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.
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.
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.