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Toronto’s Budget: A Decoder

All those terms politicians throw about? Here's what they actually mean.

A City worker and a police officer during sewer work on Queen Street. Photo by }sniderscion from the Torontoist Flickr Pool.

It’s municipal budget time, and that means everyone can get confused once again about what sound accounting principles really are; whether you should think about investing in the City while you consider cuts elsewhere (yes); and whether capital and operating are the same kind of budget (no). If budget terms seem hard to understand, then don’t worry, you’re in the company of some councillors, too.

But fear not, here’s our handy quick guide to terms that will come up over the next two months.

Operating Budget
The main budget that’s referred to at council and in the media, this covers the City’s ongoing, routine activity. It consists of the annual budgets of City departments and agencies—everything from the planning department to the library system—and the money that covers day-to-day expenditures: salaries, supplies, fuel for TTC vehicles, et cetera. The Ford administration has asked all departments and agencies to hold the line on this budget—a zero per cent increase compared to last year.

Toronto’s operating budget is $9.4 billion, and as last year’s KPMG core-service review showed, the bulk of it is tied up in provincially mandated services.

A deficit is a shortfall in an annual operating budget: it’s what happens when you spend more than you have coming in. Despite various soundbites coming from various politicians, the City of Toronto cannot run a deficit, and has never done so. Provincial legislation stipulates that cities’ operating budgets must be balanced.

Capital Budget
This is the budget that covers major projects and purchases with long term use: new buildings, the Union Station revitalization, or state of good repair work on the Gardiner, for instance. Because these are big-ticket items, they are paid for over a long period of time. As with individuals who buy houses with the help of a mortgage, often the City borrows money to make these projects possible.

Our debt is the amount owed on the capital budget—it’s how much we’ve had to borrow in order to take on those larger-scale projects. Though it is often the target of political attacks, having a debt is not necessarily a bad thing. If borrowing costs are low and the expected return on a project is high, then it makes sense to take on some debt. (For instance, if the economic benefit of investing in an arts centre is 8 per cent and borrowing costs are 2 per cent, there’s a good case to proceed.) Also, it is close to impossible to pay for major projects by saving up for them in advance (it would be like buying a house with cash upfront instead of taking out a mortgage) so some debt is widely viewed as a necessity.

While debt represents investment, it also means risk, so it’s important to ensure our debt doesn’t become too large. To ensure the risks are limited, the City has a self-enforced rule that debt servicing costs should not exceed 15 per cent of the money it takes in via property taxes—so if, for instance, you took in a billion dollars in property tax revenue, debt service should not exceed $150 million in that year. (The figure is currently 11 per cent.)

Credit Rating
Outside credit rating agencies grade the financial stability of various levels of government, including major cities. Toronto’s current grade is AA, the second highest tranche available. This puts it in good stead compared to other large North American cities. Higher credit ratings mean lower borrowing costs.

Opening Pressure
The opening pressure is the difference between the City’s anticipated expenditures and its anticipated revenues, based on very cautious estimates, early in the budget’s cycle.

The budget process is a long one, and it starts early in the year when various departments and agencies submit their annual budget estimates to budget staff. Because the City can’t run an operating deficit, those estimates tend to assume some tough scenarios, not the most optimistic ones. (For instance, the TTC might budget for increases in the price of gas so they know they can keep buses running in that eventuality.) The City doesn’t know what its final revenue will be either (like how much it will take in from the land transfer tax), and is similarly conservative in those estimates. As City staff prepare their budget recommendations, their main job is to figure out how to best close the gap between how much they think they might need to spend, and how much they can very safely assume they’ll bring in. (Matt Elliott at Metro has a fantastically clear and simple article explaining how they are proposing to close that gap this year.)

From the proposed 2013 budget.

Structural Deficit
Councillors and journalists often mention a “structural deficit,” which is a way of describing the persistence of a significant opening pressure in our budgets—the fact that every year Toronto’s budget starts off with that gap. What the structural deficit actually means is open to debate. Some, like current budget chief Mike Del Grande (Ward 39, Scarborough-Agincourt), argue that it’s caused by spending beyond our means, the result of expenditures outpacing growth. Others, like former budget chief Shelley Carroll (Ward 33, Don Valley East), contend that we have a structural deficit because the City’s limited taxation powers prevent it from meeting the complicated needs of a growing city.

Property Taxes
Unlike income taxes, which naturally grow over time, property taxes do not. So in order for council to have the same purchasing power with their revenue in one year compared to the previous one, they actually need to increase the property tax rate to account for inflation. Toronto’s current property tax rate is 0.78 per cent, the lowest in the region (Hamilton is twice as much); the average homeowner paid $2,467 in property taxes last year.

Deceptively complicated, Dylan Reid of Spacing provides a great explanation of how property taxes work.

Because council can’t be in deficit, it always has a surplus from the previous year. Sometimes the surplus is as small as $5 million, but it has been over $300 million too, depending on how conservative staff budgeting was, whether there wasn’t much snow that year, whether fuel costs were lower than expected, and any number of factors. Another political football, some councillors think our surpluses are too large—a sign of poor management—while others maintain it’s what happens when we are appropriately cautious.

The City manager has recommended that 75 per cent of the annual surplus be put into capital reserves.

Reserve Funds
The City puts money aside into various reserves, essentially the rainy-day fund of municipal government. This money is meant for planned future expenses (for instance, some is going to our new streetcar fleet), or irregular and occasional expenses (like a particularly bad winter with high snow-clearing costs), and they cannot be used to fix operating budget problems. There are two kinds of reserve funds: obligatory ones that have to be funded to meet legislation or contracts (like the Ontario Works reserve fund, to ensure those payments can always be made), and council-directed accounts for special purposes (like the streetcars).

One-Time Revenue
This is a term used to describe reserve funds, previous years’ surpluses, and sometimes also transfers from other levels of government. These are grouped together because they don’t present a long-term, sustainable way to pay our costs, say detractors—the Ford administration says we should be able to balance the budget without relying on these at all.

This post was originally published on December 4, 2012.


  • Peter Friesen

    This article should mention that only about 35% of the TTC budget is funded from the city, the rest comes from fare box revenue

    • Guest

      Also known as user fees.

  • Anonymous

    “Toronto’s current property tax rate is 0.78 per cent, the lowest in the region (Hamilton is twice as much); the average homeowner paid $2,467 in property taxes last year.”
    Toronto’s houses cost way more than Hamilton’s, so comparing the rates isn’t useful.

    Could you provide a comparison of the average amount paid by each homeowner in Toronto and elsewhere?

    • PlantinMoretus

      One has to compare the rates because the assessed value is determined by the province, through MPAC. Municipalities set their property tax rate, which is just one part of the equation.

      • Anonymous

        Yes… the other part of equation is average house value. Both the rate and the value are fairly arbitrary numbers – it’s the average amount paid per person/household that matters.

        Put it this way – if I am choosing where to live on the basis of tax burden, them it’s the amount I pay that matters.

        • Anonymous

          Somalia has the lowest taxes. It’s a libertarian paradise!

          • bobloblawbloblawblah

            There isn’t a lot of gravy in Somalia, though……

          • dsmithhfx

            What they need is a subway!

        • PlantinMoretus

          Er, no, “average house value” has nothing to do with how property tax rates are calculated. I was talking about an ACTUAL equation, i.e. a math one.
          Also, neither the rate or the assessed value are arbitrary. A lot of deliberation goes into setting them.
          Whether or not taxes are too high to make a house worth purchasing is a personal matter, and not the municipality’s or the province’s concern.

          • Anonymous

            You want mathematics? You got it:
            1) For each household, property tax = assessed value * tax rate
            2) Total municipal property tax = sum of all households’ property tax =sum of (assessed value * tax rate) = (sum of assessed values) * tax rate.
            3) Average household tax = Total municipal property tax / number of households = sum of assessed value * tax rate / number of households
            4) Average assessed value = sum of assessed value / number of households [by definition!]
            5) Average household tax = Average assessed value * tax rate
            (If you think I’m wrong with chain of logic, please point out exactly where the mistake is!)
            … so yes, if you want to look at the average tax paid by each household, you need to know the tax rate *and* the average assessed value.

            If the assessed value of everyone’s prices go up, then the tax rate can go down and we still obtain the same revenue. Hamilton’s tax rate is much higher than Toronto’s (mostly) because assessed values are much lower there.

            No-one ever complains about their rate – they complain about how much they pay. That’s why the average amount *paid* is the thing that is useful and interesting, not a number that is one half of the equation.

          • PlantinMoretus

            Yeah, I know all that. I studied municipal finance at university.
            Here’s what you’re missing:
            The MUNICIPALITY has a formula for calculating tax on individual properties.
            PEOPLE have their own personal cost-benefit ways of determining whether their taxes are fair, reasonable, worth-it, whatever.
            Two different entities, two different approaches to thinking about taxes.
            Average household tax is really not much use to anyone, because it isn’t what people actually pay (unless in their individual case it happens to be the average amount) and property values vary widely between locations.
            The only CONSISTENT element to compare is the rate. It’s the only thing under the municipality’s control.
            Hamilton’s rate isn’t higher because house values are lower, it’s because that municipality has figured that rate is what it needs to pay for the services etc that it provides.

          • Anonymous

            “The only CONSISTENT element to compare is the rate.”

            … or you could compare the amount people actually pay. What’s so hard about that?

          • PlantinMoretus

            What’s so hard about understanding that people pay more if their house is worth more, even if the rate is the same?

            Comparing what someone actually pays without considering the assessed value of their house is just dumb.

          • Anonymous

            I care about what I pay. I want to compare it with what other people pay.

          • PlantinMoretus

            Sure, compare the final amount on the tax bill for your $500K house with someone’s $1.5M house and someone’s $220K house. That totally makes sense.

            And then compare the final income paid by people who make $20K, $80K and $400K per year without looking at marginal tax rates or their deductions. That also makes great sense.

            You are really good at math.

          • Anonymous

            I want to compare what each person pays on average in each area. What’s your problem with that?

            And thanks for the compliment on my maths skills.

          • PlantinMoretus

            Your original post said:

            “…so comparing the rates isn’t useful.”

            I’ve been responding to that. THAT is how municipalities compare property taxes, so it is very, very useful. Comparing average amounts paid is NOT useful, because of the HUGE variability in housing costs.

            Also, you need to look up the meaning of irony.

        • Charley33

          So what you’re saying is that if one should choose to move to Hamilton they should hope the house prices never rise? Its a silly to say the rate doesn’t matter, of course it does.

          • tomwest

            No. I’m saying that if you’re moving to Hamilton, you’d check out whether you were paying more property tax or less than your current home. The rate only matters because you combine it with your assessed value to see how much money exits your pocket each year.

          • Charley33

            Okay, but only very short-sighted people buy homes based on what they can afford in the here-and-now (and there may be many people like this, based on all the warnings people like Flaherty and the banks make about potential rises in interest rates). For people like those of my parent’s generation (I’m 47 and born-and-raised in TO, where I live now) the house was a singular lifetime investment and the aim was to see the value rise as the mortgage diminished. I think the short-sighted are probably counting on this even more. That means the rate counts as much if not more than the annual amount.

            Short-sighted thinking like you evince also fails to account for things like business growth. If a company wants to expand into Canada and they want to attract a workforce to the area, it is the tax rates they will compare; there are always a spectrum of house prices (i.e. there are “rich” and “poor” neighbourhoods in any town or city) in an area to suit the different income levels, so that is less important.

          • tomwest

            “only very short-sighted people buy homes based on what they can afford in the here-and-now”
            You mean you don’t consider what you can currently afford???

            As for companies… again, they will look at what they actually pay, not the rate used to calculate it (for both themselves and their employees).

          • Charley33

            You’re not comprehending very well today. Where did I say anything about what I would do or have done? Obviously if Flaherty and the banks are droning on and on about people buying houses they mightn’t afford if interest rates go up, then the fear is those people are ONLY considering what they can currently afford.

            And companies do not do that, you’re making stuff up…

          • tomwest

            Ah, so you meant “only very short-sighted people buy homes based *only* on what they can afford in the here-and-now” :-) That makes much more sense.

            Companies don’t look at what they actually pay??? I think you are the one making stuff up, good sir!

    • Burlingtowne

      Well for comparison, an equally priced house in Burlington (for a $700k house) will pay $1500-2000 more per year in property taxes than a house in Toronto, along with less services, having to pay for almost every city service (i.e. public skates, pools, etc), and more expensive transit fares.

      It’s the same in pretty much every suburb of Toronto, with Durham having ridiculous property taxes that would make Torontonians have a heart attack. Hearing family complain about the “high” property taxes in Toronto always makes me laugh because they think a 2% increase is crazy (try Mississauga’s 13% increase last year) when they seem oblivious that everyone else pays a lot more for less (to be expected when comparing the outer suburbs to Toronto’s non-suburban parts).

    • PlantinMoretus

      It’s apparent from your posts that you fundamentally do not understand the property tax system in Ontario. Why don’t you learn about it properly, like read an actual book about it or take a course?

  • Anonymous

    Good article. Useful, non partisan information. I’d love to see a lot more articles like this as I’m getting awfully tired of left vs right and vise versa articles.

    That said, sure would be interesting to know how Toronto property taxes measure up on a per square foot basis.

  • Luckysod

    Don’t property taxes go up, even if the rate stays the same, when the property’s assessed value goes up? There’s barely a house in Toronto that hasn’t increased significantly in value in the years between the last assessment and this year’s. Condos, maybe not.

  • Luckysod

    I take my question back, now I’ve read Dylan Reid’s article. I live and learn!

  • Brian Young

    This is an excellent, even-handed article that every citizen would benefit from reading. It is important to remember, however, that before the Harris years several aspects of municipal need were partly covered by the province. Downloading of the much of the responsibility for these costs especially in the areas of social supports and transportation onto the city have continued to limit Toronto’s ability to deal adequately with our problems in all areas. That’s one big reason why there is very little “gravy” to be found at City Hall.