Friday, November 1, 2013

The Impact of Rob Ford on Toronto's Fiscal Future

With Toronto’s Rob Ford making the headlines yet again, I thought that it was time to update the debt issues facing the City of Toronto, an issue that seemed to be of particular concern to the Ford brothers.

Keeping in mind that Rob Ford took over as mayor in December 2010 and that he had been a city councillor since November 2000, here is a look at the debt projections for the city over the next 10 years: 

Toronto's long-term net debt rose from $2.9 billion at the end of 2012 and is projected to peak at $4.2 billion in 2018 and drop back to $3.0 billion by 2022, still above the debt level of $2.6 billion in 2011.

Fortunately for city taxpayers, the city has limited the debt servicing portion of their annual residential property tax bill to 15 cents on every dollar of taxes paid as shown here:

Unfortunately, this limit may have to change as the level of debt rises.  Looking way back to 2000, the city adopted a guideline that would not allow debt charges to be greater than 10 percent of total property tax levies and then promptly bumped it up to 15 percent in 2006.  So much for that idea!  Apparently, debt limits as a percentage of property tax levies are a moving target, one that could affect homeowners.

On the upside, Toronto's total debt on a per capita basis is relatively tame when compared to other major Canadian cities as shown on this bar graph:

Now, let's step back to Rob Ford's first full year on council and look at the debt statistics for that year.  As of December 31, 2000, the city's gross debt was $1.8 billion and it was estimated that the city would have to issue an additional $468 million in debt in 2001 to fund its operations as shown on this chart:

Here is a graph showing the debt growth since 1998 and the forecast debt growth to 2021 showing how the trend in debt growth is looking rather concerning under Rob Ford's leadership:

Let's go back to the present.  Here is a paragraph from the City of Toronto Fact Sheet issued on September 16, 2011:

"Toronto has enjoyed relatively low debt levels; however, in light of the growing capital infrastructure needs, there is a sizeable and growing gap between future capital expenditure needs and ongoing sustainable revenue sources. The City does not have the fiscal capacity for necessary growth related expenditures, e.g. TTC, Transportation, etc. For the next ten years, the TTC is projected to make up the majority of the new debt required to fund the City’s capital requirement. In fact, no new debt is required to fund the City's programs except for the TTC by 2014." (my bold)

In fact, between 2013 and 2022, an additional $7.669 billion will be required to address TTC and Transportation Services capital requirements, including the Spadina Subway Extension.  This represents approximately 50 percent of all spending over the 10 year period.  Since funds from the TTC contribute only 9 percent of city revenues, any expansions of the transit system will not be internally funded from TTC operations since the funds raised from fares are required for operations.  Obviously, this is an ongoing problem, particularly as the Ontario government gas tax contribution to operations may dry up as the provincial government sees its own fiscal house of cards come falling down.

The 2013 Capital Budget and Plan states that between 2013 and 2022, the federal and provincial governments are expected to pony up $3.786 billion or 24 percent of the total required by the City, 13 percent from the province and 12 percent from the federal government.  An increase in debt of $3.275 billion or 23 percent of the total Capital Budget and Plan will also be required.  Here is a pie chart showing how Toronto will fund its operations for the next decade:

It is important to note that the City expects new, higher levels of provincial and federal funding over the next five years as spending on the Capital Plan rises, a source of funding that is far from secure.

One key issue facing the City of Toronto is its aging infrastructure, a problem facing many governments at all levels.  The City has assets valued at over $65 billion and keeping them well maintained is proving difficult.  Approximately 70 percent of the road network is over 30 years old, 50 percent of the water network is over 50 years old and, in total, 68 percent of all City assets are over 30 years old on average.  Maintaining these assets in a State of Good Repair (SOGR) will cost an estimated $2.046 billion in 2012, dropping to $1.506 billion in 2022.  Unfortunately, the SOGR backlog could prove to be problematic as the infrastructure requires additional maintenance as the decade passes and the cost of repair puts further stress on the city's fiscal position.

While the Fords tout the importance of their fiscal contributions to the city, it is clear that the fiscal situation at Toronto City Hall is far from robust.  As in the case of most government debt projections, Toronto city council is counting on a complete change in the trend of debt growth somewhere in the future to bail the city out of its growing debt problem.  There is also no allowance for any type of decline in economic activity that would have an impact on tax revenue growth rates or any mention of an increase in interest rates on the existing and future debt, again, typical of government fiscal projections.

Only time will tell whether the Ford brothers have laid the foundation necessary to keep Toronto's fiscal picture from getting out of hand over the next decade.

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