The $86-million operating deficit in the City budget is the product of bigger problems, and Toronto needs to address them.
Yesterday, council’s budget committee passed a plan to address the City’s $86-million budget deficit. It is inaccurate to call the plan a “fix,” because it is a one-time approach to an ongoing problem. It is fair, though, to call the whole mess predictable.
A look at financial basics and how the City got to this place shows that the structural problems are much bigger than the the current budget, and require thinking and political courage that go beyond what council has displayed to date.
Unlike the federal or provincial governments, which have powers to borrow money that the City does not, council must balance its operating budget each year. (It’s mandated by the Province.)
The operating budget deals with ongoing, annual expenses—things like staff salaries and the cost to operate fire trucks or fill city swimming pools. The capital budget funds the purchase of items like fire trucks, pool construction, or new transit. With the capital budget, the City is able to borrow to finance the purchase of long-term, big-ticket assets. The value of those assets depreciates over time, but the idea is that they’ll deliver more value to the City than what it pays for the item, including the interest.
In December, the City received bad news about its operating budget. Senior staff were counting on the province to provide some kind of solution for $86 million in City funding for housing that Queen’s Park withdrew in mid-2013. The only solution the Province was willing to provide—perhaps out of fear that they would be seen as playing favourites with Toronto, which is not politically expedient for them—was a loan at prevailing interest rates, or the purchase of select Toronto real estate. The City balked at the onerous terms.
But it still had the $86-million gap to fill. With time running out and the legal obligation to deliver a balanced budget, the City and the mayor’s office would have to make difficult choices.
They could seek a private-sector bridge loan to fund the deficit, but this would just delay the fact that they have an unsustainable budget pressure to solve, and it would likely be costly.
Council could increase property taxes to help offset the pressure, which would build the annual capacity in the budget to operate housing like provincial downloading says the City should. But John Tory campaigned on tax increases at or below the rate of inflation, and this would make the City’s property tax revenue increase more than 5 per cent.
Alternatively, council could cut services. But John Tory also promised not to do this, and since being elected has acknowledged that devastating decisions during the Ford administration, like cutting TTC service levels, had a negative impact and need to be reversed. Tory argues that these services, like improved transit and the effectively at-capacity shelter system, are not frills or luxuries but basic needs for Torontonians.
So the City chose a different option to fund its operating deficit. Rather than borrowing from the Province or the private sector, the City will essentially borrow from itself.
The plan is to take money from the capital budget and use it to fund the operating budget. The City will spread out the pain of this year’s operating deficit over six years through a few different strategies. They include deferring projects in the capital budget, borrowing with interest-bearing debt, estimating that there will be increased efficiencies, and dipping into reserves.
John Tory enthusiastically endorsed the budget choices. Following the announcement, the mayor told the media that the choices “represent, I believe very strongly, a methodical, responsible approach to budgeting.”
He is wrong.
It is true that the budget plan might be responsible compared to borrowing from the private sector or the deal offered by the Province. But it is not a responsible approach to budgeting in general terms, because it does not deal with the root problem of Toronto’s post-amalgamation structural budget deficit.
If you ask almost any accountant, he or she will tell you that swapping out money from the capital budget or from reserves to pay operating costs is less than ideal. At the government level, economists can make an argument for deficit spending under certain circumstances; Paul Krugman would be happy to tell you all about John Maynard Keynes.
But these are not the circumstances in which Toronto incurs this debt. It is instead taking the debt—and will push precariously close against its debt ceiling to do so—in order to fund necessary annual expenditures. If these services are essential to the kind of city Toronto needs to be, then this is an indication that its financing model is unsustainable, in part due to the Province’s unwillingness to provide adequate funding, council’s unwillingness to raise property taxes above inflation, and the City’s lack of revenue tools to make up the difference.
The strategy to deal with the $86-million deficit also relies heavily on increasing the number of efficiencies the City can find over the next few years. However, the City will likely find diminishing returns pursuing this path, as the city manager said in 2012 that there’s less than $100 million in efficiencies to be found at city hall. The city manager has also said that below inflation property tax increases—property taxes which are the lowest in the GTA—are unsustainable given ongoing budget pressures, but this is not something the mayor’s office or most of council wants to hear. Of course, if the City fails to find their efficiencies, or if the more optimistic than usual revenue projections baked into the land transfer tax fail to materialize, council may not have much of a choice when it comes to taxes.
Perhaps in anticipation of these potential pitfalls, today the city manager said that he wanted to speak to the Province about new revenue tools for the City, and a sales tax in particular, but would like to get council’s approval to do so first. Budget Chief Gary Crawford (Ward 36, Scarborough Southwest) immediately ruled out a sales or income tax, which represents two of the most lucrative potential sources of revenue for the City.
At the same time, although there’s a lot of focus on the operating budget, the capital budget is under tremendous strain. The City has essentially no additional room to fund any projects in 2020 because of its debt ceiling, and $7 billion worth of necessary projects—think transit, housing, water, and road repair—are unfunded. These are only the projects within the 10-year capital budget, and excludes the many items that council has deferred beyond the time period despite the fact that the City faces a growing infrastructure deficit.
There are no good choices in the budget, and it is time to wake up to why that is the case and what that means. There is a much bigger discussion to have here: Toronto needs to talk about the fact that there is a structural deficit, and that it is also willing to acknowledge that things cost money, particularly the cost of making responsible decisions. If we fail that, we will see Toronto go from budget crisis to budget crisis, pulling out its hair until it wonders how it became bald.