The Star’s Jennifer Pagliaro reports that City Council has approved a confidential settlement with BILD, the Building Industry and Land Development Association, to avoid an Ontario Municipal Board hearing that could lead to rejection of the Bylaw implementing the Development Charges intended to pay for the Scarborough Subway. The matter was before Council in confidential session on June 7, 2016.

Staff miscalculations on the ridership of the Scarborough subway will leave taxpayers on the hook for millions more, after city council voted to settle a dispute with developers. According to a secret report before council on Tuesday, the contents of which were shared with the Star, the city’s lawyers advised councillors to accept a settlement with the group representing developers, the Building Industry and Land Development Association (BILD). The settlement, which reduces the amount builders will have to pony up to help finance the subway, is expected to cost the city as much as $6 million in lost revenues.

If the settlement is for only $6 million, the City should consider itself lucky because the calculation underlying the DCs is based on flawed ridership estimates and an out of date network design. Moreover, the original authorization appears to double count subway revenue with both a special Scarborough Subway Tax and Development Charges to recover the same costs.

Recent news of a 50% reduction in expected Scarborough Subway ridership from 14,100 to 7,300 passengers in the AM peak hour reignited political debate on the viability of the subway scheme. However, these numbers are not just hypothetical indicators of how the line might perform, they are integral to the calculation of Development Charges (DCs) that would help to fund the City’s share of this project.

See also my previous articles:

The formula to calculate development charges is complex, but at its heart is one key measure: how much of a new transit project will benefit existing properties versus future development. If the primary role of a new subway is to improve the lot of current riders, then only a minority of its cost can be recouped by DCs (and thus from future purchasers of new properties).

Toronto allocates DCs on a city-wide basis rather than assigning each project only to the neighbourhoods it will directly serve. These charges already help pay for many projects as shown in the introduction to the study establishing the level of new charges for the SSE.

The Council of the City of Toronto passed a Development Charges (DC) By-law, By-law 1347-2013 in October 2013, for the recovery of capital costs associated with meeting the increased needs arising from development. The effective date of the Bylaw was November 1, 2013. The recovery of DCs is on a City-wide basis and relates to a wide range of eligible City services: Spadina Subway Extension

Transit

Roads and Related

Water

Sanitary Sewer

Storm Water Management

Parks and Recreation

Library

Subsidized Housing

Police

Fire

Emergency Medical Services

Development-Related Studies

Civic Improvements

Child Care

Health

Pedestrian Infrastructure

For commercial property, there is some justification to this because increased mobility makes travel to jobs simpler well beyond the location of any one project. For example, the Scarborough Subway might be held out as a way to stimulate growth at the Town Centre, but it would also reduce commute times to other parts of Toronto, notably downtown.

For residential property, especially for the large proportion of new development downtown, this link is less clear, and DCs on new condos can wind up funding transit projects of little benefit to the new residents.

This split is part of the eternal battle between sharing the cost of public services across the city and charging them locally or by user group.

In the case of the Scarborough Subway Extension (SSE), the split between new and existing beneficiaries was determined by the change in ridership projected with the subway project. The benefit was allocated 61% to new development and 39% to existing riders. The ratio is high because, at the time of the calculation, the projected peak hour ridership for the SSE was estimated at 14,100 compared with a base value of 5,500. Both of these numbers are suspect.

The base value was factored up from actual SRT ridership of 4,000 per hour to 5,500 to represent the load the subway would have had were it to exist in 2015. That value of 4,000 is equivalent to a load of about 240 per train when the peak service was 17.14 trains/hour (3’30” headway) as in 2012. However, by 2013 service had been cut to 13.33 trains/hour (4’30” headway) to reduce equipment requirements on the aging line. That is the service operating today, although a further cut to 12 trains/hour (5’00” headway) is planned for June 20, 2016. Some of the demand that would be on the SRT travels via alternate routes, some is packed into fewer trains, and some has probably been lost to the TTC. What the ridership might be today were the RT not capacity constrained is hard to tell, but it should certainly be higher.

The high value for future subway ridership combines with the low value for presumed current demand to load much of the SSE’s cost onto new development.

The situation is complicated by two competing ridership estimates:

A TTC estimate of 9,500 riders dating from January 2013 (See Response to Commission Enquiry: Service/Technology Choices for Sheppard East and Scarborough RT Corridors at page 13)

The estimate of 7,300 riders in the recent review of the Scarborough Subway

The contexts for the three estimates differ, and this goes some way to explaining why the numbers are so far apart:

A line to Sheppard will attract more ridership than one ending at the STC.

A subway station at Sheppard, in the absence of improvements to the GO corridor such as RER and SmartTrack, will attract ridership from Markham just as Finch Station does from the Yonge corridor north of Steeles.

Removal of the station at Lawrence East, coupled with new GO corridor services, will reduce demand on the subway.

There is no guarantee that the land use, job and population assumptions underlying the three estimates are the same, especially when the highest number was produced in the context of boosting the importance of STC as a growth centre.

What we are left with, however, is the likelihood that the level of DCs allocated for the Scarborough Subway project were based on the most optimistic scenario for new ridership, and a network configuration quite different from what will actually be built. If the calculation had been done on the basis of lower ridership numbers, the DC revenue available to fund the Scarborough Subway would have been considerably lower.

The Calculation of SSE Development Charges

The full report on the calculation of new DCs explains the calculation in detail. I will trace through this here only to the extent needed for readers to understand the effect of changes to the underlying assumptions.

Allowable Components of the DC Cost Base

Although the total estimated cost of the SSE is $3.56 billion including inflation to completion, much of this is not eligible for recovery through DCs.

$2.65 billion contributed by other governments is excluded for the obvious reason that it is not a City cost.

The SRT life extension is not part of the new line, and so its cost of $78 million is excluded.

Because the DC study planning period ends in 2022, costs beyond that year are reduced by a net present value calculation to 2022 removing a further $5.5 million.

The remaining amount eligible for the DC cost base is $826.5 million.

This is suballocated to current and future beneficiaries using the 39:61 split based on projected ridership leaving $501.8 million due to ridership growth.

A 10% statutory reduction in this allocation brings it down to $451.6 million.

Costs are then allocated for recovery in the period to mid-2022 (the current DC Bylaw) and after that period (a future DC Bylaw) on a ratio of about 29:71 leaving $130.1 million in the current period.

Finally, debenture debt service cost is added in bringing the total for 2015-to-2022 charges to $255.1 million.

But What About The Scarborough Subway Tax

When Council approved the implementation of DCs for the SSE project, the report before it contained conflicting goals. Early in the report, the role of the subway tax is clear:

The total estimated cost for the SSE is $3.56 billion (expressed in inflated dollars), with current Federal and Provincial funding commitments of approximately $660 million and $1.99 billion respectively. As a result, the City’s net capital cost is estimated at $910 million, which will be funded through a combination of property taxes ($745 million, with increases of 0.5% and 0.5% approved in 2014 and 2015 respectively, and a planned incremental increase of 0.6% in 2016, for a total increase of 1.6%) and development charges (estimated at $165 million). [p. 2]

At this point, the amount to be recovered from DCs is only $165 million. However, later the report states:

The total estimated cost for the SSE is $3.56 billion (expressed in inflated dollars), with an estimated City share of $910 million (expressed in inflated dollars). After excluding the SRT Life Extension costs, which were determined to be not development-related, and expenditure timing considerations, the eligible City share is reduced to approximately $826.5 million. This amount, along with eligible associated debenture financing costs of $793 million, for a total potential recovery amount of $1,619.5 million, has been included in the development charges analysis. [p. 6]

The DC study was undertaken on this basis, and the contribution of the subway tax appears to have been ignored. In effect, the City appears to be double-dipping through both the special property tax and the use of DCs to recover all of its costs.

The Effect of Reduced Ridership Projections

The table below shows the effect of lower ridership estimates on the allocation of DCs. In this table:

“Original” refers to the TTC’s January 2013 ridership estimate.

“Revised” refers to the estimate used during the LRT/subway debate and also as the basis for the DC Bylaw.

“Jun-16” refers to the new estimate included in recent SSE public presentations.

Over the life of the DC Bylaw, use of the June 2016 ridership forecast would reduce the total revenue to the City from $255.1m to $103.5m, a loss of about $150m. Over the full life of the project financing, the loss is about $525m. The effect of the new forecast is not simply a matter of political football between LRT and subway advocates. It could have a major effect on the Development Charges revenue to which the City is entitled.

The Optimized Scarborough Plan

A further problem for the DC calculation is that it was based on a $3.6 billion project to take the line all the way to Sheppard, but the project now on the table is considerably smaller, and part of the funding has been redirected to the Eglinton LRT. That project is not part of the DC Bylaw study and there is no background on the before/after ridership effects in the corridor.

Similarly, the SmartTrack scheme was touted as a candidate for Tax Increment Financing and no provision was made for this project in the DC Bylaw. Indeed, Council adopted its support of the SSE in October 2013 before SmartTrack was even part of the City’s transportation plans.

To the degree that the SSE actually would cost less than its original estimate, the DCs applicable to it would be reduced proportionately.

Conclusion

It is quite clear that the financial assumptions behind the 2015 Development Charge amendment have changed quite substantially, and the original premise – that the City’s would recover most of its costs through a special property tax – does not align with the base amount used in the DC calculation.

Request for Feedback

Any reader who is knowledgeable about Development Charges is invited to comment on these calculations and observations, anonymously if necessary.