The Ontario Government introduced its 2019 budget on April 11. The section on transit and transportation begins with the usual statements about the cost of congestion, and the economic benefit of transit and highways. Transit specifics focus on the recent Toronto subway announcement. Metrolinx/GO continues on its expansion path, but with more emphasis on what has been done than what is to come.

The Subway “Upload”

Ontario reiterated its intention to take ownership of the Toronto subway network, but it is now clear that this will be done in two parts. First will come responsibility for system expansion as announced on April 10 with the existing system assets to follow in 2020. This puts the more complex problem off nominally for a year, but that debate is really underway now with negotiations between the City of Toronto, TTC and province.

By separating the upload into two distinctive parts, the Province can begin building subway extensions and new lines immediately while giving proper due diligence to the state of repair of the existing assets and fulfilling its commitments to consultation under the Terms of Reference.

The Province remains steadfastly committed to the full upload of the TTC subway network. [p. 64]

That “due diligence” is the nub of any transfer. Past provincial statements imply that the cost of life cycle maintenance (major repairs and replacement, items found in the TTC’s capital budget) would shift to the province leaving day-to-day costs to the City of Toronto. The problem lies in the inevitable tug-of-war between transit expansion and state of good repair. Provincial Treasurer Vic Fedeli, speaking on CBC’s Metro Morning, claims that the investment in new transit lines more than offsets gas tax revenue promised by the former Liberal government. However, this leaves a major hole in planned funding for system upgrades.

Gas Tax Transfer

Fedeli claimed that the Gas Tax can only be used for specific type of spending, but this is not true. The money today goes partly to subsidize day-to-day operations and partly to capital for state-of-good-repair (SOGR). Across the province, few cities are building rapid transit expansions, and their gas tax allocation goes to operation and maintenance of existing systems. Fedeli, in parliamentary language, is “badly briefed”.

The gas tax transfer from Ontario to Toronto for 2018-2019 will be $185 million, and this was expected to double in stages over the next four years. This increase has been cancelled in the new Ontario budget.

Beginning in 2019, Ontario will gradually increase the municipal share of gas tax funds up to a total of four cents per litre in 2021-22. Based on the averages from the past 10 years, gas tax funding is estimated to be about $642 million in 2021-22. There will not be any increase in the tax that people in Ontario pay on gasoline.

Year                            2018-19 2019-20 2020-21 2021-22

Municipal share (cents/litre)   2.0     2.5     3.0     4.0
Estimated funding (millions)    $321    $401.3  $481.5  $642

Source: Enhanced Gas Tax Program, Ontario Government Backgrounder, January 27, 2017

Note that the dollar funding above is for all of Ontario, not just for Toronto, although it gets the lion’s share due to its size.

The Province will not move forward with the previous government’s proposed changes to the municipal share of gas tax funding. The Province will continue to support municipalities through the existing Gas Tax program and ensure it continues to meet the needs of the people of Ontario in alignment with provincial priorities.

Over the next few months, the government will consult with municipalities to review the program parameters and identify opportunities for improvement. This review will be informed by the goals of responsible planning and a more sustainable government to ensure taxpayer dollars are being spent as effectively as possible. [p. 75]

Toronto allocates almost half, $91.6 million, to the TTC Operating Budget, leaving $93.4 million for capital in 2018-2019.

Planned spending based on federal and provincial gas tax transfers is summarized in the city’s 2019 budget papers. This document details the allocation of federal and provincial transfers planned over 2019-2028 with $1.358 billion broken out by TTC budget line. Note that this is less than the total that would have been expected over ten years because the “out years” of the TTC’c capital plan is constrained by city financing plans. Many projects are “below the line” in the budget, especially in the outer five years, and the rise in gas tax funding could have helped to bring some of these projects to approved, above the line status.

About 70% of planned provincial gas tax spending by Toronto is for assets that are subway related. If Ontario transfers responsibility for all of this to the provincial level, then this would offset the loss of expected gas tax. However, that depends on just what budget lines Ontario chooses to take on. When capital subsidies began under the Davis government, there was something of a shell game between Toronto and Queen’s Park over the classification of expenses because “capital” received at least a 50% subsidy while “operations” only got 16%. This sort of thing will bedevil negotiations between the two governments on funding of the uploaded subway system’s SOGR projects.

The table below summarizes the categories listed in the city’s budget and splits them between subway and surface networks. The breakdown is based on my experience in reviewing TTC budgets. Although some adjustment of percentages might be argued, the overall balance will not change much.

Financing System Expansion

A common claim of the Ontario Government is that it can be more aggressive in financing system expansion because of the accounting rules under which it operates.

The upload also enables the Province to make even larger financial contributions to new subway projects, subject to the confirmation of the accounting impacts by the Auditor General of Ontario. Under municipal ownership, Provincial contributions to the City would have had an adverse effect on the Province’s books, whereas provincial ownership of the assets would allow the Province to amortize its capital contributions, thereby treating subway builds in the same manner as other provincially owned infrastructure projects, such as hospitals and schools. This ownership transaction ultimately creates the fiscal space to allow the Province to significantly deepen its commitment to transit and start projects immediately, not sometime in the distant future.

The Province is not presupposing the outcome of the discussions with the Auditor General of Ontario and will continue to work in very close collaboration. [p. 65]

The essential difference is that a capital transfer to a municipality, for example the provincial share of the subway extension to Vaughan, must be booked as an expense and the money disappears off of provincial books. If the subway is owned by Ontario, then it is treated as a capital asset offsetting the debt. Moreover, there is a good chance that Ontario will never actually pay off the debt and it will simply pile up in the accumulated provincial borrowing to be rolled over when it matures.

By contrast, municipalities borrow over the expected lifetime of a project and pay off their debts in order to leave room for future capital spending and associated borrowing.

Ontario can build more, faster, because it has a less constrained, and one might well argue, less responsible attitude to debt costs and their burden on future budgets. This is not a peculiarly Liberal or Conservative problem, but a fundamental part of how the provincial and federal governments operate.

Ownership is all about accounting and the ability to spend on the never-never for provincial projects in a way that would look far worse on provincial books if the money went to direct municipal transfers.

This shows up in a table of the provincial net debt. Although the province expects to have a total debt of $378 billion, this is offset by almost $130 billion in “Non-Financial Assets” which include “the tangible capital assets of the Province and broader public sector” according to the footnote. That is where things like provincially owned rapid transit lines balance the debt used to build them. If Toronto owns a new subway, there is no provincial asset, and the borrowing needed to pay the provincial share shows up in the Accumulated Deficit.

Source: Ontario Budget 2019, p. 324

Toronto expects to receive over $4 billion from phase 2 of the Public Transit Infrastructure Fund which itself is part of the much larger federal Investing In Canada Plan (ICIP). However, the projects to which Toronto planned to dedicate this money do not match the provincial list with only some version of a Relief Line and the Scarborough Subway in common. Ontario includes the Richmond Hill subway and the Eglinton West LRT in its priorities, while Toronto includes the Bloor-Yonge station expansion and SmartTrack stations projects.

It is quite possible that Ontario priorities both in transit and in “green infrastructure” spending will soak up all of the federal money nominally available to Toronto.

In addition to provincial funds, the Province and the federal government have reached an agreement on the terms regarding the use of Investing in Canada Infrastructure Program (ICIP) funds for these subway projects. The federal government has confirmed that ICIP monies can be used for subway projects, regardless of underlying ownership and has further confirmed that it will invest up to 40 per cent of the cost of eligible projects. This means that the $4.2 billion allocated under ICIP for transit infrastructure in Toronto could be used for eligible subway projects, in addition to the $660 million already allocated to the Scarborough Subway Extension by the federal government.

Furthermore, the federal government has indicated flexibility in reallocating monies from the $2.25 billion Green Infrastructure Stream to the Public Transit Stream. Given the obvious ability of subway projects to reduce greenhouse gas emissions, the total funding potentially available from the federal government to support subway construction could be just over $7 billion.

The Province will continue to work with the federal government in the hopes that it will further increase its funding, consistent with a 40 per cent contribution to all new builds. The Province will also engage the City of Toronto and York Region, where applicable, to negotiate the exact contribution levels from these municipalities to Ontario’s new transit plan, in addition to the federal and provincial monies mentioned above.

The Province expects the federal government, the City of Toronto and York Region to make significant capital contributions to what will be the largest investment in subways in Canadian history. [pp. 65-66]

How Valid Are The Estimates

Provincial cost estimates are always stated without inflation to the point of construction. The cost will be higher if this is an estimate in current rather than future dollars, and yet the province makes comparison to city/TTC estimates that include inflation. This makes the provincial estimates appear lower, relatively speaking, than actual spending really will be.

A thread running through recent City debates has been the inability to keep projects “on budget” and part of this arises from budgets that are set too early in the design process to be reliable. The debate over the Scarborough Subway Extension turns on the creep between an original claim that it would cost only a few hundred million more than the LRT plan to the now-known jump to over $5 billion for the three-stop version. It is simply not credible that the province could have design work for new lines advanced to the point of an estimate that has only a small margin of error. At a comparable point in the city’s process, that margin could be up to 100%.

Finally, all estimates are subject to market pricing especially where public-private partnerships come into play, and they will carry the hidden future cost of financing.

If Ontario’s cost estimates prove too optimistic, who will pick up the difference? Would municipalities be on the hook for a share of extra costs, or could they simply tell the province to pay for cost overruns on their own projects. By analogy, the overrun on the subway extension to Vaughan was covered by Toronto and York Region.

The Ontario Line

For reasons passing understanding, the original announcement of Ontario’s transit plan was short on details, some of which were included in the budget. This contributed to needless confusion not to mention the sight of evasive answers to questions by Ministers and officials who could have better defended their plan, but were reduced to a handful of talking points.

The map in the budget shows a bit more detail than the one included in the Premier’s announcement only a day earlier. Even this map is preliminary and subject to refinement.

The preliminary cost estimate for this project — including the additional kilometres of track, new stations, rolling stock and a storage yard — is $10.9 billion, subject to market bids. The Ontario Line is expected to represent more quality and service at a cost that is incrementally higher than the current publicly estimated budget for the Relief Line South project, and in all cases, would be cheaper than what the Province anticipates to be the City’s revised estimate. [p. 68]

The province claims that it can deliver this project at lower cost through various changes including bridging over the Don River at East Harbour rather than tunneling below it. It is unclear how this would be achieved given physical constraints and planned development in the area. At least this settles the issue of “which Don River crossing”, but not the question of how it would be built.

Continuing the claims of a new technology that will save money, the province plans:

• to “… deploy lighter, more cost‐effective and modern trains that have fewer signalling problems … than existing TTC subway trains”. It is a matter of record that plans for the Relief Line included modern signalling akin to what is now under installation on Line 1 Yonge-University and planned for Line 2 Bloor-Danforth.
• trains that would be “cheaper to operate”. This can refer both to the benefits of new technology but more importantly to automated, unattended operation such as found on lines like Vancouver’s SkyTrain, a system that has been operated for decades.
• the line “would not be dependent on the requirements of the technologically outdated Bloor‐Danforth Line”. This refers to the size of trains used on BD, but also to the current signalling and control technology. To call the BD “outdated” ignores the fact that rapid transit systems all over the world operate with the same technology.
• the line would be delivered “potentially through public‐private partnership”, another time-tested way to getdebt off of provincial books at the cost of future lease/operating payments to the private partner. [quotes from p. 69]

The anticipated cost is $10.7 billion, subject to the caveats above regarding currency and accuracy of the figure.

The Yonge Extension to Richmond Hill

This project is projected to cost $5.6 billion (subject to caveats), and it is quite clear that it would open as soon as possible after the Ontario Line to deliver on political promises to York Region. Whether this schedule will hold if the Ontario Line runs into construction problems remains to be seen.

To better utilize the Yonge North Subway Extension, the Province will also undertake measures in the immediate term to reduce congestion on the Yonge‐University‐Spadina Line by better utilizing and promoting the use of the existing Richmond Hill GO line and evaluating the retrofit of the Bloor‐Yonge Station. [p. 70]

The need to make better use of Richmond Hill GO is a long-overdue commitment to exploit existing infrastructure where possible. This will not address all demand between Richmond Hill and Union Station, but it could take a slice off of the crunch facing the Yonge subway. The Bloor-Yonge expansion gets a mention, but there is no money allocated to it and, as noted above, PTIF money Toronto had earmarked for this could be scooped by Queen’s Park for its own projects.

The Scarborough Extension

The funding scheme for the proposed three-stop extension to Sheppard is a mix of existing and hoped-for contributions.

Presently, the City is focused on a one‐stop extension that has an estimated cost of about $4 billion, which has been adjusted for inflation. The Province has estimated that a three‐stop extension would cost an additional $1.5 billion, for a total cost of $5.5 billion. The Province has committed $2 billion, and the City is expected to contribute an estimated $1 billion to the one‐stop extension, to be adjusted for inflation. The federal government is expected to keep its commitment of $660 million along with an equal share, with the Province, of any remaining incremental costs. [p. 70]

This means that Ontario expects Toronto to pick up inflationary costs above its current estimated contribution (which already includes inflation), and that the federal government will equally share the incremental cost of going north to Sheppard. This would more than double the federal contribution, and there is no indication that this money would actually be available.

A related problem here is that the city and province do not yet agree on just how much Ontario’s “commitment” in Scarborough is really worth, allowing for inflation from when it was announced. In turn that would affect Ontario’s assumption of Toronto’s share of the project.

This is a particularly good example of Ontario “enhancing” a project but expecting other governments to carry a large share of the extra cost.

The completion date is 2029-30, three to four years later than the City’s plan to open in 2026.

The Eglinton West Crosstown Extension

A few important details in the budget clarify the general announcement about this extension:

• The total preliminary cost estimate of the extension to Renforth Drive is $4.7 billion, and the Province will look to the City and federal government for their contributions.
• [T]he Province would put a portion of the Eglinton Crosstown West Extension underground, primarily between Royal York Road and Martin Grove Road.
• This project has an estimated completion date of 2030–31 and could be delivered using a Design‐Build‐Finance‐Maintain model consistent with the one used for the Eglinton Crosstown project. [pp. 70-71]

The underground option is limited to the most congested part of Eglinton Avenue West and is not, as some claimed or hoped, for the entire extension.

An extension to Pearson Airport is more vague:

Ultimately, through future phases of this project, the Province is committed to establishing connectivity with Pearson International Airport. [p. 70]

The Sheppard Subway Extension

As previously reported, the province commits to an easterly extension from Don Mills Station to the planned McCowan/Sheppard terminal of the Scarborough subway. However, this is sufficiently far off that the main effect of the announcement is to squelch any hopes for the LRT option in this corridor.

[T]he Province will begin exploratory work on cost and on completion timelines to lock in the project for a future build date, following the completion of the Scarborough Subway Extension. [p. 71]

Metrolinx

There is very little news about Metrolinx in the budget beyond the recitation of works already completed and known expansion projects. The GO Expansion program will continue although the technology is not yet settled.

The Province will look to the private sector to propose innovative approaches to meet future GO Transit rail service levels, including opportunities for technology that could be used to electrify core segments of the GO Transit rail network, such as an overhead catenary system or hydrogen fuel cells. [p. 61]

This is old news, and reflects the process set in motion by the previous government by which the technology choice and pricing will be part of proposals to build and operate the expanded network.

Summary

The budget puts a bit more flesh on Premier Ford’s transit announcement, but leaves many questions especially regarding who will actually pay for all of his plan, and how much of it can progress beyond design stage during his current mandate. Some schedules are quite optimistic including the Ontario Line for which detailed design only exists for the original RL, and that based on a technology the province denigrates and rejects.

How much Ford will have to show for his efforts by the next provincial election remains to be seen. He could discover the same problem as the McGuinty/Wynne government that getting from announcements to tangible progress is difficult, especially if changing financial circumstances make original promises impossible to deliver.

For its part, Metrolinx takes on a huge program where making the government look good is top priority. This is far more than cooking the books to “justify” a new GO station in a Minister’s riding. It is a massive network expansion that, even assuming the funding problems are settled, will strain that agency to deliver. Telling Premier Ford that his signature projects might not be delivered “on time, on budget” would be suicidal. Delivering on this scale might not be as simple as the “experts” at Metrolinx and Infrastructure Ontario think, and the day may come when the province will no longer be able to gloat over alleged shortcomings in TTC’s project delivery.