Toronto and Ontario Reach a Deal to Stave off Toronto’s Budget Crisis
Toronto and Ontario Reach a Deal to Stave off Toronto’s Budget Crisis
Ontario Premier Doug Ford and Toronto Mayor Olivia Chow announced an important deal for the City of Toronto this week, providing significant short-term operational dollars and help by removing a capital albatross from Toronto’s capital budget.
The new deal will contribute to balancing Toronto’s operating budget for the next three years. The agreement does not fully, or permanently solve the structural financial issues faced by the City of Toronto. It is important, however, both for the financial support it does deliver, and for the promise of further negotiations to come.
Sets tone for new working City/Province relationship
At a political level, the agreement is a sign of a positive working relationship between Ontario and its largest municipality. It exceeded the expectations of many observers, transcending partisanship or “knee-jerk” reactions to leave Toronto to tackle their financial issues on their own.
At an administrative level, the agreement was remarkable both for its depth and its short time to successful completion. Exceeding expectations, the Toronto-Ontario working group was able to achieve agreement on a framework that went well-beyond mere stop-gap measures.
Both parties recognize that there is continued work to do. While the City was able to secure a significant financial commitment, there is considerable work to be done to fill the $46.5 billion dollar shortfall that is projected over the next decade. To complete the task will require a full toolbox, ranging from internal improvements that reduce or bend cost increases, new or increased revenues, and additional provincial and federal support.
It’s a good start
The agreement did not fix Toronto’s problems for the long term, but it was a good start. That is why they will continue the work of a recently formed Toronto-Ontario working group on the city’s finances. The next financial agreement between these two parties will be negotiated in the context of 2026 re-election goals as both Toronto and Ontario go to the polls within months of each other. This is likely to have positive policy implications for both Toronto, and other municipalities, all of which operate with an inadequate set of fiscal tools, relative to their responsibilities.
Significant operating money for the city, but difficult decisions still lie ahead
The City of Toronto’s Long Term Financial Plan forecast that Toronto faces a $46.5 billion operating and capital shortfall over the next decade – including an immediate $1.5 billion opening pressure on the City of Toronto’s operating budget in 2024. The Long-Term Financial Plan expected that the City would be required to achieve the following to get back on stable financial footing: cutting dollars from their ever-increasing operating and capital budgets, increasing property tax revenues, and transfers from other levels of government.
Operating budget gap reduced
Pre-empting cuts and tax increases, the new deal includes a transfer from the province that will provide certainty to the City of Toronto that the operating gap will be somewhat smaller as it heads into its annual budget process, but the prospect of cuts, property tax rate increases, and other revenue generating initiatives will still be needed to present a balanced budget for 2024.
Expediting the path to city building, or avoid the worst of budget impacts?
In the new deal, up to $1.2 billion has been allocated over the next three years (reportedly front-loaded to provide immediate assistance) to support the delivery of services in the City of Toronto. It remains an open question how these funds will be allocated. Whether it will permit Toronto to accelerate its City Building agenda or be used to avoid cuts that would otherwise have been needed, is still to be determined through the budget process. How sustainable it will be is subject to future agreements. Many of the details of the operating funding are still subject to conditions and details. While $990 million is committed to support the operation of the Eglinton Crosstown and Finch LRT (offsetting costs the City had committed to), an additional $600 million for housing is contingent upon matching federal support.
One-third of the way to balance
The operating dollars committed by the province represent around a third of what is needed to balance the budget in 2024. This means there are still difficult decisions that lie ahead, with new revenue sources ruled out by the province, property tax increases are likely to be the next step. A 10% increase to the residential property tax rate would expect to pull in approximately $350 million in new revenue. Even with the new deal money, there is still a significant gap to fill in the 2024 Budget, but a gap that is more comparable to the usual “starting off pressure” that we have become accustomed to at the start of the budget process.
Property tax increases are pretty much a given
In addition to the remaining fiscal gap, there are two other reasons why property taxes are a given this year.
While it would no doubt come as a surprise to Toronto taxpayers, Toronto starts off the budget process with property taxes that are low compared to our neighbours. As the Long-Term Financial Plan noted, Toronto residents pay less tax than their neighbours around them both by the percent of tax paid, and actual dollars owed. There will be pressure to bring Toronto’s taxes more in line with its neighbours before there is more provincial support. To paraphrase an old saying, “the province helps those who help themselves.”
A second issue is inflation. Unlike many revenue tools, like income and sales tax, which grow with inflation and the economy, property tax rates need to rise to offset inflation. Many Ontario municipalities, even those that don’t have Toronto’s unique mismatch of services to revenue tools, are looking at 8-10% tax increases for 2024.
Given the preponderance of financial issues still plaguing the operating budget, it will be interesting to see whether Mayor Chow begins to adjust her messaging on the deal from being one which will allow the City to deliver “more” to one which will allow the City to “maintain” services. Toronto faces the challenging situation of having to communicate both the need to do more and the need to maintain what it has.
A meaningful contribution to a massive capital problem: the Gardiner upload helps, but won’t fix the problem
Over the next decade, the City of Toronto has unmet capital needs of at least $29.5 billion, including: $16.9 billion for new transit; $3.7 billion on roads and transportation; and $1.4 billion on housing. The new deal worked to address these shortfalls, but does not come close to solving these financial pressures with only $1.9 billion in guaranteed funding via the upload of the Gardiner.
With that $1.9 billion coming off the City’s books, many expect Mayor Chow to reinvest into the housing file and decrease that unmet capital need, and respond to the political necessity to deliver on her affordable housing plan. However, this only lowers the unmet need to $27.6 billion. The only other capital contribution the province has committed to provides $750 million in new funding to purchase new subway trains for Line 2, but similar to the operating funding for housing being contingent on a federal contribution, the City cannot yet count on this funding.
To realize the full potential of the new deal, both Premier Ford and especially Mayor Chow will need to continue to negotiate with the federal government to broker a deal for the cash-strapped city, though expectations should be tempered that the federal government will solve the issue outright.
Pressure shifts on federal government to respond
Prime Minister Trudeau and his government have demonstrated some reluctance to engage in the conversation between Ford and Chow. The Prime Minister is already facing calls from Canada’s other major urban centres for increased funding, and this would only escalate if they were to enter a special deal for Toronto. It is difficult for any government to execute a one-off deal when cities across Canada need support.
However, the Liberal government and its 25 Toronto MPs will feel increased pressure to contribute to the new deal between the Province and the City as they won’t want to appear like they’re in the way of scoring additional transit and housing wins for their constituents, but need to be careful to do it in a way that doesn’t set off regional rivalries.
Neighbouring municipalities are also in line for a new deal
It’s necessary to review provincial municipal finances every ten years or so, and Ontario is now five years past the expiry of the last comprehensive deal that was made in 2007/08. Across Ontario, other municipalities are facing similar problems and need the attention of senior governments. The new deal for Toronto is being watched by all Ontario municipalities. The Ford government focused the Toronto discussions on matters that were Toronto specific – the Gardiner upload, subway dollars, and homeless shelter costs.
The municipalities are likely happy to see the province taking action on Toronto, regardless of the Toronto-specific content of the new deal. They’re ready to get in line, both via their own advocacy and through their many associations.
Long-term partnership with the City
The agreement is a positive, collaborative step that will help to get Toronto’s finances back on stable footing. It was impressive in its speed, scope, and tone. Ontario’s contribution does not solve the budget issues Toronto is facing, and still requires Toronto to make difficult but necessary decisions to bring its financial house back in order. It is hoped that the progress will continue, bring in the federal government, and be broadened to a bigger conversation that can solve the long-standing problems of the mismatch between municipal revenues and service delivery responsibilities, both in Toronto, and in other municipalities across Ontario.