Toronto’s borrowing costs rise since scandal

It could be a problem if city council can’t function, experts say

TORONTO — Toronto Mayor Rob Ford’s crack scandal is beginning to weigh on the city’s finances, driving up borrowing costs and threatening to delay fixes to North America’s second-worst traffic congestion.

The extra interest Toronto must pay to borrow from the bond market compared with federal government benchmarks rose four basis points, or 0.04 percentage point, to 94 basis points since city council urged Ford to step aside after he admitted to smoking crack cocaine.

During the same period, borrowing costs in the broader Bank of America Merrill Lynch Canadian Provincial & Municipal Index fell one basis point.

“Anybody who is outside the city or outside the country may just want to clean up their portfolios before this thing gets even uglier,” said Hosen Marjaee, senior managing director of fixed income at Manulife Asset Management Ltd., which manages $16 billion Cdn in debt, including Toronto bonds.

“I think the worry would come when the city stops being able to function,” Marjaee said from Toronto. “If the city council gets consumed by dealing with the mayor and people stop paying attention to what they have to do on a dayto-day basis, looking after the affairs of citizens — then it becomes a problem.”

The extra interest investors demand for Toronto’s 3.5-per-cent bond maturing in December 2021 compared with federal benchmarks increased 15 basis since Nov. 12, when the council began working on motions asking Ford to step aside and stripping him of powers, according to Bloomberg generic prices. The spread between Toronto’s bonds and federal government benchmarks reached its widest this year on Oct. 29 and has narrowed since, before widening out again over the past week.

“Mr. Ford has brought dishon- our to public office, the office of the mayor and his city,” Employment Minister Jason Kenney said Tuesday. “He should step aside and stop dragging the City of Toronto through this terrible embarrassment.”

“Toronto elected the most dysfunctional and incompetent and anti-urban mayor in modern history,” said Richard Florida, a professor at the University of Toronto’s Rotman School of Management and author of The Rise of the Creative Class. “These costs may not be seen in the short run, but show themselves in the long run. The biggest cost is the opportunity costs of investments and decisions deferred.”

The mayor has touted his economic record throughout the scandal, saying no money has been squandered and he continues to fight to cut spending and lower taxes. The city’s net debt to total revenue is 37 per cent, compared with an average of about 65 to 70 per cent for Canadian cities, Moody’s Investors Service said in its annual review on the city, released in May. The large, diversified economy, home to the country’s biggest banks, is a source of credit strength, Moody’s said.

Moody’s rates Toronto’s debt Aa1, the second-highest rating.

“It looks like council has been able to take the decisions to ensure the city is still functioning and operating,” said Jennifer Wong an analyst at Moody’s.