Fixing Toronto’s Funding Formula with Councillor Shelley Carroll

Toronto is at a financial crossroads. Councillor Shelley Carroll, Budget Chief for the city, joins the Board to discuss tackling the city’s $1.8 billion budget shortfall. From structural fiscal challenges to the need for predictable funding and smarter spending, hear how Toronto can rebuild its financial foundation and ensure a thriving future.

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[MUSIC PLAYING] From the Toronto Region Board of Trade, this is Toronto Talks.[MUSIC PLAYING] Toronto, let's talk city budgets. I inherited a budget shortfall of $1.8 billion. Bad news, Toronto. Your tax bill is going up, way up. It is never easy proposing a residential property tax increase. There's no math where you improve services and cut taxes. It just doesn't work like that.[MUSIC PLAYING] Decades of downloads coupled with a surging population and aging infrastructure have left the city's coffers stretched thin. The board is committed to finding solutions to our broken funding formula by securing predictable funding for streams and by exercising fiscal discipline. As part of our advocacy, the board's Associate Vice President of Policy and Research, David Campbell, sits down with Toronto's budget chair, Shelly Carroll. Here's their conversation. Well, thanks for being here, Councillor Carroll. We're so excited to have you. Maybe to start, could you just tell us a bit about yourself and your role at the city? Well, I've been a councillor for a long time now. A little over 20 years. And currently, I have a number of files. I'm chairing the Budget Committee. And our nickname for that at City Hall is Budget Chief. So it's a bit daunting. But I'm also sitting on the Toronto Police Services Board right now, which is key because it's the first line in the budget for the city. So it's good to have that under my belt. But we're also trying to achieve a lot of reform there and try and overcome some challenges that the police are having. So do a little bit of heavy lifting. And then last but not least, I'm the mayor's champion on economic development and culture. And we've just recently released two major plans for the next 10 years to really work on rebuilding the economy in the city of Toronto. Right. Well, all of those roles definitely right on point for the conversation we want to have today. Maybe as a starting point, let's talk a little bit about the new deal with the province. Reached in, I think, fall 2023, it was announced three years of really significant operating funding, lots of capital funding. Congratulations. Oh, thank you. I know that was a big accomplishment and a culmination of a lot of work. But still leave some structural challenges to be addressed, I mean, out beyond the lifetime of the plan and beyond. Could you speak a bit about that? What do you see as critical next steps to ensure the partnership address is Toronto's long-term fiscal challenges? Yes. Well, we went into those conversations with Premier Ford already having adopted a long-term fiscal plan for the city. But our challenges at that point in fall 2023 were also incredibly dire and urgent. And so we appreciated right out of the gate, the Premier said, I've read your long-term plan and I see where you want to go. But we need to do some urgent things right now. We need to get you right for this budget because we were still carrying $2 billion shortfall at the beginning of each budget process because we were still carrying a lot of COVID-19 expense carry forwards. And so we need to reduce that over time. And so the deal ended up being more about the immediate than the long-term fiscal plan. But the Premier promised that there will be a part two. But let's get you from here to the end of the current political term you're in. And also that was kind of perfect timing because we also have, over the last few years, taken on a practice of looking at the city's finances with really a three-year time frame. We can only adopt one budget at a time. So we go through this every year. But we're trying to have a three-year outlook and really plan for gradual reduction of that opening gap and improvement of services, investing for impact, all those guideposts that you have in any budget, but looking out a little more in the long term. And so the new deal spreading out a number of really strategic deposits coming from the provinces allowed us to be able to do that. But we still need that long-term fix, that structural fiscal deficit that's really been sitting there since amalgamation 20 years ago. So when you think about that structural problem, could you tell us a bit from your perspective, there's both a revenue and a spending aspect to this, I think. The city has limited revenue tools and then is asked to deliver a lot of different services. Could you speak a little bit to that balance? Where do you see the biggest challenges on the revenue or the spending side or a mix of both? Well, the challenge is what kind of revenue we receive and what kind of expenditures we have. There are the basics of running any city. I call them the picket fence expenses. Here's my house with its picket fence around it. And the classic property tax things that need to happen every year, making sure the roads around me are fine, making sure there's a little bit of community infrastructure. I want a library at the end of my street. I want kids to be safe on the way to school. I want there to be community recreation. To me, those are the things that classically property tax ought to provide. Maybe a nice bus service running by my house, all of those things. But then there are two other blocks. One for me is the mega city expenses. And here we are unique in North America in that we've become a mega city, but we don't have regular ongoing funds coming from the other orders of government who have income taxes to pay for the mega city things, like a rail transit system, like a subway system. We did, up until a certain point, we had that until 1995. And during those times, we had an award-winning transit system. And then the third bucket are things that are truly wealth redistribution. City of Toronto delivers a lot of social program. We help to deliver OW and ODSP, although part of the recent talks with the province have led to them taking some of that responsibility back. But we're also very much involved in housing. And if you think about it, housing is the essence of wealth redistribution. Housing is saying, for those of us who have a roof over our head, for those who have a generous income, we need to make sure that everyone has a roof over our head. And so income tax is a good place to go for those housing dollars. We don't have any access to that. And so we have a very limited type of revenue, but a broad array of things that we're required to spend on. Right. Well, and one of the aspects of that you just hinted at is the fact that some of those services the city is asked to deliver scale with the number of people in the city or with GDP and economic activity, but the revenue tools for the city don't necessarily scale in the same way. Right. And it's that scale. If you think of the transit system, once you have a small room, even a medium-sized municipality, you want to run a bus system around and get everybody where they need to go. But as you start to build and you have a central business district, like where we're sitting right now, you now have a regional economy. You have people coming from far and wide, commuting in to work every day. And so it's nice to have a provincial rail system that gets some of those people there. But a lot of people just make their way to the city limits. And then they want to get on that mega city transit system. And that's a real challenge, which is why back in the '70s, as it started to become exactly that, a regional system, you saw a long-term deal negotiated by Premier Bill Davis that said, look, we'll pay for 25% of the operating. Property tax should pay the other 25% of the operating that transit system. 50% can come right out of the fare box. And for the 25 years that that deal functioned, we grew the subway system without challenging the base system and became an award-winning North American transit system. Right. And that sounds like a good example of a concept that's often thrown around of funded mandates and this idea that the city often acts as a delivery agent for mandates that are provincial or federal levels of responsibility. But isn't necessarily funded for them. So it sounds like-- I imagine that will be part of these ongoing discussions with the province about a longer term deal for the city is thinking about this concept of funded mandates? Yes. And so the conversation is around, what are those structural things? I've just described the biggest one. And how do we want to resolve it? Is it, we'll simply-- we'll look at your books. You'll be transparent and accountable. We'll look at your books every year and hand it to you in pure cost. Or do we want to look at running our collection of revenue tools? We often talk about it for many years now. If we were to have a 1% share of the HST in Toronto, that would be the equivalent of probably close to $1 billion every year. So that transit piece would be fixed right away. And the rest could go to those social costs where we're not quite getting enough of a share of economy-driven types of revenue tools to pay for them. Right. Another topic that's been on our minds here at the board is around spending accountability at city council. The budget is set every year. But then there's an opportunity for counselors to bring forward ideas throughout the year that might not have been captured in the budget. Might be fantastic ideas for their board or have really helpful impacts, but come to council and aren't necessarily funded through the budget process. At other levels of government, this is part of the function of a treasury board is to ensure that they're spending accountability and that spending matches what's laid out in the budget. Do you think there's an opportunity for something similar at the city, even if not necessarily that exact model? How do you think about the spending accountability of what gets passed at council? Well, that's actually being looked at right now, because I think the residents would prefer it. What happens a lot in the year is counselors move things, but then they become what we call new and enhanced budget requests. And so you spend a lot of time shoring up support, ripping votes to get a thing that you want. And it could be at any point in the year, and you hope it'll be in the next budget. But how it goes into the budget is as a new and enhanced request. And nine times out of 10, particularly in the last decade, the answer is no. So the thing never happens. And then residents who listen to that debate are left thinking, you said you were going to do X, and it never came to pass. What's wrong with you people? Why can't you do these things? And what they don't know is it was a good idea. But the person whose initiative it was wasn't really being honest about the fact that the funds aren't there. And I'm going to have to fight for them come budget time. And of course, counselors do fight for some of them come budget time. And so sometimes you have a little extra revenue. You find that surplus is a little higher when you get the actuals. I'd like to keep that money. Keep it in the reserve. But there's a last minute scramble as the budget is handed over to the mayor. And this is not just the current mayor. Any mayor makes everyone happy by delivering with it whatever is that last pot of actuals revenue that's come to pass at the end of January. He says, OK, maybe 10 or 12 million more. But those to me are dangerous because what happens is you squeeze them in to be implemented part of the way through the year. Now that's in the base. And the following year is going to cost us more. The annualization cost is something no one takes into account. And then it becomes a reality. And then we wonder the next year why we can't just say to a department, job well done, just come in at the same amount. We have nothing new for you this year. Well, in fact, the new happened September of last year. And now they're saying, I need 6% more than I had last year. And that's the kind of thing we have to get control of. And so the job of budget chief, the hardest part of the job is your other colleagues. Say no, right? Yes. This is a sign that says no on my door. It goes up as I come back from Christmas vacation. It just says no. And it stays there until the budget is adopted. Well, and as you say, I mean, that sounds like those are problems that arise from the best of intentions, but it's really a process issue, right? It's figuring out what is the right process to ensure that those great initiatives are funded and that things are prioritized appropriately. And to me, what I hear on the ground, I'm in the position where I'm the one who goes out to do the pre-budget consultations. And I'm the one who hears from people all year round. And for many people in Toronto, they just want what we've committed to doing now to be done properly. And we face a lot of challenges doing that. And they would just like to see the thing they've come to expect every year to go off without a hitch. And I really think the city needs to just focus on that for a couple of years. Certainly what people said when we had that unprecedented sort of midterm election for a mayor was a lot of what we heard from people. Please fix things. So let me ask about one other idea. So we talked a bit about the city and how the city manages its own finances. The need-- and there clearly is a need for the province and federal government to step in and provide more support as well. But another thing we think about here at the board is how there might be opportunities to leverage more institutional capital or pension funds or those sort of organizations to help with the real capital backlog we have here in the city of-- making sure we're getting enough transit built, all those infrastructure pieces that you spoke about. Do you think there's an opportunity for the city to leverage more of this sort of institutional capital to help with some of that funding backlog? And if so, do you have an idea of what that might look like? Well, I think that the first step is in really just not having that knee-jerk-no reaction to any kind of blended model or partnership. In the early days of public-private partnerships, they weren't really-- they didn't really work out for the city of Toronto. We didn't do a lot of them because we already privatized the execution of our capital. And we have a pretty good lending rate. Oftentimes, our credit rating and our ability to borrow is better than the provinces because we're not allowed to run an operating deficit. We have to balance it every year. And so we get a really good rate. And so we would run something up the flag pole with the precursor to the Canada Infrastructure Bank and others and try to look at doing a P3. And it didn't actually pencil out because we already had a very attractive financing rate. But we do have a ceiling on how much debt we want to incur. And we also got stopped at the door because we're saying, if anybody comes in to do business with us, boom, OK, you take 100% of the risk. And those models are challenging and not penciling out around the world. And so we're now, to my mind, a tipping point where different models are being explored that do work for cities. And we're going to have to open our mind to looking at them. And we can do them in partnership with the province. We do have a good relationship with the province right now. And I know that both governments are controversial for this reason and that reason. Whatever is the issue, does your for the public, science center, whatever, those types of things come up. But by and large, we have a good relationship. And so if there's a model, and part of having these new deal conversations means we can all sit around a table, Ontario infrastructure, City of Toronto, CreateTO, and some private partners and look at what is a model that would work. What is gained by each of the people here? Let's be honest about the gains that can be made and be prepared to distribute those so that it is doable for the city. Because we're at a point where I think the partners, the pension funds, et cetera, they want this city to work. They need it to work for all of their other business interests. So their reason for investing is not just, we might be able to make some money on this deal. It's, we need this city to work. Please let us help. And I think you have to listen to that. Exactly. And at the same time, they're looking at their balancing projects in Toronto, potential projects against projects they see all over the world. So they do have also a certain duty to their shareholders and members of their pensions to make sure they're getting those returns. But some of the best examples are in these really progressive European cities and northern European cities and that kind of thing. I think public-private partnerships has taken on a bit of a-- or has gotten a bit of a bad reputation, that phrase. But it actually can mean such a diversity of things. Yes, that's the thing. The initial iteration of it had some failures and was very sharply defined. And now there's really quite a menu. And some of it might be a fit. And so I think we can't close the door in that conversation. We have to open the door, have the conversation, and find what fits. Because we've reached the point where some of the things we have to do are just so enormous, I don't think anybody would expect a city to be able to do it on its own without partnership. Right. What else are you looking forward to in your role as you look forward over the next year or two? Well, you know, I really think that this is why I welcome the talk we're going to have at the border trade. And this month, as people are just starting to turn their mind to it, at the end of the year, there'll be another budget. I really want to talk about not just what's the budget, what's the property tax increase. And please let it be over. I really think that the budget process will become a thing that all year long is a conversation. But what is our potential? What do we have to do to get there? And really begin to talk about it. Part of developing our economic development plan with business partners, we had an advisory group, really just some top-flight people, and then branched out so that we were consulting with business interests that are more suburban-based as well. So it was really, really making an attempt to be reflective. But in those conversations, what we were learning is that a lot of businesses, they wish the city would do more for them directly, did not know our financial situation. You're building a business, you don't have time for that. And if you're at a very high level, you may not know what the fundamentally primitive structure is for cities in Canada. Goldie Heider, the head of the Canada Council on Businesses, hadn't really turned his mind to it ever before. He's busy nationally figuring out the economy. So we made part of that exercise. Two sessions that we had with that big advisory group was explaining where the structure deficit is in the city's finances and the overall effect of the pandemic. They had no idea. It's been printed in journalism, but we all have to make our choices what we're going to read. And so I keep saying they literally had the look of all of them being gobsmacked by the end of the first presentation. And to a man, their response was, what can we do? How can we help? So I think they not only want to partner with us so we can get things done that they now know we really can't do on our own. They also want to advocate for us. And that's a really important thing right now. As we start the part two new deal, we have an entire corporate community that wants to advocate for solve this problem for the long term. And that we haven't really had as heartfelt as we have it right now until this moment. I think that's right. And there's just a growing appreciation, too, of the role that cities-- and as you said, a mega city, like Toronto-- it's going to play as our economies transform. And as more and more people move to the cities, these really become sort of the locus of our economy. And that comes pretty natural to us here at the Toronto Region Board of Trade. It's right to our DNA. But I think you're right that the national conversation as well is getting more and more appreciation of that. Yes. Yes. It's not-- when you're doing really well, everyone hates Toronto. But people really do understand that if we can't figure out this new world of work and we can't make this city hum, then whatever they're trying to achieve in the other 10 largest cities of Canada and beyond down to the medium size, then no one will really achieve it. And so people really are doing a lot of talking, comparing notes from city to city. We're very active in those conversations. The mayor very much so in the big city, Mayor's Caucus. But in all of these conversations, what I'm finding is people are turning to the businesses in their central business district in particular and the rest. But particularly in the CBD, it's to say, we've got to figure out what you are now. In this new world, what are you and how do we make sure we keep you vibrant? Because the city depends on it. Well, a final question for you, Councillor. What are you reading or listening to right now that you think you'd recommend to our audience? Well, lots has been printed about my music tastes because they're pretty broad. But I have become addicted to podcasts now. And I'll confess that recently it's been pretty American. Never miss the John Stewart Weekly Show because it's been getting through what's going on in the United States. And it really matters to us. We're now all biting our fingernails as to how this is going to affect the Canadian economy. But I'm finding that with podcasts, I can catch up on the things that I haven't been able to read about. I'm as guilty as those businessmen. I'm so quick to look up all the municipal articles. I lose track of national--[MUSIC PLAYING] That's all for this episode. Thanks for listening to Toronto Talks. Make sure you subscribe on Apple Podcasts, Spotify, or wherever you listen. And don't forget to keep talking Toronto. Our voice drives meaningful change.[MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][MUSIC PLAYING][BLANK_AUDIO]