[URBAN NOTE] "Toronto Doesn’t Need to Pay for New Streetcars Right Away, No Matter What Rob Ford Sa"

[rfmcdonald]

Torontoist's David Hains is unimpressed by Mayor Rob Ford's command of the city budget.

The City’s capital budget is overlooked and misunderstood by many, but it plays an important role in building Toronto. It’s the part of the budget that funds large, long-term infrastructure projects like the Union Station Revitalization. But a look at how some members of city council have recently approached one of Toronto’s higher-profile capital projects, an arrangement to purchase 204 next-generation streetcars (the order has since been reduced to 182), reveals a problematic strategy for spending these crucial capital dollars.

In 2008, the City committed to purchasing 204 modern, European-style streetcars (also known as light-rail vehicles, or LRVs) as part of the capital budget. Council voted in favour of the move, 29 to 11. This decision followed a staff analysis that buying new streetcars would be the City’s most cost-effective option; maintaining the aging streetcar fleet was expected to be so expensive that deferring the purchase of new vehicles wasn’t considered to be worth it. At the time, council believed that one third of the LRV purchase would be assumed by each order of government, but federal funding didn’t come through. Conservative cabinet minister John Baird even infamously told Toronto to “fuck off.”

[. . .] Mayor Ford’s administration offered a new way of thinking: paying for streetcars, Ford and his allies began to insist, means taking on evil, evil debt. So we better pay for these streetcars up front, because evil things are bad.

This talking point started a couple months before last year’s budget vote, with Team Ford using it to justify their unpopular proposed budget cuts.

In the face of a surplus of close to $200 million (which then grew to $292 million when all the totals came in), the argument was that all of this money was needed to pay for David Miller’s unfunded streetcar purchase—that it couldn’t be used to stave off cuts.

[. . .]

What Ford is suggesting here is that in order for the City to purchase streetcars responsibly, it has to pay the money up front, to avoid debt. To this end, in last year’s budget, a policy was passed to have all future surpluses applied to the streetcar purchase until it is fully paid off.

But Rob Ford is wrong, and the people promoting this idea either don’t understand budget basics, or are being disingenuous.

Put aside for the moment that the way council put together the streetcar debt financing ensured there was no net debt increase, and let’s focus on how the capital budget works. The City of Toronto is legally prohibited from running a deficit on its operating budget, but it takes on debt to fund large purchases in its capital budget. (Deficit is a shortfall on a yearly financial obligation, whereas debt is borrowed money, repayable over time.) This is a sensible way of doing things, because then the City can pay off its capital purchases—like the new streetcars—over their useful life, rather than scrimping and saving to pay for them up front. To use a household analogy, you pay off your mortgage while you live in the house, rather than waiting to buy one outright in 15 years.

Those in favour of paying off the streetcar purchase right away say that they’re not only retiring debt early, but also eliminating some interest costs, and thus saving money. However, this misses the big picture. The current borrowing costs (or interest rate) for a 30-year City of Toronto bond are 3.80 per cent, which represents a low-interest-rate environment, thanks in part to the City’s strong interest rating. This should mean that the City is more willing to invest in worthwhile projects, or re-finance old debt, because it’s relatively inexpensive to do so. Debt financing is worse when interest rates are high, and Toronto has a really good situation right now.