Unknowns loom over transit funds
SmartTrack financing unresolved ahead of critical council vote
Key details fuelling the likely funding strategy for Mayor John Tory’s SmartTrack plan are being kept secret from both council and the public ahead of a critical vote. Council must decide on Tuesday whether to approve a proposed transit deal with the province. It includes moving ahead with a $3.7-billion plan for six new stations as part of expanded GO service and a new light-rail line along Eglinton Ave. W. — which together form a heavily revised version of Tory’s campaign promise to build a heavy-rail service called SmartTrack.
Though the city will be on the hook to pay its share of the bill, currently estimated at $2.01billion, if council OKs the plan, city staffers say a funding strategy presented last week in a report to council is just “preliminary” and needs to be further “refined.”
Staff say the city can use what’s called tax increment financing (TIF) — basically, leveraging property taxes from future development to borrow money and build transit now — to fund a significant part of the city’s share.
However, TIF, which the city has never attempted on this scale, is incredibly risky and could fail as it has in other cities, experts say — leaving taxpayers on the hook for millions.
The financial calculation is grounded in projections done by a third-party consultant hired by the city.
But the consultant’s original work, published earlier this year, was based on Tory’s campaign version of SmartTrack — what was pitched as subway-like service with 13 new stops.
Asked by the Star last week, city spokesperson Wynna Brown said the projections were “rerun based on the revamped SmartTrack with the lower number of stations.”
But when the Star asked to see details of the updated work, Brown responded late Friday to say further work was required.
Tory’s office said Friday that the mayor, who has vowed not to raise property taxes, is “confident tax incremental financing can finance a significant part of the city’s portion of SmartTrack.”
The difficulty with TIF is not only in predicting how much future growth of residential and office space will occur over a long period, but how much of it wouldn’t have occurred if not for the investment in transit. The city must rely on real-estate experts to make those projections.
That’s where the Strategic Regional Research Alliance (SRRA) came in.
The city reported to council that the overall growth that can be attributed to SmartTrack is 23,737 new residential units and 10.7 million square feet of commercial space projected between 2017 and 2042.
But the details of how the consultants arrived at those figures, where in the city they say the growth will occur, by how much and what other assumptions were used are all unknown.
The Star reviewed SRRA’s earlier work and found potential issues with the growth assumed for at least one SmartTrack station location at Liberty Village.
Based on new midrise office-tower development at 12 storeys, SRRA predicted Liberty Village could accommodate an additional eight million square feet of office space. However, 12 storeys is nearly twice the height allowed under the city’s current zoning for the area, where other factors such as heritage considerations affect what can be built.
City planners recently raised concerns over height with an office building application on Liberty St., proposed at12 storeys. And the Ontario Municipal Board, the provincial body that settles planning disputes, recently approved an office building on Atlantic Ave. at eight storeys, which the city could use as precedent in future disputes.
Iain Dobson, who helms SRRA, first told the Star that “all of our work was based on the policies on the ground, not on anything that was aspirational or anything like that.” But when faced with the zoning discrepancy, he said city staff “felt our assessment was reasonable.”
Based on growth projections, the city says it can expect to raise $1.9 billion from incremental property taxes over 25 years as a result of SmartTrack. But because of the uncertainty, staff have said it would be prudent to rely only on 50 per cent of that revenue — $950 million over 25 years, or $428 million in today’s dollars. Staff says the city needs to borrow $878 million in today’s dollars in order to cover costs.
The real risk with TIF is this: if future development occurs at a slower rate than projected, or any of the anticipated development doesn’t materialize at all, fewer actual taxes than anticipated will be collected by the city. But the city still has to pay back what it borrowed with significant interest.
“The fallback is, if all else fails, it comes back to the property tax. I mean, Tory’s trying to say, ‘I’m not planning on that,’ but that’s the fallback,” said David Amborski, director of the Centre for Urban Research and Land Development at Ryerson University and an expert on TIF.
In North America, examples of projects using TIF often rely on it to raise from tens of millions of dollars to a few hundred million dollars, according to a recent study published by the University of Toronto’s Institute on Municipal Finance and Governance (IMFG). In rarer examples of larger-scale projects involving TIF, there have been massive set- backs. TIF is being used, in large part, to finance the $3-billion Hudson Yards project in Manhattan, where, according to a May 2016 report released by New York City’s Independent Budget Office, expected development has fallen far short of projections, leaving a shortfall of more than $141 million.
Stuart Barron, national director of research for Canadian markets at brokerage Cushman & Wakefield, said it is “challenging” to make projections 25 years out. But even if the development does occur as expected, where expected, using TIF creates budgeting problems elsewhere.
Tax dollars drawn from development to pay for transit come from the same pool of taxes that would normally go to fund basic city services. Though staff said only 50 per cent of the expected TIF revenue should be budgeted toward SmartTrack, a question remains:
“What pays for the other 50 per cent of services that would go to these new residents and businesses?” Councillor Gord Perks asked staff at executive committee last week. “You’re assuming that the new people and new businesses will consume half as many public services as the people who are currently living and working here?” The committee room was silent. Bridget Fisher, associate director of the Schwartz Center for Economic Policy Analysis at the New School in New York City, said TIF is not a “magic bullet” and pitching it as selffinancing is “misleading.”
“The city has to backfill the money you take out from TIFs in one way or another,” she said. “The only reason I can understand why they want to use it is because of the rhetorical benefits of being able to say it’s self-financing.”
Ryerson professor Murtaza Haider, who co-authored the IMFG study, agreed. “The more money we take out of the property tax revenue to put in the TIF bucket, the less is available in the regular municipal coffers to pay for municipal services,” he wrote in an email.
Some of the project, staff outlined, could be funded through development charges. A remaining gap is equivalent to a 2-per-cent property tax increase. How the city plans to fill that gap remains unclear.
“The fallback is, if all else fails, it comes back to the property tax.” DAVID AMBORSKI TAX INCREMENT FINANCING EXPERT