Toronto’s Executive Committee will consider a series of reports on the proposed SmartTrack project and related matters at its meeting on Tuesday, April 17, 2018.

• Implementation of the SmartTrack Stations Program and the Metrolinx Regional Express Rail Program
• Attachment 1 – SmartTrack Stations Program -Terms and Conditions
• Attachment 2 – SmartTrack Stations Program Funding and Financing Strategy
• Attachment 3 – New SmartTrack/Go RER Stations – Technical and Planning Update
• Attachment 4 – St. Clair Transportation Master Plan
• Attachment 5 – Regional Express Rail – Enabling Works Update
• Attachment 6 – Union Station Enhancement Project – Phase 1 Request for Proposal Renderings

These reports set in motion several aspects of the GO/RER/ST program, although the primary focus is the funding the the new SmartTrack stations which is a city responsibility. This article deals with the main report and the first two attachments.

Attachment 3 is a compilation of the information on the proposed new stations that has already been discussed in my previous articles on the public meetings.

Attachment 4 explains the link between SmartTrack and plans for significant changes to the road network in the St. Clair, Keele, Old Weston Road area including widening of St. Clair through the railway underpass and extensions of various roads to fill gaps and provide additional paths for traffic flow. The new station at St. Clair and Old Weston/Keele would be constructed based on the new layout, and work on these projects will be co-ordinated.

Attachment 5 was prepared by Metrolinx. It sets out the status of the many changes to various rail corridors that are within the City of Toronto.

Attachment 6 illustrates the planned new south platforms and concourse at Union Station, an expansion project separate from the renovation of the existing station now underway. Of note in the design is the replacement of four tracks by two making room for a pair of much wider platforms than in the older part of the station. From a service design point of view, these tracks and platforms will likely be the new home for the Lakeshore services as this will allow them to operate along the south side of the rail corridors free of interference with traffic from the more northerly corridors like Milton/Kitchener/Barrie to the west and Richmond Hill/Stouffville to the east.

(Metrolinx has already talked about the need to consolidate trackage and platforms in the old part of the station to improve capacity both for train service and for passengers, but that is beyond the scope of the city reports.)

The current report deals only with the SmartTrack stations. Specifically it does not address:

• The Eglinton West LRT which, having replaced a part of the original SmartTrack scheme, is still bound up with ST as part of the total budget number for this project.
• Operating and maintenance costs for GO/ST service.
• The cost to the city of “fare integration” or even exactly what this will mean.

A further problem, as I discussed in a recent article, is that recent changes in the Metrolinx/GO service design for various corridors has changed the mix of local and express trains on which the SmartTrack scheme rests. Metrolinx has still not explained how they will operate the number of trains the city report claims will stop at all of the “local” SmartTrack stations, and they are quite testy on the matter when pressed. For its part, the city assumes a service level (and hence attractiveness of service) greater than what Metrolinx has, so far, committed to operating.

The works that are included in the report are:

• Six new GO/SmartTrack stations at Finch, Lawrence East, Gerrard/Carlaw, East Harbour, Liberty Village and St. Clair/Old Weston.
• Additional city requirements for station facilities that are not strictly required for operation of the transit service.

The “city-initiated” requirements are over and above the original scope and budget for SmartTrack, but they are drawing from the general pool of available funding.

Unlike many traditional big-ticket construction projects (the TYSSE to Vaughan, for example), payment of the city’s share will come in a big lump in 2025 when the project is completed. The reason for this is that Metrolinx will award a design-build-finance contract for the new stations, and the bill will not be due until the work is completed. This keeps the need for the city to generate current revenue to start paying down the debt out of sight for the next seven years.

The SmartTrack program as a whole will be funded from many sources, some more dependable than others.

An important point here is that this funding only addresses the new stations portion of SmartTrack, but not the Eglinton LRT extension. It is unclear whether the entire income streams expected from these sources due to SmartTrack have been included, or only the proportion applicable to the stations. To put it another way, is SmartTrack scooping revenue that was intended, in part, to pay for the LRT line? I have a question on this matter in to City staff for clarification.

Two of these three funding sources depend on projected development.

• Development Charges are levied on new residential and commercial buildings across the city nominally to help pay for additional infrastructure the residents and jobs they will bring. There is no attempt to link specific projects such as a new subway with development in specific locations, and in practice, the development downtown is paying the freight for a lot of new infrastructure in the suburbs.
• “Tax Incremental Financing” (TIF) uses the premise that some development will only occur because the SmartTrack stations (and associated service) are provided. In theory, this represents tax revenue the city would not otherwise receive, and it can be dedicated to the SmartTrack account. In practice, a large chunk of the new taxes are required to pay for infrastructure and service these development bring, just as with any new builds.

More details on both of these come later in the article. The problem with both streams is that they depend on development happening at the projected rate, and in the case of TIF, that it occurs in the locations flagged as TIF zones. Much more property is proposed to be subject to TIF revenue diversion than is directly affected by the six new stations. The premise is that the new SmartTrack service will stimulate development at existing stations where service will be improved. However, it is unclear whether the service level claimed for SmartTrack will actually be provided, and in turn whether the stimulus it will provide will be at the same level. Moreover, the same non-ST stations will draw additional riders because of added service GO plans to operate separately from SmartTrack.

Annual ST ridership from the new stations is projected to be 33 million.

For the purpose of this analysis, the SmartTrack Stations Program consists of the six new stations in the City of Toronto, as well as TTC fares across the GO network within Toronto …

Changes relative to the earlier report include updating the analysis year to 2041 from 2031, incorporating the recently introduced Discounted Double Fares for GO-TTC trips and reflecting the latest refinements to the GO RER service concept. Not all of the changes to the GO fare structure announced in the Provincial Budget on March 28, 2018 have been considered at this point, but the change to GO fares in Toronto was incorporated.

The results of the updated ridership analysis are similar to those previously reported. The SmartTrack Stations Program is expected to serve over 33 million trips annually and attract approximately 6.2 million annual new riders to the entire transit system. [Report at p. 31]

The number sounds big, but this should be put in context. Converting to daily demand with a factor of 300 (weekends count as one “day”) gives a value of 110,000 daily riders. Assuming that this is divided evenly between the western and eastern branches of SmartTrack, that’s 55,000 on each side. This is on a par with the busiest of the TTC’s surface routes. After all, there is a limit to how many riders one can serve with a 15 minute service of GO trains. Riders will also board at the existing GO stations such as Agincourt, and the total demand on ST trains is not shown in the report.

I have asked the city for a copy of the ridership projection including a breakdown of ridership by station and the service level used in the modelling.

If there is a shortfall in revenue because development does not occur as predicted, this will land on the general property tax as a draw on the City Building Fund.

The City Building Fund is itself an extra property tax that is building up at 0.5% per year to a total of 2.5%. SmartTrack funding, shown above, will take about 25% of this. Claims that there is no property tax to pay for SmartTrack are simply not true. Moreover, by taking a slice of the City Building Fund, Smart Track eats up borrowing room that this fund might have supported for other projects.

The City Building Fund contribution, approximately $18.2 M per year on average, would vary to accommodate the gradual growth in TIF contributions over the repayment period, and to cover the funding gap in 2043 at the end of the tax increment collection period to the end of the 30-year debenture term in 2055. [Attachment 2, p. 12]

“Business Cases” For the New Stations

The City report echoes statements made by Metrolinx about the positive benefit of the new station construction:

On March 8, 2018 the Metrolinx Board of Directors approved the Preliminary Design Business Cases (PDBCs) for all new stations, which include new RER stations and the six SmartTrack stations. The PDBCs represent a higher level of design and updated cost estimates in comparison to the Initial Business Cases (IBCs) presented in 2016.

The PDBCs for the six SmartTrack stations reconfirm the positive benefit-cost ratio presented in the IBC analysis. The updated business cases also reiterate the strategic benefits of the six stations, including:

• East Harbour and King-Liberty benefit from their proximity to current or proposed major employment nodes, supporting population and employment growth in Toronto; and
• Finch-Kennedy, Gerrard-Carlaw, Lawrence-Kennedy and St Clair-Old Weston stations are expected to attract boardings from nearby residential areas and provide overall transportation user benefits.

The Metrolinx findings suggest the combined net benefits of the six stations are $4.59 B. These benefits exceed the costs of the Base Station Infrastructure ($1,195 M) and the City-Initiated Station Requirements ($268 M). [Report at p. 30]

What this statement (and the Metrolinx analyses) conveniently ignore is that the benefits flow from two major employment centres at East Harbour and Liberty Village, and that the other stations in the program would not stand on their own. Only by combining all six into one analysis do the numbers “come out right”.

Moreover, it is important to remember that much of the “benefit” does not show up in revenue to the City, but in the imputed value of travel time savings for commuters. A good chunk of that comes from the provision of more direct service to two major centres outside of downtown where the new stations eliminate the need for commuters to travel over local transit from Union to their destination. While this supports employment growth in Toronto, it does not directly contribute to offsetting the investment in new infrastructure.

Operating and Maintenance Costs

The City report proposes that the province take over responsibility for station operating and maintenance costs, although Metrolinx has not yet agreed to this. In the short term, these would likely be fairly modest, but capital maintenance such as elevator replacements over the life of the stations could be considerable.

More important, however, are two potential costs that could be both immediate and substantial.

Metrolinx has yet to produce a definitive statement of the level of service it intends to provide and pay for in the SmartTrack corridor. Original plans to mix the long-haul RER service together with the short-range ST service have been replaced with a scheme for local and express trains. The service design shown in the City report no longer matches Metrolinx’ stated intentions.

Metrolinx has talked vaguely about figuring out how to run more trains to restore the originally planned service level at “local” stations, but it is unclear how much this will cost and whether Toronto would be expected to pay toward this on the capital or operating accounts.

Fare “integration” means different things to different people. SmartTrack is routinely spoken of as having free transfers to and from TTC services within the 416 (for example, in the quote about ridership projections above), effectively operating as if it were a TTC route. This does not match the fare structure currently proposed whereby GO remains a separate fare zone, albeit with lower fares and possibly some discounts on transfers.

The full “double fare discount” is available only to riders who pay a full adult fare via Presto. It is not available to TTC passholders, and is offered at a considerably lower value to riders who pay a concession fare such as students and seniors. Operating SmartTrack at “TTC fares” is very different from what is currently proposed.

Many details remain to be worked out. If Toronto wants complete integration so that any TTC rider can use GO (or at least the portion of the GO network that is called “SmartTrack”) with no extra fare, the cost of that will almost certainly fall on Toronto’s shoulders.

Simply talking about the stations as a free-standing project and funding request avoids the larger context within which a future GO/ST service will operate.

Development Charges

Development charges apply to all construction of new commercial and residential buildings in Toronto. The premise is that growth in various municipal services will be triggered by development, and the cost should be borne in part by all new construction. New services, such as an upgraded sewer system, benefit existing property owners because they represent improved capacity and renewed infrastructure. Therefore, the full cost of the new works is not assigned to Development Charges. An updated DC Bylaw is also before the Executive Committee, and a background study explains the process leading to the new DCs.

In the case of transit improvements, there are three components to the allocation of costs:

• 43.2% of costs are deemed as a benefit to existing users of the system.
• 21.4% of costs are deemed as due to development within the 10-year period of the new Development Charges Bylaw.
• 35.4% of costs are deemed as due to development that will occur beyond the 10-year window.

[See DC background study at pp 7-8.]

Some project costs have been updated in the new DC Bylaw backgrounder. Note that for this table “SmartTrack” includes the Eglinton West LRT extension to the city boundary, but it does not include the city-initiated add-ons to the six stations portion of the project.

The full project list totals $22.1 billion including items such as the Scarborough Subway Extension (SSE). Of this amount, $5.86 billion is considered to be due to development effects, and $2.62 billion is to be recovered through DCs [see pp 34-37 of the backgrounder for details].

There is a separate element in the DC Bylaw for the Spadina Subway Extension (TYSSE), but this is a carry-over from the previous 10-year bylaw as the benefit from past investment will carry forward into the current period.

Development charges apply city-wide, and with the lion’s share of construction happening downtown, that is where most of the DC revenue comes from. There is a strong argument that many of the projects included in the DC charges base will have little benefit to downtown development and that, in effect, the strong construction market downtown is subsidizing capital projects throughout the city. Conversely, if projects were required to charge their cost only to development that directly benefits them, then the DC contribution to many projects would be substantial and could drive the cost of development beyond what the market would bear. (For example, if the Scarborough Subway were charged only to development along its route.)

Every new “large apartment” (2 bedrooms or more) will pay a DC of about $46,963 of which $17,833 is for various transit projects including SmartTrack. This is the single largest component of Development Charges. [See Tables 8 and 9 in the Development Charges background report for a detailed breakdown.]

Tax Increment Financing

TIF, to use its acronym form, is a scheme concocted originally to finance the redevelopment of abandoned parts of cities on the basis that new development will bring new taxes that a city would not otherwise obtain, and this new revenue can be used to finance borrowing that makes the development possible in the first place.

When SmartTrack was proposed as a campaign plank, the claim was that it would be entirely financed by TIF applied to areas where the new rail service would stimulate growth. This “something for nothing” sales pitch sounds great, but it runs headlong into reality checks:

• Just because there is a new rail station does not mean that anyone will choose to build there. Toronto is full of subway station sites and would-be “centres” that have little or no development, or where what occurred came years or decades after the infrastructure investment. In effect, development caught up to the presence of good transit service, it was not caused by it.
• The level of service claimed for SmartTrack was considerably better (10-12 trains/hour) than what is currently planned (4 trains/hour). The basic GO/RER services don’t count in this regard because they will arrive no matter what. The situation is further clouded by the question of just which stations the GO, as opposed to ST, trains will actually stop at. The growth projections used for TIF calculations come from a January 2016 report that dates well before the decision to operate a mix of express and local trains in the ST corridor.
• The “Regional Relief Line” that was SmartTrack’s predecessor was intended to improve access to and thereby support development in business centres in Markham and southwest of Pearson Airport in  Mississauga. Any new tax revenue from these areas will not flow to Toronto, but to the local municipalities in the 905.
• A few major development nodes will grow on their own without SmartTrack because they are, or will be, well served by other transit lines. The strongest of these is the East Harbour which will be served by GO’s frequent Lakeshore service supplemented by trains from the Stouffville RER service. East Harbour will also be a stop on the “Relief” subway line that with luck could be in operation before the development is complete.

The proposed TIF revenue zones cast a wide net for future development.

What is not discussed is the fact that at many of these locations, SmartTrack represents a relatively small increase in transit access . Moreover, the reach of each zone goes well beyond the immediate catchment area of the stations with, for example, much of Parkdale being assumed to benefit from the new Liberty Village Station. Portions of southern Scarborough already well-served by the subway, GO and the future Crosstown line are included in SmartTrack’s zone of influence.

This is a gross misrepresentation of the range of influence of a relatively minor upgrade to the regional transit network. It will not, as originally claimed, bring a ST train every 5-6 minutes, but rather will see a train every 15 minutes under the current Metrolinx plans.

Most of the TIF zones are around the rail corridors, although they reach a kilometre or more either side. It is far from clear that these districts will actually see new development, or that where this occurs, the presence of ST service will be the trigger. Development occurs all over Toronto, not to mention in the GTA beyond, and there is only so much market for new buildings. They will go where developers expect to sell, and SmartTrack will have little to do with this.

A further problem is that the more expensive portion of ST is the Eglinton West LRT extension. Already, Toronto has cut back its commitment to this to the city border, and a link to the airport, probably the most important part of the line, is left for others to finance.

Despite the hype surrounding TIF from the Tory mayoral campaign, City staff take a more conservative approach to estimating the available revenue.

First off, a definition for TIF is required:

In the literature, various terms are used to describe the TIF concept, such as “land value capture” or “value-uplift”, but there is no consistent meaning to these terms, and one has to refer to the context in which it is being used. The premise is that public infrastructure investment would lead to higher or more rapid private development and increasing property values that would not occur but for the public investment. New development and increasing property values, in turn, would lead to higher property tax revenue (the tax increment), which could be segregated to fund the project. At the maturity of the debt, all of the tax revenues revert back to the taxing authority’s general revenues. [Appendix 2, p. 5]

There are two components to property tax: the municipal tax (the one Council wrangles over every year) and the education tax (set by the Province of Ontario). Only the municipal component is available as a revenue stream for TIF, although there was enabling legislation intended to free up the education portion. However, the regulations to actually implement this have never been passed, and it is hard to believe Queen’s Park will ever give up a potential revenue stream like this.

The challenge remains of deciding which new developments in TIF zones were actually caused by SmartTrack as opposed to the natural evolution of the market.

Another aspect of TIF that the City has chosen not to embrace is the capture of “value uplift”.

The determination of tax increment revenue from “value-uplift” is less straightforward and not directly measureable. Historically, all properties in Toronto have appreciated in value over time. The difficulty is in making the determination that an increase in value—greater than would otherwise have occurred—is solely attributable to the implementation of SmartTrack. This determination will inherently encompass a degree of subjectivity. [Appendix 2, p. 6]

The quantum of potential revenue from value uplift is small in relation to incremental tax revenue from new development. Accordingly, staff have excluded value uplift from further analysis of the funding for SmartTrack. [p. 7]

Of the projected increase in tax revenue, the City estimates that about 40% would be due to SmartTrack. This is not subdivided by TIF zone, and so we do not know the distribution of TIF benefits across the corridor.

Any new development brings servicing costs. The capital element is partly offset by Development Charges, but there are ongoing operating costs associated with having more residents or office space than might otherwise have been around a station. The question, then, is the degree to which new tax revenue is required to support the marginal increase in service costs, allowing for some economies of scale with more dense development. The excess tax revenue is calculated at 18% for residential development and 49% for commercial. The City proposes that 39% of the new tax revenue be dedicated to funding SmartTrack.

Compounding this proportion with the amount of growth expected to derive from SmartTrack yields a 15% rate overall.

The report proposes that 15% of all new taxes in the SmartTrack TIF zones, beginning in 2019, be allocated to SmartTrack funding. Note that this will pick up taxes from development that is well away from SmartTrack stations and is likely to occur whether ST service ever arrives. In effect, the City will poach general tax revenue from a wide area to load up a SmartTrack reserve before the bills come due. The total expected is $292 million over the 25-year period the TIF regime would be in place.

Another source of “revenue” will be the winding down of a tax incentive program in certain parts of the city.

Since 2008, the City has been offering a Tax Increment Equivalent Grant (TIEG) program called Imagination, Manufacturing, Innovation, and Technology (IMIT). A TIEG is an economic development tool wherein the City provides grants to partially offset incremental property taxes directly for developers to build eligible non-residential property developments. The program is based on the assumption that development would not occur “but for” the incentive made directly to the developer.

IMIT is a municipal property tax rebate program for eligible commercial uses, and in particular reference to SmartTrack, for office uses around transit nodes. Eligible recipients are entitled to receive a rebate totalling at least 60% of municipal taxes over 10 years, based on set declining scale over the period. [p. 9]

The City proposes to phase out these grants in the SmartTrack corridor between 2020 and 2028 on the grounds that the ST investment is equivalent to the IMIT incentive. Developers might beg to differ, but it will take years to see the effect as the grant levels wind down and SmartTrack, such as it is, ramps up.

Two TIF zones – around East Harbour and Liberty Village stations – will be affected by this. The City expects to reduce its tax subsidy payments by $94-100 million relative to what would occur if the IMIT grants remained at 100%. This is a further contribution to the SmartTrack financing.

City Building Fund

The City Building Fund was established by Mayor Tory starting with the 2017 tax year, and its form is not unlike that of the Scarborough Subway tax with an annual increment over the basic property tax rates to build up to its full value.

About one quarter of this revenue, at its full 2021 level, would be dedicated to SmartTrack debt service costs. This is a direct use of an above-inflation property tax hike to pay for SmartTrack, something that Mayor Tory continues to claim he is not doing.

(The amount of the increase for residential taxpayers is compounded by a City policy to rebalance commercial and residential rates so that the residential increase is higher than 0.50% each year.)

Conclusion

Many questions remain to be answered about SmartTrack including its costs (all-in including future operating, maintenance and fare subsidy) and service levels.

This is a project that was sold to voters on the basis that it was the only rapid transit project Toronto needed, and that the connectivity it would bring would solve a wide variety of problems both directly in transportation and indirectly in economic and social benefits. That was quite a stretch, and it was based on a considerably higher level of service and lower fares than appear to be likely.

Meanwhile, large capital and potential future operating/subsidy costs loom. These may be rationalized as worthwhile investments in the City’s future, but they have never been fully quantified, and their worth compared to other spending the City might undertake is completely unknown.