October 3, 2009 : THE GLOBE AND MAIL

Toronto's $2.8-billion Doomsday Clock is ticking

by Marcus Gee

As David Miller prepared to announce his decision not to run again for mayor, his critics were aiming one final rotten tomato at the back of his head. They accused him of covering up an accounting error that understated the amount the city owes its employees for future sick-leave payouts by $200-million.

Lost amid the fuss about this phony scandal was a much more consequential figure: $2.8-billion. That is the amount that the city is expected to need to cover all its future payouts to employees – sick leave, leftover pensions, worker’s-compensation awards and health benefits. It adds up to more than $1,000 for every man, woman and child in the city and it is growing fast. The city’s overall benefit liability is rising at roughly $100-million a year.

Councillor Mike Del Grande, an accountant by training, calls it a “ticking time-bomb.” He argues that while everyone gets excited about the mayor and the $200-million, they are missing the real story: The city’s failure to grapple with its soaring liabilities.

There are no Watergate plumbers in this story. It has little to do with Mr. Miller. Instead the fault lies with a generation of short-sighted civic leaders who conceded generous benefits and pension plans to civil servants without considering the eventual cost.

In past years, says Cam Weldon, the city’s chief financial officer, “It was easy to say, ‘We’ll give them a benefit here and a benefit there and take care of it in the future,’ so these things built up over time.”

Now, things are coming to a head. Cities across the country are facing escalating benefit costs, the result of an aging population, rising drug costs and costly modern treatments. Retired people are living longer, spending more to preserve their health. Toronto officials note that health-care inflation is running at an industry average of 15 per cent a year.

Toronto’s sick-leave liability alone stands at $467-million – the amount it will have to pay out to retiring police, firefighters and other city employees when they cash in the unused sick days they have banked over the years.

Some day, somehow, someone will have to pay for all this. But like a schoolboy kicking a can down the road, the city keeps booting its financial obligations into the future.

As long as Toronto keeps up with its current annual pension and benefit payments, it can persuade itself not to worry about the long-term liability and leave the problem for future governments and future taxpayers. “The election cycle is a short time period and they don’t think about the future,” laments consultant Bruce Hollands, a former vice-president of the Federation of Canadian Municipalities. “Everyone’s got their head in the sand.”

In the private sector, employers have to worry about what it’s going to do to their stock value or credit rating if they have big liabilities hanging over them. The market is always asking, “Is there a risk this company will fail?” But the great thing about being a government is that you can never go bust. No matter how poorly you manage your affairs, your creditors know you will stay in business indefinitely. They also know that if you find yourself in a hole, you can always get the taxpayer to haul you out.

That means less pressure to cope with the liabilities problem. Toronto does not even bother to put much money aside to deal with them. Its employee benefit reserve fund, intended partly to cope with sudden surges in demand for benefits, stands at only about 10 per cent of its total liability. Most large Ontario municipalities put aside from 15 per cent to 45 per cent.

A city report last year said Toronto was “significantly under-funding” its liability. Though council has vowed in the past to boost the reserves, it has instead dipped into them to pay for things such as wage settlements.

The city insists it is taking steps to wrestle with its looming liabilities. It did away with bankable sick leave for non-union employees and is phasing it out for unionized staff as part of the settlement of the summer strike. It is striving to reduce worker’s compensation by pushing injury-reduction measures.

But going further will be tough. Try wresting bankable sick leave from the police or firefighters’ unions; or raising the retirement age and de-indexing city workers’ pensions.

It’s much easier to keep kicking that can down the road and let others deal with it.