Draft Report On City of Toronto's Financial Future

Iteration 3 - LTFP Full Report - Draft - 20170822 - 0.1.
docx
REPORT FOR ACTION
City of Toronto's Long-Term Financial Plan - DRAFT,

CONFIDENTIAL, PRIVILEGED
Date: September 12, 2017

To: Executive Committee
From: City Manager, Deputy City Manager & Chief Financial Officer, Deputy City
Manager Cluster A, Deputy City Manager Cluster B
Wards: All
SUMMARY
Note: This is a draft for discussion and input. All analysis is preliminary.
Root causes of the structural financial gap
Underinvestment in housing,
Fundamental gap between
transit, and modernizing Short-term focus
policy and fiscal expectations
government
Council must make a decision about the direction of the City of Toronto
1. Match services to what 2. Keep delivering the same services 3. Deliver on the approved
we can afford right now without further expansion strategies and plans
Budget and policy process

 Does not, but must, facilitate multi-year, integrated budgeting and
planning
Key challenges Levers
The budget process does not

Budget Present multi-year budgets with historical
adequately consider the past or the
process information and five-year projections
future.
Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 1 of 55

Iteration 3 - LTFP Full Report - Draft - 20170822 - 0.1.docx
The budget process is narrowly Organize the budget around service areas
focused and does not take a strategic focused on achieving whole-of-government
approach to financial planning outcomes
Identify and quantify risks through an annual

The budget process does not report
effectively manage risk
City-wide risk management
The policy process is not well linked to the budget Require financial estimates and offsets for all
process Council approved strategies and plans
Agencies are not well integrated into the budget Review and improve agency governance to align
process policy and financial direction with Council
Review Council governance (including: roles and

responsibilities of staff in relation to Council,
Decision-making processes are not fully mature
mandates and roles of Committees, legislative
processes)
[Public engagement challenge TBC] [Options to improve public engagement TBC]
Equity, gender, and economic impacts of

Integrate equity, gender, and economic impacts
spending is not well integrated into the budget
into the budget process
process
Expense
 Costs are significantly higher than the City can afford, and the City must
explore new ways of doing business to get the best value-for-money
Advance transformation, modernization, and

innovation across the City
Must improve value-for-money
Implement Service Management and Delivery
Reviews
Proactively address core cost drivers of labour

Core expense drivers of labour and agencies
(through a net-zero and outsourcing strategy) and
have not been effectively addressed
agencies (through reforming agency governance)

Prioritize the capital list
Integrate service plans, the official plan, and other

key planning processes into the capital plan
Capital costs have not been sufficiently

Implement stage-gating for all capital projects
addressed and capital planning is not fully mature
Explore alternative approaches for capital

planning and delivery
Continue to reduce existing capital costs
Identify the opportunity cost of tax discounts,

Tax discounts and rebates are a significant and rebates, and other concessions
poorly understood expense
Report on tax discounts and rebates annually
Revenue
 Existing revenues are insufficient to invest in Toronto's future
Develop an explicit policy that links long-term

Prioritized low residential property taxes property tax to the forecasted rate of expense
- Opportunity cost of sustained low property tax growth
increases
- Disproportionate burden on businesses and Continue to address the disproportionate burden
renters on businesses and renters
- Property tax could be applied with more
sophistication Study opportunities to optimize property taxes
(graduated rates, MPI, mitigating harmful impacts)
Heavy reliance on the Municipal Land Transfer

Reduce risk associated with the Municipal Land
Tax, without appropriate steps to mitigate the
Transfer Tax
cyclical risk
User fees have been applied inconsistently and Develop a public service pricing strategy based
disproportionately impact people in low-income on Council approved policy objectives
Development charges do not adequately pay for Ensure that development charges pay for the cost
the cost of development of growth
Leverage all feasible revenue options, including

Not using the entire revenue toolbox personal vehicle tax, parking sales tax, municipal
sales tax

Assets and liabilities

 The City's balance sheet shows the signs of unsustainable financial
decisions
Review the debt service ratio

Debt is at Council's imposed limits
Adopt a policy of reducing unfinanced capital to
$400M by 2022
Continue to review reserve and reserve fund

adequacy on a regular basis
Reserves are under strain
Increase investment return allocations to
reserves to at least the rate of inflation
Adopt an investor policy based on a prudent
Investment returns are low investor strategy and a skills based investment
board
Surpluses are decreasing and are non-recurring [Lever?]
Intergovernmental
 Need a new approach to better match the City's responsibilities to its
toolkit
Key challenge Levers
Address the mismatch between responsibilities

and fiscal capacity by seeking a new deal with the
Mismatch between the City's responsibilities and Province
a way to pay for them
Focus on addressing social housing with other
orders of government
RECOMMENDATIONS
The City Manager, Deputy City Manager & Chief Financial Officer, Deputy City Manager
Cluster A, Deputy City Manager Cluster B recommends that:
[Recommendations corresponding to the options below. Forthcoming.]

FINANCIAL IMPACT
[How to frame this section?]
DECISION HISTORY
At its meeting on December 13, 14, and 15, 2016, City Council adopted
recommendations related to the report EX20.2, "The City of Toronto's Immediate and
Longer-Term Revenue Strategy Direction," which provided a framework for the
application of existing and new revenues including principles for the selection of
potential revenues, social and economic impacts, and implementation considerations.
The report provided detailed analysis on a range of revenue options to address
immediate and long-term needs, and recommended a number of revenue options.
http://app.toronto.ca/tmmis/viewAgendaItemHistory.do?item=2016.EX20.2
At its meeting on December 13, 14, and 15 2016, City Council adopted the City
Manager's report EX20.1, "City of Toronto Long-Term Financial Direction Update",
which provided an update on the renewal of the Long-Term Financial Plan, analyzed the
key financial challenges facing the City, and presented key initiatives being advanced in
support of the Long-Term Financial Plan.
At its meeting on July 12, 13, 14, and 15, 2016, City Council adopted recommendations
related to the report, "The City of Toronto Long-Term Financial Direction – Consultation
Plan," including a request to consult the public on the City's long-term financial direction
and to engage a third-party to assist in developing broad messaging and methodology.
At its meeting on June 7, 8, and 9, 2016, City Council adopted recommendations

related to the report, "The City of Toronto's Long-Term Financial Direction" including a
request to report back to Executive Committee in the fall of 2016 on multi-year financial
and budget process, strengthening the City's strategic decision-making and financial
oversight, a multi-year expenditure management plan, a multi-year revenue strategy,
and an asset optimization study.
COMMENTS
1. The Problem and the Opportunity

Toronto is an exceptional city. Our economic performance, success at integrating
newcomers and sustained development has helped make Toronto one of the best
places to live and do business. Past investments in the city have paid off. The city is on
an upward trajectory, with significant potential to continue its climb. To do so, we need
to invest in Toronto's future.

The City offers excellent services at low taxes. This is a result of effective management
and prudent fiscal practices. It is also a result, however, of good luck. This combination
of smart decisions and good luck manifests itself in two key ways.
Despite low property taxes revenue has been stable
Property tax -- the City's main revenue source -- has been kept low. Even so, revenues
have been sufficient enough to allow for incremental investment into the city's public
services and infrastructure. Factors that have allowed low property taxes to suffice
include:
 Negotiating the upload of social service costs to the Province

 Increasing user fees and rates to invest in the city's infrastructure
 Implementing the Municipal Land Transfer Tax (MLTT) to diversify the City's
revenues and peg revenue to economic growth, including its significant and
unpredicted increase due to the city's booming real estate market
 Historically low interest rates, which have allowed the City to borrow more without
commensurate increases to debt repayment costs.
 A well-diversified economy which has shielded the City from high unemployment and
welfare costs despite an economic downturn.
Risky financial decisions have not resulted in severe negative impacts
The annual gap between expenses and revenues has been closed through mostly
unsustainable bridging mechanisms that carry significant risk. For example:
 Relying on MLTT revenue from the overheated real estate market

 Borrowing from reserves meant for other purposes
 Deferring known and necessary costs
These calculated risks have helped the City maintain excellent services at low taxes,
but have adverse long-term impacts. The downside risk from these tactics has not fully
materialized yet. However, these unsustainable bridging strategies, especially deferring
costs, have begun to manifest themselves largely in the form of underinvestment. This
is most notable in the areas of housing and transit.
1.1 The structural problem

All governments face financial challenges. The City of Toronto's financial challenges,
however, are structural. They are not the result of cyclical variations. Toronto faces an
annual budget gap because general expenditures exceed general revenue. In future
years, this budget gap will continue to be driven by five main factors (Please see
Appendix 2 for details):
 Labour costs
 Low revenue growth
 Energy costs

 Population growth
 Capital costs, including debt servicing and other financing costs
The structural problem is deeper and more nuanced than fiscal factors alone. Over time
it has been created by three root causes: a fundamental gap between policy and
financial expectations, underinvestment in key areas, and a short-term focus.
Fundamental gap between policy and fiscal expectations
Council, through its approval of a wide-range of strategies and plans, has laid out
ambitious investments in social and physical infrastructure. The development of these
policies occurs largely outside of the annual budget process or a long-term financial
direction. Policy expectations of what the City of Toronto will do are created separately
from financial expectations of how the City will pay for these investments. In other
words, there is a fundamental gap between the vision for the future of the city and a way
to pay for that vision. As a result, the City's revenues are insufficient to support these
investments. This is exemplified by the growing list of unfunded operating and capital
commitments.
A status quo forecast of the accumulated budget pressures shows this fundamental
gap. Figure 1 shows the potential impact if Council maintains the current levels of
services and capital projects as well as the current rate of revenue increases. With no
policy change, the City would accumulate a shortfall of about $2.4 billion by 2022
(please see Appendix 2 details).
Figure 1 - Forecasted budget pressure, 2017 to 2022 [Alternatively or in addition

to this graph, we could show the forecasted budget gap for the out years]
Forecasted budget pressure (2017 to 2022) ‐ DRAFT
2.5
2.0
$ Billions
1.5
1.0
0.5
0.0
2017 2018 2019 2020 2021 2022
Status Quo Add Unfunded Service Plans Add TCHC Add Unfunded Capital
Underinvestment in housing, transit, and modernizing government
While the majority of City services are excellent, Toronto faces serious future
challenges with accommodating growth and creating economic and social opportunities
for residents. This is largely due to underinvestment. At times this underinvestment has
been an explicit decision. Council has made a policy commitment without funding. It is

also a product of deferring costs. Underinvestment has been most problematic in three
key areas.
1. Social housing
Previous federal, provincial, and municipal policy decisions have dedicated fewer
resources to social housing. There is a mismatch between the City's responsibilities to
delivery social housing and its ability to pay for them. The limited and aging social
housing stock is in need of redevelopment and repair. There are now close to 85,000
Toronto households on the wait list for social housing, and more than 1,000 families use
shelters every night. Toronto's social housing problem is directly linked with issues of
homelessness, mental health, and poverty.
2. Transit infrastructure
Toronto is among the most traffic congested cities in North America. While progress is
being made, most notably through the creation of the City Building Fund and support
from the federal and provincial governments, transit and transportation priorities remain
underfunded at maintenance backlogs continue to grow.
3. Modernizing government
The structures, processes and systems of government are under pressure. To respond
to residents and businesses' needs and provide value-for-money, the City must deliver
services in smart, innovative, and streamlined ways. Years of fiscal restraint have
resulted in cuts that allow these types of improvements. The result has been a
municipal government that does not have the modern tools to tackle complex policy
challenges.
Short-term focus to budgeting and planning
The structural budget gap is a long-term problem that has been addressed on an annual
basis. The City is constantly trying to balance maintaining existing services while
simultaneously making incremental investments. The vast majority of this work is
focused on short-term problems and solutions, but must connect decisions made today
with the direction the City is moving to in the future.
1.2 The opportunity

Toronto provides exceptional services and infrastructure to its residents and businesses
because of investments it made in the past. The City has the potential to continue its
climb by continuing this investment. To do so, steps have to be taken to implement
Council's visions for Toronto.
There is an opportunity for a more sustainable and mature path forward. The structural
financial challenges facing the City have developed over years, and solutions will take
time and effort. There is an opportunity to address these problems proactively with
foresight, rather than retroactively and in a panic. The path forward must be rooted in

both expenditure management and revenue enhancement measures along with clear
improvements in governance and priority setting mechanisms.
It is critical for Council to take action where is has the ability to affect change. However,
even after exploiting all actions under the City's purview, it may be necessary to revisit
fiscal arrangements with other orders of government, particularly as they relate to the
mismatch of responsibility and funding to address social housing.
1.3 Public consultations

City staff held extensive consultations with the public on renewing the Long-Term
Financial Plan. While input and ideas were diverse, a common theme emerged. The
public wants the City to address these challenges, and to do so in a way that advances
the long-term goals and visions of Toronto. The input received through the consultation
has informed the development of this report. A detailed account of the public
consultation can be found in Appendix 3.
2. Council's key choice for long-term financial planning

The Long-Term Financial Plan is designed to encourage progress towards financial
sustainability. It does not recommend a specific path forward. There is no detailed plan
or step-by-step process that the City can adopt and follow.
Council must make a choice about the direction for the City. This choice is a reflection
of the scope of public services Council would like the City to deliver and the
opportunities Council wants to pursue. Council should first establish its collective vision
for the City, determine and prioritize the investments required to achieve that vision, and
then set the expenditure and revenue levels to carry it out.
It is not responsible for staff to put forward a scenario that continues the current high
risk financial direction. Council must align the City's policy direction with its financial
direction, invest in Toronto's future, and manage from a long-term perspective.
There are three basic scenarios for the direction of the City. Figure X quantifies the
required changes using a status quo forecast of existing expenditures and revenues.
Scenario 1: Match services to what we can afford right now

Council can choose to focus on keeping taxes low, and adjust the scope of City services
to meet the available tax room. Existing revenues could be the basis for long-term
financial planning. Under this scenario, the mismatch and resulting gap between the
City's forecasted expenditures and revenues could be solved by reducing expenditures
to be in-line with Council's direction to maintain tax rate increases to the rate of inflation,
while factoring in revenue the City will receive through existing user fees and transfers
from other governments. To achieve this, there would be a need for a wide range of
extensive expenditure reduction strategies including reducing service levels and
potentially eliminating entire service offers and planned capital projects.

Scenario 2: Keep delivering the same services without further expansion
Council can choose to set its current service levels -- as they are currently delivered
without any further expansion -- as the basis for long-term financial planning. A
moderate increase to overall revenue would be required, in addition to ongoing
expenditure management efforts. This approach would not be sufficient to pay for the
Council approved strategies and plans that are currently under- or un-funded. It would
not allow for the required investments to properly address the housing and transit
challenges facing the city.
Scenario 3: Deliver on Council's approved strategies and plans

Council's approved strategies and plans, along with the expenditures and revenues to
pay for them, can form the basis for long-term financial planning. As a result of some of
the core financial challenges facing the city, especially the fundamental gap between
policy and fiscal expectations, this gap is significant and not easily address. However, it
is achievable under certain conditions and after some difficult decisions. A substantial
increase to revenue would be required, in addition to substantive changes to the City's
expenditures -- including revisiting what the City delivers and how it is delivered.
Figure X - Financial Direction Scenarios
Forecast and Scenarios ‐ DRAFT
16
16
3
15
15
$Billions
14
2
14 1
13
13
12
2017 2018 2019 2020 2021 2022
Expense (Status quo) Revenues (Status quo) Unfunded expenses
The rest of the report summarizes the core challenges that are contributing to the
structural gap and presents options to help Council achieve their desired direction for
the City of Toronto.

3. Core challenges and options

The City of Toronto faces five core challenges to long-term financial sustainability: the
budget and policy process, expense, revenues, assets and liabilities, and
intergovernmental. Each challenge can be addressed with one or more options.
These options are policy levers -- key leverage points to change underlying dynamics.
These levers have the potential to move the City towards improved multi-year budgeting
and planning, address its long-term financial risks, and become a more effective and
mature government.
Regardless of the scenario Council chooses as the basis of its long-term financial
planning, it will need to use all of these levers. Each lever can be used to varying
degrees. How extensively Council implements each lever is a function of the scenario it
chooses. Council must adjust its approaches in response to the push-back and
opportunities they encounter.
3.1 Budget and policy process

3.1.1 Budget process
Challenge: Budget process limits effective long-term planning
Toronto has a sophisticated, well-managed budget process by any municipal standard.
Significant work has been done to date, including moving to a service-based budgeting
framework. However, the budget process has reached its practical limit as a way to run
a $12 billion organization. There are three main components that negatively impact the
budget process.
1. The budget process does not adequately consider the past or the future
The budget process focuses predominantly on the current year. While the capital
budget includes a ten-year plan, the operating budget only has a high-level, two-year
forecast. Without a true multi-year budget it is difficult to understand how decisions will
impact the long-term policy and financial direction of the City.
2. The budget process is narrowly focused and does not take a strategic
approach to financial planning
The majority of analysis and debate in the budget process is focused on relatively small,
neighbourhood level budget items. In part, this is due to the budget process being
structured by individual programs -- often synonymous with a single City division or
agency. The focus should be on city-wide, strategic priorities and outcomes.
3. The budget process does not effectively manage risk
The unsustainable bridging mechanisms used to balance the budget each should be
more clearly identified, including their potential long-term impacts. The reliance on
temporary measures, like reserve draws and deferrals of known costs, place
incremental pressure on future years, but these pressures and the risks they generate
are not sufficiently identified and mitigated.
Lever: Present multi-year budgets with historical information and five-year

projections
Incorporating past budget and service performance into the budget process will give
Council and the public a better understanding of value-for-money. As part of the annual
budget process, Council and the public should be able to clearly see progress towards
long-term strategies and plans.
Lever: Organize the budget around service areas focused on achieving whole-of-
government outcomes
To move towards further maturity, whole-of-government programs can be established
based on the outcomes Council would like to achieve. For example, community
services, transit and transportation, safety, environment, etc. A carefully selected set of
service areas could replace the dozens of existing individual programs. Within each
area Council could approve objectives, targets, and outcomes for all activities, including
strategies and plans.
This would help align multi-year plans and budgets. Multiple strategies and plans within
a service area could be managed as a portfolio, with integrated objectives and
outcomes that relate to Council's city-wide priorities.
Lever: Identify and quantify risks through an annual report

Identification and analysis is a critical step to better mitigating ongoing risks. An annual
report on risks to the City -- including all City divisions and agencies -- would better
enable Council and staff to proactively mitigate any potentially negative outcomes. The
City can no longer keep kicking-the-can-down-the-road, but if it is required the impact
should be clearly identified so it can be effectively mitigated.
Lever: City-wide risk management

The City of Toronto must take a holistic approach to managing risk to enable
management and staff to better understand the nature of risk and manage it more
systematically. Staff are currently in the process of designing a corporate enterprise-
wide risk management (ERM) policy and framework. Through this work, the City will be
better able to develop effective and efficient controls in order to identify diminishing
returns when the costs of risk outweigh the benefits.
2.1.2 Policy process

Challenge: Policy process is not well linked to the budget process
To a large extent, policy development occurs outside of financial planning. The City's
multi-year financial and service planning process does not require strategies and plans
to have financial strategies, let alone financial estimates, to be approved by Council.
Council does not have full disclosure of financial impacts when it approves these
policies. Most approved strategies and plans are aspirational and do not include
timelines, costs, and expected outcomes.

The City has an ever growing set of policies, strategies, and plans to implement -- each
a critical vision that Council has put forward for Toronto -- but the costs to implement, or
when the money will be needed, is unknown. In addition, these strategies and plans are
approved throughout the year, but through the budget process Council must then
decide how to allocate scarce dollars across a set of disparate strategies.
This makes prioritization and long-term financial planning a challenge. It is exceedingly

difficult to effectively develop and implement public policy when it is disconnected from
how it will be paid for. For example, forecasting expenditures in this report had to be
made with a range of assumptions as staff do not have an accurate estimate of what it
will cost to implement Council's visions (please see Appendix 2 for more details).
Moreover, it is this lack of sufficient integration between policy development and the
budget process has allowed for the development of unfunded operational plans and a
significant capital overhang. Many of these are already manifesting themselves as
significant expense pressures right now or will in the near future.
Lever: Require financial estimates and offsets for all Council approved strategies
and plans
A critical step to addressing the disconnect between policy development and financial
planning is to know the total costs of all strategies and plans, when the money will be
needed, how it can be paid for, and what the outcomes will be.
All existing strategies and plans should be priced, including the required expense and
revenue offsets. This work is already being done for key strategies and plans through
the 2018 budget process. It should extend to all Council approved strategies and plans
that are currently underway.
All future strategies and plans should require financial estimate and offsets before being
approved by Council. The outcomes of these investments should also be detailed. This
would greatly improve the ability of staff to advise Council on what policy options are
feasible, and would greatly improve Council's ability to prioritize work and achieve its
intended visions.
2.1.3 Agencies
Challenge: Agencies are not well integrated into the budget process
Toronto's government includes, in addition to City divisions, 34 agencies, seven
corporations, and nine adjudicative bodies to achieve a range of City Council objectives
and to deliver public services. City agencies manage 48% of the City's operating
budget, X% of the City's capital budget, and 54% of the City's workforce.
The City's relationship with its agencies and corporations has not been conducive to
reliable budget forecasting or establishing creditable budget targets and instructions.
Agencies budgets are not subject to the same level of detailed review by City staff and
Budget Committee as are City divisions. In addition, they are subject to board direction

and approval, which has at times been misaligned with the direction of Council. Agency
governance is a primary contributing factor to the City's long-term financial pressures.
Lever: Review and improve agency governance to align policy and financial
direction with Council
There is an opportunity to standardize and strengthen requirements for City agencies so
Council has the appropriate governance, financial, and policy levers to ensure a whole
of government approach to decision-making. Agencies should be aligned with the policy
and financial directions of Council. The fiduciary responsibility of board members must
be properly aligned between the agency and the City government as a whole.
Staff are in the process of reviewing the governance relationship with the City's
agencies and will bring forward recommendations to enhance accountability, strengthen
strategic, fiscal and service alignment, and improve agency capacity and effectiveness.
In addition, as requested by Council, staff will report on a program to review City
agencies and corporations one per term of office, focusing on the governance of each
body, including consistency with City of Toronto objectives and directions including
financial management, accountability, and overall performance. These
recommendations will help ensure Council has the ability and information to make
critical decisions from a whole-of-government view.
2.1.4 Decision-making processes

Challenge: Decision-making processes are not fully mature
The City's systems and processes to make good financial decisions are not fully mature.
This includes the items discussed above, but is also relates to broader governance
issues like how staff, Committees and Council operate.
Executive Committee, Budget Committee, Standing Policy Committees and Council

must work effectively together on long-term priority setting and financial decision-
making. Currently, priorities that have city-wide policy and financial impact are set
across all committees on an ad hoc basis, rather at Executive Committee as intended
under the current committee structure. The timing of decisions that have a significant
financial impact do not follow a structured process. As a result, decisions that impact the
City's policy and financial direction happen at varied points throughout the year, and
then must be prioritized through the annual budget process.
Likewise, all staff reports follow the same process through the committee structure --
moving vertically from Standing Policy Committee to Executive Committee to Council --
regardless of the financial impact. Other more mature governments have legislative
processes that treat different types of decisions differently -- for example, thoroughly
reviewing the financial impact before approving the decision at the final decision-making
body. These and other challenges exacerbate the fundamental gap between policy and
fiscal direction.
Council must understand the full policy and financial impact of their decisions, including
detailed information on the long-term financial implications like trade-offs, opportunity

costs, and value-for-money. Under the current decision-making processes staff are
challenged to do so.
University of Toronto "A Practical Blueprint for Change" report
A recent report from the School of Public Policy and Governance at the University of
Toronto, "A Practical Blueprint for Change," detailed some of this lack of maturity and
put forward a series of recommendations. A number of the recommendations are
political decisions. There are, however, recommendations that staff recognize as
valuable suggestions that illustrate a number of the challenges impeding a more
decision-making process at City Hall. For example, as recommended in the report, there
is value in reviewing how reports are routed through Standing Policy Committees,
including the budget and reports that have financial impacts without identifying specific
offsets. Staff also recognize the need for increased alignment with the City's strategic
priorities and its agencies. Likewise, issues the report highlights related to delegation of
authorities, meeting procedures, public engagement, and information sharing are worthy
of further analysis and consideration.
Lever: Review Council governance

A fulsome governance review has not been undertaken since 2005. Since then, there
have been significant changes to the challenges facing Toronto and how Council
operates. The City would benefit from a review aimed at maturing decision-making.
Staff are currently in the process of updating the Financial Control Bylaw to reflect
current practices. Revisions to the Financial Control Bylaw and Council Procedures
Bylaw may be needed to codify process changes that facilitate mature decision-making.
A governance review should focus on three areas in particular to address the main
challenges that impede more mature decision making.
1. Roles and responsibilities of staff in relation to Council
Staff play a fundamental role in helping create a mature, integrated decision-making

process for Council. There may be an opportunity to strengthen or clarify some staff
functions (for example, optimizing the role of the City Manager and Chief Financial
Officer to ensure decision authority is properly aligned when there is a financial impact
from staff recommendations).
2. Mandates and roles of Committees in decision-making
The City has a complex structure of Executive Committees, Standing Policy

Committees, and Community Councils, to support decision-making. Changes to the
mandates and roles of these Committees have the potential to improve how decisions
are made, and better integrate policy and financial decisions. For example, improving
how Committees co-ordinate major policy decisions and their financial implications.
3. Legislative process

A more mature decision-making process may be possible by analyzing and identifying
potential improvements to things like the routing of reports and delegation of authority.
[Expand on this.]
2.1.5 Public engagement

Public engagement challenge [problem statement TBC]
[FORTHCOMING]
Lever: [Forthcoming]
[FORTHCOMING]
2.1.6 Equity, gender, and economic impacts

Challenge: Equity, gender, and economic impacts of spending are not well
integrated into the budget process
The analysis of City spending is predominantly focused on the financial and service
level impact. The City is increasingly analyzing spending impact on equity, gender, and
economic impacts. This is critical work to be able to better assess and respond to the
City's priorities in these areas. If it is not clear how spending affects these areas, it is
difficult to effectively implement improvement strategies.
Lever: Integrate equity, gender, and economic impacts into the budget process
Additional analysis on the equity, gender, and economic impacts was brought forward in
2017. This work is continuing in 2018 and into 2019 in order to better integrate these
impacts into the budget process, including developing a disaggregated data collection
strategy to assist in assessing the gendered impacts of budgetary and policy decisions.
This analysis will be supported by the application of the City's recently revised equity
lens as well as new budget reporting requirements.
2.2 Expense
2.2.1 Expense trends
Overall costs continue rise, but spending has not grown out of line with inflation and
population growth. As detailed in Figure 2, overall spending rises each year but when
adjusted for inflation and population growth, expenses have declined slightly. This is a
significant accomplishment, and the result of extensive efficiencies and savings found
within the City's budget. The City has undertaken a range of successful cost
containment and efficiency exercises, including the Core Service Review, Service
Efficiency Studies, annual efficiencies through the budget process, service level
reviews, and Transformation Task Forces for the Toronto Police Service and Toronto
Community Housing Corporation. [Quantify the impact of these initiatives?]

In addition, the amount of labour cost constraint has been significant. Labour costs are
the single largest cost driver for the City and have been kept as a constant share of the
City's total expenses.
Figure 2 - Operating Expense History, Nominal vs Real per capita
Expense history ‐ Nominal Expense history – Real per capita

14,000 5,000
4,500
12,000 Rate Programs
4,000
10,000 3,500 Other(Inc.

Grants/Subisdies,
Equipm't, Debt
3,000
8,000 Charges)
Contribution To
$ Millions
2,500 Reserves & Capital
$
6,000
2,000 Service And Rent
4,000 1,500
Materials &
1,000 Supplies
2,000
500 Salaries And
Benefits
0
2010
2011
2012
2013
2014
2015
2016
2017
2010
2011
2012
2013
2014
2015
2016
2017
The City's ability to find efficiencies and savings, and in general effectively manage its
costs, is commendable. However, it is also a result of deferring costs and
underinvesting in key areas. These graphs do not show the opportunity cost of
underinvestment or short-term bridging strategies that have been used annually to
balance the budget.
2.2.2 Value-for-money
Challenge: Must improve value-for-money in everything the City does
The City is constantly balancing maintaining existing services while simultaneously
trying to make significant investments in services and infrastructure.
While savings strategies have been effective at managing year-over-year costs they
have not addressed some of the key underlying causes of expenditure growth, nor have
they reviewed or redesigned how the City ensures residents and businesses get the
most value for their tax dollars. For example, maximizing the impact of each dollar spent

by implementing more efficient service delivery models and processes -- costs that are
buried deep within the organization.
Budgets have been highly constrained but, other than social assistance which has seen
costs uploaded to the Province, have not shown actual and sustained reductions. This
is largely a function of Council and agency decisions to prioritize maintaining or
enhancing existing services, rather than shedding ineffective service offerings or looking
at new ways to do business. Moreover, when staff have recommended changes to
services or service models that generate long-term savings with only modest labour or
service impacts, Council has sown a reluctance to embrace these changes.
If the City is to expand services while keeping taxes low, it must explore alternate ways
of delivering value to residents and businesses -- for example, through partnership with
the private and non-profit sectors -- and explore all options for reducing costs, even if it
entails reductions to services.
A lack of innovation in the civil service and service delivery models is in part a function
of a lack of investment in modernizing and transforming government. For years there
has been a lack of investment in the City's back-office -- its management,
administrative, organizational, and technology capacity that allows it to find new ways to
do business at a lower cost with better results. The recent creation of a Chief
Transformation Officer and Chief Innovation Officer is a positive step in the right
direction. This is an opportunity to become a more modern and innovative public service
that delivers maximum value for the public's tax dollars, find new, more effective ways of
delivering services and streamlining processes, and increase City-wide efficiency and
effectiveness.
Lever: Advance transformation, modernization, and innovation across the City

The City should continue to advance business transformation, modernization, and
innovation to improve productivity and embrace new ways to do business. The City
currently has a series of key, enterprise-wide projects and initiatives recently completed,
underway, or planned that will help transform critical processes and realize benefits that
will reduce costs, increase productivity, and add value. These initiatives will establish
lean, end-to-end standardized processes based on best practices, with many to be
enabled by the most current technology, modernizing and digitizing government
operations.
The new Chief Transformation Officer, together with business process owners, will
shepherd a program of these transformative initiatives, supported by training for senior
leaders leading transformational and technology projects. The new Chief Innovation
Officer will work with City divisions and agencies to identify major challenges that can
be solved through innovative partnerships with external teams.
A critical component of this transformation is procurement. To achieve maximum value-

for-money the City must focus on the price of goods and services. [Expand on this.]

Lever: Implement "Service Management and Delivery Reviews"
To improve value for money it will be necessary to thoroughly review how services are
delivered, shed ineffective services, and explore more efficient ways for the City to
achieve the same or better outcomes. This could be accomplished through a series of
reviews focused on redesigning how services are managed and delivered to improve
value-for-money. A coordinated and systematic approach will ensure residents and
businesses receive the services they need in the most cost-effective way possible.
These "Service Management and Delivery Reviews" could include the following pieces
1. Undertake cost-benefit analysis of City programs and agencies on a rotating

basis.
A five-year review cycle could be established for all City programs and agencies in
order to evaluate service alignment, relevance, and effectiveness based on established
priorities and outcomes. It would enable the City to focus its resources on best meeting
the intended outcomes, identify where inefficiencies exist, and reveal opportunities to
shed least valuable or effective services. These reviews would answer the questions:
What are costs and benefits of the service? Does the program provide enough value to
continue? What is the best way of meeting the intended outcome? Is the City or
someone else best suited to deliver these services?
2. Identify and address overlap and duplication
Work is already underway in a number of areas to address overlap and duplication

across City divisions and agencies. The most notable example is Shared Services,
which is consolidating administrative services to reduce duplication and allow business
units to focus on delivering their core services.
Beyond administrative opportunities, further efficiency and value for money can be
found by addressing duplication within organizations and in how services are delivered.
For example, many services are still delivered following a district-model, where a
program is divided into organizational units corresponding to districts of the city. A
functional model would consolidate these multiple units, reducing overhead and
providing more consistent management and service delivery. Likewise, there are
opportunities to explore similar consolidations for how City divisions and agencies are
structured to deliver and manage functions like finance, information technology, and
fleet.
3. Examine services against standards and benchmarks
Most of the City's services operate within service standards established by legislation or
industry best practice. In addition, Council has approved a wide range of service levels.
The City's existing service standards and levels could be compared against other
jurisdictions to identify where Toronto is over delivering and therefore has an
opportunity to adjust services down.
4. Management and administration capacity review

There is considerable management and administrative capacity variation across the City
and its agencies. Some parts of the City have seriously underinvested in needed
oversight and management functions and as a result are exposed to unacceptable
levels of risk and not properly equipped to modernize their operations. There are other
areas where management and administrative support may be in oversupply. A review of
management and administrative capacity would help assess and improve overall
organizational design and effectiveness.
2.2.3 Core expense drivers

Challenge: Core expense drivers of labour and agencies have not been effectively
addressed
The City's two main drivers of expenditure growth are labour and agencies. These
significant costs threaten future fiscal flexibility. Insufficient attention has been paid to
addressing these core cost drivers.
Labour
As shown in Figure 2, the City has effectively contained labour costs. Regardless,
labour costs represent about half of the City's budget and must be effectively managed.
True reductions in expenditure will not be possible without examining how these costs
can be reduced. In the majority of cases, the City and its agencies are locked into
collective agreements until 2018 and the end of 2019. So the City's ability to impact
these labour expenditures are limited to 2020 and beyond. Collective bargaining with
the emergency services (Toronto Police, Fire, and Paramedics) and the TTC through
mandatory arbitration places additional challenges on the City's ability to control those
labour costs.
Agencies
Agencies take up about X percent of the City's total budget, and are projected take up X
percent by 20xx. This is a significant cost, and is rising at a faster rate than divisions.
The key agencies exerting this pressure are the Toronto Transit Commission, Toronto
Community Housing Corporation, and Toronto Police Services. The Police are in the
midst of implementing recommendations from their Transformational Task Force and
are showing cost reductions. The TTC and TCHC both continue to face significant cost
pressures, primarily due to significant capital costs and unsustainable revenue models -
- overreliance on the fare box and rents, respectively, which were never intended to
cover the proportion of costs they currently are. These escalating cost pressures will
continue to exert significant pressure if their root causes are not addressed.
Figure 3 - City versus agency cost increases

Cumulative percentage increase ‐ City vs Agency costs, 2011‐
2022
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
‐10.00% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Agencies total City rate‐based services City tax‐based services
Lever: Address the core driver of labour costs

The City should adopt a labour cost reduction strategy, covering all bargaining agents,
labour agreements, and non-union staff. This strategy should focus on the cost of labour
relative to intended outcomes. Focusing on the number of positions is misleading, and
does not consider the importance of the City's workforce and labour strategy in relation
to achieving its strategies. For example, it is crucial that management and
administrative functions are able to provide the necessary supports for efficient and
effective service, proper contract management (as highlighted by the Auditor General)
and capital project delivery. Labour costs could be reduced by following two sub-
strategies:
Section 52 applied
1. Net-zero labour costs
Related to this approach is Council's decision to reduce management positions by ten

percent. These reductions will be found through existing transformation and
modernization work that will require less management positions in the future,
forecasting attrition and retirement numbers that can contribute towards a reduction,
and identifying the most effective distribution of reductions across City divisions and
agencies.
2. Outsourcing
The City has an opportunity to reduce its labour costs by outsourcing services to the
private and non-profit sectors. This work is ongoing, and a number of areas have shown

progress. All services and activities should be examined for outsourcing and other
service delivery models that will result in labour cost savings.
Lever: Address the core driver of agency costs

To better manage agencies' costs, they must be better integrated into the policy and
budget process. As discussed, a crucial first step is reforming agency governance. This
work is ongoing through a separate review, which will be reported to Council later in
2017.
Most notably, pressures continue to escalate in the TTC and TCHC. Both agencies
suffer from unsustainable financial models which must be proactively addressed. The
Toronto Police Service, which until recently also experienced significant year-over-year
increases, has seen cost reductions due to the implementation of recommendations
from the Transformational Taskforce.
2.2.4 Capital
Challenge: Capital costs have not been sufficiently addressed and capital
planning is not fully mature
Significant unfunded capital costs have not been addressed
The City of Toronto faces significant and growing capital costs. The City's ten-year
capital budget and plan stands at nearly $40 billion and is funded from a combination of
debt, transfers from other governments, and City revenues like property tax and user
fees.
As shown in Figure 3, in addition to the funded capital budget, the City faces a
significant list of unfunded capital projects of about $36 billion. These are capital costs
that have been approved by Council, but have no funding available to pay for them. This
is a direct by-product of the current budget process that does not connect policy
development with financial planning. Investments are approved without a plan to pay for
them.
This is a significant amount, but it is not insurmountable. Like all major capital projects,
some of these costs will be shared with other orders of government, thus reducing the
City's share. These are important capital investments for the city's future, and it is
critical to find ways to get these important investments built. Doing so will mean looking
at our own revenue and debt options, as well as funding agreements with other orders
of government.
Figure 4 - Capital Forecast, Funded vs Unfunded

Capital Budget and 10 yr Plan ‐ Approved vs Unfunded (Gross)
80
70
60 $36 Billion
50
$ Billions
40 Approved
30
Unfunded + Approved
20
10
0
State-of-good-repair is a constant pressure
The City owns an inventory of physical assets valued at $84 billion, and about half of
the capital budget is spent on maintaining these physical assets in a state-of-good-
repair. Addressing these maintenance costs is a key objective and priority for the City in
order to ensure that infrastructure is able to support the delivery of services. When the
investment planned for state-of-good-repair is less than the need, the unfunded balance
is added to a backlog. Despite targeted investments made in recent years to address
the state-of-good-repair backlog, the City's aging assets and infrastructure requires
more funding in order to slow backlog growth over the next ten-year period.
Figure 5 - State-of-good-repair backlog (NOTE: Including TCHC will show the

true, whole-of-government SOGR backlog, which I assume is more significant)
SOGR Funding and Backlog (Tax&Rate) - No TCHC

25,000 8.0%
7.0%
20,000
6.0%
15,000 5.0%
$M
10,000 4.0%
3.0%
5,000
2.0%
0 1.0%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Accumulated Backlog Estimate ($m) Backlog % of Asset Value
The backlog is expected to rise over the next ten years for costs related transportation
and transit infrastructure, City facilities and real estate, libraries, and most notably the
Toronto Community Housing Corporation, which faces a projected $2.6 billion increase
in capital costs over the next ten years [check this figure].
Capital planning is not fully mature

The City has made significant improvements to its capital planning processes, like
implementing stage gating (dividing projects into distinct stages with decisions on how
to proceed at each stage) for major projects, and better aligning cash flow to project
readiness (so money is allocated when it is ready to be used and does not sit idle).
However, capital planning is not yet fully mature, which as negative implications
including how the City's infrastructure is integrated with its strategic priorities, as well as
how scarce dollars are allocated.
The City lacks a prioritization process for capital projects. Aside from legislated
requirements to maintain infrastructure in a state-of-good-repair and ensure health and
safety, there are no mechanisms for staff to effectively weigh competing capital
demands against each other, or to evaluate the relative value of an investment in one
area over another. As a result, capital projects are often funded on a first-come-first-
served basis or prioritized based on short-term pressures, as opposed to a cost-benefit
analysis of long-term costs and benefits.
There is a general lack of integration between the capital plan and other key planning
documents, like the official plan, numerous service plans, and even the operating
budget. Capital projects are often approved without sufficient understanding of how they
support -- or detract -- from other City priorities. Critically, the ongoing operating and
maintenance costs, as well as resulting debt service costs, are not effectively built into
to the capital plan.
While stage gating exists for some large capital projects, many projects are approved in
their entirety before the full costs and benefits are known. This leads to projects going
forward before they are sufficiently vetted, as well as allocating more money than can
be spent at a given time leading to a significant percentage of the capital budget going
unspent each year.
As already discussed, agencies are not well integrated into the budget process,
including capital planning, making aligning spending to project readiness a challenge.
Lever: Prioritize the capital list

All capital projects, both those that have identified funding and those that do not, should
be prioritized. (This work is currently underway for transit projects, with a report due to
Council in 2018.) Staff have been directed to deliver on these capital projects by
Council, or are required to through legislation. Yet, there is no clear list of what should
be at the front of the que when funding is available, and immature processes to
evaluate costs versus benefit. This makes long-term financial planning a significant
challenge. Staff will need direction from Council to help create criteria in order to
prioritize effectively.
Lever: Integrate service plans, the official plan, and other key planning processes
with the capital plan
The city's infrastructure and assets are a key tool to implement the City's other policy
goals, from improving social outcomes to reducing congestion. Planning processes, like
the official plan and services plans, should be seamlessly integrated into the capital

planning process. In addition, the capital plan should detail the impact of other key
plans, including ongoing operating and maintenance costs of new capital spending.
Lever: Implement stage-gating for all capital projects

Thorough stage-gating is currently implemented on a project-by-project basis. A formal
stage-gating process could be put in place for all capital projects, requiring a project to
go through a series of pre-determined stages -- for example, strategic assessment and
concept, project approach, business case and general readiness, detailed project plan,
design, implementation, and post-implementation review. This could provide better
governance and oversight of all capital projects, helping to ensure the intended value of
the project is realized, costs are well understood and effectively managed, capital
spending is aligned with project activities and timelines, and risks are proactively
managed.
Lever: Explore alternative approaches for capital planning and delivery

Alternate approaches to capital planning and delivery should be explored with the goal
of leveraging new ways to provide value to residents and businesses. Increased private
sector involvement throughout all stages of capital planning and delivery have shown
significant benefit across multiple jurisdictions. Public-private partnerships, when
applied to the right projects in appropriate ways, can provide many benefits. Potential
approaches to explore include:
 Establishing an arms-length organization to build, manage, finance and enhance the

value of Toronto's public assets (similar to Infrastructure Ontario)
 Establishing a third-party reference group to review the costs and benefits of major
strategic capital investments
Lever: Continue to reduce existing capital costs

Staff are in the process of proactively reducing the City's capital footprint. This is
ongoing work, which will continue. For example through:
 City-Wide Real Estate Review: Rationalizing and optimizing City and agency real
estate
 Office Modernization Project: Modernizing office work places to concurrently reduce
office space costs and improve productivity
 TransformTO: Implementing energy efficiency and retrofit projects to concurrently
reduce cost and increase resilience
2.2.5 Tax discounts and rebates

Challenge: Tax discounts and rebates are a significant and poorly understood
expense
The principal function of the City's taxes and user fees is to raise the revenues
necessary to fund expenditures. The tax system can also be used to achieve public
policy objectives through the application of specific measures such as preferential tax
rates, discounts, rebates, exemptions, deductions, deferrals and tax credits. For
example, to incentivize economic development, improve environmental sustainability,
reduce poverty, or better public health. These tools are used to achieve public policy
objectives at the cost of lower revenues.
The City of Toronto's tax discounts have become entrenched across multiple program
and policy areas. They include: TTC fare discounts for seniors, students, and children;
property tax assistance for low income seniors and disabled persons; the Imagination,
Manufacturing, Innovation and Technology (IMIT) tax increment equivalent grants;
water rate discounts for large industrial users and rebates for low-income seniors and
disabled persons; rebates for smaller sized garbage bins; a first-time-homeowners
rebate for the Municipal Land Transfer Tax; a number of development charge
exemptions; and many more.
The total cost of tax expenditures in 2017 was about $350 million [this doesn't include
user fee relief, and I don't think it includes solid waste bin rebates?]. This is a sizeable
cost to the City, and in some cases the policy objectives these tax expenditures attempt
to generate are either poorly understood or not achieved. Staff are currently analyzing
the cost and impact of the City's tax expenditures, with a report back to Council later in
2017.
Lever: Identify the opportunity cost of tax discounts, rebates, and other
concessions
Tax discounts and rebates have the potential to achieve policy objectives through the
tax system. However, they do so at an opportunity cost of reduced revenue. These
costs should be compared against the public policy benefits the City is trying to achieve
to determine if it is an effective use of tax dollars. This should be done for all existing tax
expenditures on an ongoing basis, and those deemed to be inefficient or
counterproductive to other city goals considered for elimination. An example is the
recent decision to eliminate the tax rebate for vacant commercial and industrial
properties.
Lever: Report on tax discounts and rebates annually

Reporting on tax discounts, rebates, and other concessions is an international best
practice, recommended by the International Monetary Fund and the Organization for
Economic Co-operation and Development. Most mature governments report on their tax
expenditures, including the Governments of Canada and Ontario.
The City could report annually on the estimated fiscal cost of tax discounts, analysis of
the value they are generating, and provide detailed information on each tax discount.
This would give Council and the public greater transparency into these costs and the
benefits they are generating. It would become a key component of the City's reporting
on expenditures and contribute to public dialogue on tax policies.

2.3 Revenue
2.3.1 Core challenge: Insufficient revenue to invest in Toronto's future
The City does not have sufficient revenues to meet its spending needs, neither under
the existing service levels and capital projects nor to pay for Council's approved
strategies and plans. Existing revenues would only be sufficient if expenditures are
drastically reduced, including exploring alternative service delivery models and exiting
from entire service areas. The growing gap is shown in Figure 1.
Because the City cannot run an operating deficit, operating revenues match expenditure
revenues each year. Like the expenditure trends, while revenues are increasing year-
over-year, when adjusted for inflation and population growth, the City is actually
collecting less revenue per person, including in the form of government transfers (as
detailed in Figure X).
Figure 6 - Operating revenue history, Nominal versus real per capita
Revenue history – Nominal Revenue history – Real per capita

14,000 5,000
4,500
12,000
Other (Inc. Fines,
4,000
Investment/Dividen
d, Reserves)
10,000 3,500 User Fees, Licenses,
Permits
3,000 TTC ‐
8,000
$ Millions
Fare/Ridership Inc
2,500
$
Governement
6,000 Transfers
2,000
Water, Waste &
Parking
4,000 1,500
MLTT
1,000
2,000 Property Tax
500
0
2010
2011
2012
2013
2014
2015
2016
2017
2010
2011
2012
2013
2014
2015
2016
2017
The City's revenue sources have been increasing as disproportionate rates, as shown in
Figure 5. Relative to property tax, revenue growth has occurred substantially in the
Municipal Land Transfer Tax, utility rates and user fees. Each of these revenue sources
is more distortive than the last. The only revenue sources that have not grown in recent

years are transfers from other governments and revenue from investments, dividends,
and fines.
Figure 7 - Operating revenue history, Nominal (cumulative % increase)
Revenue history – Nominal (cumulative % increase)
300% MLTT
260%
Water, Waste & Parking
220%
180% TTC ‐ Fare/Ridership Inc
140%
User Fees, Licenses, Permits
100%
60% Property Tax
20%
Governement Transfers
(20%)
2011 2012 2013 2014 2015 2016 2017
A detailed analysis of existing and potential revenue sources can be found in the
December 2016 Council adopted report, "The City of Toronto's Immediate and Longer-
Term Revenue Strategy Direction" (EX20.2).
Criteria to evaluate options

The December 2016 report approved by Council, "The City of Toronto's Immediate and
Longer-Term Revenue Strategy Direction" provided a clear basis for evaluating new tax
and fee options using economic criteria.
 Incidence and fairness

 Efficiency
 Policy fit
 Minimizing negative economic impacts and distortions
 Revenue quality
 Legislative authority
Revenue quality, especially the amount of revenue potential, should be the first
consideration for long-term financial planning. It is critical to focus on key revenue
drivers. Small changes in rates for large revenue sources have the greatest potential to
raise sufficient revenues. Other than the MLTT, the city of Toronto Act taxing powers
only generate very marginal revenues -- the Billboard Tax, and in the future Hotel Tax,
in combination would account for less than 0.6% of all own source revenues.
The options presented to Council in December 2016, along with scoring criteria, can be
found in Figure X. (Note, this table reflects the Provincial legislative change allowing
municipalities to implement a hotel tax).
Figure X - Revenue options evaluation [FOR REVIEW AND DISCUSSION]

Scores
Minimizing
Incidence
Revenue Options Negative Revenue Legislative
Assumed rates / Efficiency Policy Fit
Economic Quality Authority
Fairness
Impacts
Taxes on Real Property
Municipal Land Match
Transfer Tax provincial rules
$6.75/m2 to
Parking Levy
$20.25/m2/year
Property Tax
Specialty Taxes
Permitted under Current Legislative Authority (COTA)
Motor Vehicle
$120/year
Registration Tax
Hotel Tax 2% – 14%
Alcoholic Beverage
1%– 10%
Tax
Entertainment &
1% - 10%
Amusement Tax
Tobacco Tax 1%– 10%
Requiring Major Provincial Policy Change
Development Levy 2% – 10%
Parking Sales Tax 5 %– 20%
Municipal Business
0.5% – 2%
Income Tax
Municipal Personal
1%
Income Tax
Municipal Sales Tax 0.5% – 2%
Car Rental Tax TBD
Uber Registration Fee TBD
Carbon Tax TBD
Fees
Expressway Tolls TBD
2.3.2 Property tax

Challenge: Prioritized low residential property tax
Council has directed residential property tax rates to rise at or below the rate of inflation.
Toronto, like all municipalities, relies on property tax for the majority of its tax revenue.
As the main revenue source for the City of Toronto, this has put a considerable strain on
the City's expenditures and has required other revenue sources supplement the
shortfall.
Property taxes are well established and accepted by the public. They are broadly borne
by all property owners. They provide stable revenues in return for consistent municipal

services, at low administrative costs, and based on a sophisticated assessment
mechanism. Tax avoidance is negligible and collection is secured against the property.
Property tax has not growing in-line with the City's spending is a key contributing factor
to the structural budget gap. While it has been supplemented with other revenue
sources -- most notably the Municipal Land Transfer Tax -- this is a high risk approach
and is not sustainable over the long-term.
However, property tax is not an appropriate tool on its own to tackle some of the City's
key challenges related to congestion and poverty. Property tax is an efficient tool for
collecting taxes from property owners in order to service that property. It was never
designed to redistribute income, or build large-scale capital projects that do not directly
benefit individual property owners. It is also relatively inelastic (it does not grow
automatically as the economy grows), highly visible, and politically contentious. It is
unlikely to be sufficient to fund the complex and increasing demands of Toronto.
Figure 8 - Property tax history, Nominal vs real per capita
Property tax history ‐ Property tax history – Real per capita

Nominal 1,800
5,000
1,600
4,500 MLTT
1,400
4,000
1,200 Capital Building
3,500
Fund
3,000 1,000 SSE Levy
$ Millions
2,500 800
Tax Increase
2,000
600
1,500 Assessment
400 Growth
1,000
Base Property Tax
500 200
0
2010
2011
2012
2013
2014
2015
2016
2017
2010
2011
2012
2013
2014
2015
2016
2017
The core challenges of low property tax are the opportunity cost they have caused, the
disproportionate burden on businesses and renters, and not leveraging property tax in
more sophisticated ways.
Opportunity cost of low property taxes
The impact of low property tax increases can be illustrated by its opportunity cost -- the
potential revenue that the City would have received had property tax rates increased at
higher rates.

In 2010, when adjusted for inflation, the City collected the equivalent of $1,484 per
resident. In 2017, the City only collects the equivalent to $1,408 per resident. If the City
maintained the $1,484 per resident figure, that would translate into an additional $220
Million in tax revenue in 2017.
Using 2010 as a base year, if property tax had grown at the following rates, the City
would be bringing the following additional revenue in 2017 [or cumulative since 20xx? --
both set of analyses are for discussion and debate -- we could also show this
graphically]
Figure 9 - Comparison of potential property tax revenue under various scenarios

[FOR DISCUSSION - We could also include this in a line chart, showing CPI,
actual res and non-res property tax rate increases, GTHA average rate
increases, education property tax rate decreases, etc.]
Additional revenue that would have been

Comparison rate of property tax growth generated in 2017 [or cumulative since
20xx?]
Rate of inflation (X% increase per year) $220
GTHA average (X% increase per year) ?
Water, waste, and parking rates (X% increase per year) ?
Vacated provincial tax room (X% increase per year) ?
Disproportionate burden on businesses and renters
Low property taxes been have been targeted at residential properties. Commercial and
industrial properties pay nearly three times the property tax rate as residential properties
property tax than residential properties. Toronto has the highest non-residential property
tax rates in the GTHA. The City has been working to bring this ratio down to 2.5 times
the residential rate by 2020. In effect, this is a tax on business and jobs.
Likewise, multi-residential properties pay nearly [X] times the property tax rate as
residential properties. Often, renters in these buildings do not receive a property tax bill
directly, but the cost is nonetheless passed down to them from their landlords. In a
densifying city with growing poverty, this disproportionately impacts low-income
households. The Provincial decision to freeze multi-residential property tax rates will
begin to correct this unfair burden on renters.
Figure 10 - Property tax ratios by class, Historical and forecast [FOR

DISCUSSION -- we could also include the table that breaks out each property tax
type along with the City rate, Provincial education rate, and City Building Fund
rate. Seeing the absolute numbers, as opposed to a ratio, starkly shows the
differences between residential, commercial / industrial, and multi-res]

Even after the City reaches a tax ratio of 2.5, under Provincial legislation, the
Commercial threshold is 1.98, multi-res is X.X and industrial is X.X. The move toward
Provincial targets will inevitably increase Toronto's residential rates. If this were done
tomorrow, Toronto residential rates would be closer to the GTHA average [can we
quantify this?]
Property tax could be applied with more sophistication
Two key underutilized changes to property tax have yet to be fully explored, therefore
limiting the potential of property tax as a tool for the City.
Graduated residential property tax rates are not permitted under current legislation.
However, graduated rates -- applying progressive rates based on property value --
could facilitate greater access to Toronto's residential property tax base and optimize
residential property taxes while protecting lower income households.
A Municipal Price Index measures and reflects forecasted inflationary increases in the
mix of goods and services purchased by the municipality. This is the methodology used
by the City to calculate inflationary increases to user fees. Using a Municipal Price Index
to measure inflation for the purpose of setting property tax rate increases -- as opposed
to the current practice of using the Consumer Price Index for Toronto provided by
Statistics Canada -- would account for Toronto's unique basket of goods and services.
Lever: Develop an explicit policy that links long-term property tax to the
forecasted rate of expense growth
As the City's core revenue source, property tax rates should grow in line with the City's
expenditure needs. Regardless of the direction Council chooses for the City, property
tax will need to grow in-line with spending needs. While other revenue options should
be pursued, especially to tackle challenges related to income redistribution, it is critical
that property tax remains the foundation of the City's revenue toolkit.

Lever: Continue to address the disproportionate burden on businesses and
renters
It is prudent for the City to maintain its policy of lowering non-residential property tax
burden. This policy -- part of the City's competitiveness strategy and provincial direction
to reduce non-residential to residential property tax ratios -- both helps stimulate
economic development and address an inherent unfairness of some of Toronto's most
vulnerable residents paying a considerably higher tax rate than its most wealthy.
Lever: Study changes to the application of property taxes

Staff have already begun to look into the potential of graduated residential property tax
rates. This analysis, including supplementary analysis by KPMG, was presented to
Council in December 2016 as part of the "City of Toronto's Short and Longer-Term
Revenue Strategies Direction" report. The merits of this progressive form of taxation
should continue to be studied as a revenue generating opportunity and a means to
address inequality in the tax system.
Likewise, using a Municipal Price Index to calculate inflationary increase to property tax
could more accurately reflect the true costs to the City and more appropriately index the
rate of property tax increases. The benefits and detriments of this approach should be
assessed thoroughly for Council's consideration.
To mitigate any harmful impacts such policy changes could have on lower income
households, staff should also study enhancing property tax mitigation and hardship
programs.
2.3.3 Municipal Land Transfer Tax

Challenge: Heavy reliance on the Municipal Land Transfer Tax without
appropriate steps to mitigate cyclical risk
Revenue from the Municipal Land Transfer Tax has been the dominant force in
maintaining stable revenues in spite of low property taxes. When the Municipal Land
Transfer Tax was introduced in 2008, it was expected to be a small portion of total
revenues. As has been well documented and flagged, it has grown considerably with
the real estate market, bringing the City considerable and unforeseen revenue
increases along with substantial revenue risk.
Figure 11 - Municipal Land Transfer Tax, Budgeted versus actual

MLTT Revenue
Net Annual MLTT
revenue $M Actual vs Budget
$800
$700
$600
$500
$400
$300
$200
$100
$0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 *
Net Budget $M Net Actual $M * 2017 projected actual
A number of independent studies have shown that housing prices in Ontario, particularly
the Toronto region, were overvalued by 15% or more. A housing market correction,
triggered by a combination of factors including government policies (such as the recent
Provincial Non-Resident Speculation Tax), an interest rate increase, and/or consumer
confidence, would increase the risk of a sharp decline in the housing prices and sales,
resulting in a reduction in the city's MLTT revenue.
Based on a forecast model developed by City staff, a 10% to 20% decline in average
house prices over the next four years would reduce MLTT revenues by [14% to 25%
($100M - $175M)], which is equivalent to a [4% to 7%] increase in property tax, or
[$100M - $175M] reduction in services. [NOTE: Analysis TBC]
Since the Province introduced the Non-Resident Speculation Tax on April 21, 2017, the
Toronto Real Estate Board has reported significant decline in residential resale activities
year-over-year: May: -20%, June: -37%, and July :-40%. At the same time, price
growth has softened – although average resale price in Toronto is still about 5% higher
than the same period last year, it has dropped by 20% from the all-time high of
$944,000 in April 2017 to $759,400 in July 2017.
Municipal Land Transfer Tax does not need to decline for it to pose a significant
problem. In recent years, the City has been using the unforeseen increases that the tax
has generated to balance the operating budget each year -- $75 million, $101 million,
and $182 million in 2015, 2016, and 2017 respectively. Therefore, if the tax does not
continue to grow, Council will have to make difficult decisions in order to close the
structural budget gap each year -- cutting expenditures or raising revenue from other
sources.
If Municipal Land Transfer Tax was to decline suddenly, it could be filled by reducing the
percentage of the operating budget that goes directly into capital spending. This pay-as-
you-go capital funding -- called Capital From Current or CFC -- is a critical component of
the capital funding model. Therefore, a reduction to CFCs would have to be

supplemented with by increasing property tax or else reducing the capital budget and
plan.
The Municipal Land Transfer Tax also poses other challenges. A tax of its magnitude
has the unintended consequences of dis-incentivizing moving and driving up home
prices.
Lever: Reduce risk associated with the Municipal Land Transfer Tax
A new policy is needed to address the inherent and well documented risk posed by the
exceptional growth in the Municipal Land Transfer Tax. This revenue is cyclical, and
steps must be taken to effectively manage its fluctuations. The City should address the
volatility and budget reliance as Municipal Land Transfer Tax grows in importance. For
example, by allocating a larger portion to reserves. As part of such a policy, Council
should consider the appropriate role of the tax in the long-term.
2.3.4 User fees

Challenge: User fees have been applied inconsistently and disproportionately
impact people in low-income
User fees have been prioritized. They are an effective way to match who uses and
benefits directly from a service to who pays. This has been good for the City. It has
helped diversify revenues and, when used appropriately, is an economically efficient
revenue tool. A fee causes people to put an explicit value on the benefits they get out of
a service. If the benefits outweigh the fee, people are willing to pay. The City's policy of
increasing water and solid waste rates in order to pay for much needed infrastructure
investment and incentivize environmentally sustainable behaviour is an example of user
fees being effectively implemented.
However, user fees pose significant challenges, especially when they unfairly burden
those without the ability to pay or are not applied fairly across comparable services.
Transit fares are the City's second largest revenue source. About 70 percent of the
TTC's revenue comes from the fare box -- considerably more than any other large
transit operator in North America -- and fares continue to increase. This is widely
recognized as an ineffective funding model. The City has a policy goal of incentivizing
more transit use, and so it would be in the City's interest to holding of reducing fare rate
increases. But in the absence of support from other governments to cover operating
costs of transit that is not feasible. Moreover, because people with low income are over
represented on transit, compared to other transportation modes, it disproportionately
impacts low income residents. A November 2016 City report titled "Fair Pass; Transit
Fare Equity Program for Low-Income Torontonians" provides analysis and
recommendations to increase transit equity.
A challenge, and opportunity, for Toronto is user fees being applied inconsistently for
similar public goods. While a significant user fee is charged for the use of public transit,
no direct fee is charged for the use of public roads. Analysis on the potential for road
tolls for the Don Valley Parkway and Gardiner Expressway can be found in the
December 2016 "The City of Toronto's Short and Longer-Term Revenue Strategy
Direction" report. As has been well documented, Council's decision to pursue this user
fee was rejected by the Province. It would have provided an appropriate tool to both
curb congestion in Toronto as well as match the beneficiaries of those roadways with
the payer.
There are a number of user fees that have the potential to be optimized in order to
recover the full cost of the service and meet other policy goals. While most user fees
are calculated on a cost recover basis, many do not include the cost required for capital
investments. Likewise, there are opportunities to explore fixed versus variable fees for
some services where they do not exist.
Lever: Develop a public service pricing strategy based on Council approved

public policy objectives
The City should identify the full cost of all its services, including operating costs, capital
costs, overhead, and externalities. Using that information, Council can decide where
user fees and rates can be increased to recover the full cost of the service (for example
to cover capital costs in addition to operating costs) or decreased to achieve a public
policy objective (for example, encouraging recreation or transit use). Council could
assess whether the foregone revenue from not collecting the full cost of the service is
worth the public policy objective. Where full cost recovery is not achieved, Council
should know the opportunity cost. Transparency in terms of the level of subsidy for each
user would be improved. Specific areas to explore include transit fares and road pricing.
Transit fares
Transit fares are a key revenue source and public policy tool. As the City continues to
tackle congestion by investing in transit, how much users are charged will play a critical
role. The City has direct control through the collection system, enforcement of fare
evasion, and fare design including discounts. Transit fare integration is key a regional
issue, and work is ongoing through Metrolinx to analyze how to optimize fare integration
across the region.
The City should continue to work to ensure transit fares are designed to meet the City's
policy direction while helping support required costs and investments. [This section
needs review and further input.]
Road pricing
Road pricing has the potential to be an effective revenue and policy tool. If properly
applied, it can generate sufficient revenue to fund much needed investments, while
simultaneously incentivizing changes to residents', businesses', and visitors'
transportation modes. Despite being rejected by the Province after Council approval,
there may be opportunities in the future to pursue the required regulatory changes with
the Province. For example, when the Province implements road tolls on its own
roadways, and as technology develops there may be new, more efficient means of
implementing the fee.

2.3.5 Development charges
Challenge: Development charges do not adequately pay for the cost of
development
Development charges -- as they are currently implemented in Toronto in accordance
with the Development Charges Act -- do not adequately pay for the true cost of
development. As a result, there is an incremental strain on other revenue sources to
cover the difference.
Since amalgamation, successive development charges by-laws have included

discretionary policies such as rate increase phase-ins and exemptions that have
reduced recoveries, and therefore required larger than otherwise tax and rate supported
contributions to growth related capital projects, making growth related projects less
affordable within constrained capital envelopes.
Certain costs recoverable through development charges are limited to expenditures that
support maintaining services levels at the average over the previous ten years. The
concept is that developers should not be asked to fund improvements to services
beyond what current residents enjoy. For some programs, spending below this
calculated service level results in lower spending 'caps' in the future. It can be a
negative feedback cycle, making future growth related expenditures even less
affordable.
Lever: Ensure that development charges pay for the cost of growth
There are a number of tactics the City can take to ensure that growth pays for growth.
The City should seek an amendment to the Development Charges Act to lift the historic
level of service caps that limits future spending. Similarly, capital budget directions
should include a requirement to benchmark growth related capital plans against
development charges background studies to ensure that spending rates are not
undermined in the City's future development charge rates. Likewise, where discretionary
development charge exemptions are reducing capital contributions to development
charge reserves, the City should transfer the tax or rate-supported co-payments related
to these exemptions into the related project reserves. [I'm not sure if this is accurate --
needs to be reviewed.]
2.3.6 Other revenue sources

Challenge: Not using the entire revenue toolbox
The City has available revenue options it is not using. Either because Council has
chosen not to implement the revenue source, or because the Province will not allow it.
With the current expenditure need required, it is responsible to pursue all available
options so long as they are feasible, not excessively distortive, and carry acceptable
revenue to administrative cost ratios. A greater mix of taxes would give Toronto more
flexibility to be internationally competitive and respond to evolving demographics and
expenditure needs.
However, as discussed, it is crucial for Council to focus on large, existing revenue

sources that have the potential to address the City's significant revenue short fall. The

majority of remaining revenue options will only provide marginal increases to the City's
budget.
Council has debated and voted on a wide range of revenue options multiple times, with
the most recent set of decisions coming forward through the December 2016 City staff
report "The City of Toronto's Short and Longer-Term Revenue Options".
The City's broad taxation authorities are set out in the City of Toronto Act, 2006 (COTA).
COTA. Revenue options available to the City but not in use tend to be narrow in
application, and correspondingly limited in terms of revenue capacity. In addition, many
of the available options have exceedingly high administrative costs. For example, the
collection mechanisms required for an alcoholic, entertainment, or tobacco tax would
prohibitively eat into the City's revenues. However, the following options could be
pursued immediately.
Lever: Reinstate the personal vehicle tax

A personal vehicle tax was implemented from September 2009 to December 2010. A
$120 annual tax would yield annual revenue of $100 million for the City. It should be
dedicated to a specific purposed linked to the general incidence of the tax and address
the impact of potential declining or changing car ownership structures.
Despite the administrative and political challenges inherent with the revenue options
Council has not pursued, Council should make concerted efforts to use all the revenue
options available to them.
Lever: Parking sales tax

A sales tax on parking could be implemented as an interim measure until a time when
road pricing can be put into effect. It could be a fixed percentage applied to the cost of
paid commercial parking, collectible by parking lot owners and remitted to the City.
Unlike a parking levy, a parking sales tax is expected to be less distortive and would
involve lower administrative costs
Lever: Municipal sales tax

As directed by Council, the City has requested the Province allow the City to collect a
municipal sales tax. That request has been denied. However, the City should support
the Association of Municipalities of Ontario (AMO) position to raise HST across the
province to be allocated back to municipalities using an allocation model similar to the
gas tax. Formula based funding is predictable and fair.
2.4 Assets and liabilities

2.4.1 The City's "balance sheet" shows the signs of unsustainable financial
decisions
The gap between expenditures and revenues may be the most immediate issue facing
the City, but the constant financial strain also affects the City's balance sheet in terms of
degraded and depreciated assets, higher debt, lower reserves, and unfunded liabilities.

In times of fiscal constraint, these less imminent needs tend to be deferred. The City's
levels of cash, reserves, and short-term investments provide financial flexibility to
address fluctuations in funding in requirements.
2.4.2 Debt
Challenge: Debt is at Council's imposed limits
Debt ceiling
Debt is limited by the Council's policy that annual debt service charges cannot exceed
more than 15 percent of property tax revenues over a ten-year average. This policy is
designed to protect the operating budget from excessive debt financed capital
demands, and has been quite effective. This is a more conservative limit than the
provincial requirement to limit debt service charges to no more than 25 percent of all
revenues generated directly by the municipality.
The City will be at the cap for the foreseeable future, and a growing list of capital
projects remain outside the capacity of the City to debt finance without exceeding the 15
percent guideline.
Figure 12 - Debt charges as a % of property tax
Debt Charges as a % of Property Tax

17.0%
16.0% 10-Yr Avg.
15.0%
14.0%
13.0%
12.0%
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Unfinanced capital
The City does not pre-fund capital projects. Budgeted funding requirements are spent
and then funded based on the funding source, with external funds used first, followed by
own-source funds, reserves and reserve funds, and then debt. The amount that is spent
but unfunded from the approved source of funding is referred to as unfinanced capital.
Unfinanced Capital is paid from the City's working capital in order to allow capital
projects to move forward. While the City maintains more than sufficient working capital
to address this funding gap, the City must balance interest cost savings against the
opportunity cost of investment income that could be made from the working capital
instead of being used to finance capital projects. Although this temporary funding
mechanism can work favourably for the City in periods of low interest, the practice runs
against the convention of funding longer-term assets with longer-term funding
instruments. Additionally, having relatively high levels of unfinanced capital could pose
a financial risk to the City should interest rates start to rise, as there would no longer be
an opportunity to fund the liability at the relatively low long-term interest rates. While the
amount of unfinanced capital fluctuates, as of 20xx it stands at about $xxx M.
Lever: Review the debt service ratio

A review, and potential easing, of the debt repayment limit should be considered.
However, any policy change that increases debt carries significant risks. That debt must
eventually be repaid, therefore increasing the City's future expenditure needs. And,
critically, increased debt has the potential to impact the City's credit rating. Additional
study would be required to determine how much the City could raise its debt limit
without impacting the City's credit rating.
In order to increase debt capacity and stay within this guideline, the City must increase
its property tax base. Under the current guideline, the City can increase its debt by
between $150M and $300M each year depending on the mix of term of debt, assuming
that 15% of the revenue increase is available to service debt.
This rate of increase is insufficient to deal with growing state of good repair, growth, and
make an impact of the list of unfunded capital expenditure aspirations.
Lever: Adopt a policy of reducing unfinanced capital to $400 million by 2022

The unfinanced capital expenditure balance should be managed as part of the City's
overall long-term financial plan. Unfinanced capital becomes a problem if interest rates
begin to rise, causing higher future borrowing costs, or if the opportunity cost of
investment increase, as is expected through the prudent investor policy changes. A
target of unfinanced capital of $400 million will help ensure affordability over the long-
term.
2.4.3 Reserves
Challenge: Reserves are under strain
Reserves and reserve funds are monies set aside by Council to finance future
expenditures, to defend the City against an unbudgeted or unforeseen event that may
result in a budget deficit such as an economic downturn, to smooth out future program
expenditures which may fluctuate from one year to the next, or to accumulate funds for
future capital requirements or contingent liabilities. While the reserve fund balances
would appear to be a large sum, the majority of these funds are committed to special
purposes.
However, the City has consistently borrowed from its reserves to fill the annual budget
gap. This poses a significant risk over the long-term. The most concerning development
in recent years is the reliance of social services reserves and reserve funds to fund
shortfalls in operating budgets as a result of funding caps and other provincial and
federal funding changes. In particular, Social Housing, Social Assistance and Childcare

Reserves and Reserve Funds are in danger of being depleted if there are no changes to
current funding formulas.
In addition, the contingent employment liabilities reserve is underfunded and poses a

significant liability to the City. This reserve is used to unfunded costs like post-employee
benefits.
On a comparative basis, the City's overall reserve fund balance on a per capita basis is
much lower than other Ontario jurisdictions.
Figure 13 - Jurisdictional comparison of reserves per capita
The historical trend of reserves and reserve funds shows the positive impact of the
City's surplus management policy, which directs 75 percent of the annual surplus to the
capital financing reserve. This is also due to increases in fees from property
developments that are placed into reserve funds to finance the City's growing capital
costs.
Figure 14 - City reserves and reserve funds, Actual and forecasted [CAN WE
SHOW THIS IN REAL PER CAPITA?]

Reserve and reserve funds, year-end balances ($M) -

Actual and forecasted
5,000.0
4,000.0
3,000.0
2,000.0
1,000.0
-
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017f
2018f
2019f
2020f
Reserves are also a critical component of the City's investment strategy, which invests
reserve and reserve funds to optimize their potential. When reserve balances are below
target, or are "borrowed" to finance capital projects until long-term debt is issued,
investment returns suffer. Furthermore, the current policy provides for only the smallest
share of returns retains by reserves, so that over time the purchasing power of reserves
is eroded by inflation.
Lever: Continue to review reserve and reserve fund adequacy on a regular basis
Reserve funds form an integral component of the City's long-term financial
sustainability. They should continue to be reviewed to ensure that they can adequately
meet their intended needs are not under undue strain.
Lever: Increase investment return allocation to reserves to at least the rate of

inflation
The allocation of investment returns to reserves -- the source of the investment funds --
is currently below the rate of inflation, eroding purchasing power over time. The prudent
investor rules are expected to gradually increase investment returns, enabling a return
to a more balanced allocation to reserves so that purchasing power is maintained.
2.4.4 Investments
Challenge: Investment returns are low
Investment returns will not solve the City's financial challenges -- revenue gains are
marginal especially in the short-term -- but they are nonetheless a key revenue source
and should be optimized.
The City's reserves are invested and currently yield returns in the low single digits,
contributing over $100 million in operating budget revenues. In the future, the City's new
prudent investor powers will result in higher expected returns. These have been granted
to the City through an amendment to regulation under the City of Toronto Act.

Lever: Adopt an investor policy based on a prudent investor strategy and a skills
based investment board
The new provincial prudent investor standards are similar to standards that govern
trustees and pension fund administrators, and creates a fiduciary responsibility. These
reforms are expected to enable the City to earn improved risk-adjusted rates of return
on its investment as it will no longer be restricted to a prescribed list of eligible
investments. This authority will come into effect on January 1, 2018. The City is in the
process of establishing an independent Investment Board and a new investment policy
and registration, both of which are required by the amended regulation.
2.4.5 Surpluses
Challenge: Surpluses continue to decrease and are non-recurring
Toronto's annual operating surplus is not in itself sign of financial good health.
Operating deficits are not permitted under provincial legislation, and so the City must set
the budget at the beginning of the year, and manage the budget throughout the year, to
ensure there is no deficit. Surpluses have also been declining, and are the product of
one-time variances in the budget. Unlike the structural expenditure and revenue
challenges facing the City, the drivers of the annual surplus are not re-occurring.
Variances that cause the surplus are the product of factors like above forecasted
revenue from the Municipal Land Transfer Tax and underspending due to things like a
warmer than expected winters requiring less road maintenance. Detailed variance
reports are produced quarterly to monitor these fluctuations.
Figure X - Historical operating surplus, 2010 to 2016 [NOTE THIS TREND ONLY
BEGINS GOING DOWN BEGINNING IN 2010]
Operating budget surplus, 2010 to 2016
600.0 10.0%
% of gross operating budget
500.0 8.0%
400.0
6.0%
$M
300.0
4.0%
200.0
100.0 2.0%
0.0 0.0%
2010 2011 2012 2013 2014 2015 2016
Total Surplus (Tax & Rate) % of Gross Expenditure Budget
The surplus may seem large, but it is small compared to the size of the budget. Over
the last seven years it has averaged 2.6 percent of the total operating budget. Seventy-
five percent of the surplus is dedicated to the capital financing reserve, with the
remainder used to fund outstanding liabilities. It is not put back into the operating
budget.
[Lever?]
[Do we want to address this in anyway?]
2.5 Intergovernmental
Intergovernmental challenge: Mismatch between the City's responsibilities and a
way to pay for them
Through downloading of services to municipalities in the 1990s, Toronto was required to
assume responsibility for two major items that are at the core of its current challenges --
housing and transit -- in addition to a number of social service costs. Beginning in 2008
and ending this year, the Province has been uploading these previously downloaded
social service costs, like Ontario Works and Ontario Disability Support Program. In
addition to reductions in required expenditures, this has helped insulate the City from
cyclical risks related to economic downturns and unemployment and demographic
change. It also reinforces the principle that income support programs should not be
funded from the property tax base. Uploading did not include housing and transit costs
which are now borne by the City. The City's fiscal toolkit was never designed to cover
such significant capital costs or redistribute wealth at this scale. Areas of municipal
expense are now related to policy goals that the City does not have the financial toolkit
to address.
The provincial and federal governments have significantly more taxation power than the
City of Toronto, and yet have given the City the responsibility for key policy areas that
used to be under their jurisdiction. In comparison, Toronto has significantly fewer
revenue sources that its peer cities. Research by the Institute on Municipal Finance and
Governance (IMFG) highlights these differences, as summarized in Table X below.
However, as noted by the authors, these are not direct comparisons -- any feature of
municipal government must be contextualized in the different definitions of the city,
taxes and spending, as well as institutional, economic, and political contexts in which
each city operates.
Figure X -- Local and shared taxes, Eight cities (source: IMFG, 2017)

In addition, while operating transfers have remained steady year-over-year, when

adjusted for inflation and population growth transfers have been decreasing (as shown
in Figure X).
Figure X - Transfers from other governments history, Real per capita [DO WE
WANT TO INCLUDE CAPITAL TRANSFERS?]

Transfers from other governments – Real per capita

1,000
900
800
700
600
Federal Subsidies
$M
500
Upload
400
Provincial Subsidies
300
200
100
0
2010 2011 2012 2013 2014 2015 2016 2017
Lever: Seek a new deal with the Province on social housing, transit, and regional
highways
Even if the City uses all of the policy levers it controls, it is likely that the City will still be
unable to address its structural financial gap. However, before asking other
governments to solve our problems, it is critical that the City first use the policy levers
under its control. It is not responsible to assume that other governments will fix our
financial problems -- there is a poor track record of them doing so and it does not
mitigate risk. The City should continue to pursue positive working relationships with all
orders of government.
Through Bill 68, Modernizing Ontario's Municipal Legislation Act, 2017, the City of
Toronto Act (COTA) was amended. This included a five-year review of COTA. Major
legislative changes are not likely until 2022. Any potential improvements to
intergovernmental partnership will have to be made within the existing framework.
Because areas of municipal expense are now related to broad policy goals like housing
and transit that the City does not have the toolkit to address, it is appropriate to begin
exploring a new deal with the Province. There are two core areas for change: uploading
and granting the City new ways to pay for its responsibilities. The most significant
benefit of a new deal exists in three areas.
1. Social housing
Social housing is the most pressing example of the mismatch of responsibilities and
tools between the City and other orders of government. The City is legislated to provide
social housing operators with funding to operate social housing, including Toronto
Community Housing Corporation which operates over 60 percent of the city's housing
stock. Toronto is also required to fund and maintain rent-geared-to-income subsidies.
Ontario is the only jurisdiction in Canada to fund social housing from the property tax
base. Toronto provides 76 percent of social housing in the region and nearly 40% of
total social housing across Ontario. This concentration of social housing is significant,
considering that Toronto represents only about 20 percent of Ontario's population.

It is time to revisit the intergovernmental relationship on social housing, including
broader social policy in addition to capital and operating funding. The City is able to fund
one-third of the required social housing costs from its revenues. Beyond this, funding
must come from other governments. In the absence of additional funding, the City
should explore uploading social housing and related costs to the Province. The City has
neither the fiscal capacity, nor the financial tools designed for income redistribution. The
ongoing negotiations between the federal and provincial governments on a National
Housing Strategy is an ideal, but fast closing, window to improve social housing in
Toronto.
2. Transit
Significant intergovernmental collaboration is underway on key transit initiatives in the

city, including projects currently under construction (for example, the Toronto-York
Spadina Subway Extension, and the Eglinton Crosstown LRT). Through the recent
Toronto-Ontario cost-sharing agreement on transit initiatives, the City is taking a larger
role in funding transit including an agreement in principle on capital funding for
SmartTrack, and operating and maintenance costs of Toronto LRT projects. However,
there are still significant unfunded capital needs and ongoing challenges with funding
maintenance and operating costs.
The City should continue to seek support from intergovernmental partners to ensure
ongoing investments to maintain existing infrastructure and plan for future growth. A
comprehensive approach to establishing roles, responsibilities and funding
arrangements on transit projects throughout an asset's lifecycle will provide
predictability and allow the City to align its capital planning processes and priorities.
3. Regional highways
The City bears significant costs for the operation and maintenance of highways that are
key assets to the entire region. Most notably, the Don Valley Parkway and the Gardiner
Expressway. Both of these regional highways require immediate and ongoing
investment to improve transportation for residents, businesses, and visitors. While the
City receives some provincial funding to maintain these assets, Toronto residents and
businesses are subsidizing the rest of the region.
To more fairly share the cost of these regional highways, the City should explore
uploading the maintenance costs to the Province. The City should also continue to
explore implementing road tolls on these highways to better match who benefits with
who pays.

CONTACT
WHILE THIS REPORT IS IN DRAFT FORM:
Max Greenwald - Senior Corporate Management and Policy Consultant, CMO, Strategic
and Corporate Policy. 416-338-7967 or max.greenwald@toronto.ca.
SIGNATURE
Full Name
Title of Official
ATTACHMENTS
Appendix 1 - Financial Condition

Appendix 2 - Model and forecast
Appendix 3 - Public consultation results

Appendix 1 - Financial Condition
[FORTHCOMING FROM CORPORATE FINANCE]

Appendix 2 - Model and forecast

[FORTHCOMING FROM FINANCIAL PLANNING]
Base case forecast

This “base case” forecast has been developed strictly on assumed inflationary
increases, 2017 approved service levels and modest increases in the City’s own source
revenues, particularly MLTT and property tax revenues. This projection is founded on a
series of assumptions, only uses information known at the present time, and does not
include speculation as to future directions of City service levels, revenue policies, or
additional assistance from other orders of government. New or unforeseen spending
requirements not currently reflected in these projections, or reductions in revenue from
the MLTT or funding from other orders of government, would further increase this
shortfall.

Appendix 3 - Public consultations

Investing in Toronto's Future: Long-Term Financial Plan Consultations
In July 2016, Toronto City Council directed staff to undertake public consultations to
provide input and advice in the renewal of the City's Long-Term Financial Plan (LTFP).
The consultation took place in two phases. Phase 1, in the fall of 2016, focused on how
the City manages expenses, raises revenue, and maximizes assets. Phase 2, in the
spring of 2017, built on the input received in Phase 1 and incorporated new topics
related to the City's systems of governance, decision-making and financial
management. Consultation methodologies included online surveys, public meetings
across the city, and self-directed meetings hosted by community groups.
The public consultation focussed on how the City could manage expenses, raise
revenue, make the most of its assets, and make decisions that have a long-term
financial impact. It was an opportunity to hear the public's input on these important
issues as the City renews its Long-Term Financial Plan – which will guide financial
decision-making over the long-term and help put Toronto on a path to financial
sustainability.
The key findings and themes from the consultation are presented below. This is the
executive summary from the full report, which can be found at www.InvestingInTO.ca,
and includes detailed findings, an explanation of the consultation process, and the
consultation questions.
Key Findings
 Participants understand the City’s fiscal challenges and have faith in the people of
Toronto to address those challenges with strong leadership from City Hall.
 A prevailing sentiment among participants is that expenses can be better managed
by establishing and following through on clear, long-term, strategic goals and
priorities.
 Participants are more likely to support spending if the link to strategic goals and
priorities are clear.
 Participants overwhelmingly would like to see the City implement a rigorous, fact-
based assessment process for capital projects to ensure decisions are made well,
and made once.
 Participants were open to new revenue options, but there was no clear consensus
on which to pursue.
 There is strong opposition to the sale of assets, especially those supporting vital
services or those generating revenue for the City.
 Data and digital tools emerged as ways to share more information with the public
and guide decision-making.
 Participants value consultation and engagement very highly, wants the City to seek
a broader range of perspectives and enhance participation, and to see public input
reflected, or at least reported, in decisions.
 Participants feel there are many improvements that could be made to the information
and how it is shared, while acknowledging that it is very difficult to present budget
information that is both comprehensive and easily accessible
 Toronto is facing many enormous challenges that cannot be addressed only by

adjusting priorities, but also according to participants, by focussing on building
capacity, working more efficiently and finding creative solutions.
 Participants argued strongly in favour of the City having more powers to address the
challenges it is facing. However, participants stated that this is not an excuse for not
making better use of the powers it has.
Key Themes
Financial Health
Most respondents expressed a belief that the City is in poor financial health, with sixty-
two per cent of respondents believing the City’s finances are either somewhat unhealthy
and unstable or very unhealthy and unstable (n=288). Roughly half of respondents feel
that the City’s finances are worse than they were five years ago (n=289). Respondents
understood the financial challenge the City is facing. The public sees and experiences
the increasing demands on the City’s infrastructure – for example, noting that the skies
are studded with cranes and TTC vehicles are overcrowded – and senses that it is
falling behind.
A common theme among responses is that the municipal government should have
stable leadership, establish long-term plans, have a strong relationship with the
province and have a vision for what the city can become.
Participants understand the challenges the City faces, have faith in the people of
Toronto to address them and welcome strong leadership from the City.
Expense Management
Participants frequently mentioned their interest in leadership and clarity when it comes
to the City's expenses. Participants were divided on whether the City should begin the
spending discussion by focussing on available revenues and then selecting priorities, or
with projects and programs they would like to see implemented and then find
appropriate revenues. They agreed on the need to establish clear, long-term, strategic
goals and priorities – and to follow through on these commitments.
There was broad consensus on the need to apply clear criteria to spending decisions,
such as the protection of vulnerable residents, adherence to established principles, and
distinguishing needs from wants. There was overwhelming support for greater
transparency and accountability, more communication and more open government.
With clarity about spending goals, and performance measurement, the public would
have more confidence in the City’s financial management.
Many stated their belief that expenses could be reduced by finding efficiencies. While
the public is open to adjusting some service levels, there was no desire to reduce
overall service levels.
Many respondents would like to see improvements in the planning process for capital
spending. A number of participants would like the City to avoid revisiting spending

decisions that have already been made. There were many suggestions for a more
rigorous assessment process for capital projects, and cuts to specific projects. The
Gardiner Expressway reconstruction and Spadina Subway Extension were raised as
examples.
Revenue Options
Consultations on the issue of revenue generation included 23 options which were

presented to the public without ranking or recommendation by the City. Overall,
opinions were mixed, but 16 of the 23 options were considered acceptable by over 50%
of respondents city-wide.
A development levy, billboard tax, and tobacco tax received the most support, with
property tax increases, expressway tolling, and Uber registration Fee rounding out the
top six. A municipal business income tax and municipal sales tax had the least support,
and were the only options to earn less than 30% support.
Asset Management
Information for the asset management questions section of the consultation was also
presented neutrally, without any specific recommendations from the City.
There was divided opinion on the issue of the sale of assets, with a slight majority of
respondents against it under any circumstance. There was broad consensus, however,
on the need for a measured approach, the development of business cases for the sale
of any asset, and prioritizing long-term value over short-term gain. In general,
participants, do not want to explore privatizing services that people depend on, are
considered essential, or those that generate revenue for the City.
Decision-Making and Governance
Consensus emerged around the desire for a clear, long-term framework to guide
decisions. Many concerns were raised about specific decisions made by Council, but
they were out of scope of the consultation. There was vigorous debate on many issues
including for example, whether to begin the budget process with a spending limit or a
wish list. It was evident to participants that the City cannot undertake projects without
funding, but many participants felt that the absence of committed funds (including those
in the City's own budget) should not preclude examination and prioritization of projects.
Financial and Other Decision-Making Information
To be able to provide better input, most participants want more information, and for that
information to be presented in a way they can more easily understand. Participants
acknowledge a tension between providing all the data available, which is inherently
complex, and providing more accessible data, which often requires reducing the level of
detail. Participants suggested potential solutions to this challenge include:
 Providing more detail of spending at the community level
 Presenting alternative spending options, and cost and benefit analysis
 Expanding the open data program to include more topics and sources
 Using narrative or storytelling to present information

 Developing charts and visualizations which can be easily shared through social
media
 Tracking the progress of programs and strategies
 Creating more dialogue and opportunities for the public to ask questions
Several participants wanted to see regular, long-term forecasting information made

available to them, including potential issues and opportunities, so that they could
provide feedback to Council. Participants also raised a need for more evidence-based
decision-making.
Public Communications and Engagement
Participants almost universally welcome increased transparency and engagement. They

would like to see engagement embedded in City governance. There was also a sense
that the City is increasingly open and engaging. Some suggested the City could make
better use of data and use digital tools to help engage the public. Open data received
attention as an excellent tool for public information. Participants also felt that the City
could make better informed decisions by aggregating and analyzing public data.
Residents who participated in this consultation indicated a strong belief that the City's
greatest assets in addressing its fiscal challenges are Toronto’s diverse population and
its social cohesion. The majority of respondents believe diversity, tolerance,
multiculturalism and openness to new people and ideas is Toronto’s strongest asset.
Many respondents believe that Toronto residents are engaged in their communities,
care to vote and are well-informed.
Overwhelmingly, participants would like their input taken more seriously by the City.
They believe public input should carry more weight in City decision-making than it
currently does. They would also like to see broadening participation on long-term
issues, including environmental and social impact of different decisions, for example. It
also means broadening inclusion to actively reach out to people, communities and
interests that are not typically reflected in public consultation processes. The only
caveat to increasing participation is a desire to streamline decision-making.
Balancing Priorities
Participants suggested that demonstrating the value of City programs and projects,
through transparent evaluation would help increase support and credibility, and possibly
future investment rather than being limited to the funds available.
Some participants argued in favour of focusing on fewer priorities since trying to do too
much might lead to poorer quality and less effective work. However, in general, there
was a feeling that the City could not limit its priorities. Participants argued that there are
too many enormous, complex, multidimensional challenges that need to be addressed –
whether the City is ready or not. Participants argued that the City should focus on
building capacity, working more efficiently and finding creative solutions.

Many participants cited the size and complexity of these challenges as their argument
for the need to increase the City’s powers. At the same time, some participants felt that
the City could make better use of the power it has before asking for more. In general,
many participants felt that the City could both use existing powers more effectively and
benefit from new ones.
Business Input
[Does Corporate Finance have a summary of business input received through

consultations and meetings with business potentially impacted by the December report's
revenue options?]

Draft Report On City of Toronto's Financial Future

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Iteration 3 - LTFP Full Report - Draft - 20170822 - 0.1.

REPORT FOR ACTION

City of Toronto's Long-Term Financial Plan - DRAFT,

Date: September 12, 2017

Root causes of the structural financial gap

Budget and policy process

Key challenges Levers

The budget process does not

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 1 of 55

Identify and quantify risks through an annual

Review Council governance (including: roles and

[Public engagement challenge TBC] [Options to improve public engagement TBC]

Equity, gender, and economic impacts of

Key challenges Levers

Advance transformation, modernization, and

Proactively address core cost drivers of labour

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 2 of 55

Prioritize the capital list

Integrate service plans, the official plan, and other

Capital costs have not been sufficiently

Explore alternative approaches for capital

Continue to reduce existing capital costs

Identify the opportunity cost of tax discounts,

Key challenges Levers

Develop an explicit policy that links long-term

Heavy reliance on the Municipal Land Transfer

Leverage all feasible revenue options, including

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 3 of 55

Assets and liabilities

Key challenges Levers

Review the debt service ratio

Continue to review reserve and reserve fund

Surpluses are decreasing and are non-recurring [Lever?]

Key challenge Levers

Address the mismatch between responsibilities

[Recommendations corresponding to the options below. Forthcoming.]

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 4 of 55

[How to frame this section?]

At its meeting on June 7, 8, and 9, 2016, City Council adopted recommendations

1. The Problem and the Opportunity

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 5 of 55

Despite low property taxes revenue has been stable

 Negotiating the upload of social service costs to the Province

Risky financial decisions have not resulted in severe negative impacts

 Relying on MLTT revenue from the overheated real estate market

1.1 The structural problem

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 6 of 55

Fundamental gap between policy and fiscal expectations

Figure 1 - Forecasted budget pressure, 2017 to 2022 [Alternatively or in addition

Underinvestment in housing, transit, and modernizing government

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 7 of 55

Short-term focus to budgeting and planning

1.2 The opportunity

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 8 of 55

1.3 Public consultations

2. Council's key choice for long-term financial planning

Scenario 1: Match services to what we can afford right now

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 9 of 55

Scenario 3: Deliver on Council's approved strategies and plans

Figure X - Financial Direction Scenarios

Expense (Status quo) Revenues (Status quo) Unfunded expenses

Long-Term Financial Plan (DRAFT, CONFIDENTIAL, PRIVILEGED ADVICE) Page 10 of 55

3. Core challenges and options