The City and How to Pay For It

Richard Joy doesn’t care much about what a new Toronto transit system will look like. It can be light rail, underground subways or something completely different. He’s concerned with something, that in his view, is far more important than what type of vehicle should transport Torontonians from one end of the city to another: he wants to know how in the world the city will pay for it.

“The challenge is massive,” says the vice-president of policy and government relations for the Toronto Board of Trade. He says Metrolinx, a provincial agency that looks at ways to improve transportation in the GTA, wants to spend $50 billion over the next 25 years to develop transit, but the province says it will only kick in $10 billion.

“That leaves a $40 billion question,” says Joy. “That’s like building two English Channels or a Three Gorges Dam.”

How the city will account for the rest of the money is anyone’s guess at this point. Part of the problem is that it needs to fund numerous other capital projects, like fixing and building new infrastructure—such as roads and sewers—too. The city has money-raising tools like municipal bonds, property taxes and user fees in its arsenal, but with increasing demand for new infrastructure, not to mention a better TTC, Toronto will have to start looking for new ways to fund their growing list of capital projects.

Capital funding issues aren’t just a Toronto problem—most cities in the country have major infrastructure deficits that could take years and billions of dollars to fix. Cities are facing far more financial pressure than ever before says Enid Slack, director of the Institute on Municipal Finance and Governance at the Munk School of Global Affairs.

In the 90s, the federal government drastically cut transfers to cities to pay down its deficit. Then the provinces followed suit, downloading costs for things like welfare, ambulance services and some bridges and roads onto cities. People’s standards for first-rate infrastructure are also higher these days and large cities that want to compete globally, like Toronto, have to pay for “soft infrastructure”, such as cultural facilities, libraries and other things that enhance quality of life.

The city of Toronto does collect money to use on capital projects, and lots of it. Of the $2.051 billion it expects to spend in 2011, $625 million of will come from municipal bonds, $350 from provincial grants and subsidies, $322 from federal grants and $240 from “other” sources. But it’s still not enough. “There’s a considerable (infrastructure) backlog and it’s very expensive,” says Phyllis Berck, director of the Toronto Office of Partnerships for the City of Toronto.

“These are things that used to be cost sharing arrangements with senior levels of government, but over the last couple of decades we’ve seen a lessening of that cost. Municipalities now have to look at different alternatives.”

Luckily, there are a number of ways the city can raise money for new projects. One idea that’s been tossed around is implementing “tax increment financing” to help pay for a subway extension. A TIF, says Slack, is a way of “capturing an increase in value from people who enjoy the service.” Basically, the city looks at the property taxes in an area they want to develop. They see what the current rates are and figure out how much taxes would increase over, say, 25 years if no new projects were developed. Then they try to estimate how much property taxes would increase if something were built. The difference, which is collected gradually, as property taxes increase, helps pay back the cost of a project over time. “There’s definitely some potential,” says Joy.

However, it won’t solve all the city’s financial problems. Joy’s looked at this in the context of transit and says, in America, where TIFs are widely used, only about 30 percent of a transportation project’s costs are usually covered this way. TIFs have worked wonders for some municipalities; much of Chicago’s waterfront redevelopment was covered by TIFs, but Slack says that other places want to stop using this financing method. Many American municipalities have found that property taxes don’t increase as much as the city predicted, so they’re stuck with a major debt they need to pay off another way. “It’s not the magic bullet,” says Joy. “But should be one of the things we look at.”

Another option is to turn to the private sector to help fund projects. Public private-partnerships, or P3s, have been around for years, but have only recently gained steam as municipalities look for new ways to build infrastructure. One of the most well known P3s in Canada is Ontario’s highway 407. During the early 90s recession, then Ontario premier Bob Rae turned to the private sector to help build the highway. The Canadian Highways International Corporation was tasked with constructing and operating the 407, while the province footed the bill. Ultimately, in 1998 Ontario leased the highway to another company—407 ETR will operate and maintain the road for 99 years—for about double the cost of building it.

More recently, Toronto has partnered with the private sector to build hospitals and prisons, says Berck. The new Bridgepoint Health hospital, which will open in 2013 on the corner of Broadview Ave. and Gerrard St., is a partnership between the province and Plenary Health, a global company that specializes in P3s. Berck says that P3s work because the private sector does all the construction and, because there’s a bidding process, the project is usually cheaper than if the province built something itself. “The private sector puts their own skin in the game,” she says. “They put money on the table and share the risk.”

Of course, there are issues with having the private sector involved. They can—and have—pulled out of projects. Private companies also need to make money, and the profit demands of a business versus the government’s need to help the public doesn’t always mesh. But Berck says it’s up to the city to due their due diligence, and for the most part the partnerships have worked out. “It’s always looking at that balance between private sector money pubic needs,” she says. “We have a fair amount of experience doing that.”

Other ways the city is raising money is through land development charges—the city makes developers pay for the cost of building the infrastructure in new developments. However, Nigel Bellchamber, general manager of the Ontario Municipal Administrators’ Association, says that many developers just pass these costs onto consumers.

No one way will solve all of the city’s problems, but at least there are a lot of options to look at. The Toronto Board of Trade released a report suggesting 16 ways the city could pay for a TTC expansion, including implementing tolls, charging people for how many kilometers they drive and creating an infrastructure bond. But, it’s not good enough to just have reports detailing what can be done, says Joy. If we want to be a vibrant city, with better infrastructure and an improved TTC, it’s time to have a serious discussion around capital project funding now. “The challenges are massive,” he says. “We need to change the conversation’s time frame. A finance strategy for public discussion (must be) in place right away—no later than spring.”

Origin
Source: Toronto Standard