Prepare for a budget crisis

It’s a message nobody wants to hear, but it’s vital that civic leaders and Toronto residents pay attention. Canada’s largest city is in danger of a potentially devastating financial crisis, likely not too far away, unless bold preventative steps are undertaken.

Toronto has managed to balance its books in recent years only by deferring important projects, raiding its rainy day reserves and cashing in on an epic real estate boom. None of that can continue indefinitely.

Municipalities are forbidden by provincial law from running a deficit. So we have to make hard choices now, including accepting new ways to raise money from businesses and residents.

The alternative is chaos when a budget crunch hits, including disruptive service cuts, hastily imposed user fees and emergency tax increases. That’s no way to build a better city.

“It is no longer appropriate or feasible to defer difficult financial decisions to future years,” city manager Peter Wallace reported to the executive committee this week. “Solutions will take both time and effort.”

Wallace is the financial equivalent of an earthquake authority warning that the city is built on a major fault line. His expert advice calls for immediately taking judicious steps in order to avert disaster when — not if — current stability dissolves.

Unfortunately, much of Toronto city council, including Mayor John Tory, has been reluctant to listen, despite a compelling case for change.

The current operating budget has swollen beyond $11.7 billion and ratepayers no doubt feel they’re taxed enough. But Toronto’s population grows by 30,000 people, or about 1 per cent, each year. When adjusted for that, plus inflation, the real cost of municipal services, per resident, has actually dropped since 2010.

According to a staff report presented to the executive committee on Tuesday, Torontonians now pay about $165, or 3.8 per cent, less per resident than they did six years ago, “despite the consistent addition of new services.”

That bargain comes at a cost: there’s no cash available for very much else, especially major capital projects. City council, in its wisdom, has approved a host of worthy infrastructure initiatives, including much-needed transit expansion, Toronto public housing renovations, a reconfiguring of the Gardiner Expressway, fixing the TTC’s massive repair backlog and installing flood protection at the mouth of the Don River. But the city doesn’t have money to cover these projects.

The cumulative value of Toronto’s unfunded capital work, called the capital “overhang,” has been pegged as high as $29 billion. That’s the real price of trimming budgets by delaying investment in necessary work.

Yes, Ottawa and Queen’s Park are expected to provide a major injection of money for public infrastructure. But, as the staff report notes, contributions from upper governments “are likely to be contingent on matching or incremental city commitments.” In short, there’s no free ride to be expected here.

Another way Toronto has traditionally balanced its books has been to drain money from reserves meant to maintain services through hard times. Now its aggregate reserves are “much lower than those in other Ontario jurisdictions,” warn authors of the staff report. This increases local vulnerability in a crisis.

Finally, a mainstay of the city’s budget has been the municipal land transfer tax, which generated about $525 million last year alone thanks to Toronto’s red-hot real estate market. In inflationadjusted terms, income from this source has grown by a remarkable 167 per cent from 2010 levels.

But no boom lasts forever and Toronto’s excessive reliance on windfall revenue “is already at a point of potentially high risk for a municipal government,” warns the staff report.

A budget crunch is coming, that much is certain, and Toronto is poorly positioned to weather it. What remains unknown is precisely when the crisis will hit and what the city is willing to do to in order to avert it.

A key solution, raised by Wallace, is acceptance of bold new “revenue tools,” which could include a city tax on alcohol and tobacco, road tolls, a municipal sales tax, a parking tax, or giving Toronto a share of income tax. A staff report on these alternatives is being developed. When it lands, it’s imperative that city council be open to such alternatives and choose from among them to shore up Toronto’s crumbling fiscal foundations.

This represents a sound, practical way to build a great city.

City manager Peter Wallace is the financial equivalent of an earthquake authority warning that the city is built on a major fault line