Staff Report #5
April 13, 2023
To All Commissioners
Re: Recosted 2023 Operating Budget Program
Recommendation
The Commission APPROVE the recosted 2023 operating expenditure budget for London’s public transit services of $101,873,300 as summarized on the following table noting the recosting has not resulted in any changes to the City of London funding;
| Description | Conventional Transit | Specialized Transit | Total | |
| Revenue | ||||
| Transportation revenue | $33,964,200 | $ 580,000 | $34,544,200 | |
| Operating revenue | 2,284,200 | – | 2,284,200 | |
| Transfer from reserves | 8,530,200 | – | 8,530,200 | |
| Provincial gas tax funding | 8,872,100 | 1,805,800 | 10,677,900 | |
| Total Revenue | 53,650,700 | 2,385,800 | 56,036,500 | |
| Expenditure | ||||
| Personnel cost | 58,824,000 | 1,344,300 | 60,168,300 | |
| Fuel | 10,413,900 | – | 10,413,900 | |
| Direct bus maintenance | 7,443,600 | – | 7,443,600 | |
| Facility | 3,565,100 | – | 3,565,100 | |
| Insurance | 4,106,200 | – | 4,106,200 | |
| Contribution to reserves | 1,548,100 | – | 1,548,100 | |
| Contracted service costs | – | 10,561,500 | 10,561,500 | |
| All other material costs | 3,793,000 | 273,600 | 4,066,600 | |
| Total Expenditures | 89,693,900 | 12,179,400 | 101,873,300 | |
| City of London | $36,043,200 | $9,793,600 | $45,836,800 | |
Background
At the August 31, 2022 meeting, the Commission approved the 2023 base operating budget programs for conventional and specialized transit services as set out in the table below.
2023 Approved Base Operation Budget
| Category | Conventional | Specialized | Total |
| Revenue | $ 49,163,600 | $ 2,436,500 | $ 51,600,100 |
| Expenditures | 89,854,800 | 12,975,500 | 102,830,300 |
| City of London | $ 36,043,200 | $ 9,793,600 | $ 45,836,800 |
| Budget Shortfall | $ 4,648,000 | $ 745,400 | $ 5,394,400 |
As indicated in the table, at the time the budget was approved, there was an identified shortfall of $5,394,400, which was due to be the result of pandemic-related impacts on the operation. As all base funding and prior growth budgets have been fully funded through the multi-year and assessment growth budget processes, any material deviations from this require attention/additional funding. Generally, smaller increases or shortfalls have been balanced utilizing either City funding increases, expenditure reductions or an increase in provincial gas tax funding. However, since the initial onset of the pandemic in 2020, COVID impacts on the industry, as well as recent significant inflationary pressures on the global economy, have had material impacts on the public transit funding model.
The deficit identified in the original 2023 operating budget was due to the following:
- $1.645 million shortfall due to the ongoing COVID impact on conventional transportation revenue;
- $2.712 million shortfall due to higher than previously planned fuel prices;
- $0.291 million shortfall due to higher than previously planned insurance costs; and
- $0.745 million shortfall due to higher specialized contracted service costs.
As part of the approval of the 2023 Operating Budget, the Commission also directed administration to report back on options to mitigate the shortfall in March of 2023.
Consistent with established practices, the 2023 budget has been through a recosting exercise, noting this year the intent of the exercise was not only to identify significant trends and/or emergent issues that have developed since the budget was first prepared, but also to identify the manner in which the projected shortfall would be addressed. Further limiting the options to balance the budget, and thus offset some of the significant COVID impacts is the wind-down of the Safe Restart program. This emergency funding introduced in 2020, was available through December 31, 2022, but not beyond. Safe Restart funding provided support for shortfalls of $11.4 million, $12.2 million, and $4.3 million in 2020, 2021 and 2022 respectively.
As set out in the following report sections, administration is recommending that the recosted budget shortfall for 2023 be addressed through the use of the Commission’s reserves/reserve funds. The rational for this approach is two-fold. First, it provides the opportunity to defer a substantial fare increase until 2024 when service levels and the overall customer experience has improved, and second, it avoids any request to the City of London for additional funding in the current budget year. While this approach will ensure a balanced budget in 2023, it sets the stage for a difficult multi-year budget discussion should the current ridership and expenditure trends continue. Given the increased reliance on the annual Provincial Gas Tax allocation for both operating and capital budgets, the only remaining options to address shortfalls are increased fares, increased City of London investment, or service level reductions.
Conventional Transit Service
In order to complete the 2023 budget, a number of key assumptions had been applied, many of which have been refined given updated trending post pandemic. The following table sets out the updates that have been applied to the conventional transit service operating budget as the result of the recosting exercise.
2023 Recosted Conventional Transit Service Operating Budget
| Description | 2023 Budget | Recosting Updates | 2023 Recosted |
| Revenue | |||
| Transportation Revenue | $ 37,879,100 | $ (3,914,900) | $ 33,964,200 |
| Operating Revenue | 1,290,800 | 993,400 | 2,284,200 |
| Transfer from Reserves | 1,121,600 | 7,408,600 | 8,530,200 |
| Provincial Gas Tax | 8,872,100 | – | 8,872,100 |
| Total Revenue | 49,163,600 | 4,487,100 | 53,650,700 |
| Expenditure | |||
| Personnel | 59,178,000 | (354,000) | 58,824,000 |
| Fuel | 10,757,900 | (344,000) | 10,413,900 |
| Direct Bus Maintenance | 7,492,600 | (49,000) | 7,443,600 |
| Facility | 3,565,100 | – | 3,565,100 |
| Insurance | 4,106,200 | – | 4,106,200 |
| Contribution to Reserves | 962,000 | 586,100 | 1,548,100 |
| All Other Material Costs | 3,793,000 | – | 3,793,000 |
| Total Expenditures | 89,854,800 | (160,900) | 89,693,900 |
| City of London | $ 36,043,200 | – | $ 36,043,200 |
| Surplus / (Deficit) | $ (4,648,000) | $ – | $ – |
Recosting updates include all the items whose assumptions, trends, costs, rates, etc. have changed since the original budget was presented in August; including transportation revenue, operating revenue, personnel costs, fuel, direct bus maintenance and contribution to reserves. Unfortunately, the results of the updates have led to a further shortfall of $2,277,600. The adjustment to the transfer from reserves reflects the revised deficit necessary to address the combined shortfall. Further details with respect to each of these updates include the following:
Recosting Updates:
- Transportation revenue – the original budget indicated an initial transportation revenue shortfall at the time of $1.645 million due to the ongoing COVID impact on transportation revenue. Anticipated service growth and ongoing increased average fare assumptions within the original multi-year budget had not materialized and were the main contributor to the reduction. Since August, the direct impacts of the pandemic started to slow (i.e. lock-downs, etc.), but the longer term impacts on ridership are more apparent. The initial budget prepared last August, projected a quicker return to pre-pandemic levels while current trends are not supporting this. Revised assumptions regarding ridership are projecting a further shortfall of $3.915 million, an overall reduction of approximately 17% compared to the transportation revenue projected for 2023 in the original pre-pandemic multi-year budget.
- Operating revenue – significant upward pressure on interest rates, mainly a result of the economic response to curb inflation, have resulted in a drastic improvement in the interest income earned on the Commission’s cash and cash equivalent accounts. A significant operating account balance, as well as its reserve fund bank accounts, results in an update to operating revenue of $993,400. The increase in interest income of $586,100 pertaining to reserve funds is offset below as a $586,100 increase in Contribution to Reserves, as all interest earned on fund balances must stay within the reserve. The net positive impact of $407,300 directly offsets the current deficit.
- Transfer from reserves – LTC has a robust return to work (RTW) program with associated labour costs incurred within the personnel category. Historically the program was funded by the Health Care Management Reserve, which was generally replenished from the WSIB NEER rebate program rendering it a sustainable source of funding. With the recent elimination of the NEER program, and resulting declines in WSIB premiums as a result, LTC in 2019 adapted to fund the program within general operations. Although the reserve has remained in place to support the overall employment benefits program, it is recommended that given the deficit presented in 2023, and the current balance within the reserve, it be used to provide additional support to operations for 2023 only.
- Personnel costs – the original budget projected a return to full service hours in January 2023. Given the delay in implementing service growth, the budget has been updated to reflect plan of moving to full service levels in May. The net impact is a $354,000 reduction in personnel costs.
- Fuel – fuel prices in the original budget were amended to reflect the sharp increases witnessed in early 2022, due mainly to the conflict in Ukraine. This resulted in a $2.712 million increase in fuel costs and thus overall projected deficit. Unfortunately, prices have not subsided, and the prices included in the initial budget continue to reflect the current reality. Fuel costs related to the projected kilometer usage have however decreased due to the impact of not returning to full service as initially predicted and result in an overall fuel savings of $344,000.
- Direct bus maintenance (service hours) – similar to fuel, the reduction in service hours also reduces other costs within direct bus maintenance and servicing, such as tires, a savings of $49,000.
- Contributions to reserves – as noted above in Operating revenue, interest income earned on reserve fund balances is projected to increase $586,100 due to the recent interest rate hikes. Increased income earned within reserve funds must be retained within each fund, and thus an offsetting contribution back to the reserve is required. Although this does not result in a reduction to the deficit, it does help grow the reserves which in turn are directly used to support various operational and capital areas.
Reserve Adjustment:
The initial 2023 conventional operating budget projected a deficit of $4,648,000 and directed administration to report back on options to mitigate this shortfall. The recosting exercise resulted in the shortfall growing to $6,925,600, which is included in the recosted budget as a transfer from reserves.
Staff Report #3 dated April 13, 2023 sets out the current financial position of the Commission reserves and reserve funds. A combination of these, along with actual financial results in 2023 will be required to balance the budget.
The 2024 budget setting process, which also includes the City’s multi-year budget submission to include 2024 through 2027, will require a significant rebalancing of revenue and expenditure budgets. The use of reserves to manage the 2023 deficit without permanent revenue increases (i.e. City funding, rate increases) or expenditure decreases (i.e. reductions in service hours and/or discretionary spending) is not sustainable.
Specialized Transit Service
Similar to the recosting for conventional services, the same review was performed for specialized transit. The table below sets out the adjustments to the 2023 specialized operating budget and the resulting recosted budget.
Recosted 2023 Specialized Transit Service Operating Budget
| Description | 2023 Budget | Recosting Updates | 2023 Recosted |
| Revenue | |||
| Passenger fares | $ 630,700 | $ (50,700) | $ 580,000 |
| Provincial funding | 1,805,800 | – | 1,805,800 |
| Total Revenue | 2,436,500 | (50,700) | 2,385,800 |
| Expenditure | |||
| Personnel cost | 1,344,300 | – | 1,344,300 |
| Contracted services | 11,357,600 | (796,100) | 10,561,500 |
| All other material costs | 273,600 | – | 273,600 |
| Total Expenditures | 12,975,500 | (796,100) | 12,179,400 |
| City of London | $ 9,793,600 | $ – | $ 9,793,600 |
| Surplus / (Deficit) | $ (745,400) | $ 745,400 | $ – |
Similar to conventional transit, specialized also reported an unfunded deficit of $745,400 within the original 2023 operating budget. This shortfall was due to the inflationary impact on contracted services, with no secured funding confirmed at the time.
The ridership and related revenue projections for the recosted 2023 specialized operating budget have been amended to be more reflective of the current trends being experienced, resulting in a reduction in transportation revenue. The recosted impact is a reduction in transportation revenue of $50,700.
The most significant impact relates to the expenditures for contracted services. The original budget reflected the implementation of approved service hours for the full year. However, the trend of reduced demand with corresponding service hour reductions has continued longer than originally anticipated. This trend has been updated within the recosted operating budget, noting that it is anticipated the contracted service provider will return to full service levels by the end of 2023. This gradual return to full service levels will result in anticipated savings for 2023 of $796,100.
The net savings in specialized due to recosting updates essentially offsets the original deficit projected during the original budget setting last August. Although the result is that no additional funding is required in 2023 to balance the budget, it should be anticipated that this deficit will in fact return in 2024 given the one time nature in cost savings attributable to the delay in implementing full service hours in 2023. This also will provide strain on the 2024 budget and will require a more sustained approach.
Administration will continue to monitor the operating budget performance, reporting on same on a monthly basis throughout 2023.
Recommended by:
Mike Gregor, Director of Finance
Concurred in by:
Kelly S. Paleczny, General Manager