City budgeting is weird. We walk you through what it means when the City has a surplus, and how to cut through the rhetoric.
The City of Toronto is projected to run a $65 million surplus [PDF] for 2015, according to a mid-year operating budget variance report.
The projected surplus may sound like a windfall for the City, but in the wonky and arcane world of municipal budgeting there are a lot of assumptions, and context, that need to be understood.
We’ll walk you through what you need to know to understand what the projected budget surplus means (and doesn’t mean), and how you can cut through any superficial budget analysis you may encounter.
Toronto is obligated to run a surplus
A typical trope in municipal budget rhetoric is that whoever is in power might boast that in contrast to the federal and provincial government, Toronto runs an operating surplus. It is true that Toronto runs a surplus, but it’s because the City—like all Ontario municipalities—is legally obligated to do so. Ontario municipalities are not allowed to borrow money for operating needs (annual expenditures like salaries and providing ongoing services), although it can borrow money for long-term capital assets, like purchasing subway cars or building a local library.
The surplus should be understood in relative terms
$65 million sounds like a lot, and it is. But when it’s understood in the context of a $10 billion operating budget, we’re talking about a projected variance that is 0.65 per cent of the total. These variances are caused by lots of small things—changes in the price of fuel, the amount of salt the City needs for the winter, and how much people use various city services.
The projected variance is usually lower than the final surplus. Last year’s projected year-end surplus at this time was $1.2 million, but the final surplus wound up being $190.6 million. The difference between the initial estimate and final result isn’t usually so great, but the final number tends to be significantly higher.
City staff like to play it safe
The City staff who prepare budget estimates have a tendency to be conservative. It gives them a built-in buffer or margin of safety, and because they can’t run a deficit, it means that councillors don’t have to do last-minute cuts to services or large property tax increases.
Essentially, the governance structure encourages all stakeholders to play it safe, even if it causes some shortcomings in the policymaking process.
The surplus is mostly because of the land transfer tax
There are some people—lobbyists for realtors and Rob Ford (Ward 2, Etobicoke North), among others—who will tell you that the municipal land transfer tax is the worst. Except most years, it’s pretty much the difference between Toronto operating a surplus (which the City must) and a deficit. In fact, for this year’s projected surplus, the land transfer tax accounts for 85 per cent of the money.
Most of the operating surplus doesn’t go to the operating budget
The City has what is called a surplus management policy. This council policy states that 75 per cent of any operating surplus goes towards the capital budget. Council could waive this policy if it was so inclined, but in recent years has not shown the appetite to do so. The strategy of reserving 75 per cent of the surplus has a few reasons behind it. The first is that the surplus is considered “one-time money,” and even though the surplus comes through each year, it’s not considered prudent to rely on it. With that said, the capital budget does rely on the surplus (as well as anticipated city asset sales, among other things). The long-term capital budget (over 10 years) has an anticipated amount that it will receive from the surplus management policy, and this is meant to offset the debt needed to finance capital projects.
Critics, like Janet Davis (Ward 31, Beaches-East York), argue that this policy effectively shifts money from servicing operating needs to supporting debt-averse principles despite record low interest rates. Supporters of the policy, like some senior City staff, argue it imposes fiscal discipline on politicians who sometimes need that guidance.