Among the many promises made by the Progressive Conservative Party in the run-up to the June 7 election is a scheme to upload the Toronto subway system to the province with the intention of relieving Toronto of this ongoing cost. This was also part of their 2014 campaign, and it is born no doubt from the Ford brothers’ assumption that (a) this could be done cheaply and (b) Toronto would save money overall. The pot is sweetened this time around with the guarantee that Toronto would keep the fare revenue and operate the system. The overall tradeoffs in operating and capital costs are not entirely nailed down.

Oliver Moore in the Globe has written about this proposal wondering whether it is actually workable. The quotes below are taken from his article.

The Tories are framing the upload largely as an accounting exercise, making it easier to find funding and thus facilitating transit construction. The province would pay an estimated $160-million annually for major capital maintenance on the subway network, taking an obligation off city books.

Under the proposal, the Toronto Transit Commission would keep operating the subway, with its board setting fares and the city retaining revenues. Expansion planning would be controlled by the province, although Toronto and Ottawa would be asked to help fund construction.

Note that the proposal is silent on the operating cost of the subway. There is something of a myth that the subway “breaks even”, but this is not true, especially for the more-recently opened segments. It is a matter of record that the Sheppard Line loses money, and the TTC estimated that the operating impact, net of new fares, of the Vaughan extension would be $30 million per year.

If the province builds a new subway line, would Toronto, through the TTC, still be on the hook for paying its operating cost?

Any concept of “breaking even” requires that fares be allocated between surface and subway routes and this is an impossible task. One can propose many schemes, but they all have built-in biases because a “trip” and a “fare” are such different things. The situation is even more complex as an increasing number of riders pay through some form of pass all the way from the yearly Metropass (formerly called the “monthly discount program”) down to the two-hour transfer.

How Much Does The Subway Cost?

The estimated value of an upload to Queen’s Park of $160 million/year is woefully inadequate because the TTC’s capital budget for ongoing maintenance is much, much larger. There is much more to owning a subway than collecting billions in construction subsidies. Despite the frequent claim that “subways last 100 years”, they require a lot of ongoing maintenance and replacement of subsystems. With the exception of the physical tunnel and station structures, a large proportion of the older subway lines has been completely replaced or undergone major overhaul at least once since they opened. Line 1 YUS is on its third generation of trains, for example.

I wrote about this four years ago, and this article is an update of my earlier review.

A big problem arises for anyone taking a superficial look at the TTC’s books because so many projects are not funded, or are not even part of the approved “base budget”. They are “below the line” or, even worse, they are merely “proposals” of future works that might find their way into the official list. Looking only at current, approved funded projects ignores a large and growing list of projects that, for political convenience, are out of sight, the iceberg below the water line.

Slogging through the TTC’s Capital Budget is no fun, but somebody has to do it. You, dear readers, get the digested version of hundreds of pages of reports. Thank you in advance.

A few reports from the TTC contain a lot of information, but I expect only the dedicated will actually read them.

• TTC 2018-2027 Capital Budget and Plan
• TTC 2018-2027 Capital Budget Presentation
• Supplementary Line-Item Capital Budget

There are also the even more detailed “Blue Books”, two large binders with over 1,100 pages of project descriptions. These are not available online, but I have read through them to get a very fine-grained sense of the work the TTC proposes in its Capital Budget.

For the purpose of calculating the costs that apply to the subway, I have combed through the budget and broken it down into component parts by mode.

All figures are in millions of dollars. Note that some of my numbers differ slightly from the TTC’s mainly due to rounding. The values here are from the November 2017 version of the budget. Since then, some changes, notably the availability of more money from the Federal Government through the PTIF program, has shifted things a bit, but the main effect is to bring projects into “funded” status.

	Subway	Bus	Streetcar	Wheel-Trans	Total
Base Funded Budget	3397.4	1658.0	1334.5	121.6	6538.2
	52%	25%	20%	2%
Capacity to Spend Adj					426.9
Total Including CTS Adj					6965.1
Unfunded Base Budget	1643.1	270.6	361.8		2275.5
	72%	12%	16%
Total Base Budget					9239.8

A brief explanation:

• The Base Funded Budget is the amount the City is prepared to give the TTC either from its own funds or from subsidies received from other levels of government.
• The Capacity to Spend Adjustment is a bit of accounting sleight-of-hand used by the City to reduce its planned cost of TTC capital. This arises from the premise that the TTC never spends every cent they ask for (seen across a broad range of projects) and therefore the City does not need to budget for the full amount. This may be true in the short term, but a good deal of the “underspending” is a timing issue where projects from year 1 carry over into year 2. The money is needed eventually, but the City maintains the fiction each year that it won’t be thereby trimming future financing projections. (This line is not broken down by mode because it is stated across many project lines within the overall budget.)
• The Unfunded Base Budget contains projects that are approved to be in the Base, but for which no money is available.

The streetcar system is at a level that is above historical levels because the costs associated with the new fleet and with related system upgrades are still being digested. Seen over a longer period, streetcar costs are a lower proportion of the total.

The subway consumes about half of the funded budget and almost three quarters of the unfunded Base Budget project list. But this is only the start. There are other categories of “unfunded” projects that are not included here because Council has not approved putting them into the Base Budget.

	Subway	Bus	Streetcar	Wheel-Trans	Total
Not in Base Budget	166.5	856.2	9.4	18.3	1050.3
	16%	82%	1%	2%
Unfunded Scope Changes	109.1	2.7	15.2	1.3	128.4
	85%	2%	12%	1%
Future Consideration	2077.8	94.6	42.1		2214.5
	94%	4%	2%

• Not in Base Budget: These are items that TTC management has flagged as being required, but they have not been approved by Council for inclusion in the Base.
• Unfunded Scope Changes: Projects within the approved Base have changed in scope, but funding to cover these changes has not been approved.
• Future Consideration: These are “nice to have” items TTC management feels will come into play in the future. The largest among these is the major reconstruction of Bloor-Yonge Station to increase capacity and the provision of Platform Edge Doors on Line 1 YUS. PEDs for Line 2 Bloor are beyond the scope of the ten-year plan.

For the Base Budget, the subway represents about $5 billion over ten years. This includes almost nothing for new lines (only a few small studies) and this cost is overwhelmingly just “to keep the lights on”. Note that this is separate from costs charged to the operating budget of day-to-day maintenance, costs that would remain with the City under an uploading scenario.

The list of additional items is missing one key piece: the construction of a new subway yard and carhouse at Kipling. The budget includes funding to buy the property (acquisition is already in progress), but not to build anything on it. This yard is essential to the fleet replacement on Line 2 which, in turn, is a pre-requisite to the opening of the Scarborough Subway with ATC signalling.

Leaving aside the add-ons, the Base Budget comes in at about $500 million/year for the subway including the currently unfunded portion. This would be partly offset by existing subsidies:

• Of the provincial gas tax allocation to Toronto, the City allocates about $70 million to capital projects. Taking the Base as being about 50% subway, then $35m of the provincial money might be held back.
• Similarly, the federal government gives Toronto about $160 million in gas tax annually, of which $80m could be viewed as “subway” dollars. Whether the Feds would look kindly on Queen’s Park scooping a “municipal” transit subsidy remains to be seen.

Between them, these two subsidies would reduce the annual upload to around $385 million, rather more than the $160 million the Tories cite. Moreover, the provincial component does not vanish, only the need to send money to the City as a capital subsidy. Ontario would still be on the hook for about $420 million per year.

PTIF is not much help here because the Phase 1 PTIF money is largely going to the bus fleet’s rejuvenation, and a lot of Phase 2 will probably go to the big construction projects, not capital maintenance.

Who Owns The Subway?

Oliver Moore describes the way that the subway was financed.

Toronto’s subway has been built over decades, with the city financing the original and still most-heavily used section. As later parts were added, the province and Ottawa gradually took on major funding roles.

The understanding was always that Toronto would own the resulting infrastructure. This underpinned a deal struck when the subway expanded outside city boundaries last year: Toronto residents subsidize the cost for passengers boarding in York Region and, in return, Toronto owns the new subway tunnel.

In current dollars, the subway network cost about $8.5-billion to build. Because construction has become more expensive over the decades, the theoretical replacement cost – using the price per kilometre of the most recent expansion – would be about $26.5-billion.

This is true as far as it goes, but does not reflect the large investment in ongoing capital repairs and asset replacement that has been funded primarily by the City of Toronto especially since Mike Harris slashed provincial subsidies two decades ago. That is a large cumulative investment by Toronto that is as much a part of the subway’s value as the original capital construction. (Anyone who owns a major asset like a car or a house knows that the purchase price is only the start of its cost. Ongoing maintenance is expensive and avoidable only at the risk of premature deterioration.)

Moore continues:

The Tories view it differently, suggesting that much of the network’s value has amortized out to zero by now. And to discuss its current value is relevant only if someone is willing to pay that price, they argue.

Mr. Phillips [Rod Phillips, PC candidate for Ajax] said there is no plan to pay the city for its subway, but noted that taking over the capital maintenance is a sort of compensation. Ownership of air rights over current stations would be a matter for negotiation with the city, while the province would retain such rights over new stations.

The depreciation rates used by the TTC are shown in the table below taken from the draft annual report for 2017 recently presented at the TTC’s Audit & Risk Management Committee.

The original 1954 subway will be fully depreciated in 2019, but more recent lines have years to go before they are fully off of the books. More importantly, many parts of the subway have been replaced largely at the City’s expense over the years, and they are still very much “on the books” together with the ongoing interest cost for debt the City floated to pay for this investment.

Who Maintains the Subway?

Other issues would also have to be negotiated. Among them is the question of whether the TTC or private contractors do the capital maintenance work. And there are likely also to be continuing discussions about which work needs to be done and how urgent it is.

By its nature, capital maintenance can often be deferred in the short term, although transit agencies that do this too aggressively often pay huge costs down the road. In New York, a recently unveiled plan for long overdue maintenance and upgrades had a 10-year price tag estimated at US$37-billion.

If the government attempts to shoehorn the capital maintenance budget into its presumed value of the upload, many projects will simply fall off of the table. In the short term, this will not hurt much, and that was the situation nearly three decades ago as the TTC grappled with declining funding during the 1990s recession. That had a tragic cost, however, with the 1995 Russell Hill disaster where the investigation revealed the effects of deferred maintenance. Politicians of all stripes are happy to announce funding for new projects, and the Tories certainly have their list, but without regular maintenance, slow deterioration will reduce the subway’s value as a transit asset.

The Role of Metrolinx

Recent debates over transit expansion at city hall have been highly politicized, featuring bad-faith arguments and producing results at odds with expert analysis. But the process at least happened in public, was monitored by the media and played out over many hours of open debate.

Provincial decisions have been more opaque. Some key meetings of Metrolinx, the regional transit agency, were not public – government officials interfered in the process and the agency has been accused of modifying evidence to suit its political masters. Ultimate power rests in the Premier’s Office or at the cabinet table, where decisions are reached behind closed doors.

If there is one part of the provincial transit machinery desperately in need of housecleaning and transparency, it is Metrolinx and its use to shield provincial policy development from public view. The level of detail including a ten-year view of future plans that is available in budgets for City agencies such as the TTC simply does not exist at the Queen’s Park in any public document. Projects are announced as and when the government and publicity hungry ministers want a photo op, and cuts are rarely announced with explicit details at all.

If financial plans dictate cutbacks in subway spending, you can be sure that Metrolinx will be the last to tell us, and will concoct all manner of explanations and “business case analyses” to justify whatever the government wants to do. Changing this political culture is a big challenge for any government, although some parties might prefer to retain and expand on the level of secrecy to avoid being held to account.

Detailed Budget Breakdowns

The numbers in the tables above are taken from my condensation of the TTC’s detailed budget. The dollar figures are the TTC’s. The allocation of them to specific modes is my own.

TTC_2018_Budget_Breakdown_By_Mode

Page 1 of this breakdown is organized in the same major categories as the detailed budget, but with each line allocated to the four modes. Some items are easily assigned to one mode because they are things like station elevators that serve only the subway. Others are general costs which I have allocated across modes typically on the basis of 50% subway, 35% bus and 15% streetcar. One may quibble with this formula, but the dollar amounts distributed in this way are small and tweaking the percentages will not change the overall result much.

Page 2 includes the line by line detail of the Buildings & Structures budget because this is a large portion of the total ($1.6 billion), and each line affects different modes.

Pages 3 and 4 include lists of:

• The unfunded portion of the Base Budget
• Unfunded projects that are not included in the Base
• Scope changes in approved Base Budget projects
• “Future consideration” projects that are not yet competing to move into the Base Budget

The project titles are taken from the detailed version of the budget edited in some cases for space.

A sample from the TTC’s budget is shown below as a guide for those who wish to pore over the details. (Click to expand.)

The TTC budget shows each item with three projected costs and spending profiles. These lines are labelled:

• B: Previous 2017-2026 budget amount
• P: Proposed 2018-2027 amount
• C: Change

The columns show:

• Costs to the end of 2016 (if any).
• Probable costs for 2017. At the point this document was created, the accounts were still open for 2017.
• Annual spending projected for 2018 to 2027. For ongoing projects such as track replacement, 2027 is a net new cost as it did not exist in the 2017-26 budget.
• Ten-year totals for the previous and current budget windows.
• EFC: Estimated final cost.