and expression as a percentage of energy cost falls below the administrative guideline of maintaining a reserve balance of between 25% and 35% of energy costs.

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.

Actual reserve fund activity for 2019-2022 and provisional estimate for 2023 are summarized in the following table.

Health Care Management Reserve (millions)

 Description  Actual
2019 2020 2021 2022 2023
Opening balance  $2.363  $3.403  $4.283  $4.283  $4.854
Contributions – Neer rebate 1.040 0.380 0.571
Contributions – Operations 0.500
Contributions – WSIB premium savings 0.456 0.423 0.257 0.289
Return to work program cost (0.456) (0.423) (0.257) (0.289) (0.483)
Closing balance  $3.403  $4.283  $4.283  $4.854  $4.371
Employment benefit cost  $12.895  $12.688  $13.925  $13.819  $15.213
Reserve as percent of employment benefit cost 26.4% 33.8% 30.8% 35.1% 28.7%

As set out in the table above, the cost of the RTW program continues to be supported through the reserve, but the funding since 2019 has transitioned from that of an external source, NEER rebates, to that of an internal source, operational contributions, made possible due to reduced WSIB rates.

As noted in Staff Report #5, 2023 Recosted Operating Budget, dated April 13, 2023, it is planned that operating contributions to support the RTW funding be suspended in 2023, thus reducing the operational shortfall projected during the recosting process by $0.483 million.

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. Given the projected deficit that still remains, further support from this reserve may be required at year end.

Recommended by:

Mike Gregor, Director of Finance

Concurred in by:

Kelly S. Paleczny, General Manager