Wednesday, September 28, 2011

James: Best budget fix mixes fees, tax, cuts

No matter how you slice and dice Toronto’s budget, costs are rising faster than revenues; the city spends more than it collects.

Change is hard, but there are ways to permanently fix this “structural deficit” without inciting citizens to protests and demonstrations.

The formula? A small tax hike, reasonable fees, a few spending cuts, and a smidgen of help from the province.

By law, Ontario cities can’t borrow to run day-to-day operations, only for capital projects like building subways, roads and sewers. Toronto can’t run a deficit, like the province. It gets no share of income, sales or payroll taxes.

Since amalgamation, when the provincial Tories downloaded services without offsetting revenues, the city’s budget has been caught in this vice. But everything else about the city’s finances is tangled in political ideology and hot-button rhetoric that makes it difficult to navigate a solution.

Mayor Rob Ford’s solution is to cut taxes and starve the city of revenues, and to drastically reduce spending through service cuts. That’s a toxic twin, as evidenced by the protests and outcry around the current “core service review.”

There is a better way, one nearly impossible to achieve now that the debate has been poisoned by the mayor’s unnecessarily partisan and hidebound politics.

City manager Joe Pennachetti and staff have pleaded with mayors and city councillors since the David Miller days to address the fiscal gap with permanent solutions instead of one-time fixes.

Ford’s approach, in theory, eliminates the structural deficit, but the instruments he proposes are so blunt that even he backs off them as soon as the citizens realize the impact.

By definition, a permanent fix flows from property taxes or fees that recur each year; or spending cuts; or a new, ongoing revenue source such as provincial grants. A one-time fix is dipping into a depleting reserve fund; or getting a budget bailout; or using an unexpected jump in investment income or operating year-end surplus to balance the books.

Since amalgamation, city council has often used one-time fixes like the sale of hydro poles to itself to plug its budget holes. For the 2009 budget, for example, staff found $92 million from a fund few knew existed — called a “closed capital account” — essentially, money left over from construction projects.

Queen’s Park has started to take back some of the social services cost the Mike Harris government downloaded — $216 million worth this year, rising to $350 million by 2018.

But costs rise every year: $60 million in salary increases for city workers last year alone, plus benefits.

And property taxes have not kept up. In the 14 budgets approved since amalgamation in 1998, four saw property taxes frozen. Increases in the other 10 budgets ranged from 2.9 per cent in 2010 to 5 per cent in 2001. City residents may squirm at the truth, but Toronto’s homeowners have the lowest property tax rate in the GTA. Meanwhile, the majority of Torontonians tell pollsters they’re prepared to pay more taxes to save services.

These steps would fix Toronto’s budget:

• Keep the land transfer tax, now applied to home purchases. A city that is supposedly $774 million in the red cannot give back $274 million the tax yielded last year, as Ford plans. Miller did well in securing this new revenue source through provincial legislation. To give this back is to signal to citizens that Toronto does not have a budget problem.

• Give residents a clear, correct picture of the budget needs. So much obfuscation is guiding the current budget debate, it is near impossible to tell how much is needed to put the city on a sound fiscal footing.

For instance, you’ve been told Toronto is in unprecedented fiscal trouble, with a $774 million “opening pressure” or shortfall. Did you know that the “opening pressure” for 2010 was $821 million; and $759 million in 2006?

How did we survive? By using surplus, reserves, some service cuts, assessment growth, a property tax hike and provincial uploading of service costs.

If you removed all the uncertainties on the income side of the budget ledger — the investment incomes and surpluses and reserve funds — the city’s real structural deficit is estimated at anywhere from $145 million to $250 million. This is the real costs for which it has no funding source it chooses to tap.

• Freeze municipal staff salaries across the board, for one year, including a rollback of the police wage hikes the mayor boasts about. It is unconscionable to offer such increases, only to ask for a 10 per cent cut in services and reduce police staff by the hundreds.

A freeze stings. It can only be broached if the entire process is fair and credible — not in the current atmosphere where civic workers are ridiculed and diminished.

• Do an honest “core service review” devoid of the “gravy” rhetoric. Do it exhaustively, turning over every stone, and with the knowledge that the alternatives are the salary freezes and tax hikes no one relishes. This is a one-year job, not the quick-and-dirty review now bumbling along at city hall. And it would yield $50 million and leave few feeling a victim of municipal assault.

• Plan for annual 10-cent increases in transit fares, for a decade, providing a stable increase each year, starting at $30 million. It’s that or watch the TTC reduce staff by up to 1,000, packing more passengers onto buses that run less frequently, even as ridership spikes to all-time high. Absolute lunacy.

• Raise property taxes 5 per cent each year for five years, to fill the gap left by 14 years of low or no tax hikes. That nets the city $113 million in 2012; by year five, the annual take is compounded to $137.4 million.

There are other options, some that could be linked to one of the region’s greatest challenges, transportation. Metrolinx has a plan that costs $50 billion and only begins to address the needs over 25 to 30 years.

A one-cent sale tax in the Toronto region — approved by Queen’s Park — would raise approximately $450 million a year in Toronto alone. That could leverage billions for transit. Road tolls and parking charges could fill in the rest of the needs.

Polarizing politics, scare-mongering, false promises and ludicrous claims about our fiscal capacity doom the city and region to years of stunted growth. Citizens will eventually wake up to the truth, but, by then, we’d have lost a decade or two.

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