Toronto Fiscal Panel: The View From Inside

I recently took a crash course in the fascinating, challenging economics of municipal finance. I was one of the 6 members of the independent panel that was formed to review the City of Toronto’s fiscal situation. The panel issued its report last month.

Most progressive economists have long recognized the growing economic importance of cities, and the urgent need for more public investments in infrastructure, transit, community-building, and the education and cultural resources that make cities magnets for immigrants, investment, and creativity. This view is even seeping into mainstream economics. Voices like Tom Courchene and Richard Florida are calling loudly for more spending (including capital spending) at the civic level – and more ability for cities to reliably raise the money needed to pay for that spending.

However, higher-level governments are not remotely matching the rhetoric with real dollars, and cities face a constant struggle to raise funds (often by essentially begging to their provincial and federal superiors) to pay for needed investments. And the general capital stock in most cities is still running down badly. For example, waterworks in most major cities were built many decades ago, have been fiscally ignored since then (especially during the last two tight-fisted decades), and are going to need many tens of billions of dollars in reinforcements in the near future. The same is true of social housing, transit, and other public capital assets. Where will that money come from? Of course, the chronic underfunding of those assets is part of the neoliberal strategy for their eventual privatization (through the phony shell-game of P3s, and other conspiracies).

In that economic context, the chance to learn about the nuts and bolts of the financial challenge facing Canada’s largest city was both intriguing and sobering. In our panel’s three months of work, I ended up with more binders of briefing materials, budget tables, and notes than I collected – I am not exaggerating here – during my entire Ph.D.

The political background to the panel was this: Mayor David Miller (Canada’s most progressive big-city mayor) tried last fall to pass two new taxes. Recent changes in provincial legislation in Ontario allow Toronto a little bit more leeway to collect revenues, and this was the City’s first attempt to make use of those powers. He proposed a new land transfer tax (on real estate sales) and a modest vehicle registration fee. Both of them make sense to me.

However, Miller faced an anti-tax backlash from right-wing councilors, business lobbyists, and the corporate media, arguing that more tax revenues would just be “wasted” by the City, which should focus on cost-cutting instead of new taxes. In the face of this barrage, a couple of middle-of-the-road councilors buckled, and the Mayor lost the vote. To help shore up support for the fiscal plan, Miller appointed the 6-person independent panel to review the City’s fiscal affairs and confirm that the taxes were needed. And indeed, the panel’s report (more on this below) confirmed that the City is generally well run (at an operational level), and that more revenues are indeed necessary to pay for the City’s services and programs. In fact, in addition to those two new taxes, the panel also identified several new ideas for additional tax revenues (including a proposal to collect tolls on the major freeways around Toronto) that it feels will also be needed to stabilize Toronto’s financial situation.

By appointing a credibly independent panel to conduct this review, Miller managed to win over enough support to pass the two taxes in a second vote (that took place just as the panel was beginning its work). Those taxes are now being phased in, and will raise about $400 million per year – a 5% increase in the city’s total revenues. In today’s political climate it’s not easy to raise taxes to pay for public services. The creation of this panel therefore played an important role in what I consider an important step forward in solidifying the fiscal base for the City’s extensive network of public services.

However, the panel still had to conduct its review, and that was the tricky part. The panel was eclectic, but tilted somewhat to the right (reflecting Miller’s political need to demonstrate that the panel wouldn’t be a “rubber stamp”). Three of the six members were strong business voices: Blake Hutcheson (the panel chair, a major commercial real estate developer), Larry Tannenbaum (a near-billionaire with varied business interests … including the Toronto Maple Leafs!), and Paul Massara (a private equity entrepreneur with a background in the private electricity industry). The panel also included former Liberal Senator and York University President Lorna Marsden, and Rahul Bharadwaj (a lawyer now working with the Toronto Community Foundation). Plus me.

In his initial call to me last October, Miller suggested that the panel might involve 3 or 4 meetings.  I now realize that was a sick joke: how about 40 meetings, and roughly a day’s (volunteer) work per week on the project since then. All of us were appointed as individual Toronto residents; none of us represented our organizations; none of us were paid. We held dozens of fact-finding sessions with City officials, directors of the City’s various arms-length agencies and commissions, civic union leaders, social service agencies, real estate officials, and others.I still think it’s weird that public sector activities are subject to such thorough-going scrutiny, but private sector activities are taken for granted. I can assure you there is far more waste, corruption, and self-serving opulence occurring just a few blocks down on Bay Street, than at City Hall. Most of this waste occurs behind closed doors, so you don’t actually see it – but there’s enough evidence in the passing BMWs and big-spending brokers hanging out in gold-plated bars to know it’s there. The claim that this waste occurs in the private sector, and hence isn’t our business, is false. We pay for it, one way or another (through the mark-up on our mortgage payments, or the prices we pay to the companies which lined the brokers’ pockets). When will we have an independent panel to investigate the vast waste of resources in the financial industry? I am not holding my breath. Maybe that’s fodder for a future G&M column. But I digress. Back to the panel.

Given its make-up, it is not surprising that a lot of debate and horse-trading went on as we worked toward our consensus report. The report’s carefully worded 14 specific recommendations represent a consensus of the 6 panel members. (The colour commentary in the 80-page report that accompanies those recommendations was not subject to the same degree of sign-off by all the panel’s members.) I was worried about a couple of sensitive spots as we started the process: I didn’t want the panel to turn its guns on the usual scapegoats for public sector fiscal problems (unions, and public services). Given the experience of fiscal restructuring in Canada over the last 15 years, my concern was surely well-founded.At my behest, the panel held special sessions with the City officials and partner agencies who provide the impressive range of public and social services financed by the City. We toured a homeless shelter, a recreation centre in one of Toronto’s poorest housing complexes, a child care centre, and a new supported living complex for people with HIV. I also met with the folks at the Toronto Community Housing Corporation – which in my view is one of the most creative and entrepreneurial non-profit agencies in Canada. I convened a special session (including some environmental NGOs) to review the City’s renowned recent environmental initiatives (including the Toronto Atmospheric Fund, the Better Buildings Partnership, and the Enwave lake-water-cooling initiative).

I also organized panel meetings with the leaders of the City’s major unions, to hear their views regarding the state of labour relations, the problems and constraints facing civic workers, and the need for more resources in skills, training and retraining, and safety. In reviewing financial data on the City’s compensation costs, our report debunked the stereotype that the City’s employees are “fat cats.” Average cash compensation for the City’s unionized employees (including overtime) was less than $40,000 in 2007. This reflects, in part, the City’s extensive use of part-timers in its recreation and social service programs.

On the whole, I think these efforts were largely successful. The panel’s report did not “attack the unions,” nor call for a generalized downsizing of City services. The report contains strong language on the value and effectiveness of the City’s public programs, including the importance of its social services, social housing, and environmental programs.More…

For those who want to wade through the whole report, here it is:

http://www.toronto.ca/mayor_miller/pdf/blueprint_report_20080217.pdf

The report’s final grab-bag of conclusions and recommendations included:A shift in the political system that governs Toronto’s city hall, including stronger powers for the mayor to design the budget and oversee top city administrators (they currently report directly to all 44 members of City Council, which leads to all kinds of political game-playing and has clearly contributed to the cynical attitude which many Torontonians have toward their civic government).

Higher taxes, including gradual increases in residential property taxes and a proposal for road tolls on the major freeways that ring Toronto.

Modest targets for finding cost savings and efficiencies in the delivery of existing city services ($50 million out of an $8 billion budget this year, and more next year).

A call for a comprehensive human resources strategy that would allocate more resources for training, skills, and safety, and more flexible employment strategies within city programs (so that city programs can be restructured when needed without undermining the job security of city employees).

On the tricky issue of outsourcing, the report is mostly silent: it simply calls for a review of the city’s current outsourcing and procurement policies. At present, some of the City’s basic services (like waste collection), most of its social services (including employment counseling and child care), and almost all of its construction work is already outsourced to private or non-profit suppliers. The report mentions the need to more carefully evaluate those purchases to ensure that contracts are being fulfilled. Indeed, as part of the panel’s work, we received academic evidence on the economics of municipal outsourcing in North America; this evidence suggests that many outsourcing decisions are ultimately reversed (as a result of unexpected costs associated with contract compliance, quality, and supply reliability). The City’s existing approach of outsourcing some tasks, while insourcing others (for example, a portion of Toronto’s waste collection work was recently brought back under public delivery, and similar possibilities exist in snow removal operations), will continue.

On the hot-button issue of the city’s relationship with its unions, the report had to say something (after all, labour costs amount to over half of the city’s total spending). The report explicitly acknowledges that compensation and work rules for most City workers (90% of them belong to a union) are determined by a collective bargaining process into which the panel had no mandate to wade. The panel also made a generic, compromise recommendation that the growth of future compensation through that collective bargaining process should be kept in line with the progress of overall labour market averages and the City’s fiscal capacity. For anyone (whether from the right or the left) who wants to interpret that as some kind of attack on the unions, consider that those “labour market averages” are currently growing at a pretty decent clip (average hourly earnings in Canada in January were 5 percent higher than a year earlier!). Indeed, in my experience in the labour movement, I can’t think of a collective bargaining relationship that was not constrained by labour market averages and the employer’s ability to pay – in which case our compromise wording was pretty much a statement of the obvious. The panel’s recommendation is merely asking both the city and its unions to be reasonable in their future bargaining.

It turned out that the major battle within the panel was over an issue I was not really expecting: the proposed privatization of some of the City’s capital assets. The business voices on the panel came out swinging with a proposal to sell off assets like the Toronto Hydro utility, the City-owned parking authority, the Enwave cooling utility, and others. They argued that by using the proceeds to reduce City debt and hence interest costs, this one-time sell-off could single-handedly restore balance to the budget. I don’t buy that logic: Toronto is actually not heavily indebted (less than $3 billion in direct debt, compared to $60 billion in assets), and true interest costs (as distinct from principal repayment) make up only about $150 million of its $8 billion in annual spending. A one-time fire sale of assets might hide the City’s fiscal problem for a while, but can’t solve it forever. What will the City sell off the next time its cash crunch catches up to it???

I also presented arguments on the continuing public policy importance of owning those assets. For Toronto Hydro, for example, that policy mandate has expanded in recent years to include environmental goals. Toronto Hydro has pioneered some innovative and very successful conservation measures in recent years, including an idea last summer (peak demand season in this steamy city) to pay customers a 10% bonus if they used 10% less power. (It’s hard to imagine a private utility paying customers not to buy its product!)

The business folks pushed back hard, however. And it’s also clear there’s a lot of interest in the financial community in sell-offs like this one (remember: those “efficient” brokers on Bay Street get a 3% commission on every deal!). After several tough meetings on the subject, we ended up with a broad vague compromise: The City should review all of its capital assets (including the 3 mentioned above, but others, too) in order to:

1. Ensure that it is receiving a fair return on those assets, in both financial and public policy terms.

2. And consider ways in which that return could be improved, through any of a wide, inclusive range of options (everything from selling them off, to investing more public money in them in order to generate more revenue).

The panel does not recommend the privatization of anything. But there’s clearly a push on for a sell-off – one that the defenders of public power, public parking, and other public assets must gear up to oppose. On the Toronto Hydro case, now that I am suddenly an “expert” on its financial affairs, I am going to be working with the Ontario Electricity Coalition and CUPE Local 1 (which represents the workers at the utility) to make an economic case against privatization, and a case for expanding Hydro’s portfolio of activities (including by getting into green electricity generation) in order (among other goals) to boost the return the utility generates for the City. (Even today, however, as just an electricity distributor, Hydro generates a 10% return on equity to the City – almost twice as high as the interest which Toronto pays on its debt. Selling this company to pay off debt is thus clearly a money-losing proposition for the City.)

I am very unhappy with the way that this privatization issue has been handled in the wake of the panel’s report. Just prior to the report’s official release, the Globe and Mail ran a leaked false story that the panel was going to recommend selling Hydro. The next day I then broke the panel’s self-imposed media blackout to go on the record denying that the panel would recommend any such thing. At the report’s official launch, I explicitly re-emphasized that the panel was not recommending privatization, and that calling for the City to “get more” from its assets was not at all synonymous with calling for the City to “sell them off.”

The analogy I used was to a person whose home suddenly doubles in value (perhaps because it is in a prime location). How can they get more “cash” from the value that’s locked in their home? Yes, they could sell it off – generating a one-time gain. But that could be the worst idea: what if the home then doubles in value again, after they sell it??? Better to find other ways to extract value from the asset, without giving up control over it: take out a second mortgage, rent out a room, or partner with a company to open up a business (a fair trade café?) that capitalizes on the value of the location.

I do accept the point that the City could get more value from many of its assets. In fact, our panel repeatedly encountered a strange fiscal anomaly in our review: Toronto officials scramble every year, looking in every nook and cranny, for cash for its operating budget (which must be balanced each year, by law). But capital assets don’t get nearly the same scrutiny, so many are underutilized. And there are great examples in Toronto of ways in which public agencies have very creatively leveraged capital assets (often in projects which also involve private investors) to both do good, and generate fiscal returns. For example, the public housing corporation is partnering with private developers to completely rebuild Regent Park, one of Toronto’s most notorious housing projects. Some of the resulting new units will be rented out on the market, without reducing the number of (completely updated) social units which will also be available. The City took similar measures to rebuild the once-seedy Dundas Square area downtown, and to develop the land above certain key public transit interchanges. (These are not P3’s, which take existing public assets and services and sell them off through a phony, expensive shell game; these are examples of true public entrepreneurship. Indeed, I made sure that the words “public private partnership” do not appear anywhere in the panel’s whole report.) There are clearly other ways in which the City’s $60 billion in capital assets could be leveraged to produce more value (both fiscal value, and public policy value), but in my judgment that absolutely does not require privatization. (Other panel members obviously feel differently.)

Despite my efforts (and perhaps partly as a result of deliberate efforts to spin the story the other way), some media reports have wrongly interpreted the panel’s compromise recommendation as a call for privatization. I heard one radio story that actually implied (despite my public statements to the contrary) that I supported privatizing Hydro. I contacted the reporter and he corrected the error on-air the next day. There will clearly be a continuing spin battle on this issue. I am worried about the hungry financial interests lining up to profit from a sale of some of Toronto’s most valuable public assets. But any of them who try to claim justification for privatization from this panel report, however, are deliberately twisting the facts. This report does not recommend privatization of anything, only that the City make sure it gets as much bang for its $60 billion bucks of assets as it can.

Apart from the shenanigans over the wording of our recommendation on capital assets, the process within the diverse 6-person panel was cordial, honest, and effective. I liken it somewhat to trying to write an Alternative Federal Budget (something I have been involved in 12 times) – except one in which the final result must be endorsed by the Chamber of Commerce, not just the CCPA! The process was also similar, in many ways, to labour-management bargaining. Everyone around the table had their issues, and pushed for them. But we had to reach a deal at the end of the day. I’ve been involved in many of these multi-stakeholder initiatives over the years. In my experience, you aim for 2-3 good things that you want, and try to keep the ball out of your own net on the other stuff. But if you are looking for a pure expression of socialist principles, undiluted by the need to achieve a multi-party consensus, then you are in the wrong place.

[Start of commercial: If you want an undiluted statement of socialist principles, buy my new textbook for activists, Economics for Everyone, when it comes out in June. Fabulous illustrations by Tony Biddle. I am reviewing the page proofs this week, and they are awesome, if I do say so myself. End of commercial.] As one member of our panel put it, we all ended up way outside our comfort zone with the set of final recommendations. And it will be up to posterity to decide which is the greater anachronism: a unionist calling for “restraint,” or three business leaders calling for higher taxes.

In every round of collective bargaining, the union committee tries its hardest, then brings the deal back to the members for ratification. Someone inevitably stands up then to denounce the deal as a sell-out, and the bargaining committee as scoundrels. I am sure I will hear that from a few of my friends on the left about this report. Nevertheless, the report recommends a diverse and fairly balanced set of measures (including new taxes) that would help, if adopted, to solidify the fiscal foundation for the important public services which this City provides. I believe that those who were familiar with the process (including the union leaders we liaised with) will confirm that I played an important role in helping steer the panel in a relatively positive direction.  And recalling the political context for the panel’s creation, I believe the panel (and its members) did its job well: we evaluated the general effectiveness of the City’s operations, and endorsed the need for new revenues to continue financing essential public services.

Once I even (jokingly) proposed that the City nationalize Bay Street to solve all its fiscal woes in one fell swoop. The proposal was not adopted by the panel. But my socialist conscience can sleep at night.

I’d be interested in any and all feedback on both the panel and the broader challenges of municipal finance in Canada, either through this blog or direct to me at stanford@caw.ca.