Staff Report #3
March 26, 2025
To All Commissioners
Re: Status of Reserve & Reserve Funds – December 31, 2024
Recommendation
The report be NOTED and FILED.
Background
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 2024 year-end process noting the balances provided in the specific tables following are all inclusive of the adjustments.
Reserve and Reserve Funds Adjustments – December 31, 2024
| 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 | $ 7.362 | 0.5 | $1.334 | $ 8.696 | 0.6 |
| Capital program | Years available | 6.757 | 8.0 | 0.369 | 7.125 | 8.4 |
| Public liability | % unencumbered | 5.184 | 69.9% | – | 5.184 | 69.9% |
| 19.303 | 1.703 | 21.006 | ||||
| Reserves | ||||||
| Energy management | % of energy costs | 1.665 | 14.0% | 2.500 | 4.165 | 35.1% |
| General operating | % of expenditures | 2.999 | 2.7% | 1.494 | 4.493 | 4.1% |
| Health Care Mgmt | % of benefit costs | 4.102 | 25.6% | 0.500 | 4.602 | 28.7% |
| 8.766 | 4.494 | 13.260 | ||||
| $28.069 | $ 6.197 | $34.266 | ||||
A summary of the six reserves and reserve fund balances are set out in the following table, noting the Provincial Gas Tax Reserve Fund is a requirement under its program guidelines. The provisional estimates provided in this report are based on the Commission’s approved 2024-2027 multi-year budget.
Reserve and Reserve Funds Balances at December 31, 2024 (millions)
| Description | Actual | Estimate | |||
| 2023 | 2024 | 2025 | 2026 | 2027 | |
| Reserve Funds | |||||
| Provincial Gas Tax reserve fund | $13.782 | $ 8.696 | $ 5.620 | $ 4.579 | $ 3.511 |
| Capital program reserve fund | 7.638 | 7.125 | 6.814 | 6.412 | 6.101 |
| Public liability reserve fund | 5.148 | 5.184 | 4.712 | 4.240 | 3.768 |
| 26.569 | 21.006 | 17.146 | 15.231 | 13.380 | |
| Reserves | |||||
| Energy management reserve | 1.665 | 4.165 | 4.165 | 4.165 | 4.165 |
| General operating reserve | 2.999 | 4.493 | 4.493 | 4.493 | 4.493 |
| Health Care management reserve | 4.586 | 4.602 | 4.104 | 3.590 | 3.061 |
| 9.250 | 13.260 | 12.762 | 12.249 | 11.720 | |
| $35.819 | $34.266 | $29.908 | $27.480 | $25.100 | |
The reserves and reserve funds, particularly over the last number of years when City of London investment has been subject to substantial constraints and operational impacts resulting from the global pandemic resulted in increased pressures on budgets, 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.
Reserves and reserve funds, as indicated in the following table, currently provide investment support of approximately 10% 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 operating costs required additional reserve funding to maintain service at appropriate levels. As planned during the 2024-2027 multi-year budget, reliance on reserve funding levels has been reduced to a more sustainable level.
The reserve and reserve funds’ investments in capital expenditures as a percentage of the total have been fairly consistent in recent years but will see a significant decline over the remaining years of the multi-year budget. This is due mostly to the exclusion of provincial gas tax going forward as a source of funding for capital projects as well as significant capital projects whose funding is provided by the City of London, and other senior levels of government (Highbury Facility Rebuild, ZEB transition) rather than internal reserves.
Percent Funding Provided by Reserves and Reserve Funds
| Description | Actual | Estimate | |||
| 2023 | 2024 | 2025 | 2026 | 2027 | |
| Percent of operating expenditure investment | 12.4% | 10.0% | 9.8% | 10.2% | 9.2% |
| Percent of capital expenditure investment | 32.1% | 28.8% | 12.3% | 2.1% | 2.1% |
Reserves do not have identified assets – the reserves represent the Commission’s working capital supporting current operations. In 2024, investment returns on working capital largely accounted for the $872,200 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 respective reserve fund. In 2024, investment returns on reserve funds totaled approximately $1,216,600, a slight decrease over the $1,439,800 earned in 2023, both due to continued interest rate hikes in response to global inflationary pressures. This additional interest income 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.
The remainder of this report provides further detail and analysis of each of the Commission’s reserves and reserve funds.
Provincial Gas Tax Reserve Fund
The Province of Ontario has established the Provincial Gas Tax Program (PGT) dedicated specifically for public transit services (conventional and specialized transit services). PGT funding has supported 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 allocation 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 total amount of PGT allocation for eligible transit systems in Ontario 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 funding allocation received in 2024 for the 2023-2024 Gas Tax Program ended up being $10.158 million, 8.1% less than the $11.052 million received the prior year. Within their allocation letter, the Ministry acknowledged the variation in ridership recovery amongst the systems in the province and committed to holding the overall funding envelope constant to that provided in the 2022-2023 program. As the allocation for 2023-2024 was based on 2022 ridership levels, the 8.1% reduction for London Transit directly indicates that ridership growth is not keeping pace with the other systems in Ontario.
The 2024-2025 PGT funding letter has not yet been received, however, the allocation is not expected to increase given the continued softer ridership gains in comparison to our peers. It is also uncertain as to whether the overall funding envelope will change significantly or whether the Ministry will add to the envelope as had been the case in 2023-2024. At this point and included in the table below, the funding allocation for 2025-2027 is projected to be constant, however, a further decline is possible.
The use of PGT is approved via the annual (multi-year) budget process, and often is adjusted during the year-end process as required. The extent of its use has historically been impacted by the London Transit administrative guideline, which has set a minimum unallocated balance in the reserve fund at the end of each year equal to 1.5 years of planned use. Given the significant pressures on the operating budget in 2024 and going forward, the decision was made to shift the use of the PGT funding to have the annual allocation fully utilized to offset expenditures in the conventional transit operating budget. Notwithstanding this adjustment in approach, significant increases in revenue were also required from a fare increase and through increased investment from the City of London. The projected balances in the reserve fund would be available to fund one-time projects or any budget deficits that may be faced in a given fiscal year. As demonstrated in the following table, the projected balance remaining in the reserve is well below the historic 1.5 years of planned use.
The following table sets out the actual reserve fund activity for 2023-2024 and provisional estimates for 2025-2027.
Provincial Gas Tax Reserve Fund (millions)
| Description | Actual | Estimate | |||
| 2023 | 2024 | 2025 | 2026 | 2027 | |
| Opening balance | $12.955 | $13.782 | $ 8.696 | $ 5.620 | $ 4.579 |
| Provincial contributions | 11.052 | 10.158 | 10.158 | 10.361 | 10.568 |
| City capital funding offset | – | 1.333 | 0.832 | 1.433 | 1.484 |
| Investment income | 0.716 | 0.536 | 0.250 | 0.250 | 0.250 |
| Approved expenditure | |||||
| Capital | (0.042) | (5.914) | (2.892) | (1.433) | (1.484) |
| Operating – conventional | (10.413) | (11.200) | (11.424) | (11.653) | (11.886) |
| Operating – specialized | (0.486) | – | – | – | – |
| Closing balance | $13.782 | $ 8.696 | $ 5.620 | $ 4.579 | $ 3.511 |
| Budget expenditure investment – funded by PGT | $18.934 | $13.484 | $11.652 | $11.885 | $11.885 |
| Years available at December 31 | 0.7 | 0.6 | 0.5 | 0.4 | 0.3 |
As set out in Staff Report #2, dated August 28, 2024, the contract award for LTC’s 2024-2027 replacement bus program with New Flyer Industries resulted in a bus price greater than that budgeted previously for the program. As the program is fully funded by the City of London, administration was advised by civic administration to submit an amended business case, outlining the impact of the increased prices as part of the 2025 budget process. The business case was approved but required LTC to fund the increase through the PGT reserve. To offset this hit to the reserve, the ongoing surplus that results from the timing of the implementation of service growth hours will be utilized. Note that in each of 2024-2027, the implementation of LTC’s conventional service hour growth commences in September, rather than January. This planned timing has always resulted with an in-year surplus compared to the approved annualized funding levels. The positive impact to the reserve is noted in the above table as ‘City capital funding offset’, while the usage of the funds is included as the capital approved expenditure for 2024 through 2027.
As noted above, the reserve is currently below the administrative guideline and is projected to continue to remain below over the next multi-year budget cycle.
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 London Transit would need to seek additional capital funding in the area of $500,000 to $1,000,000 per year from the city.
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 2023-2024 and provisional estimates for 2025-2027 is summarized in the following table.
Capital Program Reserve Fund (millions)
| Description | Actual | Estimate | |||
| 2023 | 2024 | 2025 | 2026 | 2027 | |
| Opening balance | $7.872 | $7.638 | $7.125 | $6.814 | $6.412 |
| Contributions – capital cost amortization | – | 0.369 | 0.250 | 0.250 | 0.250 |
| Contributions – from operating | – | – | – | – | – |
| Investment income | 0.422 | 0.401 | 0.250 | 0.250 | 0.250 |
| Capital expenditure | (0.657) | (1.283) | (0.811) | (0.901) | (0.811) |
| Closing balance | $7.638 | $7.125 | $6.814 | $6.412 | $6.101 |
| Budget allocation (new expenditure investment) | $0.657 | $1.283 | $0.811 | $0.901 | $0.811 |
| Years available at December 31 | 8.1 | 8.4 | 8.1 | 7.7 | 7.3 |
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 2023, the budgeted contribution to the reserve was not made in an effort at year-end to mitigate the anticipated budget shortfall. Given the operating surplus position at year-end, the annual required contribution of $369,000 was made. As a result, the reserve is considered to be in good standing and is anticipated to remain so through the multi-year budget period.
Public Liability Reserve Fund
The public liability reserve fund is used to fund:
- annual public liability claims costs up to the established deductible amount of $100,000; and
- annual accident benefit claims costs up to the established deductible of $100,000.
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 2023-2024 and provisional estimates for 2025-2027 is summarized in the following table.
Public Liability Reserve Fund (millions)
| Description | Actual | Estimate | |||
| 2023 | 2024 | 2025 | 2026 | 2027 | |
| Opening balance | $5.608 | $5.148 | $5.184 | $4.712 | $4.240 |
| Contributions – current operations | – | 0.400 | 0.400 | 0.400 | 0.400 |
| Investment income | 0.302 | 0.279 | 0.250 | 0.250 | 0.250 |
| Insurance claims costs | |||||
| – accident benefits | (0.705) | (0.600) | (0.856) | (0.856) | (0.856) |
| – public liability | (0.056) | (0.043) | (0.266) | (0.266) | (0.266) |
| Closing balance | $5.148 | $5.184 | $4.712 | $4.240 | $3.768 |
| Outstanding – deductible claims cost at Dec. 31 | $1.331 | $ 1.562 | $1.594 | $1.625 | $1.658 |
| Unencumbered | 3.818 | 3.662 | 3.118 | 2.614 | 2.110 |
| $5.148 | $5.184 | $4.712 | $4.240 | $3.768 | |
| Percent unencumbered | 74.1% | 69.9% | 66.2% | 61.7% | 56.0% |
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. Similar to the capital program reserve, the 2023 budgeted annual contribution of $400,000 was not made in an effort at year end to mitigate the anticipated budget shortfall. With claims reduced during the pandemic and the current level of anticipated future claims, the reserve remained in a somewhat healthy position. However, with the recent increase in claims associated with the growth in ridership, along with the anticipated reserve required for increasing outstanding claims, the reserve is projected to return to the range within the guideline. Given the 2024 operating results, the budgeted annual contribution of $400,000 was made. With this contribution the reserve fund is considered to be in good standing through this multi-year budget cycle.
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 2023-2024 and provisional estimates for 2025-2027 are summarized in the following table.
General Operating Reserve (millions)
| Description | Actual | Estimate | |||
| 2023 | 2024 | 2025 | 2026 | 2027 | |
| Opening balance | $2.999 | $2.999 | $4.493 | $4.493 | $4.493 |
| Contribution from/(to) operations | – | 1.494 | – | – | – |
| Closing balance | $2.999 | $4.493 | $4.493 | $4.493 | $4.493 |
| Total expenditure | $97.358 | $110.402 | $112.059 | $115.421 | $118.877 |
| Reserve as % of operating expenditure | 3.1% | 4.1% | 4.0% | 3.9% | 3.8% |
An opportunity existed at year-end to provide a $1.494 million contribution to the reserve given favourable operating revenues (interest income) and lower than budgeted contracted services expenditures. The additional contribution creates an improved operational cash flow as well as putting the reserve in a greater future position noting the Commission has less PGT available to support potential shortfalls in operating funding. The reserve’s funding status increased from 2.7% of total operating expenditures to 4.1% as a result of the additional contribution. With the administrative guideline of maintaining a reserve balance of between 2.5% and 5.0%, 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 year-end processes.
Actual reserve fund activity for 2023-2024 and provisional estimates for 2025-2027 is summarized in the following table.
Energy Management Reserve (millions)
| Description | Actual | Estimate | |||
| 2023 | 2024 | 2025 | 2026 | 2027 | |
| Opening balance | $ 1.665 | $ 1.665 | $ 4.165 | $ 4.165 | $ 4.165 |
| Contribution – current op. surplus | – | 2.500 | – | – | – |
| Fuel costs – unfunded increases | – | – | – | – | |
| Closing balance | $ 1.665 | $ 4.165 | $ 4.165 | $ 4.165 | $4.165 |
| Estimated total energy costs (diesel, hydro) | $10.941 | $11.858 | $11.893 | $ 12.222 | $ 12.568 |
| Reserve balance as a % of energy cost | 15.2% | 35.1% | 35.0% | 34.1% | 33.1% |
As has been the case in recent years, energy costs continue to be somewhat unpredictable. The operating budget for diesel fuel especially can vary significantly with a slight price increase given the volume consumed on an annual basis. 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, the reliance and need for this reserve remain important.
The reserve balance as at December 31, 2024, prior to year-end adjustments, equated to 14.0% of energy costs, well below the administrative guideline of 25% to 35%. The reserve had remained below this guideline since 2022 when a depletion of the reserve was required to offset surging fuel prices. Favourable fuel results in 2024, due mostly to lower prices than budget, along with other favourable operating results provided the opportunity to fund an additional $2.5 million to the reserve at year-end, raising the percentage of energy costs to 35.1%. As a result, the reserve is now 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 London Transit’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.
Actual reserve fund activity for 2023-2024 and provisional estimates for 2025-2027 are summarized in the following table.
Health Care Management Reserve (millions)
| Description | Actual | Estimate | |||
| 2023 | 2024 | 2025 | 2026 | 2027 | |
| Opening balance | $4.854 | $4.586 | $4.602 | $4.104 | $3.590 |
| Contributions – Neer rebate | 0.123 | – | – | – | – |
| Contributions – Operations | – | 0.500 | – | – | – |
| Contributions – WSIB premium savings | – | – | – | – | – |
| Return to work program cost | (0.392) | (0.484) | (0.498) | (0.513) | (0.529) |
| Closing balance | $4.586 | $4.602 | $4.104 | $3.590 | $3.061 |
| Employment benefit cost | $15.044 | $16.035 | $16.587 | $17.181 | $17.798 |
| Reserve as percent of employment benefit cost | 30.5% | 28.7% | 24.7% | 20.9% | 17.2% |
As set out in the table above, the cost of the RTW program for the next multi-year budget cycle continues to be supported through the reserve. Historically the reserve was funded directly from WSIB’s NEER rebate program. With the change in WSIB’s format to one where rates have been stabilized and are modified either up or down annually based on an organization’s performance, the NEER rebate has been eliminated. With this change, and subsequent reduction in net WSIB rates, it was anticipated that funding the reserve would occur by contributions from operations. However, with the cost pressures faced during current multi-year budget cycle and noting the healthy position of the reserve heading into the next four years, contributions were not budgeted.
An opportunity existed at year-end to provide a $0.500 million contribution to the reserve given lower than budgeted actual benefit expenditures. The additional contribution provides future support to the reserve through the current multi-year budget that hadn’t been anticipated. The reserve’s funding status increased from 25.6% of employment benefit costs to 28.7% as a result of the additional contribution.
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 in 2023-2026 but is anticipated to drop below the threshold by the end of the multi-year budget cycle.
Recommended by:
Mike Gregor, Director of Finance
Concurred in by:
Kelly S. Paleczny, General Manager