Mayor John Tory has presented a third solution to plug an $86-million hole in Toronto’s budget and cover future shortfalls.

Tory and senior officials argue that this is the best fix, after two false starts, but the city could be backing itself into a corner with a strategy that involves borrowing internally — a move rarely attempted by the city and not tried at all since amalgamation.

Tory defended the measures at City Hall on Thursday, while vowing to keep his campaign promise of keeping property tax increases at or below the rate of inflation for his entire term.

“They represent, I believe very strongly, a methodical, responsible approach to budgeting,” Tory said. “Confronted with a challenge, we have found a sensible way to give us time to meet it.”

Last month, talks with the province fell apart after the city balked at an offer of a $200-million line of credit. City staff say the current $86-million hole and future pressures are a direct result of the province cancelling payments to offset the cost of social housing.

Tory and city manager Joe Pennachetti then presented a solution to the executive committee that would, in part, involve using a bank loan.

But Thursday, a day before the budget committee is set to meet again, Tory announced a plan to reduce the funds flowing from the operating budget to the city’s capital budget by $130 million over three years.

Instead of borrowing from the province or a bank, the city will essentially borrow money from itself, to be paid back over six years.

For years, Toronto has made a substantial operating-to-capital transfer in recognition of massive and rising capital costs for infrastructure needs, including the repair of roads and century-old underground pipes.

The city is also proposing to cut $25 million from this year’s operating budget — cuts Tory said would not dramatically affect programs and services. Some $9 million of that will have to come from the city’s two largest agencies: $5 million from the Toronto Police and $4 million from the TTC.

In 2016, pressures on the budget will only get worse, with the city needing to find savings of $69.3 million in total — or an additional $44 million over this year, assuming this year’s cuts remain intact. That’s equivalent to increasing property taxes by 1.7 per cent, not including any other necessary increase and a 0.6 per cent levy for the future Scarborough subway.

Additional 1.7 per cent property tax increases would be needed each year until 2019, unless the city can find further cuts.

That leaves little breathing room for any new spending Tory may have in mind if he plans to keep his tax promises. But he stressed that the new spending this year — including $75 million for the TTC and a plan to let children ride for free — are necessary returns to basic service and not just for “frills.”

Also at issue is the tight financial position the city may finds itself in with capital needs — the big money needed for infrastructure fixes including the crumbling Gardiner Expressway.

Because the current strategy brings the city’s borrowing nearly flush with the current limit set out by council, it’s not clear how the city could deal with large, unexpected demands. Borrowing levels are not expected to return to normal until after 2020 — when the city would go back to the old model of channeling money from the operating to the capital budget.

Pennachetti, who retires April 30, said this is the most “prudent” way to balance the budget in unprecedented times.

But Councillor Gord Perks called it a “really high risk approach,” arguing the city should raise property taxes now to avoid even higher tax increases later.

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“Effectively, the mayor is recommending that the city borrow from its own ability to run the city,” he said. “The mayor is gambling that he’s going to be able to find magic efficiencies that he didn’t find yet, and if we don’t find them, the property tax impact is twice as big as if we acted today.”

Councillor Shelley Carroll, who sits on budget committee, said she supports the new solution, but cautioned it requires council to stick to the plan for four years.

“The mayor is being both prudent and realistic, in that he is trying to find a way to phase into the property tax base paying for something that in fact he shouldn’t have to pay for,” she said.

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