Budget 101: How Mayor John Tory (more or less) balanced the 2015 budget

I wrote a few times over the past year about how the city’s 2015 operating budget looked pretty grim.

Despite cheerful views from most mayoral candidates who argued we'd be just fine with low property tax increases now and forever, the numbers pointed to a perfect storm of factors that would put a real squeeze on city finances.

It turns out the numbers were right.

Launched on Tuesday, Mayor John Tory’s first budget is a complicated beast. It only finds its way to balance by taking advantage of $86 million in provincial assistance, which looks like it’s going to be offered in the form of a line of credit. At the same time, it tries to both maintain low property taxes while investing in transit, homeless shelters and other areas that haven't seen new spending in recent years. It also tries to prepare for the future.

It’s a tricky line to walk. If we're to really understand how many factors must be considered, let’s break down the steps city staff took to balance the 2015 budget.

Before we start, a refresher on the basics: the city’s operating budget has to be balanced by law. Deficits are not an option.

The process works by first considering everything that will increase costs over the next year and adding it up to determine budget pressure. Then, the nerds at city hall build a balancing strategy of revenue increases, tax hikes, program savings and cuts.

Got it? Good. Let’s get started. Here’s how the 2015 operating budget was balanced — more or less.

Step 1: Add up standard inflationary pressures

The big factors? $83 million in growing TTC costs, which is needed just to maintain current service levels.

There’s also $71 million in labour costs, rising due to labour agreements, cost of living increases and other factors beyond anyone’s control.

Then there’s a further $48 million in base budget changes, again just enough to maintain existing services across the city.

It’s these kinds of growing costs that make promises about keeping property taxes at or below the rate of inflation so dicey. The city faces a lot of annual cost increases, some of which don’t really correlate with standard measures of inflation. If politicians aren’t going to support covering these rising costs with rising property taxes, the city needs to find ways to offset the increases in other areas — and that’s easier said than done.

Step 2: Factor in provincial cuts, federal cuts and other revenue losses

While the $338 million in rising costs would present an obstacle on their own, the real challenge in this year’s budget comes because the provincial government cut funding for housing and social services. Thanks, Queen’s Park!

That revenue loss increases the budget gap by $86 million. On top of that there’s a further $9 million in pressure added by a federal government cut to housing programs. Thanks, Ottawa!

The city also faces other revenue losses that put a burden on the budget. The Toronto Parking Authority has seen a decline in parking revenues, partly because so many streets are under construction. That amounts to a $7-million hit to city coffers.

Similarly, the amount of revenue generated traffic fines has been declining in recent years, increasing the gap by another $15 million.

Factoring in these rising costs and revenue losses, the budget pressure rises to $455 million. Now we’ve got to figure out how to balance that.

Step 3: Find ways to increase revenues

The city has several tools at its disposal. In 2015, staff identified $162 million in revenue increases. This includes $37 million generated through increases to user fees, like the cost of using a sports field or playing at a city-owned golf course. (Yes, the city owns golf courses.)

The municipal land transfer tax also continues to help out with budget balancing. This year, staff are recommending the city hike expected revenue from the land transfer tax by another $30 million. In a first, they’re also recommending the city apply an extra $40 million in land transfer tax revenue to the capital budget. It really is the gift that keeps on giving.

Other revenue boosts come in the form of $5 million in extra fares from TTC ridership growth, $13 million in dividend income that comes via the city’s ownership stake in agencies like Toronto Hydro, and $23 million taken from a reserve fund.

There's an additional $30 million from some uploading of service costs to the provincial government. Thanks, Queen's Park! For real this time.

Step 4: Cut some costs

After looking at revenue, you have to examine costs, and where you can cut them. The 2015 budget proposes $85 million in what staff calls “efficiencies, service changes and other base budget savings.” We still don’t have a full breakdown of this figure, but the idea is that it’s made up of tiny nips and tucks to various programs that won’t have service impacts.

Still, let’s keep an eye on it.

A further $18 million is found by changing the way the Solid Waste Rebate Program works. Right now, homeowners pay an annual fee for their garbage bin, which varies depending on the size of the bin. That fee is offset by a tax-funded rebate that takes, for example, the total cost of having a medium-sized bin from $280.09 per year, to just $56.09 per year. With the new budget, the plan is to decrease those rebates, so the new cost of a medium bin after rebate will be $88.73 annually.

After that, we get to the boring stuff. Some people have this idea that saving money in government is all about rooting out huge waste and corruption, but much of it is just small, bureaucratic tweaks to the way things operate. This year, for example, the city projects to save $13 million through reduced financing costs, $10 million through a reduction in employee benefit liability funding and $8 million because of expected lower case loads for social services.

Add up the revenue increases and cost reductions, and the balancing strategy gets to $296 million.

Let’s pause here and note that if the city didn’t face any of the revenue losses — most of which was forced by the provincial government — the budget would be almost balanced after this step, with just a $42 million gap. You could fill that with a 1.68 per cent residential property tax increase.

Step 5: Hike TTC fares and ask the province for money

A ten cent TTC fare increase helps, even if it’s a bit of a kick in the teeth for riders. That generates $36 million. Assessment growth from new developments joining the property tax base adds another $30 million.

But we’re still short. This is where the provincial government comes in. Because the province is somewhat responsible for this budget trouble, it makes sense to ask them for assistance. So this year’s budget includes $86 million in “special assistance.” We’re still looking for all the details of the deal, but it looks like the cash will come in the form of a line of credit.

That provokes a range of concerns about sustainability, because the budget really can’t and shouldn’t be balanced with provincial loans over the long term. And it's hard to even say that the 2015 budget is really balanced if it relies on a loan.

But that’s a debate for another day.

Added together, these measures bring the balancing strategy to $448 million, just $7 million short of the budget gap.

A more rabidly conservative mayor may have wanted to stop here. A $7 million gap requires a residential property tax increase in the neighbourhood of 0.25 per cent, way below inflation. The city could have done that and called it a day.

But they didn’t.

Step 6: Improve services

This is a relatively new thing for Toronto budgets. Over the past four years, talk of improving services was mostly verboten. But with a new mayor comes a new outlook, and it would seem new spending is once again on the table.

The 2015 budget includes $36 million in TTC service improvements, including an increase to the TTC’s operating subsidy. There's another $13 million in other service improvements, mostly centred around homelessness and anti-poverty initiatives.

That increases the budget gap by $49 million, to $504 million total. We’ve got to find $57 million on the balancing strategy side — and there’s really only one tool left.

Step 7: Raise tax revenue

But, wait! There’s one more thing.

Step 8: The Scarborough subway

This year’s contribution to the Scarborough subway adds $12 million to the budget gap, offset by a 0.5 per cent residential property tax hike.

This will happen again in the 2016 budget, after which the cost of the subway will be absorbed within the city’s annual property tax revenue for the next few decades.

Bonus step: Turn Toronto's 2015 budget balancing strategy into a gif