Archived columns and blog posts by Matt Elliott

Budget 101: How Toronto’s staff-recommend operating budget was balanced

By: Metro Canada Published on Wed Nov 27 2013

Set aside all that tiresome mayoral scandal stuff. It’s time to delve into the fast-paced world of municipal budgeting.

City Hall's budget season launched Monday. Mayor Rob Ford was there. So was Deputy Mayor Norm Kelly, who recently absorbed most of Ford’s powers. He brings some perspective on city finance that isn’t based on gut feeling or magic, which is nice.

Ford, of course, ended up railing against the budget, suggesting that city staff and councillors had worked together over the last week to covertly craft a tax-and-spend budget designed to appease their socialist overlords.

The story Ford’s telling doesn’t jibe with the numbers. Toronto’s staff-recommended 2014 operating budget is actually a pretty unremarkable budget — one that’s clearly been crafted from a conservative perspective. There will be some changes to come as the budget goes through committee, but let’s take a detailed look at how things are shaping up.

Before we dive in, a few things to remember:

  • There’s no such thing as a deficit when we’re talking municipal government. The operating budget is balanced every year, by hook or by crook. That’s the law.
  • Property taxes are absurdly complicated. City Hall does not directly set a rate that applies to the assessed value of your house. City Hall does not automatically collect more revenue just because your home was reassessed at a higher value.
  • The way the budget is balanced is through calculating an “opening pressure” — the difference between projected revenues and projected spending over the next year. Staff and politicians then look at things like property taxes, user fees and cutbacks to reduce that pressure to zero.

2014 Opening Pressure

The expected opening pressure — solely based on past services and obligations — is about $210 million.

That number is comprised of three major components. First is the 2013 reserve draw. Despite what you may have heard, Ford and council used one-time reserve funding to balance the operating budget last year. So for 2014, they need to figure out how to replace that funding. They also need to pay for costs related to financing the city’s debt load.

The biggest driver, though, is simple inflation — the enemy of would-be budget slashers everywhere. Inflationary impacts add $160 million to the opening pressure right off the bat, the equivalent of a 6.6 per cent increase on the average residential property tax bill.

That $160 million is made up of $69 million related to labour compensation and benefits and another $62 million related to TTC costs. In both cases, the city’s hands are mostly tied, either by labour deals or increasing ridership demands. Just $29 million, or 18 per cent, comes from other inflationary impacts.

Luckily, budget balancing is made a little easier due to continued provincial uploading and some adjustments to the city's tax deficiency fund — used to handle property tax appeals. Together they shave about $50 million off the expected opening pressure. Still, $210 million is a big number.

And that’s just the expected pressure. The 2014 budget also has to deal with some unexpected pressures. In other words: Surprises! But not the good kind.

Unexpected budget hits cause the 2014 opening pressure to jump to about $271 million. About $18 million of this is related to some Bay Street bank towers that successfully appealed their assessment and are now set to pay less in property taxes. Another $43 million comes from a provincial decision to phase out funding that had been going to affordable housing.

But wait! There’s more.

This is the first budget since 2010 to really include any significant new and enhanced services. You could refer to this as the return of the gravy train, or you could consider that Toronto is a growing city and probably needs to grow some programs to fit the increasing population. It’s your call.

There are about $14 million in new and enhanced services in this budget. They take the form of things like 31 new fire inspectors, a couple hundred more police officers, two new libraries, spending increases that should mean more available shelter beds, three new community centres, a long-needed increase to arts funding and changes to the planning department to accommodate more, you know, planning.

Add that $14 million to other budget pressures and we're at $285 million.

But we can’t forget about the subway, can we? Council didn’t debate the thing for an estimated twenty zillion hours just to gloss over it in budget documents.

As part of a council-approved financing strategy that will eventually see the average household pay about $40 a year toward the subway debt for the next few decades, the 2014 budget demands about $12 million to start financing our all-underground transit dreams. That gets us to $297 million in budget pressure.

With a cool $297 million to cover, here’s how staff recommend council balance its budget:

Various reductions to program spending and absorbed inflation make up $64 million of the balancing strategy. This continues the legacy of cost containment and continuous improvement that started when Toronto introduced its long-term fiscal plan in 2005. I forget who the mayor was then.

An increase to property tax revenues brings in another $61 million. This breaks down to $35 million to cover inflationary costs, $14 million to cover new and enhanced services, and $12 million to cover the Scarborough subway. For residents, this will mean a 2.5 per cent increase on the average tax bill — or about $64 annually. The city also gets an extra $22 million via assessment growth, as new properties start paying tax.

The city again goes to its reserves to fund another $28 million of pressure. This is hard to square with claims that the city isn’t using one-time funding to balance its budget. Yes, the balancing strategy isn’t directly using surplus dollars to close the gap, but these reserves are replenished — at least in part — by surplus dollars.

The land transfer tax adds another $20 million as it outperformed estimates in 2013 and staff have built in a revenue increase for next year. It’s always important to note how critical the land transfer revenue is to the city’s fiscal health. Without it, the opening pressure would be about $350 million higher than it is.

Increases to various city user fees contribute to another $6 million off the pressure. That doesn’t include fees paid by TTC users in the form of fares, though they’re set to go up, too. The five-cent increase to the cost of a token and the $5.25 Metropass hike will bring in another $23 million — equivalent to about a one per cent increase on the residential property tax bill. TTC riders also help the city balance its budget in another way, as budgeted ridership growth adds another $7 million in gross revenue.

Finally, we get to the tricky parts. The $18 million hit that came from Bay Street reassessments has been made-up with savings derived from new legislation exempting TCHC properties from paying property taxes. That's the good news.

The bad news? For the other unexpected pressure, staff have resorted to using another reserve fund (related to Toronto Employment and Social Services, or “TESS”) to offset the $43-million provincial funding removal. Because they're using one-time funding, council will have to deal with the shortfall again next year. It'll make for a double whammy, as they'll have to figure out how to handle the $43 million they covered with one-time funding this year, plus another $43 million hit that will come next year as the funding phase-out continues.

The move gets the 2014 operating budget to zero balance, but it means that next year councillors and the mayor — at the start of a new term — will have to deal with an $86-million budget hole on top of everything else. And the outlook for 2015 and 2016 is not good. Staff are projecting opening pressures of $450 million and $322 million for the next two years.

This negative budget outlook should keep Toronto mayoral candidates from promising property tax freezes or big infrastructure investments without revenue strategies backing them up. Unless, that is, they’re totally willing to ignore fiscal reality. But would anybody ever vote for a candidate who did that?

The budget debate will continue at city hall until a special council meeting on January 29.

This post was originally published at on 2013-11-27T00:00:00.000Z

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Matt Elliott

City Hall watcher, columnist and policy wonk in Toronto.
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