Item - 2023.EX8.5

The Executive Committee recommends that:

1.  City Council consolidate the Doubtful Loan Guarantee Reserve in Appendix A, Schedule 1 of Toronto Municipal Code Chapter 227 with the Debt Servicing Reserve Fund in Appendix B, Schedule 7 of Toronto Municipal Code Chapter 227, the purpose of which is to mitigate the effects of the rising costs of capital financing, reducing the volatility of the City's annual debt service costs and to provide a source of funding for any shortfalls or defaults in interest and/or principal payments by an organization under which the City has provided a loan guarantee or a loan.

2.  City Council close and delete the Doubtful Loan Guarantee Reserve from Appendix A, Schedule 1 in Toronto Municipal Code Chapter 227.

Reserves and Reserve Funds established by Toronto City Council (Council) are key in the financial management and operations of the City of Toronto (City). These funds are set aside to help offset future capital needs, future obligations such as employee expenses, fiscal pressures from ongoing programs and unforeseen costs or to offset revenue shortfalls, minimizing annual tax rate fluctuations. As an example, prudent financial management requires the City to retain a Tax Rate Stabilization Reserve balance as a contingency to address unanticipated and emergency events. The City has committed to maintaining a Tax Rate Stabilization Reserve balance of no less than 2% of annual property tax revenues for this purpose.

Reserves and Reserve Funds are drawn upon to finance operating and capital expenditures as designated by Council; the contributions to, or draws from, Reserve and Reserve Funds represent a source or use of funds. Contributions to Reserves and Reserve Funds are not revenue earned by the City; similarly, draws are not expenses. Total Reserve and Reserve Funds are consolidated within the City's Accumulated Surplus position on the Consolidated Statement of Financial Position. These balances have accumulated over the last several years with half of the contributions made to address COVID-related financial challenges at the expense of contributions that otherwise would have supported the City's capital program. Outside of planned reserve contributions for specific uses, when possible, contributions may be made when there are excess cash inflows over budgeted amounts, when there are lower expenditures than budgeted or when there are timing impacts to commitments originally planned and approved. With the lasting impacts of the pandemic and the increased financial pressures on the City, these balances are being drawn down. The COVID-19 backstop is expected to be nearly depleted in 2023 and then fully depleted early in 2024. Based on current practices and the current budget there is no predictable source of funding to replenish the balances.

This report provides 2023 activity to June 30, 2023, for the City's Reserves and Reserve Fund balances.

Reserves and Reserve Funds balances as at June 30. 2023 totalled $5,663.0 million, an increase of $231.4 million over the December 31, 2022, balance. This change is the result of various deliberate contributions for capital investments in housing and capital infrastructure, and the proceeds from land sales credited directly to the land acquisition reserve fund, as authorized by Council. The majority of the City's reserve and reserve fund balances ($5,463.9 million, or 96.5%) are committed to future Council directed activities that include capital and operating expenditures and rate-based activities. Only the remaining balance of $199.1 million, or 3.5% of total reserves and reserve funds is uncommitted and available to respond to various unanticipated costs, stabilize various funding sources, including the tax base, or for emergency purposes such as extreme weather events.

Of the $5.5 billion in committed reserve and reserve funds, there are approximately $15.4 billion in future commitments and obligations against the existing reserves and discretionary reserve fund balances, which are consistent with Council approved plans over the 2023-2032 capital planning period. These commitments and obligations are nearly 3 times greater than the current reserve and discretionary reserve fund balances, requiring continued reserve contributions to support planned expenditures.

This report also requests Council approval for administrative amendments to the City of Toronto Municipal Code Chapter 227, Reserves and Reserve Funds ("Chapter 227"). This involves a request to merge the Doubtful Loan Guarantee Reserve into the Debt Servicing Reserve Fund, amend the purpose of the Debt Servicing Reserve Fund, and close the Doubtful Loan Guarantee Reserve.