The cash-strapped City of Toronto is heading towards bankruptcy because of its large operating budget, the absence of a long-term funding plan and the constant dipping into its reserves funds, councillors warn.

The city's reserve fund was $1.3 billion in 2001, but only $24 million of that remains. The grim news came after council's executive committee endorsed taking money from the reserve to help cover a $71 million funding shortfall.

Chief financial officer Joe Pennachetti said the measure is needed because the province isn't paying its fair share for various social programs.

"The delay in planned provincial uploads results in major operating funding shortfalls," Pennachetti said. "It results in the depletion of our discretionary reserve funds."

Toronto's $7.8 billion operating budget means taxpayers will see a 3.8 per cent property tax increase. For the average homeowner, that means about $80, but it will raise $45 million for the city.

While council voted unanimously to sue the Ontario government over the $71 million it feels it is owed, opponents of Mayor David Miller say Toronto has a flawed funding formula that could lead to bankruptcy.

"It's the message that I've been giving out since the mayor's first budget, that we have not been dealing with the fiscal problems of the city and the province has not been dealing with the fiscal problems of the city, and we are going towards bankruptcy," said Councillor David Shiner.

Councillor Karen Stintz says a new blueprint must be drawn up to correct the ongoing problems.

"We're not in a sustainable situation, we don't have our house in order, and we do need to make some serious structural changes to our budget process in order to continue to live and service the people of Toronto," Stintz said.

But some councillors say Queen's Park has to keep its promises and treat Toronto fairly.

"We should be concerned, and there is an election coming up provincially," said Councillor Kyle Rae.

"Toronto voted for the Liberal government to unravel the unfair practices of the (Mike) Harris government and they have not done that."

Mayor Miller, meanwhile, said the word "bankruptcy" was not accurate. But he said the city is facing serious financial challenges.

"Two years ago, the Conference Board of Canada said we're $1.1 billion short every year. They were right," Miller said.

"This year's budget shows that the city simply can't afford anymore to pay for the downloaded programs. It's that simple."

With a report from CTV's Desmond Brown