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In times of plenty, it can be easy to forget there may be leaner years ahead.
But Toronto city council and its city managers need only look westward for a cautionary tale about relying on a volatile source of revenue; here, it's the municipal land transfer tax — but in Alberta it was oil.
Plunging oil prices have taken their toll on provincial revenues — down to $1.4 billion this year, from a high of more than $10 billion. That's a glimpse of what could happen in Toronto when the housing bubble eventually bursts, real estate economist Frank Clayton says.
Unless, however, we choose to follow Norway's example.
The Norwegian path
The oil-rich Scandinavian country has invested its energy revenues in a sovereign wealth fund since 1996, which now tops more than $1.158 trillion. Typically, the government can draw up to four per cent from that fund each year, slightly more than its annual 3.7 per cent rate of return, according to Norges Bank Investment Management.
And when the economy dipped last year, the country weathered it easily, taking its first-ever capital transfer from what Clayton dubbed its "rainy day fund".
Norway's sovereign wealth holds lessons for Canada
"So now that oil prices have gone down, Norway's got assets and it's producing income," the Ryerson University professor said. "So the message to Toronto is, 'Don't spend it all.'"
Instead, Clayton suggests looking at the average revenue earned from the municipal land transfer tax in the last four years — $421 million. Anything earned on top of that figure, should be stored in a reserve for less profitable years, he said.
Toronto construction noise
Real estate economist Frank Clayton says some of the money from the housing boom should be put in a reserve for when the market cools. (Aaron Harris/Reuters)
The city had been expecting to earn $485.6 million from the tax this year, roughly $40 million of which was earmarked for the capital reserve fund. But higher home prices had municipal staff change their projections; now they expect to earn $540 million this year.
But although that's more than three time what Toronto earned in 2008 when the tax was first adopted, the city has no plans to put more than that in a reserve, the chairman of the budget committee, Coun. Gary Crawford, said Friday.
That's because the city's costs have grown faster than its revenues. And it relies on the funds from the land transfer tax to bridge the gap, Crawford said.
'Free rider on a real estate boom'
Toronto's city manager has warned council that it cannot count on the money indefinitely. It's a source of revenue that's at the whim of the market, Peter Wallace told the executive committee last December.
"In very practical terms, the city of Toronto has been a free rider on a real estate boom," Wallace said then. "If that tax did not exist, the city of Toronto would have gone through the fiscal wringer a long time ago."
And although the market's still scorching, with the realty firm Sotheby's predicting that Vancouver's foreign buyer tax will send investors eastward, Wallace and other economists know that at some point it will cool — and the city won't see a long-term benefit from the boom.
Cutting costs
Crawford said he thinks both council and the budget committee are heeding Wallace's warnings. Next year's budget will focus on cost-cutting and council and staff are meeting this fall to look at new ways of generating revenue.
But he said he doesn't expect to see council saving much from the municipal land transfer tax. In theory, however, he said that a reserve fund is a good idea.
Initially, the city stored about 25 to 30 per cent of that tax revenue in a reserve, Crawford said, but in recent years it's saved less than 10 per cent of what's been collected.
Toronto Coun. Ana Bailao says the city should invest some of the land transfer tax revenue into affordable housing initiatives. (CBC)
Affordable housing
A way to rein in spending would be to connect the cost to the source of revenue, Coun. Ana Bailao said. And in this case, there's a natural connection between the municipal land transfer tax and investing in affordable housing, she said.
Vancouver plans to use the revenue from its 15 per cent foreign buyer tax on housing initiatives. Since the city is benefiting from high housing prices, it makes sense to use some of that for those unable to find affordable homes, Bailao said. Right now, the Toronto Community Housing Corp. has an average waitlist of about four years.
"I believe that as we introduce revenue tools we should be tying them to certain areas and projects," she said. "And I think housing is an area that needs something going towards that."
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