Nov. 20 (Bloomberg) -- Toronto Mayor Rob Ford’s crack scandal is beginning to weigh on the city’s finances, driving up borrowing costs and threatening to delay fixes to North America’s second-worst traffic congestion.
The extra interest Toronto must pay to borrow from the bond market compared with federal government benchmarks rose four basis points, or 0.04 percentage point, to 94 basis points since city council urged Ford to step aside after he admitted to smoking crack cocaine. During the same period, borrowing costs in the broader Bank of America Merrill Lynch Canadian Provincial & Municipal Index fell one basis point.
“Anybody who is outside the city or outside the country may just want to clean up their portfolios before this thing gets even uglier,” said Hosen Marjaee, senior managing director of fixed income at Manulife Asset Management Ltd., which manages C$16 billion ($15.3 billion) in debt, including Toronto bonds. “I’m not worried about the city or city finances or the ability to pay its debt, I’m worried about the negative press it’s getting, and inability to move on.”
The crisis at city hall has escalated since the first news reports by the Toronto Star and other media six months ago that the mayor had been caught on video smoking crack cocaine. Ford refused to step down after admitting he used the drug, and that he purchased illegal drugs while mayor.
Ford’s admissions have dominated debate at city council this month, leading councilors to cut Ford’s staff and budget, and remove his powers to lead the executive committee in Canada’s biggest city.
“I think the worry would come when the city stops being able to function,” Marjaee said by phone from Toronto. “If the city council gets consumed by dealing with the mayor and people stop paying attention to what they have to do on a day-to-day basis, looking after the affairs of citizens -- then it becomes a problem.”
The extra interest investors demand for Toronto’s 3.5 percent bond maturing in December 2021 compared to federal benchmarks increased 15 basis points since Nov. 12, when the council began working on motions asking Ford to step aside and stripping him of powers, according to Bloomberg generic prices. The spread between Toronto’s bonds and federal government benchmarks reached its widest this year on Oct. 29 and has narrowed since, before widening out again over the past week.
“Mr. Ford has brought dishonor to public office, the office of the Mayor and his city,” said Jason Kenney, the federal minister of employment, in Ottawa yesterday. “He should step aside and stop dragging the City of Toronto through this terrible embarrassment.”
Several of Ford’s mayoral duties now rest with Deputy Mayor Norm Kelly, though no leader will have a democratic mandate to lead the council until new city elections in October.
“Toronto elected the most dysfunctional and incompetent and anti-urban mayor in modern history,” said Richard Florida, a professor at the University of Toronto’s Rotman School of Management and author of “The Rise of the Creative Class.” “These costs may not be seen in the short run but show themselves in the long run. The biggest cost is the opportunity costs of investments and decisions deferred.”
The turmoil at council comes as Toronto looks for ways to ease what the Toronto Board of Trade estimates is a 66-minute average commute, the longest in North America after New York.
The city is in need of new transportation infrastructure to cut down on the gridlock, which costs the Toronto region C$6 billion annually in lost productivity, according to a report from Toronto-Dominion Bank. That number could grow to C$15 billion per year by 2031, according to the report, citing Toronto Board of Trade figures.
Mayor Ford won support from city council for a tax increase to fund a subway extension to the suburban neighborhood of Scarborough, which will be partially funded by the federal and provincial governments.
However, the Toronto Transit Commission has warned that extending the subway system further into the suburbs will result in “significant overcrowding” on the city’s main subway artery along Yonge Street by 2031. The only way to solve the problem is to build a “downtown relief line,” according to the commission. That proposal is currently being studied by the city planner.
“I would characterize the challenges the city faces as urgent,” Derek Burleton, deputy chief economist at Toronto-Dominion Bank, said by phone from Toronto. “Not only is there a leadership void but the attention of the city council has been diverted. This is not helpful to the city in addressing its challenges.”
Toronto’s economy also faces challenges as the housing boom which helped power its economy slows down. Though Toronto had more housing highrises under construction than any city in North America last year, construction is beginning to slow.
Total housing starts in the first nine months of 2013 fell 36 percent from the same period last year, while residential pre-sales in the Greater Toronto Area this year are the lowest for the past decade, according to a Nov. 12 report from the city. Resale home prices in Toronto are forecast to rise 2.4 percent this year and 2 percent in 2014, according to a Conference Board of Canada report yesterday.
Still, the city’s finances are among the soundest in Canada. Ford ran in 2010 on a promise to “stop the gravy train” at city hall and last year under his leadership Toronto cut spending for the first time since it was amalgamated with five surrounding suburbs in 1998.
The mayor has touted his economic record throughout the scandal, saying no money has been squandered and he continues to fight to cut spending and lower taxes. The city’s net debt to total revenue is 37 percent, compared with an average of about 65 percent to 70 percent for Canadian cities, Moody’s Investors Service said in its annual review on the city, released in May. The large, diversified economy, home to the country’s biggest banks, is a source of credit strength, Moody’s said.
Moody’s rates Toronto’s debt Aa1, the second-highest rating.
“It looks like council has been able to take the decisions to ensure the city is still functioning and operating,” said Jennifer Wong an analyst at Moody’s by phone from Toronto. “Council will set the direction of the city but a lot of these structures are already in place.”
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