In his continuing program of bribing the electorate with promises that the City cannot afford, Mayor Tory has asked the TTC to bring forth a 2018 operating budget containing no fare increase. This would come, of course, just in time for his re-election campaign where Tory could brag about all the transit wonders he has bestowed on our fair city.

Fare freezes are simplistic approaches to a “transit policy” not unlike fantasy subway maps and promises that tax increases will be held at no more than inflation. Can’t fit it all into the budget? There must be efficiencies, cost cutting that will solve problems, because as we all know public agencies like the TTC are rife with fat just waiting to be trimmed. That’s a great story, and it plays to the wing of Council whose only concern is to be re-elected for keeping taxes down.

The reality is not quite what it is made out to be.

TTC faces a shortfall in its budget for 2018 thanks to increasing costs and expansion of its subway service. The degree of this shortfall has probably been understated. There is no provision for improved service (net of the subway extension) because ridership is expected to remain fairly static. The cost increases cannot be wished away with an appeal to make the TTC more “efficient” both because of their scale, and the many cuts that have been made in recent years responding to subsidy constraints.

Several projects-in-progress are expected to bring efficiency savings to the TTC in future years, but not in 2018. Moreover, some “savings” are really an ability to do a better job with existing resources, not to cut costs.

“Fare equity” means different things to different people, and can be argued from viewpoints that trigger quite different outcomes.

“Poverty reduction” is a key strategy for City Council, but much more as a talking point than a real, financial commitment. TTC fares are part of this strategy, but there is a danger this will get lumped into overall transit costs rather then be recognized as a need for dedicated, separate funding in the City budget.

The inherent economic value of simply having good transit service at an acceptable price rarely enters the discussion even though billions in tax revenue and development opportunities hinge on transit’s existence.

Policy discussions consistently avoid complex issues regarding fare discounts and service quality, and there is little understanding of the menu of options available should Toronto and the TTC choose to pursue them. As in so many past years, the TTC enters its budget cycle in crisis mode – how will we find all the money – having studiously avoided the details of its budget and of revenue options.

Perish the thought that the TTC might actually suggest or even advocate for new fare and service policies without first getting the Mayor’s blessing and staging a press conference to announce his decision.

Fare Policy

TTC’s prime source of revenue is the farebox with much smaller contributions from income such as rent, advertising and commuter parking. None of the non-fare revenue lines can be arbitrarily increased except parking fees, and a large increase would represent only a small gain on the budget overall. Higher parking rates might drive away customers, although it can be argued that the TTC really should not be in this business anyhow. Some lots are being taken out of service for redevelopment.

“Outside City” operations shown below are the services provided at cost to York Region. This will fall in future years as YRT takes over more routes, but with an offsetting reduction in expenses.

Ridership is down from projections in 2017, and so revenue is below target. However, the TTC has more than offset this with expenditure cuts to the extent that a budgeted $14 million draw from a reserve fund will not be required. It is worth noting that there is a $1m parking revenue shortfall for 2017, partly offset by better than expected “other income” (mainly interest).

[CEO’s Report for July 2017]

At $1.16 billion, fares will cover 65.3% of operating costs in 2017. The revenue/cost ratio has been the subject of much debate over the years, and this value is often misquoted simply by looking at the subsidy level without taking into account the roughly 4% that is covered by other income. In any event, Toronto has a high R/C ratio compared to almost all other transit systems, certainly those in North America where values of 50% or less are common (including many GTHA operations). What is a “fair” level has usually been decided by historical trends such as the Davis-era “fair share ratio” where 1/3 of operating costs would be paid through subsidy. There is no magically “correct” value for this, only a question of how much funding agencies, and by implication, taxpayers are willing to spend on transit.

Equally important, but much less commonly discussed, are the questions of fare equity and service quality. One might have a system with a lower R/C ratio, but what quality of service is operated? A higher level of subsidy (and hence lower R/C value) could represent an investment in better service, or it could indicate a city unable to attract riders and running only enough service to “show the flag” and serve a minimal, captive market.

To some budget hawks, any empty seat on a bus is waste, an opportunity for cutbacks, even if this could make transit less attractive. To others, the empty seat is room for growth at minimal cost. The reality will vary from location to location, and will depend on the policy decisions that dictated the service design.

Are fare types balanced among riders in a way that is perceived to be “fair”? What is transit pricing fairness? A charge for service used (distance, time, quality)? A flat fee for system access (passes)? A fee based on ability to pay? Do riders feel they are “getting their money’s worth”, whatever the fare might be?

The problem with discounts remains that if “nobody pays retail”, the total revenue must still fund its “share” of operations. As an example, few riders pays the full cash fare, and the lion’s share of revenue comes from adult tokens (or Presto) and passes. Those media are the base line for any discussion about fare structure.

No matter what adjustment we might make to discount structures and subsidy levels, we will soon be back to the basic issue that costs and the demand for service both go up, and must be paid for with higher fares or subsidies. Any hope that transit will magically break even or [gasp!] be profitable avoids the fundamentals of transit economics and certainly does not address pressing needs on a year-to-year basis. These increases cannot be avoided, and even if every conceivable discount is built into the tariff, fares are going to rise. Fare policy should consist of more than carving up the fare “pie” so that some users pay less, while avoiding the larger question of what services the transit system should provide.

In 2016, over half of all “fares” were paid with passes, based on the translation of pass sales to an equivalent trip count. These riders purchase transit as a flat-price service, not based on a trip-sensitive price, and have an incentive to get as much from their fixed price as possible. Conversely, they see any fare increase as a value in dollars, not pennies, because they pay for all of their month’s fares as a single purchase.

2016 System Total (000s) 538,079 Regular Monthly Pass 194,820 36.2% Post-Secondary Pass 51,861 9.6% Weekly Pass 7,547 1.4% Senior/Student Monthly Pass 27,621 5.1% Senior/Student Weekly Pass 959 0.2% GTA Pass 4,855 0.9% PASS TOTAL 287,663 53.5%

[Adapted from “Analysis of Ridership 1985-2016” available on the City of Toronto Open Data Site]

With the current token rate set at $3, a ten cent increase would bring 3.3% gross offset by whatever ridership loss the higher prices triggered. The elasticity of demand relative to fares is not an exact number because other factors affect a rider’s choice of shifting away from the TTC. Is the service perceived to remain acceptable value for the price? Are alternatives so expensive or inconvenient as to be uncompetitive? Are some trips simply not taken because “choice” rides are unaffordable? The answers to these questions are not uniform across all types of rider, and especially are not the same depending on whether one has unlimited riding through a pass, or pays for every trip.

At 3%, the value of a fare increase would be about $34.8 million assuming it were implemented uniformly across all fare classes. In the face of (at least) a $126 million gap, that 3% does not go very far, and much of it would be absorbed simply by the cost of opening the Spadina subway extension.

Inevitably there are calls to mitigate any increase by selectively reducing or eliminating the effect on certain fare classes, and this is not always offset by bumping others. Discounts are offered to various classes of riders including students and seniors, but most notably frequent users of the system for whom passes are a cost-effective way to cap transit costs.

Seniors were the first to obtain reduced transit fares years ago as their rising numbers became a political force. There are arguments that what was once an impoverished class is now among the most wealthy and this subsidy should be revoked. Of course the problem here is that average perceptions (and not a little jealousy from younger cohorts) masks the fact that not all seniors are rich. An offsetting consideration is that seniors tend not to travel during peak periods, and therefore the cost of carrying them is below the system average, especially when expensive capital assets are sitting comparatively idle.

Another group that lobbied hard and successfully is the post-secondary students who cried poor (think opera with starving artists in a Paris garret) even though it can be argued that there are much more deserving members of the “working poor”, a group that never quite makes it into the charmed circle.

Most recently, children, with no direct lobbying effort, obtained free fares thanks to newly-elected Mayor Tory’s discovery that he needed to “do something” about transit without spending too much money. Free rides for children is a boon to all parents, including the poor.

All of these discounts arise from the premise that some groups of riders, or their families, are disproportionately badly-off and “deserve” lower fares.

Toronto Council adopted a “Poverty Reduction Strategy” which includes reduced fares for various low income groups. The implementation is to be staged over coming years, but as with so many programs, there is no funding unless money is cut from some other part of the City’s budget. There are two major issues with the proposed reduced fare for those in need:

The discount will be to allow regular adult riders to travel at senior/student rates. This means that there is no benefit to riders who are already eligible for this fare class.

There is no guarantee that this will be a separate line-item subsidy. By analogy to seniors’ fares (for which there originally was a dedicated subsidy), the cost of reduced fares for the poor could be lumped in with all TTC costs and compete year-by-year with other demands.

The projected cost of the program is small in 2018, but it builds substantially in future years. Whether Council will remember its “commitment” remains to be seen.

[For a longer discussion of fare equity, see Who Deserves a Fare Subsidy?]

Time-based transfer rules (making one fare valid for a set time period rather than only for a connected, single-direction journey) have been discussed for several years, but they are presented as “too expensive” with a budget effect of about $20 million. The calculation works roughly like this:

About 4% of unconnected trips are taken within two hours of another trip. Therefore, if 100 fares were collected today, 96 would be collected under a time-based scheme.

Of the 538.1 million rides in 2016, 227.4 million paid some form of single fare. If 4% of those fares are “lost” to time-based transfers, this translates to 9.1 million “free rides”.

Depending on the value assigned to these rides, the effect on revenue varies. The average fare system-wide is a bit above $2, but this includes many rides taken on passes that are not part of the single-fare market. The average fare for this group could be higher.

To put this in context, for 2016 there were 21.9 million free rides given to children, albeit at lower cost because the forgone fare is lower.

The debate has always focussed on “cost”, not on the benefits including:

Multi-hop transit trips (or “trip chains”) are uneconomic if a fare must be paid for each hop. Transit use and convenience could be improved if time-based transfer rules were in effect.

The validity of a “transfer” is clearly based on the time a fare was paid, not on arcane rules about routes. This would greatly simplify Presto tracking of “valid” fares and confusion about when a new fare must be paid.

The length of the validity period could vary by time-of-day or day-of-week as an off-peak riding incentive

Fare capping is a variation on the concept of passes, and this is already supported by and used on the Presto system. Rather than buying a pass up front, riders are guaranteed a capped cost regardless of usage over a period of time. Beyond a threshold, rides are free. This scheme has been proposed as the replacement for TTC Day Passes, although it brings its own revenue challenge because riders would no longer have to decide, in advance, whether getting and using a pass would be worthwhile. They would simply enjoy a capped cost of transit on days when they took many trips. A similar scheme could be used for weekly or monthly fare caps. The advantages of capping are that it is automatic for any rider, and that it does not require an up-front investment in a pass.

Distance-based fares achieve “equity” if your definition of the term is “pay for what you use”, but quickly runs into the policy implications of making trips for the far-flung, and generally less prosperous, suburbs more expensive than trips within the increasingly affluent “downtown”. Inter-suburb trips could become cheaper, but with the average trip length on the TTC sitting at under 10km, longer commutes across the City or Region could become a lot more expensive. Metrolinx has studied this option for several years, including detailed modelling of the effect of revised fare schemes on riders, but has published nothing to indicate what these would be or how a new fare structure would reflect policy options. The basic problem here is that unless subsidies are increased, a “zero sum” scheme where total fare revenue is unchanged will trigger big fare increases for riders who travel longer-than-average distances.

The Evolution of TTC Revenues and Expenses

Financial data about the TTC can be challenging to research because reports are produced at different times and on different underlying methods. However, the Annual Report includes a Ten Year Summary whose format has remained constant over a long period. The table below is from the draft version of the 2016 report.

The lowest R/C ratio, 66.7%, came in 2009, the third year of Mayor Miller’s mandate, although this was a short-lived dip.

Today, the adult token fare is $3, and it was $2 back in 2005. However, the increases have not been uniform. There was no increase in 2008, 2009 and 2011, and only five-cent increases in 2012 and 2013. TTC management and the Board routinely talk about how small, regular increases are best for transit riders, but political considerations always win out with a fare freeze as a simplistic “solution” to transit problems.

Over the ten years covered by the chart above:

Ridership has gone up by 17.0%

Fares have risen by 28.9%

The amount of service (measured as vehicle kilometre travelled) has risen by 20.5%, but this is more so on the bus network (28.8%) than the subway (11.4%) or streetcar (11.0%) networks.

The bus and subway fleets are larger (24.7% and 23.9% respectively) while the streetcar fleet declined by 11.7%, mostly in the last year.

Total operating expenses rose by 52.2%, but expressed per trip, the increase was 29.8%. The cost per trip rose faster than the number of trips.

Total revenues are up by 44.9%, or 23.3% on a trip basis.

Subsidy is up by 72.3% (47.7% per trip).

The TTC faces huge problems attracting riders simply because it cannot increase capacity on the subway system (minimum headways possible with existing signals), and there are not enough streetcars and buses to handle actual demand. These conditions will only begin to be “fixed” over the next two years. Ironically, the moment the TTC is able to increase service to address the backlog of travel demand, its operating costs will go up along with the financial demand for subsidy, and a counter-demand that it become “more efficient”.

Future TTC Operating Costs

For its part, the TTC has been less than forthcoming about its budget woes studiously avoiding a detailed projection of future year costs and budget options. The TTC’s Budget Subcommittee cancels most of its meetings, and if there is any informed discussion of budget options by the TTC Board, it certainly does not take place in public. From the TTC’s website:

There is no public indication from Board debates that the members, be they Councillors or “citizen” appointees, understand the complexity of the TTC’s situation, and that it cannot be fixed overnight. Options for fare and service policy rarely come forward for debate, and when they do, there is little information on how the pieces all fit together. “I’ll get back to you on that” is a far too common reply from management, and this arises from the absence of a wide-ranging review.

A glimpse into the situation for 2018 was provided in the City Manager’s report that launched the budget process in May 2017. This shows cost pressures facing the TTC (and thereby City Council) of $126 million broken down as:

$26 million for the added cost of operating the TYSSE to Vaughan

$6 million in other cost increases related to capital projects

$102 million for net increases in the cost of the existing system

$12 million saving of $45m from elimination of ticket collectors and $5m for maintenance of legacy fare gates, offset by $38 million for additional fees to Presto

Other minor changes

[See Tables 1 and 3 on pp 9 and 11]

This figure involves some creative thinking notably as it relates to fare collection costs:

The ticket collectors will not, for the most part, be eliminated but will be redeployed as roving station agents. The saving associated with them will not actually materialize except at the margin where extra collectors might have been required for busy locations. It is not clear whether City Council has actually approved this scheme and its associated cost considering that the City Manager expects to see a saving in staff costs here.

There has been no examination of the true cost of maintaining the new vs the old fare gates and other equipment, and whether a saving will actually be achieved.

The TTC has never published a detailed, consolidated estimate of the costs and savings expected to flow both from the new fare equipment and systems, and from associated changes in staffing both at the front line and in maintenance. This makes the 2018 estimates suspect because they are founded on changes that may not occur, or costs that may be different from original projections.

The TTC is midway through many projects that are expected to reduce its cost base in several areas. However, none of these has yet completed, and some have not even begun. The following table is taken from the TTC’s November 21, 2016 Operating Budget Report at p 11.

Across the organization, the amount shown here is roughly a 10% saving, although one must be careful both of double counting and of prematurely booking anticipated savings.

Presto savings are already included as a factor in 2018 projections.

One person subway operation will not be in place on Line 1 YUS until 2020, and on Line 2 BD until at least the mid 2020s.

Office consolidation will be triggered whenever the TTC moves out of many existing buildings into a new main office rumoured to be sited on the Eglinton Station lands. These will not be available for construction until the early 2020s.

Reliability Centred Maintenance is a program to pro-actively repair buses before they fail. Council has not funded the startup costs of this program, and so the saving in future years may not be obtained.

SAP is a financial management system already used by the City of Toronto, and it will replace many archaic applications still at the TTC.

CAD/AVL (VISION) is the replacement for the vehicle location and tracking system which is now three decades old. The savings suggested here may be offset if the TTC chooses to increase the level of route supervision to take advantage of the new system’s features. This will not be fully in place until about 2020.

Wheel-Trans savings do not affect the TTC’s main operating budget as W-T is separately funded.

The LRV fleet savings relate both to reduced maintenance costs and a slightly smaller operator workforce for fewer cars than in the existing fleet. This will not be fully in place until about 2020.

In brief, there are future “efficiency” savings in the pipeline, but they stretch over many years and their effect on any one budget year will be small. Moreover, these are one-time savings.

There is no estimate of the cost effects of the new LRT lines (Crosstown and Finch) – how much will Metrolinx charge the City as a contribution to operating costs, and what will the TTC’s direct costs be for that part of the operation they perform. These too are in the middle future, but will come into play in the same period as some of the savings touted above are expected to occur.

The TTC’s Operating Budget can be broken down into major segments to get a sense of where the money goes [from Appendix F of the TTC Budget report]:

The chart gives an indication of where major savings or cost pressures will come from. Note that maintenance costs shown here are day-to-day running maintenance, not the major capital projects such as replacement of vehicles and infrastructure that collectively amount to almost $1 billion in the Capital Budget.

Over half of the total budget relates to direct provision of service including maintenance of the fleet and infrastructure.

All of these costs tend to rise as the result of two factors: inflation, and increases to service levels. The combined effect of these is rarely less than inflation itself, but there is a polite fiction at Council that somehow TTC costs can be constrained to no more than inflation, or even reduced to fit a “flatline” directive for the operating subsidy.