Toronto Mayor Rob Ford's admission that he used crack cocaine has caught the attention of the world's news media. But could the turmoil at city hall actually hurt the city's finances?
A Bloomberg News report on Wednesday suggested that bond investors were starting to take a second look at the issues swirling around the city's controversial mayor – potentially affecting the interest rate Toronto would have to pay on future bond issues.
The story reported that since Nov. 12 – the day before Toronto city council urged Mr. Ford to step down – the spread between Toronto's bond yields and those of "federal government benchmarks" rose 0.04 percentage points, while an index of provincial and municipal bonds fell by 0.01 per cent.
In the media frenzy over the mayor's drug use and other behaviour, the story bounced across Twitter and was posted on newspaper websites. But a closer look at the data shows that the perceived risk of investing in Toronto's debt has barely changed at all, despite fears that the circus inside City Hall has weighed on investors.
The Bloomberg story suggests that the yield on Toronto's 3.5 per cent bond, which matures in December 2021, had pulled away from "federal benchmarks" by 15 basis points since Nov. 12, the day before city council voted on the first of its motions to censure Mr. Ford. But it is unclear precisely what benchmarks are being compared.
In fact, an examination of the yields on a City of Toronto bond that matures in 2021 and the comparable benchmark federal bond suggests that investors were unmoved by the Ford saga, which has also included allegations of drunk driving and sexual harassment. And even if the yield differences between several Toronto bonds and several federal benchmarks average out to 0.04 per cent, the shift is so small it is insignificant.
Toronto's bond yields also moved largely in step with those of other Canadian municipalities. Since Nov. 12, Vancouver's comparable bond yield moved in close proximity to Toronto's.
If investors were truly worried about the city's financial state, its bond yields should have gone up, not down. But they now yield 3.383 per cent – slightly lower than the 3.438 per cent it was paying on Nov. 12. The yield on a city bond due in 2023 also fell.
The muted impact on bond markets shouldn't surprise anyone, as the scandal really does not involve the city's finances.
Toronto's city council has always had the power to pass and amend its own budget even without the mayor's support, who has now been stripped of many of his powers to influence council's agenda. He retains his one vote on council.
The city is also banned by law from borrowing to cover an operating budget deficit, meaning it must balance its books every year. It takes on debt for infrastructure projects and other capital costs.
Credit ratings agencies have consistently praised the city, with Moody's giving it an Aa1 crediting rating, the second-highest, and praising its relatively low debt load, broad tax base and fiscal discipline in a rating reaffirmed in August with a "stable" outlook. Moody's said Wednesday it has no plans to revise this rating in the near term.
The city's credit ratings have remained largely unchanged since long before Mr. Ford took office. The city also enjoys an AA credit rating from Standard & Poor's.
A city spokeswoman says the municipal government's financial outlook and borrowing costs remain unchanged.
"The City of Toronto interest rates remain stable in relation to the underlying Province of Ontario bonds and in relation to other municipalities," city spokeswoman Wynna Brown said in an e-mail. "The City's debt issuance syndicate of banks has also indicated that investor demand for municipal bond issues continues to be very strong."