Monday, 23 January 2012

Your January 2012 Executive Committee Preview

Rob Ford at an Executive Committee meeting, presumably telling a deputant to live long and prosper. 
So Tuesday brings us another Executive Committee meeting and there's several items on the agenda that will generate interest. There's also one item that will be introduced at the meeting, as Michelle Berardinetti will put forward a motion to encourage local businesses to apply proceeds from the five cent plastic bag fee  towards protecting Toronto's tree canopy. 

The item that will generate the most interest is on selling TCHC homes, and there are also motions on Dave Meslin's Fourth Wall and Occupy Toronto that are of note. 

TCHC Motion:

The TCHC motion to sell 675 standalone homes will begin at 1:30pm and will be the most contentious of the day. 

The administration argues that there is a backlog of capital repairs ($650M) to be done on TCHC housing and the standalone homes are the worst of the lot. These homes are also relatively high-value (they're right around the city averarge for home values in the mid-$400,000s). City staff figure that selling 675 homes would generate somewhere in the neighbourhood of $330M after fees. 

But there are significant downsides to the plan. While a number of the existing houses are in dire need of repair, some are perfectly fine and so amount to a decrease (or cash-in) of the existing housing supply. 

This comes at a particularly bad time. There are currently 81,000+ on the waitlist for housing and this grows each year. Over the past three years the number of new tenants coming into TCHC housing has declined from 4,266 to 3,733 to 3,300, indicating that lower turnover will cause the waitlist to grow longer. The reduction of the proposed sale units (as current tenants will be relocated) will further exacerbate this problem. 

Moreover, there are questions as to how much such a big sale will actually help. The proposal at hand suggests using the $330M as an endowment of sorts to be invested in a a safe investment like an annuity that would protect the principal. The interest earned would then be used for capital repairs, but this is paltry next to the city's claim of $650M needed for repairs.

The assumed discount rate of 5% from an annuity would generate an estimated extra cashflow of $12M, hardly the big dent in $650M that is needed. 

$12M is a decidedly optimistic number, even if the document refers to the 5% discount rate as 'conservative' (the Bank of Canada currently has the 30-year bond yield at 4%, which is a big difference). The sale proposes a phased approach to sell homes (which makes sense) but assumes the real estate market will remain as robust as it currently is. Given that Toronto is the hottest market in North America, it might be prudent to price in a correction as well. On the other hand, if you ever wanted to sell fixer-upper homes, then doing so at the top of the market makes most sense.

Additionally, many of these homes are in clusters (like wards 30 and 32, which combine for more than 200 of the 675). This creates further problems in selling as there is limited demand in any given area which will cause prices to drop in the area, and not just for TCHC homes.  

Lastly, the $12M number is derived by mixing operating and capital budgets together (sound familiar?), as seen in the table below:
A hat tip to reader Rowan Caister for pointing out question marks here. 
The problem with mixing up operating and capital in this case is that the capital expenses (like capital repairs) are declining and terminal while the assets like rental income from the property are ongoing and growing (within limits). This has the effect of further exaggerating the net value of the cash flow in the table in addition to the above points. 

If the annual income derived from selling 675 homes is in the neighbourhood of $8-12M (to be conservative), then legitimate questions do arise about whether the sale is really a remedy for repairs or a way to decrease housing in the spirit of 'smaller government,' as the City Hall letterhead says.

There are structural problems in TCHC homes, but moreso there are structural problems in the relationship the city has with funding housing (both with the province and tenants). Having an extra amount of money on hand sounds enticing, but it's not the detailed blueprint the TCHC needs to build a better foundation for public housing in Toronto.

When I covered the Scarborough budget town hall a couple of weeks ago for The Grid, I was surprised at the turnout to oppose the proposed 10% privatization of TO Hydro. 

Scarborough receives a disproportionate amount of brownouts and residents were concerned these would increase if a private company would focus on profits more than people. 

TO Hydro is in a tough spot. The Ontario Energy Board recently ruled that they could not raise their prices in response to what TO Hydro felt were growing fiscal challenges (TO Hydro has since asked them to reconsider). To reduce costs TO Hydro has fired hundreds of contractors, as they need the money to invest in infrastructure. 

However, this motion does not propose that the proceeds fund TO Hydro. Instead, any money from a sale would go to the Capital Financing Reserve Fund to offset future debt issuance. In other words, it's taking money from one area that needs it now to save it for a rainy day. 

Knowing what kind of return TO Hydro would generate is difficult. The Committee doesn't discuss that kind of financial information in public, but utility companies have relatively low and stable price to earnings ratios and are comparable to bonds in some respects (a steady stream of reliable income). However given TO Hydro's state its discount rate would be lower than usual. 

A number of councillors- including centrists- have expressed reservations about selling 10% of TO Hydro, so it could be a hard sell at Council. There's also the legitimate concern that without investment in the organization TO Hydro's dividend will freeze (which has been budgeted for) or even fall (which rarely happens at companies and is a sign of big trouble). 

Josh Colle, with his newfound superhero status, background as an energy executive and board position on TO Hydro, could play an interesting role in this. 

Dave Meslin's Fourth Wall/Civic Proposals:
I'm planning on writing more about this later, but this is a motion that is heartening. For the past couple of months activist extraordinaire Dave Meslin has hosted a collection of proposals at 401 Richmond to promote civic engagement. They run the gamut from ranked balloting to voting on weekends to wifi in Council (already achieved, woot!) 

Meslin's motions are being forwarded by Paul Ainslie, who visited the Fourth Wall exhibit (several other councillors have too). I tend to deride Ainslie a bit as being too much of a follower and not enough of a leader, but on this he deserves credit. It's easy to say you think an idea is interesting but it's harder to attach your name to it, and he followed through. 

Of course credit goes to Mez too, who continues to work within and outside of institutions to great effect. This motion will study a variety of the proposals without a commitment to them, but it's still an example of the political process working. 

Plastic Bag Fee Motion:
Michelle Berardinetti has been looking for additional revenue sources and she will add this item to the agenda tomorrow. The item is to encourage businesses to direct the five cent bag fee toward the city fund to protect the tree canopy. 

The five cent fee has been a pet peeve of the Toronto Sun for some time, and they've done favourable reporting on Berardinetti's idea.

No business could be forced to comply due to the fee's legal structure, so this would just be a case of moral suasion. That's a good enough tool to use when you need to although it's pretty difficult to pull off too. 

After all, companies either like to keep the money or donate it to existing charities that fit in with their existing branding. 

So the challenge for Berardinetti's idea to be successful would be to package the branding of directing money towards the city's tree canopy as something that's appealing and noticeable for company's to take part in. Whether this is leveraging the idea of supporting local goods and the environment or connecting the idea of trees and healthy living, there's some room to work with there but it's not an easy task. At council, the challenge for Berardinetti will be to frame it in a way that all sides will like, something like, 'We need to give the private sector the opportunity to contribute to the public good.' 

Additionally, the five cent bag fee is something that Rob Ford mentioned in year end interviews he might like to get rid of. So if there's little take-up on Berardinetti's idea it could be used as a further argument to cancel the fee by saying, 'See, companies just want to keep the money.'

It's worth mentioning that the fee has been incredibly effective for its purpose of reducing plastic bag use. Reports have bag use at 70% less than before the fee, as this Toronto Star editorial points out.   

Motions that will Likely Fail
There's also two motions that were referred to the Executive from Council, and so they will die here. Those are Gloria Lindsay Luby's motion to declare EMS an essential service (currently in lockout or strike situations only 15% can be off the job at a time, but this hurts response times). 

Another motion is to 'endorse the peaceful protests of Occupy Toronto.' It might make for some interesting deputations and responses from the Executive but will go nowhere. 

And lastly, there's a motion from Kristyn Wong-Tam and Glenn de Baeremaeker to exempt Toronto from the implications of Canada-EU trade talks. It won't pass, but de Baeremaeker outdid himself on an awesome prop once again, this time a gift left outside City Hall:

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