Updated July 30, 2015: Comments on the discussion at today’s meeting have been added.

The Budget Committee met today and received the presentation linked from the main article. There was considerable debate, a welcome change from the Stintz/Ford years at the TTC where detailed knowledge of the budget was not of much interest to politicians. Now there actually is a Budget Committee, and its members take their job seriously. The idea is that by the time the budget hits Council, there will be a group of informed advocates beyond the senior staff who, in past years, have been left to fend as best they could as proponents of better transit in a hostile environment.

Among the topics that came up were:

the question of the “average fare” and the role of a monthly pass in the fare mix;

the future role of and arrangements for fare collection with Presto;

the implications of various possible fare schemes, including increases, and the resulting effect on the TTC budget and subsidy requirement;

the provision of improved service, its cost and its beneficiaries;

the staffing of TTC and especially the numbers of new staff and their cost for various functions.

The “Average Fare”

An ongoing issue with TTC financial reporting is that it measures revenue “per ride”, the tradition metric and one which is used to compare transit systems with each other. There are three fundamental problems with this approach:

With the rise of various forms of unlimited ride media, notably but not exclusively passes, the definition of a “ride” is getting softer. For example, if one makes a stopover that is not permitted by the TTC’s strict transfer rules, but is riding with a pass, does a new “ride” start every time one pops into Tim Horton’s while waiting for the Queen car to show up? If one “fare” buys a limited time pass (e.g. the “two hour transfer”), how should that fare be counted? (There are many other variations on this theme.) When the TTC calibrates the usage multiple for Metropasses, do they use the more restrictive “transfer rules” definition of a “ride” and thereby inflate the assumed number of single fares a rider might otherwise be paying?

With half of all adult fare TTC travel now taken with a Metropass, what is the “basic fare”? Does the adult ticket or cash rate make sense today as a reference value? Fares below the adult rate are always referred to as “discounted” when in fact it may be the single-token or cash rider who is paying a premium over the typical fare.

The marginal cost of providing capacity for a “ride” varies depending on where and when it is taken. Although the average “ride” on the TTC may cost over $3.23 (total 2016 expenses of $1.795b divided by 555m riders), the marginal cost of many rides is zero because they consume excess capacity. Conversely, the marginal cost of some rides is very high because they trigger the need for more service, vehicles, operators and infrastructure. Saying that each new “ride” costs over $1 in subsidy completely obscures this range of costs.

A corollary to this viewpoint is that Metropass users, since the day they were introduced, reluctantly, in May 1980, have been seen as “beating the system” and paying a lower fare than they should. This is a very important consideration: the presumption that somehow pass users are not entitled to their lower fare even though passes have many benefits and frequent users of the system are rewarded for their “transit habit”. The marginal cost of the “extra” trips beyond the (roughly) 50-fare break even point is much less than “n” times the average cost/ride because those trips tend to be taken at times and locations where there is free capacity.

As long as the TTC debates fares from the premise, an ideal, that everyone pays the same “full” fare, the discussion is backwards, especially in an era when the goal of a transit system is to encourage more travel both for mobility and to reduce traffic congestion from trips that might otherwise use an auto. Mobility benefits have a value, and increased traffic has a cost, but neither of these show up in the TTC’s budget.

With the future move to Presto, Toronto could well have a situation where 75% of riders are travelling on some sort of “loyalty” program whether it be a monthly subscription to unlimited travel within a specified area, or a “capping” mechanism such that daily, weekly and monthly costs never exceed certain levels. In this environment, “riders” completely lose their traditional meaning, and the important metric becomes “how many Presto users do you have” and “how much revenue do you get from the average user”. Ridership has a meaning for service planning: is the bus full, and is the service design appropriate to the demand, but these are separate from the question of revenue.

The committee’s discussion touched on, but did not fully illuminate this issue, in part because TTC staff are wedded to the traditional model of counting riders and describing “full” vs “discounted” fares. This leads into problems with the perception that every new ride costs Toronto more subsidy, an oft-repeated comment that is well wide of the mark.

Presto and Future Fare Structures

By the start of 2017, the TTC hopes to have its system completely Presto-enabled. Whether or not they make that target remains to be seen, but there are a few critical discussions and decisions that must occur in the near future:

Once Presto is the primary method of fare collection, the TTC has the option to look at various schemes for graduated fares. Not only could there be equivalents to the current “pass” structure, but also time-of-day pricing, time-based transfers, and fare integration (whatever that may look like) with other GTHA systems including GO Transit. TTC staff will bring a report to the Commission in fall 2015 discussing the various options in detail, and the Budget Committee has asked that this come to them first so that it can be understood in depth before a full board debate and a recommendation to Council through the budget. The actual transition to a new fare scheme is not likely to occur before 2017 when the system will no longer be in “mixed mode” of Presto-based and legacy fares. The discussion, however, must take place now in preparation for the effects on a 2017 budget.

During 2016, the TTC will be supporting both its old and new fare collection mechanisms, but once the transition to Presto is underway, there will be a large redeployment of staff functions. The most obvious is for station collectors, but there is also a small army of people who deal with fare handling and cash, and the associated fare machinery. A great deal of this will pass to Presto itself, and the TTC will simply purchase support for the fare system via the 5.5% service fee on all fare revenue Presto collects. Any savings will be offset by deployment of fare inspectors and station staff in a customer service role. Again this is a plan for future years, but the details must be discussed and agreed to up front.

Alternative Fare Schemes and the City Subsidy

The discussion took an unfortunate turn because, inevitably, a member of the committee, Commissioner and City Ward 4 Councillor John Campbell, wanted to talk about a budget that would not require an increase to the City’s subsidy. Thanks to the demonization of the Metropass, he seized on this as a possible opportunity to review whether the TTC should even have passes. This shows the danger of the misrepresentation of the “cost” of passes and of increased ridership they represent.

The typical Metropass rider takes over 70 trips per month by the TTC’s count, and with a break-even point of about 50, this means that their average fare is about 2/3 that of a “full adult” fare rider. If (a) they continued to ride at the same rate and (b) the pass were not available, the net effect would be a 50% increase in their fares. That’s a wonderful way to treat the most loyal of TTC riders who consume 50% of the “rides” on the system. Such a proposal is complete madness, and runs counter to the “all you can eat” basis on which fares are charged with various forms of bulk discount all over the world.

The committee adopted a motion from Chair Colle asking that staff bring back a report on various scenarios for a fare increase. What was not clear from the motion would be whether the intent is to completely make up the budget shortfall from fares, or whether various options involving a greater or lesser contribution from fares is the goal of the request.

The Relationship of Service Improvements, Costs and Marginal Ridership Changes

Only the day before, the full TTC Board approved the improvement of off-peak loading standards on its most frequent services to, in effect, reduce by 20% the target average load on vehicles. (The old standard was a seated load plus 25%, and the new standard is just a seated load.) This reverses a change implemented under the Ford regime and has benefits on the heaviest routes in reduced crowding, improved attractiveness of service, and provision of room for ridership growth.

Other changes that have been recently approved include:

Implementation of a “ten minute network” with headways no wider than 10 minutes on a core network of routes at all hours except overnight. In practice, this does not represent a big change because most of the affected routes already have “frequent service” (10 minutes or better) at most times of the day.

Restoration of full service on most routes that were cut back early in the Ford era so that service is provided on all days during most of the period that the subway is open (typically with a 1:00 am cutoff on the lighter routes).

Addition of new Blue Night routes so that service is within a 15 minute walking distance of most areas in Toronto.

Each of these changes has a cost both in dollars and in increased headcount, together with a projected ridership increase. The debate veered off into a discussion of how much the TTC would be spending to acquire new riders, but the vital point that was completely missed is that the new services and standards improve the lot of all riders on the affected routes. The population of affected riders is much greater than the marginal growth of ridership in the first year of operation for the improvements. Again the problem is one of perceived high cost when the beneficiaries of a change are not fully acknowledged.

From the report on improved crowding standards at the July 29, 2015 board meeting:

Funding in the amount of $3.2 million is included in the TTC’s 2015 Operating Budget to operate this improved service from September to December, 2015. This additional expense will be partially offset by an increase in fare revenue in 2015, from increased ridership, of up to $1.2 million. The improvements will increase operating costs by approximately $9.9 million annually, in 2016 and beyond. Increased ridership attracted by this service improvement will partially offset additional operating expense, with an annual increase in fare revenue of $3.6 million. [p. 2] This service initiative will benefit approximately 55 million customer-trips each year that are now made on these services, and will attract an estimated 1.8 million new customer-trips each year. This service improvement largely reverses off-peak service cuts that were made in February 2012, when the crowding standard at off-peak times was increased, resulting in off-peak service reductions on 37 routes. [p. 5]

The Commission approved this less than 24 hours before the Budget Committee debate, although it is unclear whether some members understood the implication. When the Mayor and some members of Council choose to hold a photo op to announce this type of improvement, there is a cost, and it is unfathomable that a Commissioner would balk at funding the cost of so well-publicized an improvement.

The new standards are only expected to draw 1.8m new trips, but the added comfort and shorter waiting times of less-crowded buses and streetcars will benefit the 55m trips taken on the affected routes, or about 10% of all TTC trips. The cost of this improvement should be measured against this 55m, not against the 1.8m marginal increase in rides. A related benefit is that this will provide headroom for growth so that new trips can be handled on moderately well loaded, rather than stuffed vehicles, and this has long-term implications for the attractiveness of transit as a travel mode. People are used to the idea that the subway provides very frequent and often uncrowded service until 2:00 am over the full network. Meanwhile proponents of “efficiency” in service delivery portray empty space on surface vehicles (which carry over half of the TTC’s riders) as an evil that must be eradicated. We should not waste service, but the distinction is that transit must be attractive enough not to be seen as a last resort.

Budget Adjustments and Clarifications

During the presentation, we learned that the TTC has now brought its future diesel fuel contracts to 90% of projected 2016 requirements through hedging, and the expected cost is $5 million less than projected in the preliminary budget (lowering the preliminary shortfall from $99m to $94m). This sort of change is not unusual at this stage of budget presentation, especially considering that the total expenditure budget is $1.8 billion.

Future Work by the Budget Committee

Members of the committee expressed a strong interest in a “deep dive” into specific aspects of TTC budgets (both operating and capital) including topics such as fleet planning and a “zero-based” view of workforce planning. This is fundamentally different from the high-level budget presentations which identify year-to-year changes, but leave out the base information. Such work will not necessarily precede completion of the 2016 budget, but the committee’s hope is to develop expertise in various aspects of the TTC’s budgeting so that they can understand the options and challenges facing the system in coming years.

One major topic that will inevitably come to both the TTC and to Council will be the question of peak period loading standards. This is not addressed in the 2016 budget because there are no spare vehicles with which to improve average loads. We already know that there are plans for new express services using buses on order that will arrive starting in December 2015, but beyond this, the specifics of further peak improvements have yet to be discussed. The marginal cost of such improvements is very high because they will require more vehicles, more staff and more infrastructure (maintenance and storage space). By contrast, the marginal cost of off-peak improvements implemented in 2015 is comparatively low because the vehicles are already here, and even driver costs come in at less than average levels because better off-peak service improves staff utilization (less garage mileage between the peaks, and more “straight through” work schedules).

A more thorough understanding of the factors affecting the cost and mechanics of providing transit service at the TTC Board level will be essential to an informed process of rebuilding transit’s credibility in Toronto.

The original article follows below:

Updated July 29, 2015: A section has been added showing the TTC’s projections for the 2016 budget that were included in the 2015 package.

On July 30, 2015, the TTC Budget Committee will have a first look at the 2016 Operating Budgets.

This budget will be an important test for the Commission and for Council because policies set in motion in 2015 will now have full-year effects in 2016 and beyond. These require ongoing funding, not a one-time “Eureka!” moment where the sins of the past administration are finally recognized for their effect. If Council chooses not to fund the cost of its new policies, we will know just how serious Toronto really is about sustained improvement of the transit system.

Year-to-year changes in the budget arise from various factors, and these interact to produce the final estimates:

Ridership projections based on economic factors, and on the added riding induced by service improvements.

Full-year effects of changes such as fares and services implemented mid-way through 2015 including new Service Standards that require more service to provide more attractive and comfortable service.

Changes in maintenance standards to improve service reliability.

Changes in fare collection procedures.

Inflationary increases in wages and material costs.

The ridership projection for 2016 is summarized below:

The original projection for 2015 was 545 million rides, but this has been scaled back primarily because of the effect of the bad winter, greater than expected loss from the fare increase, and lower than expected economic growth. For 2016, the projection is an additional 15 million rides bringing the projected total to 555 million.

Fares are overwhelmingly the largest part of TTC revenues. One might argue that there is “gold” to be mined from some of the ancilliary sources, the fact is that even a doubling of any of these would yield very little, and would only shave a small amount off of the requirement for subsidy. TTC does not expect much increase in these areas in part because some of the income streams are set by contractual arrangements.

Note that the chart above and all other material in the Preliminary Budget has been prepared on the assumption of the existing fare structure. A fare increase is a separate issue, and I will turn to that later in the article.

Service provision requires operators to drive vehicles, mechanics to maintain them and the infrastructure, energy to propel vehicles, and a variety of other costs. In 2016, there will be a one-time effect from the opening of Leslie Barns and the transitional presence of both the old CLRV/ALRV fleets and the new Flexity streetcars.

The Presto rollout will continue, but TTC is not yet at the point where savings from changes to their fare processing and cash handling can be built into the budget.

The preliminary operating budget will require $99 million more in subsidy (before any fare increase) than in 2015, an increase of almost 21% that is bound to drive the budget hawks on Council mad.

This is the inevitable budget arithmetic:

Expenses go up because there are more riders

Expenses go up because the quality of service has been improved

Expenses go up because of inflation

These three items compound into a year-over-year value that is not the simple inflationary increase of a few percent many on Council hope to see, and certainly not the 2% reduction asked for by Mayor Tory.

If Council gives the TTC 2% more subsidy for 2016, this would be $9.48 million, but nowhere near the $99 million they need. Equally, if Council were to cut the subsidy by 2%, it would decline by the same amount leaving an even bigger hole for the TTC to fill.

The fare revenue increase shown above is the combined effect of more riders in 2016, but riding at a slightly decreased average fare because of the uptake of Metropasses as the preferred payment method. Supposing that the TTC were left with $90 million to find (after a $10 million bump from the City), this would require a 7.8% fare increase (with no allowance for lost ridership). A lower fare increase requires a higher subsidy, or a decision to roll back some of the service improvements that are only now at the announcement stage, not even yet on the streets.

For reference, a 1% increase in property taxes yields about $30 million in revenue. If the City were to give the TTC $40 million more (the original 2%/$10m plus another $30m), this would still leave the farebox to provide $60 million, or a 5.2% fare increase. There will have to be some hard discussions about the fact that we must now actually pay for all of those photo ops and service improvements launched in 2015. (This is also an example of an ongoing shortcoming in a lot of budgeting in that the TTC did not produce a future year budget showing what 2016 might look like with the combined effect of the factors listed above.)

The revenue increase, such as it is, and with no fare increase included, works out like this:

Although there will be an increase in advertising revenue of $2 million, this is expected to be offset by lower parking revenue and a reduction in contract/charter services (mainly YRT services).

Updated July 29, 2015 at 11:30 am:

Council was warned of the impending need for greater subsidy during the 2015 budget cycle. The 2016 increase in fare revenue is based on five cents on the regular adult fare. The debate will inevitably turn on whether to load more of the revenue requirement onto fares, onto taxes, or onto yet more demands for “efficiency” without actually cutting service. Small amounts may be found around the edges, the the total required is too much to achieve simply through political posturing and judicious trimming of office supplies.

The shortfall of $99m shown above is, allowing for the lack of a fare increase in the preliminary budget, almost identical to what was forecast.

The overall expenses budget:

Expenses go up a lot more than revenues:

Of the $105 million added on the expense side of the budget, $87 million comes from the decisions taken for 2015. About half of this is the combined value of full-year operation of the service improvements, plus the additional service triggered by 10 million more rides.

Leasing costs relate to the 50-bus facility in York Region that the TTC will begin using in 2016, as well as a proposed 250-bus facility (this has not yet been identified and would be a part-year expense), a new warehouse, and additional office space.

“CBA” refers to the increase from the Collective Bargaining Agreements.

“Reliability Centred Maintenance” refers to a new program by which the TTC pro-actively performs maintenance and parts replacement before the anticipated time of failure rather than letting vehicles fail in service. A related factor here is the increase of the bus spare ratio so that more vehicles are available for routine maintenance rather than being pushed out of the garages into service.

POP Inspectors did not increase in 2015 as originally expected, and with the slow rollout of new streetcars and the POP implementation generally, this wasn’t much of a problem. However, Council cannot duck the fact that a change to all-door boarding requires fare inspectors – they are part of the cost of doing business and of getting best use out of vehicle capacity.

Other Employee Costs refers to benefits and legislated requirements such as the employer component of the Health Tax and Employment Insurance. These are affected both by any change in rates, and by growth in the workforce to support more service and system expansion.

“Other” nets out to $2 million, but this is actually comprised of $11 million worth of increases including $5m for Presto, offset by $9m reduction in capital-from-current contributions because most of the recent 50-bus order was charged to this account in the 2015 budget.

Expanding the system and improving service requires more staff:

Of particular note here is that the TTC expects to staff Leslie Barns primarily through redeployment of staff rather than by duplication. Also, reliability from the transition to new streetcars and from improvements on the older fleet that remains is expected to reduce costs by $48m.

For some members of Council, “headcount” is a fetish which pre-empts any other discussion. In the case of many city services, the argument is always about doing more with less, but that’s not an option if you want to operate and maintain a larger fleet for longer hours and for more riders. The discussion needs to be much more intelligent and begin from the viewpoint of what service is to be provided, and then how can this best be done, not simply a blanket objection to hiring more staff.

Future budget pressures are listed in the presentation, but with no estimated values for events such as:

Opening of the Spadina extension in late 2017

Full Presto rollout

Additional construction effects from major projects

Energy costs

AODA implications (see WheelTrans budget below)

Inefficiencies from crowded bus maintenance facilities

Any new fare policy (a proposal will go to Council later this year)

A new Collective Agreement in 2018

One of the recommendations in Council’s approval of the 2015 budget was a request for the TTC do develop multi-year budget plans to deal with items such as these, but there is as yet no information on what 2017 and beyond will look like.

The WheelTrans Budget reflects a strong demand for more service.

This reflects the fact that ridership is growing at 13.7%, almost double its historical rate, and that there is an AODA requirement that the “unaccommodated rate”, the proportion of requests for service that cannot be provided, average 0.5%. Unlike regular service, AODA mandates provision of rides for almost all who are entitled to and want them.

Almost all of the increase is accounted for by the service needed to handle more riders. This is yet another $9 million that Council must fund, and more generally they must face the fact that this requirement will continue to grow in future years. There is no funding from Queen’s Park for this service, and all of the cost falls on Toronto.