04/23/2015 10:11 EDT | Updated 04/24/2015 09:59 EDT

Tories' Public Transit Fund Has Some Mayors Scratching Their Heads

New system of loans and private partnerships in order to fund transit questioned

OTTAWA — Conservative MPs will be able to announce more pre-election promises for big transit projects after the federal government changed the way such investments are funded.

The creative accounting has several critics and mayors scratching their heads, wondering whether the changes will be disadvantageous for them.

The Public Transit Fund, announced in Tuesday’s budget, doesn’t kick in for another two years. But once it gets going it will be worth $250 million in 2017-2018, $500 million in 2018-2019, $1 billion in 2019-2020 and, presumably, every year thereafter until its commitments expire.

What’s new is that instead of upfront cash transfers, Ottawa could force municipalities and provinces to take out multimillion-dollar or even billion-dollar loans to cover the federal government’s share of the public transit projects. In return, Ottawa will pay back their share of the loan and the interest over the next two or three decades via small annual payments.

Ottawa Mayor Jim Watson told The Huffington Post Canada Wednesday that he wasn’t sure what the new funding scheme would mean for municipalities.

“At this point, we don’t know what the financial obligations are going to be,” he said. “We’ve asked our staff to examine how this is going to affect everything from our credit rating to our borrowing authority, and if it is going to cost us more.”

“Our preference, obviously, is the traditional method of grants to municipalities for these massive transit projects. It’s much more understandable and cleaner,” he added.

The Ottawa mayor said he is also worried that the federal government is trying to limit federal funding by tying the new money solely to projects that are public-private partnerships (P3s). The federal government provides only 25 per cent of funds for P3 projects, while it provides 33 per cent for traditional cost-sharing ventures with the municipalities and provinces.

“If it is going to cost us more or [if] we are going to be eligible for less funding then obviously we have a problem with that,” Watson said. Ottawa is currently planning the second phase of its light rail transit (LRT) project.

Over in Montreal, Mayor Denis Coderre was optimistic that an LRT project to the city’s south shore or the West Island link would qualify for the new money. Coderre said he wasn’t worried about the P3 requirement “as long as the federal government tells us that La Caisse complies as a private partner.”

The Caisse de dépôt et placement du Québec, a massive pension fund, announced earlier this year that it was ready to invest in both Montreal projects.

When he was asked directly about the Caisse’s potential as a P3 partner, Finance Minister Joe Oliver said details would be coming in the next few months.

“We will decide the projects that are meritorious,” he said, adding that there are qualifying projects all over Canada.

Oliver also said he felt it was important that public transit projects have a private partner to keep them “disciplined,” finished on time and on budget. “We have to structure each investments so that each project brings in money for the private sector, that is obviously essential,” he said.

Toronto Mayor John Tory told HuffPost he expects his city to get its fair share of the new transit fund. He will be submitting SmartTrack, a 53-kilometre, 22-station surface subway for consideration under the new fund, he said.

“This is my top priority as Mayor,” he wrote in an email. “The criteria set out in this fund… [are] ones that SmartTrack will meet.”

The Federation of Canadian Municipalities said it wasn’t prepared to comment on the fund and its potential impact.

“The truth is the structure of the fund is something FCM will be working with the government to flesh out over the next few weeks,” senior media relations strategist Neil Morrison wrote in an email.

But FCM’s president, Fredericton Mayor Brad Woodside, suggested in a statement that some mayors might want to keep the up-front cash grants on the table.

The debt-financing model has the potential to support a great number of projects, he said, but each city needs to determine which funding model makes the most sense for them.

Several budget experts contacted by HuffPost suggested that the fund might never get off the ground, because there is little incentive for the provinces to accept the federal government’s share of public transit debt on their books.

“It is just a proposal in an election year,” a former finance official said.

UBC economics professor Kevin Milligan, who also serves on the federal Liberals’ economic advisory council, said the major difference in the funding formula is that it will hide the federal government's deficits and debt load, by asking others to take on the debt and spreading the federal payments over many years.

“This makes it easier to spend more on infrastructure because it doesn’t affect your budget now, it affects your budget over 40 years that you write off that capital infrastructure,” he said.

The Conservative government told HuffPost that the money would be booked as “direct program spending,” similar to the annual transfer of gas tax revenue to the provinces for infrastructure projects.

Jack Mintz, the director of the Calgary School of Public Policy, has argued in the past that such accounting measures make it too easy for governments to spend. He said the move would give the federal government, which has only small surpluses, an opportunity to leverage future investments.

Andrée-Lyne Hallé, spokeswoman for Quebec Finance Minister Carlos Leitão, declined to comment because the province had not been consulted or briefed.

“We don’t have any details…. So we cannot comment until we know more,” she said.

Ontario Transport Minister Steven Del Duca also wasn’t consulted. He said he looked forward to learning more about the plan but was shocked there was so little money.

“The funding announced [Tuesday] would not even start until well after the next federal election and even then, $1 billion in annual funding spread across the entire country is simply not enough,” he wrote in an email.

“Ontario is investing nearly three times the amount the federal government is for a population a third of the size of Canada,” he added, referring to billion-dollar investments in the GO Transit passenger rail system and the new Hurontario-Main LRT.

Patrick Leclerc, vice-president of the Canadian Urban Transit Association, said he thought it was important that, for the first time federally, there will be “predictable and dedicated funding for transit.”

He said the P3 requirement wasn’t surprising and that many cities, such as Toronto, Edmonton and Winnipeg, are already including the private sector in public infrastructure projects.

Sauder School of Business professor Werner Antweiler, however, said he had heard from several communities that might not be able to find a private partner and were worried about the P3 requirement.

“If there isn’t a private partner, does that mean they will not be able to tap into these funds?,” he asked. “That is a big concern especially for mid-size metropolitan areas where there may not be these types of partners available.”

If the private sector doesn’t think they can make any profit, they won’t sign on, Antweiler said. “The notion of forcing everybody into these private and public partnerships is problematic.”

Some mid-sized municipalities, such as Kitchener and Waterloo, are also wondering whether they qualify for the fund which is aimed at “major” public transit projects.

Oliver’s spokeswoman Melissa Lantsman told HuffPost that more details on the parameters of the new public transit fund would be announced later this year. The goal, she said, was to invest in projects that addressed gridlock and promote economic growth.

“This has the potential to leverage up to $65 billion dollars in infrastructure funding,” she said.

Opposition critics remain skeptical.

NDP infrastructure critic Hoang Mai said he worries that municipalities that don’t want to take on a P3 partner for transit projects would be shut out of the fund.

He was also concerned Ottawa would determine which projects get funded and which ones don’t.

“The federal government is imposing its way on provinces and municipalities rather than working with them,” he said.

The Liberal critic for urban affairs, Adam Vaughan, a former Toronto city councillor, also believes electoral considerations might determine which projects get funds.

“[It will] lead to all kinds of problems, because they’ll run a transit line through ridings that matter to them and they won’t do it through parts of the city that are growing. We’ll get the Scarborough subway, rather than the downtown relief line,” he said.

Vaughan was also critical of the size of the fund and its structure, which doesn’t allow funds for continuing operations, repairs and upkeep.

“You may build a new LRT in Mississauga and you may pay it off in 30 years, but I will guarantee you within 15 years the operating costs … are going to be magnificent. You’re going to have to rebuild cars, rebuild the stations on an ongoing basis, and nobody pays for that.”

“It’s all about elections, not about good transit planning,” he said.

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