What’s a Fair Share?

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.

7 thoughts on “What’s a Fair Share?

  1. This is a very interesting read and sheds a lot of light into the budgeting choices that need to be made.

    This also reminds me how it never ceases to amaze that the so-called conservatives in and around Toronto politics, who want to build subways everywhere, don’t understand simple facts of the TTC’s financial situation. In the meantime, so-called “socialists”, like Steve is supposed to be, continue to provide the most fiscally prudent analysis.

    Steve for mayor?

    Steve: I have always believed that one cannot propose policy without understanding the underlying policy issues. If I want to see a better transit system, I have to convince people of my position, and work ten times as hard because I am not a well-paid career transit bureaucrat, nor a consultant, and am only just on the edge of being one of those civic worthies who has an opinion about everything.

    It’s not just a right-vs-left thing. Politicians of both flavours make statements with a dubious understanding of issues. Some, like David Miller, had a real scandal to deal with in his bid to “clean up City Hall”. Others assume that if you fire off enough vague, unsubstantiated claims, people will believe that some of it must be true and praise you for your bull-headed “honesty”.

    The person who can admit that they are wrong is stronger for it. The person who is always right is a fool and a demagogue.


  2. Too bad the amounts used for Mississauga, Montréal, and Vancouver weren’t shown for comparison purposes.

    Steve: These have been published before, but I am not sure that the numbers used reflect the same accounting treatment as the TTC’s report. Broadly, one can say that system “X” gets a better subsidy than system “Y”, but this may mask local treatment of accounts, and says nothing about service quality. It’s not just the dollars we pay through fares or taxes, but what we get in return.


  3. Wayne said: In the meantime, so-called “socialists”, like Steve is supposed to be, continue to provide the most fiscally prudent analysis.

    Ah, but there will be people whose definition of “fiscally prudent” differs from yours (and Steve’s). These are the same people that believe that roads have already been paid for (and magically require no maintenance or other upkeep). There are too many people that look only at the cost-recovery ratio and say that the TTC should have 100% cost-recovery in order to be “fiscally prudent.” Nevermind the $300M backlog we used to have for road repairs in the 416 alone, they don’t think that has anything to do with the TTC (even though TTC buses use the same roads as cars and trucks). It is people of this belief that far too many feel somehow obligated to appeal to.

    I do support the principle of a 100% cost-recovery target for the TTC, but there must be one very critical condition met at the same time for that to be even remotely practical, and that is that the road network also be subject to a policy of 100% cost-recovery in the GTHA.


  4. Karl raises an interesting question. What would 100% cost recovery for the Toronto road system mean? Do we in fact have it now since home owners currently pay through their taxes for upkeep of the roads. The problem is that this is a flat charge with no relevance to how much of the road system they use. A transit subsidy can be seen as a rebate to the transit user of road space he has paid for but not used.

    Steve: This may sound trivial, but again I must ask “100% of what”? The jump in fares needed to get to 100% cost recovery would be huge, and would be accompanied by widespread service cuts. Those “service class” workers who travel off peak would find that transit was even less friendly to them than it is today. Even then we would only be covering operating costs, not capital. Any discussion of transit and roads must look at a minimum at both budgets, not to mention the avoided costs in road construction, parking, auto operation, etc., which transit enables for people who would otherwise be forced to drive.


  5. My understanding is that cost-recovery refers to operations and maintenance elements. I thought that was the common understanding, but this is apparently an error on my part.

    If roads were required to have a 100% cost-recovery, that would be a huge “fare hike” on road use, even if you eliminated the gas tax at the same time, and many people who drive today would probably be unwilling to pay it when the TTC (or GO, for that matter) becomes even cheaper than it already is compared to driving. If that happens, TTC would see ridership surge. While some kind of change in the fare would be likely, I seriously doubt the fare hike would be “massive,” certainly not when compared to the road network “fare hike” since it is currently perceived as “free.”

    TTC wouldn’t have to cut services either, as they’d more likely be struggling to keep up. The hard part wouldn’t be the TTC reaching 100% cost-recovery, but meeting the surge in demand as existing infrastructure and fleet would be inadequate to accommodate that shift if the road network has to recover all its own costs (and I mean all, including road accidents (fire, EMS, police, and court admin), traffic signals, non-sidewalk-purpose lighting, road fare collection staff and equip, etc.).

    100% cost-recovery for the road network is an extremely unlikely reality, as it’s an epitome of political suicide. However, it would undeniably be a total game-changer and would easily restore the TTC to a profitable operation. If we’re a capitalist society, as we like to think we are, then we should have capitalist principles apply to our roads. That’s a dramatic cultural change, and challenges many (too many, in reality) to practice what they preach.

    I don’t believe that the best way to approach the problem is to make transit competitive with the road network by subsidizing it to death like the road network, I believe the best way to approach the problem is to stop subsidizing the road network to death and force the road network to compete with transit on a level capitalist playing field. Transit would come out on top by a wide margin if people actually knew, and had to pay for, the real costs of a road network up front like riders do for transit.

    Steve: When I talked about a big fare hike, it was based on the presumption that you would move to 100% recovery (about 50% higher than the current 64% paid by riders) and that any change in road pricing would be handled separately. If road pricing does go up, there will still be a bigger surge in peak demand than offpeak on transit, and this means we need a lot more infrastructure (including vehicles and their garages). This creates new operating costs that may or may not be overcome by better utilization of the system, hence a lower cost per trip, hence a recovery rate closer to 100%.


  6. In the meantime, normally, the cost of asphalt doubles in price every 10 years, but recently it doubled in 2 years. So the cost of new roads, replacement roads, and filling potholes is skyrocketing. That is why taxes are going up so much, to pay the roads where buses (and cars) drive on. Complain about the cost-recovery of asphalt? There are bus stops where the ruts are almost, is not already, scrapping against the bottom of vehicles.


  7. Another way of looking at this:

    The TTC is not a financial vacuum, for example you need to balance this in accord to the city budget as a whole. The fewer people taking transit, the more people are driving cars which means an increase in the car subsidies (more roads, more road maintenance, due to heavier use). Even that’s not all, think about the land dedicated to parking all those cars, less tax revenue there, and more expenses due to storm sewer runoff.

    Often politicians are known for spending $25 to save 25¢.

    Steve: There are additional costs of transit cutbacks. If people have to drive more, especially if they have to buy a car to do so, that takes money they would spend on other things out of the economy. It will make the car, gas and tire industries happy, but money spent on them isn’t spent elsewhere.


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