Like the U.S. government, major cities such as Toronto also have to manage their budgets within the constraints put in place and need to take care to not exceed their debt ceiling.
How it Works
The point of a capital budget for a city is to allow it to use debt to fund long term projects over their expected useful life, in much the same way as companies depreciate their capital assets. This in turn gives the city a certain amount of flexibility when deciding which major projects to fund and how exactly those funds will be raised.
This process is similar to that used by countries and companies as it relies largely on the city’s credit rating and its total amount of outstanding debt. In Toronto the debt ceiling is set by the City Council and is currently restricted to 15 percent of the total income generated from property taxes which gives a debt ceiling for 2015 of $447.4 million.
Based on current projections, Toronto is likely to hit its debt ceiling by 2019 as there are a number of large infrastructure projects pending. Assuming that those projects go ahead, rather than being shuffled around for another administration to deal with, the projected need for borrowing will end up at 14.41 percent by 2019, up from its current level of 11.61 percent. This would put the city in a dangerous financial situation as it would have little wiggle room if anything else major happened in the meantime.
While of course, the City can alter the rules at any time and increase the debt ceiling this would potentially affect its AA credit rating, making its funding costs for debt more expensive. This leaves only two options, both of which are unpopular. One is to raise property taxes which would in turn increase the debt ceiling, or to continue to delay much needed capital and infrastructure projects. In the end this will come down to the political ramifications and whether the City Council can act in time.