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

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