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politics

Toronto Doesn’t Need to Pay for New Streetcars Right Away, No Matter What Rob Ford Says

The Ford party line has it that taking on debt to pay for Toronto's new streetcar fleet is a bad idea. But there are plenty of reasons why that's not true.

One of Toronto's new streetcars, photographed at a media preview in November.

The City’s capital budget is overlooked and misunderstood by many, but it plays an important role in building Toronto. It’s the part of the budget that funds large, long-term infrastructure projects like the Union Station Revitalization. But a look at how some members of city council have recently approached one of Toronto’s higher-profile capital projects, an arrangement to purchase 204 next-generation streetcars (the order has since been reduced to 182), reveals a problematic strategy for spending these crucial capital dollars.

In 2008, the City committed to purchasing 204 modern, European-style streetcars (also known as light-rail vehicles, or LRVs) as part of the capital budget. Council voted in favour of the move, 29 to 11. This decision followed a staff analysis that buying new streetcars would be the City’s most cost-effective option; maintaining the aging streetcar fleet was expected to be so expensive that deferring the purchase of new vehicles wasn’t considered to be worth it. At the time, council believed that one third of the LRV purchase would be assumed by each order of government, but federal funding didn’t come through. Conservative cabinet minister John Baird even infamously told Toronto to “fuck off.”

Without funding from the federal government, council voted, in June 2009, to proceed anyway, and deferred some items in the TTC capital budget so the City could pay for the new streetcars without taking on any additional net debt. During the council vote to do this, at an estimated additional cost of $417 million, even penny-pinching, current budget chief, Mike Del Grande, joined the majority: it was 36 to 6, in favour of the purchase.

However, attitudes changed during the 2012 budget. Mayor Ford’s administration offered a new way of thinking: paying for streetcars, Ford and his allies began to insist, means taking on evil, evil debt. So we better pay for these streetcars up front, because evil things are bad.

This talking point started a couple months before last year’s budget vote, with Team Ford using it to justify their unpopular proposed budget cuts.

In the face of a surplus of close to $200 million (which then grew to $292 million when all the totals came in), the argument was that all of this money was needed to pay for David Miller’s unfunded streetcar purchase—that it couldn’t be used to stave off cuts. This tactic hasn’t gone away. In October, Rob Ford told Metro Morning‘s Matt Galloway:

“We have to finish buying the streetcars. They cost about $700 million to finish the purchase, and we’ve got approximately $200 million to go.”

What Ford is suggesting here is that in order for the City to purchase streetcars responsibly, it has to pay the money up front, to avoid debt. To this end, in last year’s budget, a policy was passed to have all future surpluses applied to the streetcar purchase until it is fully paid off.

But Rob Ford is wrong, and the people promoting this idea either don’t understand budget basics, or are being disingenuous.

The interior of one of Toronto's new streetcars.

Put aside for the moment that the way council put together the streetcar debt financing ensured there was no net debt increase, and let’s focus on how the capital budget works. The City of Toronto is legally prohibited from running a deficit on its operating budget, but it takes on debt to fund large purchases in its capital budget. (Deficit is a shortfall on a yearly financial obligation, whereas debt is borrowed money, repayable over time.) This is a sensible way of doing things, because then the City can pay off its capital purchases—like the new streetcars—over their useful life, rather than scrimping and saving to pay for them up front. To use a household analogy, you pay off your mortgage while you live in the house, rather than waiting to buy one outright in 15 years.

Those in favour of paying off the streetcar purchase right away say that they’re not only retiring debt early, but also eliminating some interest costs, and thus saving money. However, this misses the big picture. The current borrowing costs (or interest rate) for a 30-year City of Toronto bond are 3.80 per cent, which represents a low-interest-rate environment, thanks in part to the City’s strong interest rating. This should mean that the City is more willing to invest in worthwhile projects, or re-finance old debt, because it’s relatively inexpensive to do so. Debt financing is worse when interest rates are high, and Toronto has a really good situation right now.

This is a key part of the capital budgeting process: assessing the value of investing in each project, and weighing that against the risk you take and the return you need. Through some relatively simple formulas, you assess the cost of borrowing compared to what you determine to be the value of the project. Then you weigh that against your risk tolerance and other opportunity costs.

The Ford method, meanwhile, only looks at the variable that centres the mayor’s ideology—cost—and not at the surrounding factors that give the situation its context.

There are great reasons to pay for capital purchases, like streetcars, over long periods of time. For one, the streetcar deliveries will be staggered from now until 2019, and it’s hardly the kind of purchase the City would want to make before getting its product. After all, if there are problems with the vehicles—and there very well could be—then the City would want to be able to motivate Bombardier to fix it. The best way to do so would be by withholding payment if contract terms aren’t met.

There’s also the cost of capital. A dollar today is worth a lot more than a dollar in 20 years, as you can invest that money into projects with a high rate of return in the meantime. This point came up during the recent council discussion of how to spend the proceeds from the sale of Enwave, a partly City-owned corporation. Ford allies argued that it should all be earmarked for capital reserves in order to pay for streetcars. Other councillors proposed that some of the money should go into TCHC renovations, as the streetcar payment isn’t needed immediately, and deferring needed housing repairs will only cause them to be more expensive down the road. This was dismissed out of hand by council’s conservatives, who have a fixation on earmarking funds for streetcars while they don’t apply the same logic to, say, the Gardiner.

It remains an open question whether this wrong-headed approach stems from a genuine lack of budget understanding or disingenuous ideological stances. Either way, anyone who insists that the City of Toronto pay for 182 streetcars with up front cash detracts from any real conversation to be had on City finances, should re-examine how the capital budget works, and should have zero credibility in the meantime.

Comments

  • Anonymous

    Rob Ford’s remaining political capital consists of the sob sister act (dude, cry me a river!), and manufactured “bad news” well past its sell-by date.

  • http://www.facebook.com/LadybirdMagpie Andrea Peattie

    Does anyone know if the streetcars will still ding. This really concerns me because I love the StreetCar Ding!

    • Anonymous

      I do hope they keep the ding, its far nicer sounding than a horn for those situations where a horn isn’t warranted. There’s just something cheery about two streetcars giving each other a ding as they pass. But they’re not keeping the centre light on the front which will make it harder to spot far off streetcars in certain lighting conditions letting us know our long wait is almost over.

      • Anonymous

        The clanging of streetcar gongs enhances the atmosphere and character of Victorian main streets like Queen, and that atmosphere would be slightly duller without it. So I also hope that that feature will be maintained.

  • Anonymous

    “… thanks in part to the City’s strong interest rating.”
    I think you mean “credit rating”.

  • Roger B

    cap-ex vs. Op-ex…. you’d think he’d know that as a self-professed businessman.

    • https://paul.kishimoto.name/ Paul Kishimoto

      Was that taught in first-year business at Carleton in the ’80s? If not…

      • Anonymous

        I believe he was Poli-Sci, so I doubt he’d know. Then again, he did attempt first-year twice…

    • Lje

      As the CFO of Deco!

  • http://twitter.com/wklis W. K. Lis

    182 new streetcars? The TTC’s website shows 204.

    Metrolinx has agreed to purchase 182 new LRVs for the Transit City lines, with an option for 118 more.

  • Jacob

    Who needs complex reasoning when a simplistic ideological dogma will do?

  • DSC

    It’s back to 204 in this Budget. See page 27 of http://www.toronto.ca/budget2013/pdf/cap13_an_ttc.pdf

  • jesus christ.

    are you the fucking mayor? no? then quit deciding what to do.

  • Anonymous

    Were is the money for the Gardiner coming from?

    • https://paul.kishimoto.name/ Paul Kishimoto

      Your question presumes there *is* money.

      • Anonymous

        There’s money for football…

  • Andrew

    To me, streetcars seem like a reasonable choice for capital budget spending. What I don’t understand is how the city can justify spending capital funds on IT projects. Why take on debt for technology, which by its very nature has a short lifespan? I’d love it if you or someone other enterprising journalist would delve into this issue one of these days.

  • http://twitter.com/Brandon_Quigley Brandon Quigley

    So, what you’re saying is Rob Ford wants to give our tax money away now, for something we don’t get for a few years.

  • Mort

    But you didn’t counter the central premise of Ford’s pitch: Is it cheaper to pay for it now, or is it cheaper to pay for it later?

    This is the problem with debating Rob Fordisms, they are rarely wrong. Wasteful spending really IS wasteful; Taxpayers (voters/citizens/residents) really SHOULD get respect; People honestly DO want Subways.

    The only way to challenge him is to prove these are false statements, which is impossible. We try to point out how hypocritical he is in terms of implementation, but we can’t argue the basic premise of most of what he says.

    • Anonymous

      Many of his claims may not be “false” but that doesn’t make them practical, achievable, desirable, or necessary, or make pursuing them worth the cost, or make works-on-paper work in the real world, or free them of the long-term consequences obvious to his detractors.

      And Ford has never said anything to indicate he means anything but taxpayers when he says taxpayers, which only serves to reduce government to mere service-provider.

    • Anonymous

      Well aren’t you late to the party. Fordisms are “rarely wrong”: is that how the Fordistas think? Because, normal people with > grade 3 education know better. Ford’s thinking is all wrong, and that’s been amply proven all over the place, in considerable detail, except in Sue Ann Levy columns, and Sunday afternoons on Newstalk 1010.

      Rob Ford saying something doesn’t make it right, true or real. Quite the opposite.

      • Brenda

        ya, let’s blame Ford for everything. he’s always wrong and you’re always right.

    • Testu

      Actually, I believe they did address that. In terms of the number of dollars used to pay it off, it’s cheaper to do it now.

      In practice, because of the incredibly low interest rate the city pays on its debt it is probably just as “cheap” to do it later, especially when inflation is factored in. More to the point, there are a lot of things that money would be better spent on right now. Things that could improve the cities financial situation in the longer term.

      Unfortunately that kind of nuance doesn’t stand a chance against Fordisims, it’s not nearly pithy enough. Also, every idiot that thinks municipal finances are even remotely comparable to family finances.

    • Anonymous

      It also depends on who is asking the question, and who is answering it. One person’s answer on what counts as “wasteful” can be very different to another person’s view. Wasteful is wasteful, but only to people who can agree what is defined as wasteful.

  • David

    Taking on debt or not has nothing to do with th timing of paying bombardier. The debt would be taken on in order to pay the bill. If we save money for the purchase in advance it is invested in short term until the bill comes. As for an incentive to have bombardier fix issues, generally these contracts withhold a portion of the price to cover this very thing (usually 10 percent)

  • chrisoftoronto

    It’s all just accounting BS anyways. Pay cash for streetcars, borrow to pay for something else. Borrow for streetcars, pay cash for something else. At the end of the day the books look very similar.

    It’s kind of like someone buying a house and a car at the same time, but they have a bit of extra cash more than the minimum downpayment for both. Do you put it towards the house, or the car, or something else entirely? These are the sort of complicated questions that Rob Ford’s blunt populist government can’t answer.

    • Anonymous

      Except that the “borrow for something else” in this case is a really different form of borrowing called “deferred maintenance”. That’s the sort of borrowing where you hold off on paying to fix your leaky roof until next year, by not fixing it until next year, and the interest you get charged is called “water damage”.

      This is more like having a roof spring a leak while buying a car, and you can get cheap financing. You could fix the roof and borrow to buy the car, or you could pay the car in full and ignore the roof because you don’t want to take on any debt.

  • Anonymous

    Yes we need new cars, but much more – an organized, professional control center, so one does not need to wait 20 min for a streetcar. Good luck with that one.