Updated June 9 at 12:01 am: During discussion of the preliminary budget at the June 8 TTC meeting, staff repeatedly noted that all estimates are based on current Service Standards which drive the quality of service to be provided in the face of growing demand.  This is a troubling state of affairs because we will almost certainly face a proposal to cut service quality by amending the standards as part of the 2012 budget process.

The last thing the TTC needs is a return to a there’s-still-room-on-the-roof planning which is a guarantee for declining customer satisfaction and employee morale, and for strangling ridership growth.

Chair Stintz made reference to the level of rider subsidy and observed that it is uneven across the system.  Would new standards be imposed that would trim routes and periods of operation beyond what already happened in May 2011?

The Commission desperately wants to preserve service (one of Rob Ford’s campaign slogans), keep costs down, and yet somehow squeeze much of the cost savings out of “efficiency”.  This is simply not possible, especially if Council imposes a cutback in the TTC’s operating subsidy.  Combining the known shortfall in the 2012 budget, the likely pressure from wage increases of the now-essential TTC workers, and a potential subsidy cut, there is a gap of over $100-million.  A good chunk of this is directly traceable to the short-sighted decision to freeze fares and eliminate the vehicle registration tax in 2011.  Another large contribution comes from the expected 1/3 increase in the cost of diesel fuel.

Management has been asked to look at opportunities for staff cutbacks that will not affect service, and this means that any cuts will disproportionately hit support services that make up a small proportion of the total organization.  Moreover, even assuming cuts can be found, this is a one-time fix and the cost pressures will return in 2013 and beyond.  Options to be reviewed include contracting out and sharing functions with the city.  It is unclear whether some Commissioners have grasped the idea that increased crowing on buses is a service cut, or if all they care about is that some transit vehicle wanders by now and then to preserve a fiction of service.

The timetable for finalizing the budget will see a report to Council in September with options for the TTC budget, and a final version, based on Council’s direction, to the TTC board in October.

The original June 8 post follows the break below.

On June 8, the TTC will consider reports showing the general outline of its 2012 Capital and Operating Budgets.  This article deals with the Operating Budget, and I will turn to the Capital report in my next article.

The Operating Budget presents a severe challenge for the City of Toronto which faces a deficit of around $700-million going into the budget process.  (An earlier, higher figure has been reduced by better-than-expected results in the final accounts for 2010.)

Presuming that the operating subsidy from the City remains at $429m, the TTC projects a shortfall of $39m not including any additional costs resulting from the new wage contract effective April 1, 2011 (negotiations are still underway).  Wages and benefits account for about $1b of the total running cost of the TTC, and so a 1% increase in compensation translates to roughly $10m in extra annual expense.

Part of the overall budget deliberations will involve the City’s “core service review” and that could well lead to changes in service standards and fare policies (what services should the TTC provide and how much should it be prepared to subsidize riders).  The report is silent on these issues and offers no discussion of the options that might be under consideration.

While the TTC projects a need for $39m in added revenue, not including the provision for wage increases, it is well known that the City is looking for cuts in spending by its departments.  Recently Councillor Michael Thompson floated the idea of a 10% cut in funding of the Toronto Police Service.  (TPS is completely funded by the City and so its effect on the City Budget is more than the TTC’s even though its total budget is smaller.)  If the same tactic were applied to the TTC, it would mean a cut of about $43m in the City’s subsidy which, coupled with other cost pressures on the TTC, would mean devastating service cuts and/or fare increases.

TTC and City staff are still working on a multi-year projection of ridership and finances, a topic that has been under discussion at City budget debates for some years.  This is an extremely important piece of work because it would take the debate about transit funding, ridership, system growth and fare policy beyond the scope of an annual circus.  That circus may suit some who prefer a stage-managed crisis and political theatre over good planning, but it’s of little use to the transit system.

The gap between revenues and expenses is expected to grow at $50m-$70m annually without any change to subsidy or fare levels, and presuming continued growth of riding and service to match.

In 2012, ridership is expected to crest the half-billion mark at 502m, up 3.1% from the 2011 budget figure of 487m.  This will be the primary contributor to a projected $32m increase in revenue for 2012 ($29.6m from fares, $2.6m in other revenue).  Actual 2011 ridership is running ahead of budget and is expected to be about 490m.

For the “conventional system” (excluding Wheel Trans), the TTC estimates a subsidy requirement of $468.1m presuming that service is maintained at current standards and there is no fare increase.  They start from the assumption of a City subsidy of $429.1m, the approved subsidy level for 2011.  (Approximately $90m of this is actually paid for by Queen’s Park from gas tax revenue with the remainder coming from City funds.)

Service is budgeted to increase by 3.3% in hours and 2.7% in kilometres.  This is a combination of service changes to handle ridership growth and the full year effect of changes implemented in 2011 such as the May service cuts.  The cost of additional service is budgeted at $19.3m.

Fuel is an important part of the cost mix at the TTC.  In 2010, mainly through careful hedging, the TTC saved $15m relative to budget on diesel fuel.  This was about half of the “surplus” the TTC reported at year-end.  Other fuel savings came from the elimination of bio-diesel ($1.5m) and from lower consumption by hybrid buses ($4m).

While this is an impressive achievement, the TTC cannot budget on the assumption of a repeat performance.  Moreover, fuel prices are now rising rapidly, and the TTC budgets for diesel fuel expense to rise from $86m to $121m from 2011 to 2012.  Just over 10% of this increase is attributable to extra service with the remainder coming from higher pricing.

“Other Employee Costs” (benefits, pensions) rise by $8.6m.  Some savings have been achieved in this area through a new joint contract by the TTC, the City and the Toronto Police Service with Manulife for administrative and underwriting services for employee and pensioner benefits.  (This is an initiative started by City Council in 2008, but only now implemented as all of the then-existing arrangements were run out to their expiry dates.)

Bus maintenance costs will rise $4.5m due to the added complexity of new vehicles, the end of warranty coverage and other technological changes.

2012 is a leap year, and this will add $2.8m to operating costs.  This is partly offset by the added ridership and fare revenue (except for monthly passholders).

Text messaging (sending “next vehicle” info) is expected to cost $1.3m in 2012.  The TTC is considering a business model for provision of customer information and expects to make a “pricing decision” in the next few months.  I cannot help noting that there are other ways to deliver this information than using SMS, and any review should include web access such as is available from NextBus or from various third-party applications.

There are a variety of other changes listed in the budget report, but they are all relatively small.  They are important in that they reduce the net additional revenue needed to balance the books, but some of them cannot be replicated year-over-year.  There are only so many efficiencies to be squeezed out of an organization, and savings from better technology (such as the replacement of old H-series cars by TRs) only occur once.

The budget for accident claims has been flatlined at $33m.  As part of the recent provincial budget, transit operators were exempted from no-fault insurance, and the TTC expects that this will lower their claims cost.  The effect will be gradual as claims from accidents after the change took effect become the majority of cases.

There is a provision for additional workforce required for improved service, and this is partly offset by reductions in maintenance staff for subway cars and Orion V bus work.  Over the past 20 years, the Operating Budget workforce has grown less than the population of Toronto (14.7% vs 20.8%), and much less than the amount of service (24%).

Still unresolved is the question of pension fund solvency.  The TTC is seeking an exemption from the need for full solvency on the grounds that it is not going out of business.  I discussed this and many other issues in a previous article reviewing the TTC’s financial statements for 2010.

The overall review of the City’s budget is just getting underway.  What is notable by its absence from the TTC budget report is any discussion of the options available, or the effect of any decision that might be taken on reducing subsidy levels.  We can reasonably expect that there will be at least an additional, unbudgeted cost of about 2.5% in the coming wage settlement based on other activity in the public sector.  This would add about $18m to the 2011 budget (requiring an in-year adjustment), and $25m to the 2012 projection.

This would bring the gap between budget and subsidy up to about $64m and require a fare increase of at least 7% if no other funding source or significant reduction in operating costs were found.  Another round of service cuts would be counterproductive for several reasons.

• We were told early in 2011 that the May cuts were to pay for service improvements in coming months.  If they don’t appear, that’s a broken promise.
• The scale of cuts needed to address the 2012 budget shortfall is much, much larger than the value of the 2011 cuts.  Any pretense that only the least productive of services were being sacrificed “for the greater good” would not be credible.
• We could see stealth cuts implemented through changes in the Service Standards akin to the invention of a new rule about riders per vehicle hour used for the May 2011 “reallocations”.  Any such proposal needs to be discussed publicly and its effect clearly understood.  If crowding standards are worsened (that is to say, a “full” bus will have more passengers on average), this will affect the attractiveness of service and will undermine the shift of riding from autos to transit.

Equally counterproductive would be cuts to maintenance quality.  The TTC is already criticized for the cleanliness of its system, a situation it sought to remedy partly in 2011, but the worse cutback come out of sight, on those systems and infrastructure where deferred maintenance has long-term consequences.  We went through this in the 1990s and should have learned the folly of such tactics.

Finally, there isn’t one word in the budget about improvements to Customer Service.  The cost of any new initiatives will have to be added to the budget, or taken from something else.  The TTC needs to be clear on what we are getting in 2012, and how much of the hopes for improvement lie in the garbage heap of budget constraints.