politics Toronto Budget Shortfalls Threaten Transit Plans

An in-depth analysis of what the 2016 budget says about the TTC's future.

This article is part of Torontoist’s special 2016 municipal budget coverage. If you value journalism like this and you’d like to see it year-round, then subscribe now and help fund a staff writer to hold City Hall accountable.



Toronto City Manager Peter Wallace launched his first budget with refreshing clarity. Gone is the pattern of past years when, almost by magic, a large potential deficit transformed into a balanced budget. All was well in our fair city, politicians delivered low tax increases and hard questions about Toronto’s future were swept away for another year.

No more.

Wallace has a new style, one that recognizes the line between staff recommendations and political decisions. The responsibility for spending and taxing choices belongs with City Council, but with that comes a clearer and disturbing view of the state of city finances.

So what does this mean for the TTC in 2016 and coming years?

Operating Budget Shortfall

This reveals a huge problem with Toronto’s political practices. Council and agencies like the TTC can announce new programs, the Mayor and his circle can bask in glory, but when it comes time to pay the bills, the cupboard is bare.

For transit, $16.7 million worth of changes have been approved by the TTC Board, including earlier Sunday morning service, reliability improvements and new express bus routes, but these are not funded in the preliminary budget. Other programs including the high-profile Poverty Reduction Strategy and better funding for Toronto Community Housing Corporation are also omitted from this budget leaving an additional $67.4 million to be found for 2016 and more in following years.

This situation begs the question: what is the purpose of so-called approvals by Council and by boards of various agencies if these are not built into the budget? Does Toronto risk a year of unmet expectations because promised improvements are not met with adequate funding?

The preliminary budget gives three conflicting views of the funding gap facing Council:

Mayor Tory’s target tax revenue increase of 1.3 per cent from residential properties leaves a $23 million hole to be filled with additional revenue or cuts to existing programs.

A tax increase of 2.17 per cent would eliminate all of the shortfall for existing programs ($57.4 million), but it would not touch the new programs including TTC improvements.

A further tax increase of 2.5 per cent would be required to fund all of the new programs, bringing the total to 4.7 per cent.

Linking tax increases to the residential tax rate obscures the actual amount of new revenue the city will receive. There is a long-standing requirement, imposed by Queen’s Park, that Toronto rebalance its tax rates between commercial and residential property to match the ratio in the Greater Toronto Area. The effect is that residential rates go up by three times commercial rates, and with other tax adjustments, commercial rates can even fall. If Council budgets for a 1.3 per cent residential increase, the actual increase across all properties is only 0.88 per cent. If the tax increase is 2.17 per cent for residential, the blended increase across all property tax classes is 1.46 per cent. The City may say that taxes are going up at “inflationary” rates, but in fact the amount of new revenue is well below that value, and this further limits growth in city spending.

This imbalance will continue until 2020 and only after then will commercial properties bear an equal load of new taxes. Already the Scarborough Subway tax is carried mainly by residential properties, and much of Mayor Tory’s proposed 2.5 per cent capital levy will similarly be avoided by commercial taxpayers. (“Commercial” includes rental properties such as apartment towers, while “residential” includes houses and condos.)

Council has other options for new revenues beyond property taxes including road tolls, a levy on commercial parking spaces and the Vehicle Registration Tax abandoned with great haste in the early days of Rob Ford’s regime. None of these can be implemented instantly, and at best can only make a part-year contribution to the 2016 balance sheet. Talk of these inevitably will bring outcry from the “no new taxes” brigade for whom any new tax is inherently evil, and yet this is a debate Toronto must have if revenues are to grow beyond property taxes.

If Council chooses not to fund the TTC improvements, the issue lands back at the TTC Board which could face demands to reverse the improvements or to further increase fares. This could see the price of Metropasses unfrozen, and the token rate go up by more than the planned $0.10 increase for 2016.

2017/2018 Outlook

The preliminary budget includes a two-year forecast that includes substantially higher TTC costs.

In 2017, the projected growth in TTC subsidy, including WheelTrans, is $116.9 million, roughly double the increase for 2016. There is an additional $51 million for fees for Presto, the Metrolinx fare card, even though that system is supposed to cost the TTC less to operate than its existing system of tokens, tickets and cash. This jump is attributed to the transition period when both the old and new system will co-exist, but that should be substantially completed in 2017 after the TTC finishes Presto implementation on surface routes through 2016. The TTC argues that there will be savings to offset the Presto fees, but there is no sign of this in the budget.

In 2018, total subsidy requirements continue to increase, although at a lower rate of $70.8 million. This includes an expected $11 million needed to pay the net operating cost of the Spadina Subway Extension that will open to Vaughan at the end of 2017. Presto fees rise by a further $6 million again with no offsetting saving.

These forecasts do not include a provision for service enhancements beyond the basic transit growth, and fail to address the latent demand for service the existing system cannot handle.

Transit Capital Projects

For many years, the TTC’s list of capital projects, both for ongoing maintenance or “State of Good Repair” (SOGR) and for system expansion, has been much longer than the funding approved by City Council.

Broadly speaking, the TTC has three classes of capital projects:

Projects with Council approval and full funding in place. Within this group are two categories: the “base” ten-year capital plan (largely for ongoing maintenance) and projects with dedicated budgets (such as the Spadina extension).

Projects with TTC Board approval, but without funding approval from Council. These are the so-called “below the line” items, and they account for almost one third of the TTC’s $9 billion ten-year plan.

“Future improvements” on the TTC’s wish list but without even TTC Board approval for inclusion in the plan.

This arrangement has the effect of masking future capital requirements by fitting projected spending to City-imposed targets regardless of the actual need. A related problem is that projects, especially the “futures” list, get little detailed scrutiny to determine whether the list is complete, how each item fits into the larger scheme of transit growth, and what the priorities should be. A good example is the Downtown Relief Line which languished for years as a project the TTC downplayed, but which now stands at the top of the list as a critical future requirement. Even so, it remains only a “future improvement,” not part of actual spending plans.

Because capital plans and priorities have never been considered as a total program rather than as independent projects, Toronto does not really know how badly misaligned its capital plans might be with crucial spending needs. The big ticket projects, notably new rapid transit lines, bring an added layer to the debate because inclusion and prioritization within the plan trigger “me too” demands from Councillors more attuned to the political needs of their own wards than of the city as a whole.

If there is one big message in the 2016 budget, it is that Toronto cannot afford everything, and it cannot afford to entertain the transit fantasies of every member of Council.

The Crisis in Capital Funding

Toronto funds its capital spending from many sources, including:

Subsidies from other governments

Surpluses in the City operating budget for prior years

A portion of the Municipal Land Transfer Tax (MLTT)

Development charges

“Capital from Current” (or “CFC”), money from the current year operating budget

Debt

Subsidies from the provincial and federal governments have two fundamental problems. Money dedicated from gas tax revenues funds only a small part of the “SOGR” capital needs, and does not keep pace with the rising cost of maintaining an aging system. Funding for specific projects such as the Spadina extension evaporate when the projects complete, and there is no guarantee that new projects will receive similar treatment.

City surpluses have declined over years thanks to better budgeting, but they are also sensitive to economic conditions which could turn against the city’s favour. MLTT revenue and Development Charges are determined by activity in the real estate market. This has been strong for several years, and Toronto was able to keep tax hikes down thanks to windfall profits from that sector. However, Toronto could face a drop in revenue if the market cools.

Capital from Current spending is equivalent to paying for a house renovation, at least in part, with money from your paycheque rather than from a bank loan. This saves on interest costs and keeps the debt load down, but it uses money that might otherwise be spent on day-to-day operations. Between them, CFC and debt servicing costs take a large bite out of city revenue and reduce the room for growth in other parts of the budget. In short, Toronto can spend more money on capital projects, but it will have less money for day-to-day needs.

The City has a policy regarding debt that limits servicing costs to 15 per cent of property tax revenues. If the city needs more money to fund capital works, this must come from other sources. Current borrowing takes Toronto almost to that line by 2019 when it will reach 14.87 per cent, and there is no headroom to pay for new capital projects in the near term without breaking through that limit.

But this isn’t the only problem. Toronto borrows only as the last source of funds. Throughout the year, the city uses its working capital (a “float” of cash to pay the bills and cover the ebb and flow in revenues) to fund capital spending. Later, the city borrows in blocks of several hundred million dollars partly to replenish capital spent from this pool. For many years, however, Toronto spent more on capital projects than it borrowed leaving a deficiency or “unfinanced debt.” By 2015, this gap grew to nearly $1 billion, when a more prudent value preferred by city staff would be a few hundred million.

Part of this growth came from a Council decision to fund a budget shortfall triggered by Queen’s Park (the cancellation of the “pooling” subsidy for social programs) and to spread the effect over four years while the City adjusted to the lower revenue. This was achieved by redirecting CFC moneys to fill the budget hole, but that in turn drove up the unfinanced debt. Now it’s time to pay back that “loan” where Toronto raided its own float. A change in the economic climate could choke off revenues leaving the city caught short, and that’s not a good position for Toronto. The Chief Financial Officer has two proposals to replenish working capital. One is quick and one is longer term, but both require more revenue and add to other capital pressures in the operating budget.

Not to be forgotten is another council policy directing that the CFC increase by 10 per cent annually so that more capital projects are funded from current revenue rather than borrowed money. The combined effect with reducing the unfinanced debt will be to almost triple CFC payments from 2016 to 2025 (from $254.4 to $723.6 million). The annual increases are greater than the new revenue that an “inflationary” increase in residential taxes will bring, and without new revenues, the cumulative effect will be to squeeze all other lines in the operating budget to pay for capital projects.

Mayor Tory proposes a new levy to grow at 0.5 per cent annually from 2017 to 2021, but the money raised would only support another $1 billion or so in borrowing, nowhere near the full backlog of unfunded capital projects. This is only one of many potential funding schemes city council must examine. Whatever they are called, “levies” or “revenue tools,” they are all new taxes. Tory’s election promise–keeping property tax increases at the rate of inflation–runs smack into the fiscal reality that Toronto’s spending in past years was affordable only because of tax revenue from the red hot real estate market.

Toronto simply cannot borrow forever to pay for both its state of good repair backlog and the many projects the city needs to support its growth. Schemes whose value lies more in vote-getting than real value for the city must receive much harder scrutiny. Council must face up to the difference between the funding provided by other governments, the taxes it is willing to raise locally, and the cost of city building on the scale Toronto requires. Asking Queen’s Park or Ottawa to share in the cost of dubious projects is no solution, and only wastes available capital.

This leaves not just public transit but other city budget areas with a major dilemma: press conferences do not pay the bills, and creative accounting cannot be used forever to hide the gap between what the city wants and what it can afford. Toronto now has billions worth of “below the line” projects the city needs but cannot pay for, and further billions in a wish list. Capital spending will take an increasingly large chunk of operating revenues crowding out many deserving programs including better transit service.

Toronto will not stop growing simply because politicians cannot face budget reality, but the long-term effect of hiding real needs and costs will be to strangle growth as the city’s attractiveness fades.