The Avatars Say It All

`Brilliant' payback plan has its risks

December 08, 2009

Royson James

Toronto appears ready to cash in the family jewels – the last barrier between the city and crushing debt.

Mayor David Miller calls the plan "nothing short of brilliant."

Rather, it is nothing short of desperate.

Still, city staff say theirs is a wise approach to the massive spending decisions Toronto faces, including a near $1 billion TTC capital budget.

Proposing a two-pronged strategy, Miller will try to sell city council on an idea he and staff rejected until now. First, repay city loans for some building projects over 30 years instead of the traditional 10 years. Second, use $600 million of a Toronto Hydro windfall – money jealously guarded by staff until now – on projects this year.

To better understand the strategy: it's as if you tripled the amortization on your mortgage, the time it takes to pay it off, so you can reduce the monthly payments. And you cash in a huge inheritance left by your parents and use the money as a down payment on the car, rather than hold on to it for looming costs.

The strategy would be roundly embraced were it not for three issues.

One, city staff have argued against it until now. Two, it clearly increases the overall cost of city services even as it decreases the annual payments. Three, once you use the hydro windfall, it's gone.

As such, expect a rousing debate at city hall Tuesday as city councillors argue across the philosophical divide.

But is it wise, or "an extraordinary achievement," as Miller trumpets? As usual, the mayor oversells. And, as usual, there is a whole lot of truth in his assessment.

City finance staff have been planning for this rainy day. When Toronto Hydro agreed in 2006 to pay back a $980 million loan from the city, staff stashed most of the money in a fund earmarked for long-term building projects. That was designed to keep it away from cash-strapped councillors looking for money to fund the operating budget.

Also, staff kept pushing for the city to repay its debt over 10 years. The annual costs were higher, but it left room for adjustments when the huge TTC costs were anticipated.

City manager Joe Pennachetti says now is the time to trigger the funding strategies.

The global economic crisis is a pressure point. As well, Toronto could soon exceed the 15 per cent debt ratio target it has set – that is, the per cent of the capital budget that is paid for each year from the operating budget in a pay-as-you-go strategy.

Besides, Toronto Hydro would love to pay back the city now. It still has borrowing needs, but can borrow from the market at current low rates. Finally, an independent fiscal review panel recommended Toronto "monetize" the hydro and other assets, essentially as is being proposed.

"It's a different world today than it was two or three years ago when we passed this policy," Pennachetti said Monday, explaining why he now supports the strategy.

Following the status quo, city's debt charges would rise precipitously, jumping past the 15 per cent ceiling in 2011 and not returning until 2018. By borrowing over 30 years instead of 10, the situation improves, but only somewhat. But by adding the $600 million of Toronto Hydro windfall to reduce debt payments now, the impact is dramatic. Spending never goes above the 15 per cent ceiling and by 2017, the city should be in good shape.

That's the theory. Reality has taught that new projects could detonate the carefully-scripted plan. And the architects won't be around to be held accountable.