Archived columns and blog posts by Matt Elliott

Six ways Toronto could have avoided a provincial loan to balance the budget

By: Metro Canada Published on Wed Jan 28 2015

Mayor John Tory is taking flak from all sides over his decision to use a line of credit from Queen's Park to plug an $86-million hole in the city’s operating budget.

It’s not undeserved. Using an interest-bearing loan to balance the city’s books is decidedly not standard practice and, though the terms of the loan have not yet been disclosed, it’s likely this will just create more pain in future budgets.

But did Tory have any other options? Options that would put the city on solid financial footing and not, you know, torpedo his 67 per cent approval rating?

Let’s consider. Here’s a list of six alternative budget-balancing strategies Tory could have pursued, and the pros and cons of each.

1. Raise property taxes by another 3.4 per cent or so

Pros: A sustainable solution. Adding another 3.4 per cent to this year’s residential property tax increase would bring in the $86 million the city needs, plugging the gap.

Plus, the city would still be able to boast about having the lowest property taxes in the GTA.

Cons: Remember that 67 per cent approval rating? Screaming headlines about how Tory raised property taxes by a total of 6.2 per cent would probably hurt it.

2. Use the 2014 operating budget surplus

Pros: The latest projections from Toronto’s beancounters show city hall coming out of 2014 with a surplus in the range of $100 million. If Tory and council simply took that money and applied it to the 2015 budget, it would be balanced. No provincial loan or steep property tax increase necessary.

Cons: This is an unsustainable strategy. By building surplus funds into the budget, city staff put themselves into a position where they’re relying on funds that may not be there next year.

Toronto used this strategy repeatedly in the decade after amalgamation when city finances were in flux and each budget was delivering a massive surplus, but the trend in recent years has seen surpluses shrink.

Still, it’s fair to wonder why taking a loan and going into debt to the provincial government would be preferable to using city-controlled surplus funds.

3. Cut $86 million from the operating budget

Pros: A sustainable strategy. If council could dig up $86 million in permanent savings, this year’s gap would be closed permanently.

Cons: It’s not at all clear that there is $86 million in operating savings to be found. To put that figure into context, $86 million is about half the Toronto Public Library’s annual spending.

This year’s budget already includes $108 million in total budget savings according to the city CFO. And city manager Joe Pennachetti has repeatedly said there’s few savings left to be found. You going to call him a liar?

4. Convince the provincial government to reverse the funding cut

Pros: A sustainable strategy. Had the province just kept funding in place, Toronto would have been able to deliver a 2015 operating budget that keeps property taxes low, invests in transit and other services and doesn’t create bigger fiscal problems going forward.

Cons: It seems the city asked repeatedly if the province would reverse the funding cut, and Queen’s Park repeatedly said no. Maybe if it was an election year.

5. Roll the dice on real estate

Pros: This strategy could balance the books without a loan, massive spending cuts or a sharp tax increase. It’s like magic. Risky, unreliable, dangerous magic.

In 2014, the city budgeted for $350 million in revenue from the municipal land transfer tax. Due to a continued hot market, they brought in a $425-million windfall.

This year, staff have recommended the city budget $385 million in operating revenue from the land transfer tax, with an extra $40 million planned to go toward capital projects. They’re being conservative with their estimates, cautious of a market softening.

But what if they weren’t? If Toronto were to budget for $475 million in operating revenue from the land transfer tax, the budget gap that has necessitated the provincial loan would disappear.

Cons: As prudent fiscal policy goes, this is only a few steps short of just taking the city’s tax revenues, going to Vegas and plunking it all down on the craps table.

Last year’s city budget saw some councillors make small adjustments by increasing the city’s revenue estimates for the land transfer tax by a few million here and there. They got away with it, but it’s still too risky — if the real estate market were to crash, the city would immediately go into a deficit situation.

6. Travel back in time and pass better budgets

Pros: Led by Mayor Rob Ford, Toronto City Council passed three budgets with residential property tax increases below the rate of inflation over the past four years — in 2011, 2013 and 2014. In those years, the average property tax increase (not including the special Scarborough subway levy) across all property classes was 0 per cent, 1.29 per cent and 1.14 per cent, compared to Toronto inflation rates of 3.3 per cent, 1.4 per cent and 2.6 per cent respectively.

Now imagine council had budgeted better. Had property taxes come in at the rate of inflation in each of those budget years, Toronto would have about $115 million more in permanent tax revenues than it does today.

In other words, there would be no problem with this year’s budget. Heck, if council hadn’t nixed the Vehicle Registration Tax in 2011, they’d have even more money to invest in programs, services and planning for the future.

Cons: So many of my best municipal policy ideas are dependent on the invention of safe and affordable time travel, but, alas, the science isn’t there. There’s no going back and fixing the mistakes of the past.

But that doesn’t mean those mistakes can’t be acknowledged. One of the bigger problems with municipal budgeting is that the weird nature of property taxes compels politicians to make choices that are popular in the short term but fiscally irresponsible in the long term.

Unless sub-inflation property tax increases come with an explanation of how inflationary costs were offset through permanent, sensible spending cuts — and they pretty much never do — all those decisions do is create problems down the road.

Problems that might require balancing the budget with a provincial loan.

This post was originally published at on 2015-01-28T00:00:00.000Z

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Matt Elliott

City Hall watcher, columnist and policy wonk in Toronto.
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