The TTC’s Audit Committee recently considered the Draft Financial Statement for 2010, a report that will likely show up on the regular meeting agenda in May.  As usual, the interesting parts are buried in the notes.

Last fall, I wrote about the manner in which the TTC is financed and the baffling array of programs and reserve funds through which money flows to various parts of the TTC operating and capital budget.  This article continues with the info for 2010.

Operating Budget

This budget includes all day-to-day service and routine maintenance.  Large scale repairs, reconstruction and improvements fall under the capital budget.  These are typically works that have an extended lifespan.

In 2010, the total budget was $1.480-billion with $482.6-million coming from operating subsidies.

The components of this subsidy are:

• $91.6m Provincial gas tax
• $84.2m City subsidy for Wheel Trans
• $306.8m City subsidy for the regular system

This subsidy is approximately $30-million less than in 2009 thanks to the unexpected “surplus” the TTC attained through strong ridership and savings in some cost areas, notably fuel.  Remember this the next time you hear about the desperate need for service cuts saving a few millions.

The rate of subsidy differs considerably between the regular system and Wheel Trans.

• 32% for the TTC overall
• 94% for Wheel Trans
• 29% for the regular system

The Provincial gas tax deserves special mention.  The total tax received by the City from Queen’s Park is $160.6m, down from $164.1m in 2009.  The City allocates $91.6m of this to the Operating subsidy and the rest goes against Capital projects.  Although we often hear from Queen’s Park about their generosity with the gas tax, it is a drop in the bucket compared to Provincial funding levels two decades ago, and the value declined in 2010.  From the City’s point of view, the gas tax allocated to the Operating budget is almost totally offset by the cost of Wheel Trans for which there is no Provincial subsidy.

Farebox revenues provide 67% of the regular system’s costs with just over 4% coming from other income such as advertising, contract services to the 905, property rentals and interest.

Capital Budget

The Capital budget mainly covers major repairs and construction, and vehicle purchases.  Almost the entire budget is covered by some form of subsidy except for a small amount of depreciation on unsubsidized assets that is charged to the Operating budget ($2.2m in the 2011 budget).

In 2010, capital subsidies totaled $909m from various governments:

• $423.0m City of Toronto
• $260.6m Ontario
• $213.8m Canada
• $11.8m Other

However, this money flows through many paths with a great deal coming from reserves that were paid up in previous years.  The amount of new spending from a budgetary perspective is comparatively low, except for Toronto’s share that comes from its year-to-year capital program.

Several sources are winding down.  Although they provide funding in the short term, they are not replaced by new programs in any proposals at the Federal or Provincial level.  Reserves are a way of soaking up surpluses in the good years when the economy appeared to be booming.  This type of financing works tolerably well, but only if booms come often enough to refill the pot.  Otherwise, governments face the unpalatable question of how to maintain spending (assuming that they want to do so) in hard times.

Spadina Subway Extension

This extension is jointly funded by Toronto (20%), Ontario (40%), Canada (27%) and York Region (13%).  Ontario’s share sits in the “Move Ontario Trust” and was expensed by Queen’s Park in past years.  Other governments contribute their share on an ongoing basis, and there is a cap on the total amount Ottawa will pay.  2010 draws on this project totalled $185.9m.

Although the project reports fairly regularly on unexpected cost increases, often due to more complex engineering challenges than originally foreseen, the TTC has not produced a public report showing how it is managing the overall project budget.  This is the first major project where the TTC is working within a fixed price, and I expect to see some creative solutions to financing as opening day approaches, and the funding pools run dry.

This funding source is time-limited by virtue of its dedication to a single project.

Canada Strategic Infrastructure Fund (CSIF)

This is a joint Federal-Provincial program, but the actual mechanism of the funding works differently for each partner.  CSIF will run out in 2012, and in 2007 Queen’s Park made a one-time payment for its future obligations that went into a City reserve fund.  The TTC has drawn on that fund each year, and the balance is now down to $35.7m.

Federal funding under CSIF is paid by Ottawa as claims are made against the program.

Spending from this source in 2010 was $35.6m (Ontario, from the reserve) and $31.6m (Canada).

Public Transit Capital Trust (PTCT)

This reserve was created by a Federal contribution in 2007, and it was almost completely drawn by the end of 2009.  Spending in 2010 was $3m from interest earned on the reserve in 2009.

Ontario Rolling Stock Infrastructure Reserve Fund (ORSIF)

This reserve was created by a Provincial contribution in 2007.  Spending in 2010 was $8.7m, and there is $20.9m left in the reserve.

Ontario Bus Replacement Program (OBRP)

Queen’s Park keeps changing the way in which it funds bus purchases, and has now bailed out of this as a dedicated funding stream.  In 2008, Ontario changed the way it paid this subsidy.  Instead of making a lump sum payment to Toronto for its 1/3 share, Queen’s Park asked the City to take out a debenture matching the expected lifespan of the bus fleet, and Ontario would pick up the annual cost of paying down this debt.  This was nothing more than a complex dodge to keep the expenditure out of current accounts, something we have seen in other Provincial financing schemes.

By 2010, Queen’s Park changed its mind and simply paid down its future obligations to Toronto in a lump sum.  Although this would normally show up as a TTC reserve, in fact it has been transferred to the City’s books to balance the long-term debt.

Transit Technology Infrastructure Program (TTIP)

This reserve was created by a Provincial contribution in 2007, although much of this was already on the TTC’s books as an account receivable.  Spending from this reserve was $2.1m in 2010, and $4.2m remains.

Metrolinx

There are two Metrolinx funding streams.  The first of these is a reserve created in 2008 under “MoveOntario 2020”.  In 2010, $79.5m was spent from this reserve, and $339.0m remains.  This money is earmarked for specific projects.

The second stream was set up to fund Transit City, and this was handled on an ongoing basis as costs were incurred.  $77.4m was spent in 2010.

The whole situation with Transit City is, needless to say, in flux.  $106.1m has been spent on various projects to the end of 2010, and this must be subdivided to reconcile those costs that the Province will assume (Eglinton/Scarborough LRT), and those that the City will have to eat thanks to Rob Ford’s cancellation of the overall plan.  I suspect that we will have to await the 2011 Financial Statements to see the details.

With the Memorandum of Understanding between Queen’s Park and Toronto (or more accurately with Rob Ford as the MOU has not yet been endorsed by Council), Metrolinx is now removed as a funding source to the TTC unless some new joint project is undertaken.  The “MO2020” reserve will be drawn against the projects for which it was allocated.

One major project for which some funding was earmarked both by Canada and Ontario is the implementation of a new fare card.  However, the reserves for this (sitting in CSIF) are too small to fund the entire project.  It is unclear whether Toronto will fund the difference itself (the MOU commits the City to implementing Presto), or if other subsidies will magically appear.  A complicating factor is the roughly $100m difference between the implementation cost estimate used by the TTC and the one proposed by Presto.

Infrastructure Stimulus

The Federal stimulus program allocated a total of $60.4m to transit projects in Toronto, of which $27.8m was spent in 2010.  An equal level of 2011 spending will close out this program.

LRV Project

The new Low Floor Light Rail Vehicles (LFLRVs) for the “legacy” Toronto system are funded 1/3 by the Province.  The subsidy on this project for 2010 was $30.1m.

Gas Taxes

In 2010, gas tax from both Ontario and Canada was allocated to the Capital budget.

• $154.4m from Canada (down from $162.9m in 2009)
• $69.0m from Ontario (down from $72.5m in 2009)

This is the only ongoing capital subsidy still available to Toronto that is not earmarked for specific projects already in progress.

From time to time, we hear schemes to transfer the subway to some other authority such as Metrolinx.  This is not quite as attractive a proposition as it might seem.  Even if we presume that some sort of revenue allocation would show the subway as “profitable”, this calculation does not include the large and growing capital costs of replacing systems that are 40 or more years old.

If Metrolinx took over the subway, the responsibility for those costs would shift to Queen’s Park.  If a private operator, lured by tales that the subway is so profitable, bought the subway, they would be in for a rude shock the moment they looked under the hood.

TTC Subsidiaries

The TTC has three subsidiaries which, relative to the parent, are small change.

Toronto Coach Terminal Inc. (TCTI)

This company is the remnant of the former Gray Coach Lines, and its sole function now is to operate the Bay Street bus terminal.  For many years, the company was losing money and was propped up by funds advanced from the TTC itself totalling $15.6m.  In 2010, the company was profitable ($473k), and this went to improve the accumulated deficit on the balance sheet.

This company’s real asset is the land on which the bus terminal sits.  One way or another, this will be redeveloped, and it will be worth much more than the book value (the total capital assets of TCTI are $6.129m).  At that point, the TTC will finally recoup its advance.

TTC Insurance Company Limited (TTCIC)

This company was created to handle the self-insurance business of the TTC and exists as a legal requirement.

Toronto Transit Consultants Ltd (TTCL)

This company was dormant for many years until it was reactivated and renamed in 2011 as Toronto Transit Infrastructure Ltd (TTIL).  This company exists as a means for supposed private sector participation in the Sheppard Subway project while being one level removed from public scrutiny.

When the change to TTIL was reported, it was claimed that it has $162k in assets that will be used to fund operations until some other revenue stream is secured.  However, only $62k of this is retained earnings, and the remaining $100k is the TTC’s original capital investment in the company.

Benefit and Pension Liabilities

Long term liabilities are a significant issue in private and public sector financial considerations and the TTC is no exception.

At the end of 2010, there was an accrued liability for various benefits of $320.7m.

Separate from this is the TTC’s pension plan which is discussed in detail in a report from the City Manager on the Government Management agenda for May 2 (scroll down to page 14 for the section applicable to the TTC).

The TTC Pension Fund Society was formed before OMERS (the pension system for municipal employees in Ontario) was created.  The benefits paid by the TTC Society are not as good as OMERS, and some of the actuarial assumptions are different.

There has been some discussion of merging the pre-OMERS plans with another large pension provider such as OMERS itself, the Teachers’ Pension Plan or of conversion of existing obligations to plans purchased from the private sector.  However, any transfer would require that the outstanding liabilities of the pension plan be fulfilled because they could no longer be assumed to come from future revenues.  The amount at issue is $600m to $800m.

In parallel with this discussion, the TTC is attempting to gain an exemption from the pension solvency rules so that it would operate like OMERS as a going concern rather than a fully-funded basis.  Such a decision rests with Queen’s Park.  If the exemption is not granted, there will be a large additional charge on both the TTC operating budget and on the contribution levels from TTC staff over the next decade so that the plan could be built up to a solvent level.

Any decision on the future of the TTC’s plan must be taken with the agreement of the members (current and former employees), and the TTC and City do not have the right to make a unilateral change in the fund’s operation.

Like the overhang on the capital budget for unfunded major repairs, the pension situation poses a challenge to anyone who would look at merging part or all of the TTC into another organization, or selling the operation.  At that point, the funding deficit in the pension must be assumed by someone.

Parting Thoughts

TTC finances are not the easiest to understand given that this is a large organization, and some of its accounting practices have evolved to fit the prevailing political and subsidy schemes.  However, it is worth knowing a bit about all of this to make sense of claims that billions of dollars are flowing into the TTC, and we should all stop griping.

Yes, billions are flowing, but a great deal is money promised a few years ago when times were good, but there is little in the pipeline for future years.  Most of this funds specific projects, not the day-to-day operation and maintenance that keeps the system running.  Nobody cuts a ribbon when buses and streetcars run reliably picking up everyone waiting at their stops, when electrical switch rooms are rebuilt or worn-out paving is replaced at a garage, but this sort of thing is just as important as opening a new subway line.

In this article, I talk about the accounting side of things, not whether any expenditures are “good value for money”, or how the budget projections might be changed.  From previous articles, regular readers will know my general feeling — any saving through “efficiency” will be more than offset by unfunded costs that have been hidden from view.

We may be able to run the existing system “better”, get more for our money, but this will not get around basic problems with the lack of funding and the undue focus on project-specific subsidy streams.

Meanwhile, anyone who thinks that this could all be solved by dumping the TTC in someone else’s lap really needs to understand the actual financial position of the organization.