Green bonds that sink Ontario deeper in the red

A plan to sell “green” bonds will push the province further in the red and do little to solve its transit and congestion woes.

Ontario’s provincial leaders want to dig the province into a deeper financial hole with their latest plan to sell “green” bonds to fund transit expansion. The end result will be higher fares, increased taxes and worse transit systems.

Speaking on Wednesday, Premier Kathleen Wynne called green bonds a “great” tool to raise money for transit expansion. Green bonds are fixed-income securities designed to raise money for projects with a positive environmental impact. To date, green bonds have largely been used to raise money for projects aimed at mitigating the impact of climate change. The World Bank and other multilateral institutions have used them in recent years.

And while both Wynne and Finance Minister Charles Sousa were light on details of what projects will qualify as being “green”, the impact on Ontario’s finances is clear enough. The government already expects the interest payments on outstanding debt to grow by an annual rate of 5.5% over the next three years – outpacing spending increases on health, education and social services. Revenue, meanwhile, is only slated to grow 3.3% over that same period.

In short, a greater percentage of the Ontario budget will be going to debt payments, rather than programs that residents use. Already, debt payments are the province’s fourth largest expense.

Worse still is that much of this money – the province hasn’t said how much it intends to raise – is going to fund transit expansion in areas that already operate on massive government subsidies. Metrolinx – the provincial transit agency overseeing expansion in the GTA – has already tabled a $50-billion plan, but those projects won’t be funded by the new bonds. Instead, it is expected the money will go to transit projects across the province.

Take Barrie, for example, where the transit system’s revenue-to-cost ratio – which measures the amount of revenue raised through fares compared to the cost it takes to operate the transit system – is currently at 41%. Barrie is not alone. Grand River Transit, which operates in Cambridge, Kitchener and Waterloo, has a revenue-to-cost ratio of 40%. In the York region, it’s also 40%, while in Durham that figure is 37%.

The province’s plan is to fund a massive expansion of transit in the hope that it will increase ridership and grow revenues. But, as has been shown in similar plans across North America, it will result in greater subsidies, higher fares and a siphoning off of resources from sustainable routes and operations.

Take Los Angeles, which built a 17.4-mile subway line for $4.5 billion over a 15-year period – during which, the project was plagued by cost overruns and construction delays. Eventually it opened to ridership levels that were nearly a third below original forecasts. Even after being in operation for more than a decade, ridership levels are still about half of what planners originally expected.

Since construction began on the subway line in 1986, bus ridership – the highest in the United States – fell to 400 million a year from 500 million annually, as officials were forced to raise fares substantially and dedicate more resources to the subway line. The transit system’s heaviest users ended up with worst service and higher fares – hardly what transit officials has originally promised.

In Dallas, meanwhile, the number of passengers at many of the city’s light rail stations is lower than when they first opened – even after billions of dollars in subsidies and heavy promotion. Thirty-four light-rail stations that opened in the Texas city between 1996 and 2002 now mostly serve fewer riders today than they did in January 2003. Ridership has fallen both in aggregate and at 19 of the 34 individual stations. The only way that the city’s transit system has been able to increase ridership was by adding service where none existed.

And in Sacramento, California, while the city’s transit budget has by increased by about 15 times, ridership has grown by less than three times. A massive, publicly subsidized light rail system has been a financial drain on the transit system since its inception in 1987. In order to try and cut costs, officials had to cut bus lines – the only part of the system that is used to capacity – while leaving the light rail lines untouched.

Ontario should take note. Its plan to rush headlong into a massive transit expansion in order to grow ridership will most likely cripple transit systems. Higher fares needed to operate the new transit systems – mixed with higher taxes necessary for the increase in subsidies – will divert services and attention away from where transit is most needed.

Brady Yauch is an economist and Executive Director of the Consumer Policy Institute (CPI). You can reach Brady by email at: bradyyauch (at) consumerpolicyinstitute.org or at (416) 964-9223 ext 236.