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

[freshcutgrass]

So, let's not confuse a discussion about the TTC and debt with building new subways, or buying new buses, or building new stations

Which is why I pointed out the difference between an operational budget...and a capital budget in my first post. This seems to be where the "confusion" lies. Translink's quoted $1.1 billion debt is long term capital debt...not operational debt (which like the TTC, does not have any).

For a much different situation, you can look at NYC. The "city" of New York (the municipality), is not responsible for its public transit at all. Their public transit is owned and operated by a State Authority (MTA). These State Authorities are quasi-private corporations, which do not not need to consult the taxpayers when it borrows money. They also shift funds from the capital budget to the operational budget using "creative" means.

The MTA has a 2011 operational deficit that is 2-3 times the taxes that Toronto uses to run the entire TTC!! Its debt-servicing charges from its operational budget is more than the entire cost of running the TTC!! The MTA has a debt of $31 billion. Yes...I said THIRTY ONE BILLION DOLLARS!!! And yet their system is still falling apart faster than they can spend, and it is only going to get worse. It, like the city of New York, is essentially bankrupt.

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.

I guess it's a moot point, since they can't. But I find it odd that you refer to TTC salaries/benefits and maintenance as if it were out of line. TTC salaries & benefits are industry average, yet the TTC gets more bang for their buck than other agencies. And the in-house maintenance is one of the most important elements of why the TTC can put out such impressive numbers on a shoestring budget. There's a reason why TTC vehicles have an average lifespan roughly double that of any other NA transit agency (beside the fact that we don't purchase new vehicles in a timely manner).

 

[Chuck]

The MTA has a 2011 operational deficit that is 2-3 times the taxes that Toronto uses to run the entire TTC!! Its debt-servicing charges from its operational budget is more than the entire cost of running the TTC!! The MTA has a debt of $31 billion. Yes...I said THIRTY ONE BILLION DOLLARS!!! And yet their system is still falling apart faster than they can spend, and it is only going to get worse. It, like the city of New York, is essentially bankrupt.

The standard definition of the words "debt" and "deficit" shouldn't even apply to transit systems. Transit systems are largely funded by the government. Funding is completely arbitrary, random, and variable - certainly not tied to any tangible good or service. All else being equal, the TTC would operate at a huge loss if the City of Toronto happened to cut their subsidy in half. Yet, if Toronto decided one year to triple the subsidy, the TTC would all of a sudden operate at a "profit".

In the case of New York, it has a first class transit system that is arguably the best in North America. Unlike the TTC, the MTA truly meets the needs of its host city. That New York's subway system is crumbling and in so much debt is a function of chronic underfunding. Transit systems by their very nature cannot turn a profit. Therefore, we shouldn't be holding them to the same financial requirements that we would a private corporation. Fiscal responsibility and efficiency should still be a priority, but even that will not put an end to massive, permanent losses.

Although I tend to be very fiscally conservative, this is one instance where I'm far from it. Since subsidies make up such a large portion of a transit system's income and are arbitrary anyway, simply raising the subsidy is a very effective way to eliminate deficit.

 

[GraphicMatt]

The TTC's inability to directly borrow money to cover operational deficits doesn't restrict salaries or other costs. (With regards to salaries, the TTC no longer has any real control over what their unionized employees are paid. Thank the mayor.) The TTC's annual budget shortfall -- and there will always be a budget shortfall, unless we target our farebox recovery ratio at 100% -- is (essentially) automatically covered through a city subsidy. The city, which also can't borrow money to cover its operational deficits, will either raise taxes or cut services to balance its budget.

There's probably a reasonable argument to be made that the city's inability to run an operating deficit helps avoid catastrophic fiscal situations. But, on the other hand, there's a good reason why other governments the size of Toronto's can and do run operational deficits from time-to-time: it allows for longer-term planning.

 

[freshcutgrass]

The standard definition of the words "debt" and "deficit" shouldn't even apply to transit systems. Transit systems are largely funded by the government. Funding is completely arbitrary, random, and variable - certainly not tied to any tangible good or service

I really don't agree with either of those statements. A transit agency is just a corporation like any other that operates on budgets. Deficits and debts are a reflection of that. And public transit is certainly a tangible service.

Transit systems are largely funded by the government.

This is where the TTC is the odd man out...it is largely funded by user fees. This would be its one major flaw.

All else being equal, the TTC would operate at a huge loss if the City of Toronto happened to cut their subsidy in half. Yet, if Toronto decided one year to triple the subsidy, the TTC would all of a sudden operate at a "profit".

Neither of those things would happen. If the city increases or decreases subsidies, the TTC would have to adjust fares/service to meet its budget either way.

Transit systems by their very nature cannot turn a profit.

Well, technically they could. But the purpose of transit is not to make profits...it's to increase the economic activity of the area it services. For every dollar you spend on transit (assuming it's spend somewhat wisely), you get at least 10 dollars back in economic activity (and perhaps much, much more).

Since subsidies make up such a large portion of a transit system's income and are arbitrary anyway, simply raising the subsidy is a very effective way to eliminate deficit.

Well, concentrating on "deficits" is looking at the wrong target. Everything runs on a budget. Surpluses and deficits are just a reflection of how accurate you are at predicting a budget. The idea was to stick to the budget. Surpluses and deficits are supposed to only account for unseen things. If transit needs more funding, than you simply increase the budget in the first place. The TTC actually ran a surplus last year....not a deficit. But that hardly means the TTC should have its budget decreased...does it.

there's a good reason why other governments the size of Toronto's can and do run operational deficits from time-to-time: it allows for longer-term planning.

I'm not aware of (m)any that do. And there is a good reason for it. Once you start, it's difficult to stop. And once debt-servicing starts eating up your operational budget, it just gets worse (it's bad enough servicing capital debt). We don't give short-term politicians the power to make future generations pay for services we use now...because that is exactly what they would do. ha ha


Up-front users fees make sense when it's a service you want people to conserve or not waste....like water, electricity, garbage. But we actually want to encourage as much public transit use as possible. So in that sense, the most logical thing to do is not charge up-front fees (fares) to use it at all. Not only would that increase ridership by a massive amount, it would make investing in more and better infrastructure both publicly and politically a much higher priority. It would also eliminate gazzillions of dollars of expenses tied to fare collecting.

But Toronto is still living in LaLa Land. This is going to change, but we have to finish living our little fantasy first.

 

[rbt]

This is where the TTC is the odd man out...it is largely funded by user fees. This would be its one major flaw.

No, a majority of the TTC Funding is government.

User fees collected is roughly $1B. Government funding this year is closer to $2B:

Government Subsidy for 2011 broken down:
* $430M for operations.
* $100M for wheeltrans operations.
* $900M for the base capital program. This is basic maintenance like replacing rolling stock, tunnel/track repair, garage expansion for new rolling stock orders, and legislated items like elevator installation. This does not include large expansion projects.
* roughly $600M for expansion, which at this time includes the Spadina Line and Eglinton Line. These tend to be a fixed budget and funds cannot be redirected to the base capital program, despite a short-fall at this time for basic maintenance.

You are correct that the TTC does collect more in user fees (as a percentage) than most other transit agencies, but they are still not a majority of funding.

 

[freshcutgrass]

You are correct that the TTC does collect more in user fees (as a percentage) than most other transit agencies, but they are still not a majority of funding.

The operating budget of the TTC is 70% funded by user fees.
The capital budget is tax/debt funded (obviously)

 

[rbt]

The operating budget of the TTC is 70% funded by user fees.
The capital budget is tax/debt funded (obviously)

Yes. Exactly, except the "obviously" bit which is not a constant today or through history.

Nor is there an obvious split between capital and operations. Escalator cleaning, is that operations or capital? Most transit companies call it operations but the TTC calls it capital because the find it easier to get capital dollars. There are hundreds of millions of dollars in the TTC annual capital budget that many other transit corporations (including TTC before the 90's) would call operations because it has to do with day to day maintenance.

You really do need to consider the budget as a whole to get any kind of accurate comparison. This gets worse when you realize that reduced operations (station cleaning, pot-hole repair, bus cleaning, track grinding/cleaning) results in increased capital (retiling of stations, repaving, purchasing new buses due to corrosion, track replacement).

I can easily run the TTC with 100% operations funding coming from the farebox; but you won't like the capital budget.

 

[Chuck]

Also, is it even valid to separate operating and capital costs? When a manufacturing company needs to build a new factory, they pay for it themself. Meanwhile, when the TTC needs to build a new subway line, we don't include the construction cost in the annual budget. Even worse, we will actually claim that the TTC is not operating with a deficit!

 

[rbt]

Also, is it even valid to separate operating and capital costs? When a manufacturing company needs to build a new factory, they pay for it themself. Meanwhile, when the TTC needs to build a new subway line, we don't include the construction cost in the annual budget. Even worse, we will actually claim that the TTC is not operating with a deficit!

Separation does occur in the factory too, in that the capital at the factory has depreciation and tax write-offs are spread over several years (CCA's); but the "blackness" or "redness" of the budget as a whole is considered with all of that in it.