Back when SmartTrack was first announced as the centrepiece of John Tory’s mayoral campaign, the most obvious question was “how will you pay for this”. At the time, “this” consisted of very frequent service running over existing GO transit trackage plus a heavy rail extension to the Airport Corporate Centre, and it had a nominal price tag of $8 billion. On the presumption that each level of government, so overwhelmed by the obvious necessity of SmartTrack, would pony up 1/3 of the cost, the campaign then turned to the issue of how the City of Toronto’s share, $2.6b, might be financed.

Enter the tax wizards of Tax Increment Financing (TIF), a financial scheme not unrelated to pulling rabbits out of hats or making the attractive assistant float in mid-air with no visible means of support.

The premise of TIF is simple: If there is a piece of land that, but for public investment, would sit empty for all eternity, then any taxes that might arise from induced development there are “found money”. In other words, if we take a swamp, drain it, clean up the pollution, build roads and utilities and install a transit corridor, all with public money, then the development that follows can be used to finance the investment through its future property taxes.

It’s rather like investing in a pair of glass slippers and then charging Cinderella for wearing them. She’s going to marry into money, and her family can afford to pay you back.

In some cases, notably “brownfield” developments where substantial remediation of an existing site is needed to reduce developer risk and give the area potential as a future neighbourhood, it is reasonable to treat the investment and the future tax income as directly related. It might be a zero-sum game – the city could wind up with no new money directly – but the development could have spinoff benefits in other types of economic activity so everyone comes out ahead in the long run.

Most of the area served by SmartTrack cannot be called a “brownfield”, and indeed substantial development is already underway without ST operating a single train. Moreover, we now know that the originally mooted ST service is considerably greater than what Metrolinx now proposes to host, that fewer stations will be built, and that service will be provided both by ST and by GO Transit (which really will be one and the same thing by then).

Mayor Tory’s supporters, operating under the banner Friends and Allies of SmartTrack, have produced a report claiming to show how ST can be financed through TIF. This is the sort of pre-emptive planning and financial gobbledygook that skews public debate. It gives a patina of professionalism to the Mayor’s scheme even though City staff are much more guarded in their view of the subject. The problem quickly becomes one of debunking, or at least casting serious doubt on, a report that tells the Mayor what he wants to hear – transit development can be “free” – and fighting an uphill political battle against the Mayor’s allies on and off of Council.

In the interest of advancing public debate and knowledge, herewith is my own take on the miracle of TIF as it applies to SmartTrack.

By the way, I am not a financial or planning professional. I am merely a lowly taxpayer concerned that the City may buy into a scheme that is unworkable, and be stuck with a huge bill that I and my compatriots will have to pay for decades to come. Oddly enough, we don’t hear much about “hard earned tax dollars” when the flim-flam artists work their magic at City Hall.

What Development Would SmartTrack Stimulate?

Although a background study prepared for the City looked at 18 potential TIF zones, only three of these were held to have a benefit from the addition of SmartTrack: Liberty Village, the Unilever Site and the area around Lawrence East Station.

The first question one might ask is just how much development will occur whether SmartTrack is built or not?

Liberty Village, for example, is building out quickly and development there shows little sign of slowing down. How much, if any of this development, could reasonably be claimed to be the effect of new ST service?

The Unilever site differs from Liberty Village in that a new GO/RER (Regional Express Rail) station will be built there under current provincial plans, and it will also eventually be a stop on the Relief Line subway and an extended eastern waterfront streetcar network. Therefore, the only contribution of ST will be additional trains on the GO corridor that might otherwise not have operated.

As for Lawrence East, there already is a rapid transit station there on the SRT which has generated some residential density nearby, but the area is certainly not a major development node. Moreover, any move to direct development to this station (regardless of which type of line serves it) would compete directly with hopes for growth at Scarborough Town Centre (STC).

The background study estimated that there would be little potential for growth of commercial space without SmartTrack in these three areas, but a considerable residential growth even if ST did not exist. The ST potential increases are factored down by the TIF study’s authors to account for the fact that some of the “growth” is not new, seen on a city-wide basis, but is redirected from other sites by the increased attractiveness of lands around the ST stations.

Square Feet Commercial Residential Without SmartTrack 510,000 40,930,000 With SmartTrack 22,040,000 71,085,000 Incremental Growth 21,530,000 30,155,000 Adjust for diversion (10,080,000) (25,000,000) Net with Smart Track 11,450,000 5,155,000

The report does not subdivide the growth into the three TIF zones, and so we do not know the sensitivity of these numbers to changes in assumptions about each site. Moreover, the assumption that all of the growth is ST-related ignores the presence of GO/RER service that contributes substantially to the total capacity and network connectivity provided at each site. For example, a station at Unilever would benefit not just from the SmartTrack trains to Unionville, but also from service on the Lake Shore corridor. Similarly, a Liberty Village station could also be served by trains from beyond the Bramalea terminus of SmartTrack operations. Much of this service will exist whether SmartTrack per se runs or not.

What is evident in the table above is that SmartTrack is not expected to make much contribution to residential growth, but that substantial commercial growth is projected. To put this in context, Great Gulf claims that it will build 15 million square feet of new office space at the Unilever site. That is more than all of the commercial space attributed to SmartTrack by this study. Conversely, the Unilever site is a very large development, and one must wonder just how much potential there is at Liberty Village or Lawrence East to contribute on a comparable scale.

TIF New Development vs Uplift

Another aspect of TIF not yet recognized by provincial legislation is the capture of the increased value a new transit investment might bring.

In an October 2015 report, city staff noted that tax increments can potentially flow from two sources: development of new buildings; and “uplift” (defined as appreciation – caused by new transit – of vacant land and properties with existing buildings). Ontario regulations limit increased property tax revenue to revenue from new development and from tax increases announced in annual budgets – municipalities are not permitted to obtain revenue from appreciation. However, the staff report said amendments to provincial regulations and / or legislation could allow the city to obtain revenue from the uplift component of appreciation. [p 6]

The importance of this aspect of the scheme becomes clear in a summary table.

Over half of the total tax increment is due not to new development, but to the projected increase in value of existing properties presumed to flow from SmartTrack. As the City’s report notes:

The determination of tax increment from existing property value uplift is less straightforward and not easily measureable. Historically, all properties in Toronto, with few exceptions, have appreciated in value over time. Determining the tax increment is difficult because it assumes that the increase in value is greater than would have otherwise occurred, and is solely attributable to the creation of SmartTrack. This determination will inherently encompass a degree of subjectivity. [pp 5-6]

In the table above, 56% of the new revenue is due to “uplift”. Moreover, 40% of the additional tax revenue is the provincial school tax which in the TIF/ST supporters’ eyes is available to help finance the City’s share of the rapid transit project. The grand total of $2.3 billion is tantalizingly close to the required $2.6 billion City share, but much of this revenue may not actually be available, or be directly attributable to the SmartTrack project.

The report concludes:

The incremental cost of SmartTrack has been estimated in the City staff report “Developing Toronto’s Transit Network Plan to 2031” – on the Executive Committee agenda for the June 28, 2016 meeting. This incremental cost estimate, which includes upgrades to provincially-funded Regional Express Rail as well as the Eglinton West LRT, is in the $2.7- $3.1 billion range. The estimated TIF revenue in Table 2, along with the federal SmartTrack funding commitment (up to $2.6 billion) and potential revenue from Mississauga and York Region, appears sufficient to fund the estimated cost. [p 7]

That is a bit of a stretch. What is now called “SmartTrack” includes the Crosstown West LRT line to the airport, and this explicitly is not part of the ST project to which Ontario is contributing. Queen’s Park has been quite clear that its share of ST will be in kind contributions through expansion of the GO network for RER, and the Crosstown extension is not part of that project. Any added stations along the ST route that the City wishes to provide (over and above those GO/RER already includes) will be at the City’s cost. These factors combine to give the $2.7-3.1b range cited above. None of this is subject to provincial subsidy, and therefore the idea that the education tax might be available as an offset is, at best, an optimistic view of the situation.

Toronto Council must wrestle with a large collection of transit proposals and financial commitments in billions over the coming decade and more. Financial fictions provided by SmartTrack supporters do not help the situation, but perpetuate the something-for-nothing concept of transit financing that first infected transit debates under former Mayor Ford.

Diverting tax revenue seems attractive, but it ignores the fact that many other costs beyond rapid transit construction will be incurred to serve new developments. Money earmarked for one project is not available for the host of other demands on City resources, and ST advocates practice artful misdirection in the hope we will not notice them pickpocketing the City treasury. This is another way of saying “there is only one taxpayer”.

There might be some incremental revenues that Council could tap and dedicate to debt service for SmartTrack and other rapid transit projects, but they should do so with a clear understanding of just how much money is available and the tradeoffs this scheme will involve.

There is at most one rabbit, not a breeding warren of them, in that hat.