City shutdown? New taxes? Here’s what could happen to Toronto if there is no bailout

Thestar.com
Nov. 18, 2022

With all the talk about the city’s budget crisis -- before all the talk became about the pediatric ICU crisis, and then the possible school strike crisis, and the selling-off-the-Greenbelt crisis, and then the dismantling-of-local-democracy crisis -- one element may have jumped out to some readers.

Namely, that the city has an $815-million deficit in its budget for this year, less than two months before the books on 2022 close, and that Toronto is legally forbidden from running a deficit.

Like me, you might have wondered what exactly that means.

Maybe you had visions of “Bad Boys” playing and an army of OPP officers flooding into City Hall to march politicians and city managers out the door in handcuffs. “These folks wanted to take credit,” the lead detective might say, dramatically removing his sunglasses, “well today, their card... was... declined.”

YEEEEEEEEEAH. No.

More likely, you might have wondered if the province would put the city into receivership, and take over managing the place from Queen’s Park full-time (rather than as a favourite hobby, as Premier Doug Ford has been doing), like when the state of Michigan took over the government of a bankrupt Detroit. Or if some other dramatic penalty would be imposed.

Or instead, you might have tried to picture what the city would do, if the requested bailout from the province and the feds didn’t come through, to head off such a scenario: they cannot levy new taxes at this point in the year, and surely almost all of the city’s planned spending for the year is done by the time Dec. 1 -- Mayor John Tory’s stated deadline to hear back about the bailouts -- rolls around. Even if the city just shut down its government for the last month of the year -- laying off police and firefighters, locking up the subways -- would it come up with that kind of money in savings?

While the province and the federal government played hot potato with the question of who should kick in the cash, the question remained about any scenario in which they didn’t come through: what will happen, exactly?

As it turns out, if it comes to pass, it won’t be as dramatic as all that.

Because, as it turns out, the city has $815 million sitting in the bank -- allocated to its capital budget -- set aside as a contingency against that outcome.

This was clarified for me this week by Stephen Conforti, executive director of the city’s financial planning division. While the operating budget was passed assuming financial support from other governments for COVID-19 shortfalls would come through as it had over the past two years, he wrote in an email, they set up a “backstop strategy” in which $515 million in planned capital spending that was paused as a contingency fund at the onset of the pandemic would continue to be held back, and $300 million in 2022 capital projects would be paused as well.

That money is supposed to be spent -- it is budgeted to be spent -- on capital projects like building and repairing the physical infrastructure of the city. But it is being held at the moment in a break-glass-in-case-of-emergency situation.

Conforti made it clear this doesn’t mean that wouldn’t actually be an ongoing emergency for the city: “These backstop measures are one-time measures that cannot be repeated,” Conforti wrote. Those funds, moved to the operating budget and spent this year, would no longer be available for the needed capital purposes they were allocated to. And then, they also would not be available as a backstop or contingency of any kind in the future -- where just over the horizon in the 2023 budget planning process, the city currently faces a $1.48-billion gap that needs to be made up.

So as I understand it, the city’s budget situation this year is dire, but the government is in no immediate danger of breaking the law. No “Untouchables”-style team of financial-ledger-examining coppers appears likely to be coming to take down Tory any time soon.

Which, it further turns out, isn’t what happens anyway. Digging into it, I have clarified that while municipalities in Ontario cannot pass budgets that they know or expect will run a cash deficit, there is some allowance for unexpected events putting them in the red temporarily. (A 2020 report from the province’s Financial Accountability Office showed some municipalities actually running significant operating deficits in some years.) What happens in that case is that the municipality needs to roll that shortfall over to the next year’s budget -- as detailed in the province’s guide to municipal budgeting -- which will then need to show a balance when it’s passed.

What if they did it again? “If a municipality were to operate with a significant deficit over several years and planned to continue this practice, it would likely face major financial repercussions,” the provincial guide says.

So on both ends of the no-bailout scenario question -- how Toronto could avoid the shortfall and what would happen if it didn’t -- the answer is significantly less dramatic than some of us might have imagined. Less like falling off a cliff, and more like being forced to continue standing near the cliff edge as the rock face continues to erode toward you.

That’s still not a good situation. And it doesn’t change the arguments about whether Tory is justified in seeking this help (because COVID really has created an unfixable budget condition) or is just crying out for a rescuer after tying himself to the railroad tracks (because he has not taken opportunities to raise city revenue through property taxes, for instance). The budget crisis is still a crisis, and not a typical one. It’s just not the kind where jail time or bankruptcy are immediately likely outcomes.

Which may make it a problem that’s less fun to talk about, even as it remains no less important to solve.