News / Toronto

Toronto facing a massive $1.42 billion budget gap in five years

Outgoing city manager outlines a rocky financial future and decline in services if a new plan is not implemented by a council that must be willing to act.

Toronto city manager Peter Wallace during a council debate a request to city staff to try to freeze departmental spending in the 2018 budget on May 25, 2017.

Torstar News Service / David Rider

Toronto city manager Peter Wallace during a council debate a request to city staff to try to freeze departmental spending in the 2018 budget on May 25, 2017.

If the city continues on its current financial course, it will face a massive $1.42 billion budget gap in just five years, warns a new report from the city’s top bureaucrat.

Peter Wallace, the current city manager who is leaving to take on the job of secretary of the treasury board in Ottawa next month, tabled his long-awaited and much-delayed long-term financial plan on Monday. It will be considered by Mayor John Tory’s executive committee on March 19.

Without raising taxes or finding a new source of income, the services the city provides will suffer or user fees like TTC fares or those for recreation classes could increase. Cuts could affect things like the number of hours the library is open, the availability of shelter beds, how quickly potholes are fixed, how often the bus comes, and many other basic functions of municipal government.

A property tax increase alone would need to be significant to make a dent in the looming operating gap. A 1 per cent residential property tax hike currently raises $30 million.

Because Wallace’s report was delayed until after the last budget of this term, and simply recommends executive have a new city manager bring forward an action plan, change won’t be possible until the 2020 budget process. With the election scheduled Oct. 22 of this year, it will be up to a new council to implement it.

The challenges are great, but not insurmountable, Wallace wrote. By 2023, council will have to find a way to cover a $1.42-billion pressure in a nearly $15-billion operating budget — a massive chasm for a city that is not legally allowed to carry a deficit and whose key policy direction for the last eight years has been to maintain property tax increases below inflation.

A failure to address the future financial cliff and the tradition of punting expenses to future years is to simply “kick the can down the road,” as Wallace became known for saying.

“While city council has clearly established policy directions and expectations for implementation, there are real barriers to their realization which are primarily financial,” the report reads. “Business as usual will not allow the city to continue delivering exceptional services while managing costs.”

Ahead of the election, the report offers several broad and specific actions for consideration, including calling on the mayor to lay out clear strategic direction for the city at the beginning of the term, so that funding will actually match council’s city-building goals.

The operating gap forecast for 2019 will be in line with recent pressures at $388 million. But the gap grows to $730 million in 2020 and $961 million in 2021. Those forecasts assume the housing market does not dip at all, which the real estate industry has said is inadvisable, and that council continues to approve inflationary tax increases of just 2 per cent, which is not enough to even maintain existing service levels. To balance its book, the city places a heavy reliance on the land transfer tax which is directly linked to the ups and downs of Toronto’s housing market.

The city’s efforts to find “efficiencies” won’t be enough to make ends meet, Wallace’s 68-page report says. Some $900 million may be needed just to keep services from falling below current levels.

There is also $30 billion in capital projects that have been approved but which remain unfunded.

“There is a growing gap between council’s vision for Toronto and available funding,” the report says.

Wallace recommends council establish clear criteria to prioritize that list of projects, including assessing value for money.

That has proven difficult for council in recent history.

Though a relief line subway, which would ease congestion on the Yonge line, has long been the priority for transit officials and experts, the estimated $6.8-billion cost is entirely unfunded. Meanwhile, Toronto council approved the $3.2 billion extension of the just-completed University line to Vaughan, and is substantially funding —through a $910 million levy on homeowners — a one-stop subway extension of the Bloor-Danforth line to the Scarborough Town Centre for more than $3.4 billion.

As the city’s most-expensive infrastructure project, there is evidence the Scarborough subway is a vast overbuild, serving fewer people for more money compared to a light-rail alternative. As costs continue to climb, Councillor Josh Matlow, who has pushed for an LRT network, has tried repeatedly to convince council to order a value-for-money comparison and to prioritize the list of infrastructure projects. Tory and a majority of council have rejected those motions.

Wallace also noted funds transferred by the province end in 2018, which adds to Toronto’s financial pressures going forward. There is still hundreds of millions of dollars council has not identified required to keep Toronto Community Housing units open and billions of dollars in transit expansion plans that remain unfunded — two expenses Wallace says the federal and provincial governments should share.

With a pending face-off between Liberal Premier Kathleen Wynne and newly-elected Ontario PC party leader Doug Ford expected this June, it is unclear what financial assistance could be in Toronto’s future.

Specific recommendations in the report include:

  • Reducing the number of staff across all divisions and agencies.
  • Establishing an arms-length organization to manage the city’s public assets, similar to the province’s Infrastructure Ontario.
  • Lobbying the provincial government to modify the legislation governing development charges to ensure growth pays for growth.
  • Continuing to explore the potential privatization of Toronto Hydro and the Toronto Parking Authority.

With respect to a longstanding dispute about how the city should raise new revenues, Wallace was clear those tools are needed, but chose not to propose which tools council should pursue.

When presented with new options in 2016, council endorsed few transformative options. A move to toll the Gardiner Expresway and Don Valley Parkway was later blocked unexpectedly by Wynne’s government.

Wallace also continued to draw attention to, as he has over the last three years, the precarious reliance on a hot housing market. A dip in home prices could create a hole of $72 million to $130 million this year, Wallace’s report says — which would likely require mid-year cuts to offset.

As Tory has continued former mayor Rob Ford’s tradition of demanding at-inflation residential property tax increases, council has continued to draw on a rainy-day reserve to balance the books.

The city’s tax stabilization reserve, which is meant to be available should the city’s finances take an unexpected dive, was reduced by about 50 per cent in 2018 to help cover the operating gap and remains “well below that of other municipalities,” Wallace wrote.

Executive committee will consider Wallace’s recommendation to have a new city manager report back with an implementation plan in the new term. The report will not be considered by the whole of council.

“The upcoming term of council, beginning in the fall of 2018 after the municipal election, will provide an opportunity for a reassessment of policies and better integration of program ambitions with fiscal capacity,” Wallace wrote.

Pulling back from the financial brink, he indicated, will require a new council willing to act.

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