The question of a “fair” allocation of TTC revenues between the farebox and subsidies comes up quite regularly, often at budget time, but now also in the election campaign.  Some argue that the riders don’t pay enough, while others argue that they pay too much.  Rarely does anyone look at the detailed figures.

The TTC publishes a statement, as part of the Chief General Manager’s more-or-less monthly report, showing a breakdown of revenues and costs.  The report linked here takes us to the end of May 2010.  (There are separate accounts for Wheel-Trans which is not part of this discussion.)

There are three sets of figures:  data for the current 5-week period (this interval is used to avoid variations due to lengths of months), year-to-date data, and full-year data.  These are further subdivided by actual and budget values.

On the income side, the total 2010 revenue is projected at $957.515-million against expenses of $1,412.034-million.  However, within the revenue, only $905.200m comes from the farebox, while $52.315m comes from other sources.  Charters and services operated under contract for transit systems in the 905 are on at least a break-even basis.  Although the expense of running them appears as part of the system’s total, this expense is completely offset by revenue (projected at $17.675m for 2010).

On the expense side, the total cost for subsidy purposes is reduced by two deferred items:  post-retirement expenses and accident claims.  These do not require cash outlays in the current year because they not be paid until future years.  This gets us to a net cost for operations of $1,368.684m and a projected shortfall of $411.169m.

The City has actually budgeted for a shortfall of $429.805m, but the TTC’s ridership and fare revenue held up better than expected in 2010, and the City’s full subsidy provision will not be required.  Any leftovers remain under the City’s control for year-end budgetary adjustments.

The deferred costs noted above are an accounting mechanism first introduced in 2006 for post-retirement benefits, and in 2009 for accident claims to ensure that the City transfers to the TTC only the cash that it actually needs to pay for current expenses.  Previously, deferred costs were included in the subsidy payment for the year they were accrued by the TTC.

This change reduces the City’s cash outlay in the short term, but creates a long-term payable for the City that will come due as and when the deferred costs must actually be paid.  The City hopes, of course, that the actual expense will be lower than projected and that they will pay in future, inflated dollars.

In future years, from the City’s point of view, there will be TTC-related cash outlays that are not part of the current TTC budget, but leftovers from previous deferrals.  Any discussion of a “rider’s fair share” must first determine whether the current TTC budget base will be used or the City’s version including the deferrals.  At some point, the deferred costs will start to come due, and this will offset cashflow savings from new deferrals in the current year.  Meanwhile, the accountants will have lots to mull over, and the politicians will be even more confused about TTC budgets than ever.

Using the full $1,412m projected TTC expenses for 2010, the breakdown of the cost shares is:

• Fares: 64.1%
• Contract services and charters:  1.3%
• Advertising:  1.1%
• Rent:  0.7%
• Commuter Parking:  0.6%
• Other Income:  .1%
  • Subtotal:  67.8%
  • Subsidy:  29.1%
  • Deferred:  3.1%

We hear a lot about getting the rider’s share down to 2/3 of the TTC costs, but this has already happened and, in fact, there has been a slight overshoot — riders now pay only 64.1% of total costs.  Meanwhile, the subsidy (current and deferred) is 32.2% coming, in 2010, entirely from the City.

A higher rider share has been suggested in some quarters, but the first question is “a higher share of what”.  Should riders contribute to the cost of contract services and parking lots, both of which have their own revenue sources?

If riders were expected to pay 75% of the total current expenses, this would require that fare revenue go up from 64.1% by 17%.  Miscellaneous revenue would bring in 3.7% leaving only 21.3% of the system’s costs to be recovered from subsidies.  This would take us back, more or less, to the Harris era of transit funding cutbacks.

A further complication with deferred expenses relates to pensions.  Like many organizations, the TTC’s pension liability is not “fully funded”.  This means that if the TTC were to go out of business tomorrow, there would not be enough money in the pot to pay out all existing pension claims.  However, the TTC argues that as a public entity, it is not going out of business, and should not be required to maintain a huge reserve to fully fund costs that would be paid out in future decades.  This matter is still under negotiation with the Ontario government.

If the ruling goes against the TTC, a very large infusion of cash from fares and/or subsidies will be required over coming years fully fund the pensions, but this will contribute nothing to service.  This liability would also apply to any agency that took over the TTC unless it was left behind as a “stranded debt”.

Vital in any of these discussions is the question of how big the TTC operating budget should be.  In many years past, growth in the dollar total was constrained to match available subsidies while keeping the percentages more-or-less at the target level.  This preserved the political fiction of good support for transit.  Service declines were obvious, but maintenance less so, at least in the short term.

The first question to answer is this:  what type and quality of service should the transit system provide?  What should transit look like?  We may not be able to reach that target in one budget year, but at least we would know how severe the shortfall is, and what tradeoffs are required.  Are we serious about providing greater mobility by transit?

Total system costs are affected by many pressures:

• Increases in the scale of operations.  More riders and service generate a requirement for more subsidy unless all new riders can be carried at zero marginal cost relative to the revenue they generate.
• Implementation of major new system components.
  • Opening the Spadina subway extension will add at least $10-million to TTC costs net of benefits to revenue.  At least in the short term, the majority of subway riders will simply shift from existing bus services, but they will receive a higher service quality for the same fare.
  • It is likely that the marginal costs for Transit City lines will be higher than current bus costs, if only because a superior service will be delivered both in capacity and frequency.  Metrolinx may pick up the tab, but this is not yet certain, and this only moves the cost from one pocket to another.
• Increase in materials costs, notably fuel and energy.  These factors go up (and sometimes down) beyond the TTC’s control.
• Increase in labour and benefit costs.
  • The last round of labour increases was imposed on the TTC by arbitration at 3% annually.
  • Some costs are driven up by changes in labour standards such as the maximum length of a work day.
  • Benefit costs are affected both by the terms of labour agreements, and by changes in costs from benefit providers.
  • It is possible that proposed legislation at Queen’s Park will freeze public sector wages for a few years, but this will not last forever.

Stirring all of this into a pot suggests that keeping the growth in TTC budgets to strictly inflationary levels will be difficult, let alone doing so while continuing to expand the system and provide improved service.

I have deliberately left out various forms of privatization.  Even assuming there would be a saving, that is only a short-term benefit.  Future transit costs will rise, just starting from a lower base, and we will have the same debate about fares and goals for transit service all over again.  It is important that we know what those goals are.  I’m not saying we should ignore the privatization debate, but we need to know whether the purpose is to reduce subsidy costs, temporarily freeze fares, or provide equivalent or better service for the same outlay.

Many groups call for fare concessions.  Just this year, student fares have been extended to adults although many are excluded because they are in short-term or non-degree programs.  Mayoral candidate George Smitherman proposes free travel for seniors between 1000 and 1400.  Some groups call for reduced fares for those receiving social assistance.  Some advocate a move to fare-by-distance or fare-by-time, as well as integration or co-fare arrangements with neighbouring transit systems.  At the most extreme, some even call for free transit.

Fares will almost certainly rise, and this should happen on a regular basis, not every two or three years when budgetary crises force the issue.  Creating a new concession fare will isolate some riders from the effect, for a time, but a lowered fare is not a frozen one.

All of these proposals deserve debate so that we can understand the benefits, costs, and relative merits compared with other service-related changes.

In the next article, I will turn to the mysteries of TTC subsidies and the competing claims about how the TTC is funded by various governments.