Budget 101: Mayor Rob Ford's City Hall looks to asset sales, operating surpluses in capital plan
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We dipped a toe into the wild world of Toronto's 2013 operating budget last week, discovering that the budget balancing process is a multi-step affair that always -- after some combination of scare tactics and yelling -- gets back to zero. This week, let's look at the other side of the city's finances: capital.
The capital budget is rarely a hot topic during budget season, even though it's just as important as its more service-oriented sibling. Where the operating budget is an assembled list of all the programs the city provides to residents and businesses, the capital budget basically works as Toronto's shopping list. It includes all the big and small ticket items we're going to buy over the next decade, covering everything from those shiny new streetcars the TTC will be rolling out, to costs relating to a "refresh" of Council Chambers at City Hall, through which hopefully they'll install more comfortable seating.
The staff-recommended capital plan that will come before council next month holds some intrigue. Covering the years 2013 through to 2022, the plan reveals a fundamental shift in the way the city approaches capital purchases. It reads a bit like an attempt by the Ford administration to establish a fiscal legacy.
In other words, the guys in charge have changed some things. I'm just not sure their changes make any sense.
But let's not skip ahead. Here's how the staff-recommended ten-year capital plans suggests the city divvy up its spending:
What Toronto will spend its capital money on
So far, so good. About 70 per cent of the spending included will go straight to what the city's number crunchers call "state of good repair." In other words, most of our spending just goes toward making sure things don't fall apart.
The only major differences between this spending plan and past years is that the new plan includes a bigger emphasis on road resurfacing and repairs. About a half-billion dollars in new spending, or about 17 per cent of the total Transportation allotment, is directed toward holding up the Gardiner Expressway.
The TTC, as always, takes up the biggest chunk. I know references to Premier Mike Harris are tiresome, but, hey, this is still worth pointing out: If not for him and his downloading, a huge chunk of that giant blue section would be cost-shared with the province and the city would have more money for other things.
So that's the spending for the next decade. Now, how are we going to pay for this?
How Toronto will pay for its capital spending
Just like with operating, the city has a lot of ways to raise revenue to balance its capital budget.
First, there are our fair weather friends at the provincial and federal governments. Note that very little of their contribution is dedicated funding. Instead, it's mostly tied to specific projects. As a result, we see a lot of year-to-year variation in the provincial and federal share as projects are finished and new ones are announced. In our current plan, they're kicking in a combined $3.7 billion, or 25 per cent.
The city also scores some cash for capital through its reserves. Toronto's got money squirrelled away in various accounts. There's also some revenue that comes in via the nebulous "Other" category. And then there are Development Charges, which make up a shamefully small part of the pie despite all those cranes on our skyline. Together, these categories equal $3.3 billion, or another 22 per cent.
But the big dogs in this fight are debt and "capital from current." The former is often painted as a villain, though it's worth pointing out that Toronto's debt levels are within its self-imposed limits and very healthy compared to other North American cities. We're looking at issuing $3.5 billion in new debt to fund purchases over the next year. This won't increase Toronto's debt by $3.5 billion, though, because other debts will be paid off during the same time.
"Capital from current" is harder to explain, but it's kind of like a pay-as-you-go strategy. The city will take an average of $350 million in revenues per year from the operating budget -- money from property taxes, land transfer taxes, and other taxes and fees -- and apply that directly to the capital budget. No financing, no debt -- straight-up cash for purchase.
At $3.5 billion each, "capital from current" and debt make up 47 per cent of the capital revenue plan.
Which leaves $1.2 billion to be covered by "financing strategy"—but, wait, what's a "financing strategy?" Isn't debt a "financing strategy?"
This is where things gets weird.
Historical capital revenue plans
The ten-year capital plan wasn't something the city started doing until the 2010 budget cycle, so we don't have a great basis for long-term historical comparison. But even a four-year window reveals something obvious: that pink slice for "Financing Strategy" is new. We don't see it in 2010, which was the last budget fully produced by Mayor David Miller's administration. And we don't see it in 2011, which was a transitional budget between the two administrations.
It emerged in 2012, the Ford administration's first real crack at a definitive fiscal plan all their own. And now, in 2013, it's gotten bigger.
So what's the financing strategy? City staff make things pretty plain, indicating that it's a pool of revenue from a combination of:
- 75 per cent of prior-year operating surpluses, when they exist
- sales or monetization of city assets
- additional provincial or federal funding
I wouldn't count on the other orders of government to come running with more cash any time soon, which means the city will be leaning on the first two options. So that $1.2 billion over the next 10 years is earmarked to come from any extra operating cash the city has hanging around at the end of the year plus any net proceeds from selling things the city owns -- just as council did with Enwave this fall and has considered doing with pieces of Toronto Hydro.
Of that $1.2 billion, about half is supposed to go to the TTC's capital needs while the other bit will go toward roadwork—including some of those damn Gardiner Expressway costs.
This new strategy raises a lot of questions.
First, didn't some councillors used to get lectured about relying on operating surpluses as a means of balancing the budget? Isn't the new financing strategy essentially doing the same thing, only on the capital side?
Second, the capital budget already includes money from operating revenues -- it's that whole "capital from current" thing. If staff are figuring that surpluses are reliable enough to bake into the ten-year capital financing strategy, shouldn't those revenues come through the operating budget?
Third, are there more asset sales planned to cover this newly-created gap? What are they? Can we see a list and maybe talk about it?
Fourth, and most importantly, why do this?
City Hall's new culture: Cash is king
A theory: "Debt" has become such a dirty word amongst some in the Ford administration that staff are now going to great lengths to avoid it. With this new ten-year capital plan, Toronto is now looking to pay cash for nearly a third of its purchases. The percentage of capital spending to be paid for by cash -- through the operating budget and this new financing strategy -- has basically doubled since the new mayor took office.
Maybe this should be considered a good thing. Paying off debt is often a cause for celebration in most households.
But here's the other side of the household analogy: there's not a respectable accountant on the planet that would suggest a family making good money consign themselves to living in a skid row apartment for five years while they save up to buy a $400,000 home with cash. A respectable accountant, especially in a low-interest rate environment, would suggest that family get a damn mortgage and get moving.
Toronto's budget chief, Coun. Mike Del Grande, happens to be an accountant by trade, which makes this approach even weirder. Everyone would agree the city has huge capital infrastructure needs -- far beyond what's reflected in the current spending plan -- and yet the fiscal strategy seems centred around avoiding the debt bogeyman at all costs. By doing so, Toronto risks missing out on opportunities to make long-term strategic investments in much-needed assets at record-low interest rates.
Remember, "cash is king" is a good motto for budding entrepreneurs and thrifty households, but we're trying to run a major city here. I'm pretty sure there's a difference.