cityscape How Much Would a Scarborough Subway Extension Really Cost?

Why the headline-grabbing cost figures don't tell the whole story.

In May, city council met to discuss 15 different revenue tools—that is, different types of taxes and fees—to fund the proposed “Big Move,” Metrolinx’s long-term transit plan for the Toronto region. But there was a problem: a majority of councillors like public transit, but they don’t like to pay for it.

Councillor Giorgio Mammoliti (Ward 7, York West) put forward a motion in support of a Finch West subway, a line not included in The Big Move, but said he couldn’t support $1,000 per household in new taxes (although the recommended total would average $500 per household). Councillor Cesar Palacio (Ward 17, Davenport) said he couldn’t support taxing the middle class and working poor to pay for The Big Move. Councillor Frances Nunziata (Ward 11, York-South Weston) said that her residents couldn’t afford $100 a year for public transit if they weren’t going to get anything from it, let alone $1,000. “Are we crazy?” asked Nunziata during her speech to council. “We’re crazy!” she confirmed.

In particular, council showed no appetite for a property-tax increase, which was rejected by a 41-2 margin. But that was May. And since council is crazy, it’s about to debate this again. With a Ford-approved Scarborough subway extension within its grasp, council is more likely to approve tax increases than it was just a few months ago. Here’s a look at the funding recommended by City staff, the problems spending that money would pose, and how much it might cost the average taxpayer.

The Background

The proposed three-stop Scarborough subway extension currently has funding from the provincial government ($1.48 billion) and the federal government ($660 million). But subways are expensive, and there’s still a $910 million funding gap for the City to make up. According to the City manager’s July report [PDF]—which was prepared in only 10 days—the recommended way to fund the remaining $910 million is a mix of property taxes ($745 million) and development charges ($165 million).

Since a subway extension is a capital asset, it would be paid for over the course of 30 years, which is the maximum duration for municipal debentures. What this means is that the City would add to its debt, and would pay the interest and principal by increasing property taxes and development charges.

The City manager estimates that the required property-tax increase would be 1.6 per cent. If council follows staff recommendations, the increase would be phased in over three to four years, but already some councillors are balking at the amount needed. Councillor Gary Crawford (Ward 36, Scarborough Southwest), a member of the mayor’s executive committee, told the Globe that $745 million is a greater property tax increase than he’s comfortable supporting. At Wednesday’s TTC board meeting, Councillor John Parker (Ward 26, Don Valley West) expressed his opposition to the plan by using the mayor’s campaign rhetoric: “There is only one taxpayer and we’ve got to stop the gravy train.”

For his part, the mayor has repeatedly said that he supports no more than a 0.25 per cent tax increase each year for four years, which he claimed in a July council debate would only cost $5 per household each year. This is true for the first year of that plan, but by year four it would cost about $23 per average household each year, because property tax increases are cumulative. Another thing the mayor seems not to understand is that even if this tax increase were in place for 30 years, it wouldn’t be enough to finance the subway extension.

With an assumed 4.2 per cent interest rate, the 30-year loan for the subway extension would cost an estimated $38 million per year in additional property taxes. With one million households in Toronto, that’s $38 per home in 2013 dollars until at least 2044.

The Risks

The $910 million, or $38 million per year, is far from a final price tag. In fact, the TTC includes a 30 per cent variance in its estimates, meaning the City could end up paying far more if planning and construction problems arise (or, less likely, 30 per cent less). Unlike the fully-funded LRT plan, the subway plan contains no provision for the province to cover cost overruns. That means that if the $3 billion project exceeds estimates by 15 per cent, the City could find itself having to raise another $450 million through debt, which would cost an additional $342 million in interest over 30 years. According to the City manager, the responsibility for cost overruns still needs to be finalized, but it appears unlikely that the City will get additional concessions from the province. A September 10 letter from Metrolinx to the City said, “The extension of the TTC’s subway would be a City/TTC project, and the City would be responsible for project scope and schedule, including any cost overruns, operating costs and maintenance costs.”

There are other risks the City faces. While the provincial and federal funding is inflation protected, the City’s portion, funded by debt, carries interest-rate risk. According to the City manager in July’s council meeting, every increase of 25 basis points in borrowing costs would add $5 million a year to the project’s costs—the equivalent of an additional 0.25 per cent in property taxes.

This additional debt would also be added on to the City’s debt-service charges, and would raise the threshold of debt as a per cent of property taxes by one per cent, from 12 to 13 per cent. This would bring the City to within two per cent of its self-imposed debt ceiling.

There are costs on the operating side, too. The previous plan for this corridor called for a Scarborough LRT, which would have had its operating costs funded by the province. No such deal exists for a subway extension. The City would have to pay an estimated $32-64 million a year to maintain the three additional subway stations and pay for state-of-good-repair costs, money that would be an additional drain on the TTC’s limited operating funding.

Opportunity Costs

Whenever you make a big spending decision, it’s not just about what you buy, but what you could have done with the same amount of money. In Toronto’s case, there are a number of things that $745 million could pay for. For instance:

The TCHC’s $751 million state of good repair backlog

Flood protection for the lower Don River, at an estimated $600 million

Reducing the TTC’s $2.5 billion state of good repair backlog by 32 per cent

Resurrecting the 16.5 km Jane Street LRT line, at $630 million

At $12,000 each, a Kyle Rae-style retirement party every four hours for the next 30 years

The Conclusions

Raising money for transit investment is not bad in and of itself. What’s needed is an honest debate about the value of that investment relative to the full scope of the City’s financial exposure. Given the extremely preliminary nature of this subway plan—environmental assessments won’t be available for three to four years—costs could very well escalate, with property taxes likely making up the difference. In the meantime, committing to this subway extension also means the City gives up future financial flexibility, making it more difficult to fund future projects like the downtown relief line, deal with infrastructure problems as they arise, or maintain service levels.