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In the end, Harris could help Miller

Toronto Star - February 20, 2006
by Royson James


This is the story of how former Ontario premier Mike Harris gave the City of Toronto an asset worth $1.6 billion in 1999 and how that stupendous gift could help Mayor David Miller avoid breaking a key campaign promise in an election year.

It's a tale of how the city "loaned" Toronto Hydro $980 million without actually giving the utility a penny, and how the utility must pay back the "loan" in real money by 2013. And how the annual interest on the loan, as well as annual profits, amount to more than $100 million this year.

As well, if the city's budget hole is not substantially filled by the province, Toronto could force Toronto Hydro to repay up to a third of the loan this year and use the cash to keep taxes low.

The city's finance staff and budget chief David Soknacki prefer to raise property taxes up to 6 per cent to fill the gap. Miller, who promised to keep taxes at around inflation (2 per cent currently) doesn't want to break his promise and prefers to call in a portion of the Hydro loan, if he has to.

Miller is expected to meet with Premier Dalton McGuinty this week and we'll soon know how much of the $300 million budget gap McGuinty will fill. If it's only $100 million or less, a small tax hike won't cover the shortfall and we could face a showdown at city hall over the use of the Hydro money.

No one at city hall relishes the showdown. They see the Hydro money as the city's last hedge against bankruptcy. What no one ever sees is their way clear to thanking Mike Harris for what is, in effect, a huge inheritance from someone considered a deadbeat dad.

Harris is reviled in these parts for amalgamating the six municipalities of Metro Toronto into one Toronto, beginning Jan. 1, 1998. The former premier is rightfully excoriated for destroying the hasty marriage when he downloaded hundreds of millions of dollars worth of costs in a service swap that proved anything but revenue neutral, as he had stated.

So it's not uncommon around city hall to hear hisses accompanying any utterance of the ex-premier's name. Rarely, if ever, is a good word said about the man. And certainly no one says thanks for the Great Gift: Toronto Hydro.

In 1998, Harris restructured the province's electricity business by turning over the distribution arm of the company to cities and towns. Up to then, the hydro commissions operated as non-profit businesses, where profits were used to keep electricity rates low.

The new rules made Toronto Hydro, for instance, a city-owned corporation whose profits belonged to the city. The immediate result was higher rates — in essence, a hidden tax — that went directly to municipal coffers. But more on that later.

By 1999, the Toronto Hydro Commission had all of its assets eliminated and turned over to the City of Toronto. Across the province, some $6 billion worth of hydro assets were given to municipalities. Some municipalities sold their gift and took the money. Toronto chose to keep Hydro and run it as a for-profit business.

Because the new company, though essentially the same old company, had its operations collapsed, it legally had no poles, power lines, trucks, transmitters or employees. The assets, assessed at $1.6 billion, now belonged to the City of Toronto. And although Toronto now owned Toronto Hydro, the new company had no money of its own. It was faced with borrowing to pay for assets it once had but which were now turned over to the city.

Enter the ingenious paper transfer of money and equity that continues to benefit the city every year.

Robert Hatton, manager of business investment and inter-governmental finance for the city, explains it this way: "The city didn't give them a billion plus worth of stuff ... and they didn't have any money, so we loaned them the money to borrow the stuff off us."

Hydro said to the city, "For the first $1 billion, we'll owe you. For the next $600 million, we'll issue you shares to cover that $600 million." And because the city is the sole shareholder, it gets all of the profits, estimated to be $38 million this year.

Then, Toronto Hydro pays interest on the "loan" at a rate of 6.8 per cent per year. Last year, the interest totalled $67 million.

So then, the hated Mike Harris turns over the assets of a profitable company to the city.

To continue operating, the company must borrow money from its new owners to cover the cost of some of the company's assets. And it issues shares to cover the rest. The new owner, the City of Toronto here, gets a new company, annual interests and sure profits.

What's in it for ratepayers?

Less transparency, for one. Before Toronto Hydro was turned over to the city, profits were reinvested in the company and electricity rates were kept low. Now, profits are used to repay the loan to the city and to pay a dividend.

The city's new-found money helps to moderate property taxes. But it means higher user fees — a hidden tax — for consumers.

It's also set up this dilemma: If councillors call in the loan — council can cash in $330 million at a time — the money disappears in the city coffers, while the service costs remain.

Some councillors say this is akin to selling the furniture to pay the grocery bills. And the fact that Mayor Miller is considering such a move underscores the gravity of Toronto's fiscal crisis.


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