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Major unknowns, risks in funding Tory's SmartTrack plan remain ahead of vote

How council will fund $2 billion share of project still unknown, as city says financing work still “preliminary.”
Nov. 7, 2016
By Jennifer Pagliaro

Key details fuelling the likely funding strategy for Mayor John Tory’s SmartTrack plan are being kept secret from both council and the public ahead of a critical vote.

Council must decide on Tuesday whether to approve a proposed transit deal with the province. It includes moving ahead with a $3.7-billion plan for six new stations as part of expanded GO service and a new light-rail line along Eglinton Ave. W. - which together form a heavily revised version of Tory’s campaign promise to build a heavy-rail service called “SmartTrack.”

Though the city will be on the hook to pay its share of the bill, currently estimated at $2.01 billion, if council OKs the plan, city staffers say a funding strategy presented last week in a report to council is just “preliminary” and needs to be further “refined.”

Staff say the city can use what’s called tax increment financing (TIF) - basically, leveraging property taxes from future development to borrow money and build transit now - to fund a significant part of the city’s share.

However, TIF, which the city has never attempted on this scale, is incredibly risky, and could fail as it has in other cities, experts say - leaving taxpayers on the hook for millions.

The financial calculation is grounded in projections done by a third-party consultant hired by the city. But the consultant’s original work, published earlier this year, was based on Tory’s campaign version of SmartTrack - what was pitched as subway-like service with 13 new stops at a TTC fare.

Asked by the Star last week, city spokesperson Wynna Brown said the projections were “re-run based on the revamped SmartTrack with the lower number of stations.”

But when the Star asked to see details of the updated work, Brown responded late Friday to say further work was required.

Despite lacking details, Tory’s office said Friday the mayor, who has vowed not to raise property taxes, is “confident tax incremental financing can finance a significant part of the city’s portion of SmartTrack.”

The difficulty with TIF is not only in predicting how much future growth of residential and office space will occur over a long period, but how much of it wouldn’t have occurred if not for the investment in transit. Because, city staff reported, that calculation “cannot be determined with certainty,” the city must rely on real estate experts to make those projections.

That’s were Strategic Regional Research Alliance came in.

The city reported to council that the overall growth that can be attributed to SmartTrack is 23,737 new residential units and 10.7 million square feet of commercial space projected between 2017 and 2042.

But the details of how the consultants arrived at those figures, where in the city they say the growth will occur, by how much and what other assumptions were used are all unknown - making it impossible to assess the reasonableness of those projections.

Iain Dobson, who helms SRRA, said it was up to the city to publish the work they provided.

Dobson, a current member of the Metrolinx board which is pushing for the city to approve this transit deal by end of the month, has also been billed as the “creator of SmartTrack” in talks he has given around the city to speak of the plan’s merits.

His earlier work on regional transit is said to have been the basis for Tory’s campaign pitch.

When asked if it was a conflict for him to consult on a fundamental component of the plan and if he had a stake in the outcome, Dobson said: “To me, it’s not a political thing … No. I don’t feel conflicted at all.”

The Star reviewed SRRA’s earlier work and found potential issues with the growth assumed for at least one SmartTrack station location, at Liberty Village.

Based on new midrise office-tower development at 12 storeys, SRRA predicted Liberty Village could accommodate an additional 8 million square feet of office space. However, 12 storeys is nearly twice the height allowed under the city’s current zoning for the area, where other factors like heritage considerations affect what can be built.

City planners recently raised concerns over height with an office building application on Liberty St. proposed at 12 storeys. And the Ontario Municipal Board, the provincial body that settles planning disputes, recently approved an office building on Atlantic Ave. at eight storeys, which the city could use as precedent in future disputes.

Iain Dobson, who helms SRRA, first told the Star that “all of our work was based on the policies on the ground, not on anything that was aspirational or anything like that.” But when faced with the zoning discrepancy, he said city staff “felt our assessment was reasonable.”

City staff did not respond to a question about whether it was reasonable.

Based on growth projections, the city says it can expect to raise $1.9 billion from incremental property taxes over 25 years as a result of SmartTrack. But because of the uncertainty in predicting growth, staff have said it would be prudent to rely only on 50 per cent of that revenue - $950 million over 25 years, or $428 million in today’s dollars.

Staff says the city needs to borrow $878 million in today’s dollars in order to cover costs.

The real risk with TIF is this: If future development occurs at a slower rate than projected or any of the anticipated development doesn’t materialize at all, fewer actual taxes than anticipated will be collected by the city. But the city still has to pay back what it borrowed, with significant interest.

“The fallback is, if all else fails it comes back to the property tax. I mean, Tory’s trying to say, ‘I’m not planning on that,’ but that’s the fallback,” said David Amborski, director of the Centre for Urban Research and Land Development at Ryerson University and an expert on TIF.

Most examples of TIFs used in North America are meant to raise sums ranging from tens of millions to a few hundred millions, according to a recent study published by the University of Toronto’s Institute on Municipal Finance and Governance.

In rarer examples of larger-scale projects involving TIF, there have been massive setbacks.

TIF is being used in large part to finance the $3-billion Hudson Yards project in Manhattan, which includes a subway extension and other infrastructure. According to a May 2016 report released by New York City’s Independent Budget Office, expected development has fallen far short of projections, leaving a shortfall of more than $141 million.

Bridget Fisher, associate director of the Schwartz Center for Economic Policy Analysis at the New School in New York City, said the paperwork for the Hudson Yards project was finished in 2005, just a few years before the recession hit.

“The projections that they used to document all of this and make their spreadsheets work, they couldn’t have anticipated the great recession,” she said.

Stuart Barron, national director of research for Canadian Markets at brokerage Cushman & Wakefield, said it is “challenging” to make projections 25 years out. In Toronto, growth and occupied office space in the downtown core has been strong, totalling 6.2 million square feet since 2009, he said, while growth in the suburbs has been virtually nonexistent. But even if the development does occur as expected, where expected, using TIF creates budgeting problems for the city elsewhere.

The tax dollars drawn from development to pay for the transit come from the same pool of taxes that would normally go to fund basic city services for the people who would live and work in the areas around the new stations - people who still need to call 911 in emergencies or who would like their roads to be cleared of snow and free of potholes. Though staff said only 50 per cent of the expected TIF revenue should be budgeted towards SmartTrack, a fundamental question remains:

“What pays for the other 50 per cent of services that would go to these new residents and businesses?” Councillor Gord Perks asked staff at executive committee last week. “You’re assuming that the new people and new businesses will consume half as many public services as the people who are currently living and working here?”

The committee room was silent.

“I’ll take that as your answer,” Perks said.

Bridget Fisher, associate director of the Schwartz Center for Economic Policy Analysis at the New School in New York City, said TIF is not a “magic bullet” and pitching it as self-financing is “misleading.”

“They city has to backfill the money you take out from TIFs in one way or another,” she said. “The only reason I can understand why they want to use it is because of the rhetorical benefits of being able to say it’s self-financing when they’re selling this idea to the public.”

Ryerson professor Murtaza Haider, who co-authored the IMFG study, agreed.

“The more money we take out of the property tax revenue to put in the TIF bucket the less is available in the regular municipal coffers to pay for municipal services, whose costs are increasing at a rate faster than the inflation,” he wrote in an email.

Former city manager Joe Pennachetti was quoted in the Globe and Mail during the 2014 campaign saying unless the city could harness the provincial education portion of property taxes, which is currently not allowed under the legislation, there was “no benefit” to TIF.

Tory promised during the campaign that the entire project could be financed through TIF and that property taxes won’t be required.

That much, council and taxpayers now know, is not true.

Some of the project, staff outlined, could be funded through development charges. Contributions from the federal government, the City of Mississauga and the Greater Toronto Airports Authority have all been assumed, but are not confirmed. A remaining gap is equivalent to a 2 per cent property tax increase.

How the city plans to fill that gap, today remains unclear.