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