Public Transit Economics 101

Aside from Hong Kong and Singapore, few cities operate public transit systems in which fares cover all costs. Instead, mass transit is paid for through some combination of fares and government contributions.

Riders and municipalities cover almost all operating costs

Generally, the larger a city is, the more it can depend on fares to recover costs, largely due to economies of scale. Nationally, cost recovery (the percentage of operating expenses covered from fare box revenues) averaged about 62 percent in 2003 and has declined slightly to 60 percent in 2005. Even so, fares pay for a greater percentage of costs in Canada than in many other OECD countries, roughly 50 per cent more, in fact, than in the United States, Sweden and Italy.

The Canadian Urban Transit Association´s 2005 Transit Fact Book reports that in 2005, it cost $4.2 billion to operate transit systems in Canada. Total revenues were $2.6 billion. The shortfall between fares and operating costs comes almost entirely from municipalities—94 per cent in 2004. Some provincial governments provide operating contributions, while the federal government does not. By way of comparison, in the United States, federal and state governments contributed 30 per cent of operating costs of US transit systems in 2003.

Paying for capital costs: some federal and provincial help

The picture is somewhat different when it comes to finding funding to pay for capital costs, such as renewing and rehabilitating existing capital assets, and expanding to improve service or in response to population growth. Over the last five years, on average nationwide, annual capital investment has been roughly the same as net operating costs, or operating subsidies. In 2005, for example, the industry invested about $1.60 billion in capital improvements compared to operating subsidies of $1.67 billion.

The provincial share of direct capital investments has grown in the last few years, reaching almost 38 per cent in 2004 compared to less than 15 per cent in 2000. In addition, several provinces also transfer fuel taxes or vehicle licensing revenues to cities, which the cities use for their infrastructure needs, including their transit needs.

Importantly, since 1993, federal infrastructure funding programs, such as the Canada Strategic Infrastructure Fund (CSIF), as well as the more recent Gas Tax Transfer, have included transit projects as an eligible category for support. With these recent infrastructure investments, the federal government has increased its capital contribution to 8 per cent of the national total by 2004. Even so, these programs are not long-term, predictable sources of revenues for transit authorities.

In addition, for the first time in decades, the federal government is providing funding specific to transit. In fiscal year 2005-06, the federal government provided $400 million through the Public Transit Fund. This accounts for as much as 25 per cent of total 2005 capital spending on transit. For the following three years, 2006-07 to 2008-09, a Public Transit Capital Trust will provide $300 million annually via the provinces.

THE WAY WE PAY FOR TRANSIT ISN´T WORKING

Municipal shares of both operating and capital subsidies derive primarily from property taxes. Clearly, the property tax on its own is not sufficient to support public transit, given the estimated $60 billion municipal infrastructure deficit, the limited revenue sources, the growing responsibilities of municipal governments and the already substantial municipal support for transit. Municipal governments need help to deliver the transit services that the nation´s economy, quality of life and environmental sustainability rely on.

Finding the necessary funds is a major issue facing municipalities. CUTA estimates that the new investments required just to stay afloat, to say nothing of meeting unmet and future demands, are almost as large as the entire sum currently invested in all transit capital projects.

A long-term approach is needed

Clearly, much more needs to be done even just to maintain what we have. Recent federal government initiatives for municipal infrastructure funding are an important and welcome start. But we need to replace short-term, ad hoc funding with longer term, more predictable commitments from all orders of government that come closer to addressing the outstanding needs. Planning for, building and maintaining transit is a long-term project, with a planning horizon of 20 years or more.

Canada remains the only OECD country without a long-term, predictable federal transit-investment policy, even though moving people efficiently in urban areas requires a partnership among all orders of government. As transit´s share of urban travel continues to grow, federal and provincial governments must provide long-term reliable funding, so that transit systems have the financial certainty they need to meet the needs of Canadians now and in the future.

For more information: Massimo Bergamini, 613-907-6247 or [mbergamini@fcm.ca]