Selling half of Toronto Hydro would get the City only a fraction of the way toward a realistic funding plan.
When mayoral candidate Karen Stintz delivered a February 26 speech at the Toronto Region Board of Trade, she told gathered business leaders how she would fund the much-needed Downtown Relief Line: “If we have priorities that require investment to be realized, like the Downtown Relief Line, we need to start thinking about how to unlock the value from other City assets. Just as we used the proceeds from the sale of Enwave to pay for our new air-conditioned streetcars, we could use the proceeds from the sale or lease of Hydro to pay for transit.” Asked about the proposal after her speech, Stintz clarified that what she meant—and what was in her script—was that due to its tax treatment only 10 per cent of Toronto Hydro should be sold, not the whole thing.
At an announcement at Gerard and Carlaw on Monday morning, Stintz modified her stance, saying that she would now like to sell a majority of Hydro in order to fund the DRL, so long as she gets provincial approval to waive the accompanying tax liabilities. However, there are a lot of question marks around this promise, and other questions that it prompts.
Two main things should be evaluated when looking at the Stintz proposal: the cost of the Downtown Relief Line and the value of Toronto Hydro. The former is relatively easy to assess. Stintz supports the eastern DRL alignment that goes through Pape station up to Don Mills. As of 2013, Metrolinx estimated [PDF] that this subway line would cost $7.4 billion, which is a substantial transit investment. For major transit projects, the funding model has often been that the City contributes one third of the cost, with the province paying either two thirds or the federal government contributing a portion when it feels like it. So it’s reasonable to assume that under a plan that is not Metrolinx’s Big Move (in which revenue tools would pay for transit expansion on an ongoing basis), the City would have to find about $2.5 billion for its plan.
Toronto Hydro is an asset wholly owned by the City, but it is not worth $2.5 billion. In 2012, the company was valued at $1.14 billion, and as a utility company, its growth and dividends are fairly predictable. So selling 51 per cent of Toronto Hydro at fair market value would net about $550 million.
But there’s a catch. Toronto Hydro currently enjoys favourable tax treatment—it pays only $26 million a year in taxes to the province. This tax treatment would change if the City sold more than 10 per cent of the company, and there would be a 33 per cent tax on the proceeds of the sale above 10 per cent. So rather than $550 million for Hydro, we’re looking at something closer to $400 million, which doesn’t include the discount that would be needed to account for the increased taxes the company would face.
This makes the sale of Toronto Hydro very difficult, and there are entirely good reasons for this. When the province decentralized hydro (in an effort to try and get more private competitors in the market and lower prices), it created several municipally managed companies (like Toronto Hydro) from Ontario Hydro. This left Ontario Hydro with an increased debt load on paper, but one that is implicitly backed by the other companies it created (after all, cities are creatures of the province). Privatizing companies like Toronto Hydro would increase the debt load of Ontario Hydro by decreasing its implied collateral, and also change tax agreements in place between the various orders of government. So there’s a good reason why the cost of changing the status quo is prohibitive when it comes to Toronto Hydro.
Stintz wants to ask the province to cut through this mess and waive the 33-per-cent penalty. Given that the City will subsequently ask the province for anywhere from $2.5 billion to $5 billion to invest in the Downtown Relief Line, it’s unlikely that the province would readily accept waiving the $150 million in taxes it is due while Ontario Hydro takes a credit hit and the same tax treatment would be expected to be maintained. However, Stintz’s policy brief [PDF] on the subject addresses what the province can get from the agreement in order to make it happen: “[We will] recognize the province foregoing the provincial transfer tax as part of the provincial capital contribution to the Toronto Relief Line.”
If the City were to accept the province’s waiving of the transfer tax as part of the province’s contribution to the DRL, then there would still be $150 million missing, because the province would consider it part of the DRL budget and the City would have to find the difference elsewhere. In other words, Stintz requests that the province waive the fee, but given the understanding above, the City would effectively be borrowing money from itself, and be obliged to solve the problem later.
This brings up another problem. The Toronto Hydro policy is to issue a dividend that is the greater of: $25 million annually, or 50 per cent of consolidated net income. (In 2013, for example, consolidated net income was $86 million, which means the dividend was $43 million.) If the City were to sell half of the company, it would also lose half of the value of this dividend, and the equivalent financial offset would be an additional 0.87-per-cent property tax increase.
Stintz refers to her plan as a “down payment” on a Downtown Relief Line, and this captures the fact that selling Hydro alone does not constitute a plan to fund the DRL. In fact, selling half of the company and introducing a 0.5-per-cent tax increase would raise only around $400 million as a ballpark estimate, given that the Stintz plan would give the province credit for waiving the transfer tax. Four hundred million is about 15 per cent of the municipal share Toronto would need to make the DRL a reality, so there would be a long way to go.
In order to fund the other 85 per cent of the DRL, the City would need to find other revenue sources, as there aren’t five more assets like Hydro to be sold. Council would need to raise almost three times the amount of property tax over 30 years (meaning a roughly 4.6-per-cent increase in property tax revenue) as it did for the Scarborough subway plan in order to fund the rest of the relief line, and would likely go over its self-imposed debt ceiling to do so.
On its own, selling Hydro does not constitute a plan to fund the Downtown Relief Line, and would have to be paired with other means of raising a great deal money for the City.
This post originally indicated that Toronto Hydro issues a $25 million dividend, which is equivalent to a one-per-cent property tax increase. However, the Toronto Hydro policy is, in fact, to issue a dividend that is the greater of: $25 million annually, or 50 per cent of consolidated net income. If the sale of Toronto Hydro were to go through, a property tax revenue increase of 0.87 per cent—not 0.5 as the article originally stated—would be needed to offset the income.