What is the advantage of transit systems being able to incur debt?

[BMO]

Hey UT forumers. Been on these forums for well over a few years, posting every now and then.

I've been researching on Translink (Vancouver's transit authority/ agency), and I read that the system currently has a debt close to $1.1 billion.

I was wondering if any of you could shed some light on why it would beneficial for a transit agency to be able to incur debt. As far as I'm aware, currently the TTC is not allowed to incur debt, because it is a municipal service, and Canadian municipalities aren't allowed to have debt in a sense.

thanks in advance.

Brandon,

 

[Mapleson]

The TTC does not incur debt, but the City of Toronto does on their behalf. I'm not sure where you heard Canadian municipalities aren't allowed to have debt, but they are limited by a debt ceiling. By allowing the municipal service, like Toronto Hydro, to maintain it's own debt, you can gain a lower bonding and insurance cost by having a higher proven revenue stream to debt ratio than by lumping everything into one pile. It also allows the service to grow in proportion to need and usage, rather than being driven by political spending and whims.

 

[BMO]

The TTC does not incur debt, but the City of Toronto does on their behalf. I'm not sure where you heard Canadian municipalities aren't allowed to have debt, but they are limited by a debt ceiling. By allowing the municipal service, like Toronto Hydro, to maintain it's own debt, you can gain a lower bonding and insurance cost by having a higher proven revenue stream to debt ratio than by lumping everything into one pile. It also allows the service to grow in proportion to need and usage, rather than being driven by political spending and whims.

oh cheers, thanks for the correction. I guess I confused the TTC being unable to take on debt, as meaning the municipality couldn't either.

 

[freshcutgrass]

The TTC does not incur debt, but the City of Toronto does on their behalf.

To clarify...legislation dictates that municipalities are not allowed to incur operational debt, meaning its operational budget must always be balanced by law. Since the TTC is an agency of the municipality, its operational budget will automatically be balanced as well. Municipalities can issue debt to fund their capital budget.

 

[Admiral Beez]

The largest benefit of a transit system being able to incur debt is that they can incur expenses that they can not afford and thus defer making tough spending decisions to the future. Essentially you can borrow from the future citizens of the city to pay for unaffordable transit expenses today.

 

[GraphicMatt]

The idea that a transit agency -- or any government body -- should literally 'save up' money and then make capital purchases is insane. Governments have a tremendous capacity to attain low-interest long-term debt, and the infrastructure they build with that money can see huge ROI.

 

[BMO]

To clarify...legislation dictates that municipalities are not allowed to incur operational debt, meaning its operational budget must always be balanced by law. Since the TTC is an agency of the municipality, its operational budget will automatically be balanced as well. Municipalities can issue debt to fund their capital budget.

Thanks for clearing this up Freshcut!

The largest benefit of a transit system being able to incur debt is that they can incur expenses that they can not afford and thus defer making tough spending decisions to the future. Essentially you can borrow from the future citizens of the city to pay for unaffordable transit expenses today.

The idea that a transit agency -- or any government body -- should literally 'save up' money and then make capital purchases is insane. Governments have a tremendous capacity to attain low-interest long-term debt, and the infrastructure they build with that money can see huge ROI.

So in terms of looking at the TTC, just as an example. to prevent having to cut back service on routes, they go into debt to cover the operational costs, and over the long-run the increased service on the bus routes will increase ridership and, eventually lead to more ROI?

Would that be an effective example?

 

[unimaginative2]

The largest benefit of a transit system being able to incur debt is that they can incur expenses that they can not afford and thus defer making tough spending decisions to the future. Essentially you can borrow from the future citizens of the city to pay for unaffordable transit expenses today.

More specifically, the future citizens who will actually be using the new infrastructure will also be paying for it.

 

[freshcutgrass]

So in terms of looking at the TTC, just as an example. to prevent having to cut back service on routes, they go into debt to cover the operational costs, and over the long-run the increased service on the bus routes will increase ridership and, eventually lead to more ROI?

That is not a good example. The TTC's annual operational budget is balanced...it doesn't go into debt. What is not covered by TTC revenues, is subsidized by the city's tax-based operational budget, which also does not incur debt. Determining the TTC's operational budget, is a combination of how much the city wants to spend to subsidize it....how much they set fares at...ridership levels...and what level of service they provide.

Would that be an effective example?

Something from the capital budget. Things such as subway lines, new vehicles, yards or streetcar tracks is a capital expenditure. Building a subway line is too expensive to be paid for within a standard capital budget within its construction time. You "could" do it, but most people would not be willing to take that kind of tax increase to cover it. You need to borrow those billions and pay it off over a longer amount of time than it takes to construct it.

More specifically, the future citizens who will actually be using the new infrastructure will also be paying for it.

And it would be cheaper than if they waited. If you need it...you need it. The longer you wait, the more expensive it gets, and the more pronounced the infrastructure inadequacies become.

The problem lies in the fact that the average taxpayer wants the service but doesn't want to spend the money....and that the average politician is a coward and won't do what they know they should (despite the whining of the taxpayer).

 

[Admiral Beez]

The problem lies in the fact that the average taxpayer wants the service but doesn't want to spend the money....

I'm an average taxpayer and I have no interest in using the service. I pay for it as I do for all infrastructure through my property taxes, but give me my motorcycle, car and good old walking shoes anyday over the TTC.

 

[Chuck]

The largest benefit of a transit system being able to incur debt is that they can incur expenses that they can not afford and thus defer making tough spending decisions to the future. Essentially you can borrow from the future citizens of the city to pay for unaffordable transit expenses today.

Tis true, I have nothing to say except for 'thank you' to the people who delivered the first major stage of the subway system two generations ago, even if they did leave behind some debt to contend with.

In 25 years when new subway lines cost $2B/km to build, I'm sure that the next generation will be thanking us for constructing the DRL, Eglinton, and Sheppard lines at a bargain cost of $250M/km.

 

[unimaginative2]

Tis true, I have nothing to say except for 'thank you' to the people who delivered the first major stage of the subway system two generations ago, even if they did leave behind some debt to contend with.

In 25 years when new subway lines cost $2B/km to build, I'm sure that the next generation will be thanking us for constructing the DRL, Eglinton, and Sheppard lines at a bargain cost of $250M/km.

Very true. Maybe we could give them an even greater gift of finding ways to bring construction costs down to more sane levels!

 

[freshcutgrass]

I'm an average taxpayer and I have no interest in using the service. I pay for it as I do for all infrastructure through my property taxes, but give me my motorcycle, car and good old walking shoes anyday over the TTC.

Well, if you never use the TTC, then you would not be "average". The vast majority of Torontonians use the TTC to some degree or another. When the time comes (and it will) when public subsidies for private vehicle use in the city become less politically viable, we will see many more of you on the TTC.

But it really doesn't matter if you never use it...it's still in your best interest to live in a city that invests as much as it can into its public transit infrastructure.

Tis true, I have nothing to say except for 'thank you' to the people who delivered the first major stage of the subway system two generations ago, even if they did leave behind some debt to contend with.

Pretty sure the original Yonge Line had little or no debt. But I bet we wish they would have gone ahead with that Queen Line that was planned at the same time, but dropped when no outside money that was promised showed up. What was supposed to be two subway lines at $42.3 million became one subway line at $28.9 million (this was 1946 dollars). Sound familiar? The TTC had $18 million in surplus cash at the time to throw at it. Although by the time the subway was finished in 1954, the final cost was $67 million.

 

[Admiral Beez]

We need to clarify that building new rail or other public transit infrastructure is not the same as transit systems being able to incur debt. The debt incurred to build subways or other large multi-year/decade projects is incurred by the municipal and/or provincial governments.

So, when I said earlier that a transit system being allowed to incur debt is pushing unaffordable expenses onto future generations, I was not referring to multi-billion dollar, multi-year infrastructure projects and system expansions. This debt has never been incurred by the TTC. So, if the TTC were allowed to incur debt, the Commission would most likely use the debt capability to cover operating cost overruns, mostly unsustainable increases in salaries and benefits, or non-tendered (thus uncompetitive and needlessly costly) system maintenance.


So, let's not confuse a discussion about the TTC and debt with building new subways, or buying new buses, or building new stations - these costs in the past, present and future are covered by the city and higher levels of government, never by the Commission borrowing money. If the TTC could incur debt it would be for operational and maintenance costs - both of which would skyrocket out of control if debt-allowance removed the ceiling on spending.

 

[doady]

In addition to getting rid transit, the City should also get rid of the fire and police services because they also incur debt, and defer affordable expenses and tough spending decisions onto future citizens.