Toronto Transit Commission - Sheppard Subway
- Bessarion Station
The Strategic Policies and Priorities Committee recommends the adoption of
Recommendation No. (1) of the Budget Committee contained in the transmittal letter
(October13,1998) from the City Clerk.
The Strategic Policies and Priorities Committee reports having received for information the
report (October 19, 1998) from the Chief Financial Officer and Treasurer and forwarded it,
together with the communication (October 8, 1998) from Mr. Vincent Rodo, General
Secretary, Toronto Transit Commission, to the Chief Financial Officer for consideration of the
funding options contained therein during deliberations of the 1999 Capital Works Program.
The Strategic Policies and Priorities Committee submits the following transmittal letter
(October 13, 1998) from the City Clerk:
Recommendation:
The Budget Committee on October 13, 1998 recommends that:
(1)the contract for the construction of the Bessarion Station be approved; and
(2)the communication (October 8, 1998) from Mr. Vincent Rodo, General Secretary, Toronto
Transit Commission be considered in conjunction with the report on the Sheppard Subway
funding options being provided by the Chief Financial Officer and Treasurer at the October
20, 1998 meeting of the Strategic Policies and Priorities Committee.
Background:
The Budget Committee on October 13, 1998, had before it communication (October 8, 1998)
from the General Manager, Toronto Transit Commission relating to the Bessarion Station on
the Sheppard Subway.
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(Communication dated October 8, 1998 addressed to the
Clerk, City of Toronto from the
General Secretary, Toronto Transit Commission)
At its meeting on Wednesday, October 7, 1998, the Commission received a verbal update
from J. Sepulis, General Manager - Engineering and Construction concerning the Sheppard
Subway Budget/Schedule.
After hearing the above update, the Commission approved a motion that the funding issue
regarding Bessarion Station be forwarded to the City Budget Committee, City Strategic
Policies and Priorities Committee and City Council to advance a decision on the matter prior
to November 1, 1998.
Due to the fact that tenders received for construction of Bessarion Station expire on
November 1, 1998, it is essential that a decision on whether to proceed with the construction
of Bessarion Station be made by City Council at its meeting on October 28, 1998. Attached is
a report from our Engineering and Construction staff on the ramifications of not reaching a
decision by this deadline. To facilitate this decision, it would be appreciated if this matter
could be included on the respective agendas for consideration by the City Budget Committee
on Tuesday, October 13, 1998, the City Strategic Policies and Priorities Committee on
Tuesday, October 20, 1998 and City Council at its meeting on Wednesday, October 28, 1998.
Your cooperation with respect to the foregoing is greatly appreciated.
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(Report entitled "Status of Sheppard Budget and
Bessarion Station Contract Award" from the
Sheppard Subway Department, E&C Branch)
Project Budget Status:
The approved budget for the Sheppard Subway project is $875.4 million. The expenditures to
the end of September 1998 were $384.4 million.
The current amount of funds committed in the form of contracts awarded, purchase orders
issued, property acquired, etc., but payments not necessarily made, is $700.4 million.
The budget has $175.0 million remaining funding available to cover the balance of the work
not yet committed.
The current budget overrun on Sheppard is $51.9 million for a total expenditure of
$927.3million. City Finance Department, based on the City's Auditor report, is projecting a
total cost overrun of $56.7 million for the project for a total project expenditure of
$932.1million by the end of the project.
The project is currently on schedule for completion in June 2002. At this time there are no
critical design or construction elements behind schedule.
To the end of September, approximately 35 percent of physical construction was completed.
Bessarion Station Contract Award Status:
The Bessarion Station bids were received on June 3, 1998 and the contract was originally
scheduled to be awarded on June 17, 1998. Due to a projected budget overrun for the
Sheppard Subway project, award of the station ($33.9 million) was deferred pending the
resolution of funding of the projected budget overrun. The Commission was briefed on this
issue at the July 9 and September 3 meetings.
While efforts have been initiated to establish a strategy for the funding of Bessarion Station,
no funding commitment has been made to date. As the validity of the Bessarion Station bids
has already been extended once, and will expire on November 2, 1998, the purpose is to
outline the financial and schedule implications of not awarding Bessarion Station on or before
November 1, 1998.
There are three options for the eventual construction of Bessarion Station:
Option 1:
Award Bessarion Station prior to the expiration of the current bids on November 2, 1998.
Option 2:
Allow the existing bids to expire on November 2, 1998. Re-tender the Bessarion Station
contract on or before February 20, 1999 and commence construction on or before May 1,
1999.
Option 3:
Defer the construction of Bessarion Station until after the Sheppard Subway has opened for
revenue service in June 2002.
The implications of the above options are outlined below:
With Option 1, the existing bid price ($33.9 million) would not change and the station would
be open to the public when revenue service of the Sheppard Subway line commences in June
2002. It does, however, require that the project budget be increased now to address the
projected budget overrun.
It is possible to request a further extension to the validity date of the low bidder but it is
uncertain whether the low bidder would be agreeable to a further extension. In addition, the
schedule milestones, sequencing of work and other contractual criteria will have to be revised
to reflect changes on account of the delay. This could expose the Commission to claims.
With Option 2 there are cost, schedule and construction implications.
While the award of Bessarion Station can be delayed until spring 1999, it will only be
possible to complete the station box structure prior to the commencement of revenue service
in June, 2002. The Sheppard Subway would be open for service and the completion and
opening of Bessarion Station to the public would follow by several months.
A new contract document for Bessarion Station would have to be prepared with the resulting
re-design costs. In addition, it is likely that construction prices will continue to rise between
now and spring, 1999. There are premiums associated with a contractor completing the station
construction while revenue service is in operation. Consequently, the estimated cost of
Bessarion Station will increase by approximately $5 million if Option 2 is implemented.
With Option 3, the construction of Bessarion Station would be deferred until the future (i.e.
after the commencement of revenue service) and the estimated costs will increase from $33.9
million to approximately $70-$80 million. This is due to the fact that construction would
involve excavating the station down to the tunnels, careful dismantling of the tunnel liners
(when the subway is not operating) and construction of the station during the nightly
shutdown period of the subway. This type of construction is technically complex, risky and
expensive.
Conclusion:
In the absence of confirmation of funding to cover the cost of project overrun it is necessary to
let the contract bid validity expire.
If a decision is made to fund the construction of Bessarion Station after November 1, 1998,
the cost of construction will increase significantly.
The Strategic Policies and Priorities Committee also submits the following report
(October 19, 1998) from the Chief Financial Officer and Treasurer:
Purpose:
To outline options for financing projected project cost overruns for the Sheppard Subway.
Funding Sources, Financial Implications and Impact Statement:
If the projected amount is financed through the issuance of debentures, debt charges for this
project will increase over original estimates.
Recommendation:
It is recommended that this report be received for information and that the financing options
contained herein be considered during deliberations on the overall 1999 Capital Works
Program.
Council Reference/Background/History:
At its meeting held on September 11, 1998, the Audit Committee received the report
"Sheppard Subway Project Cost Overruns" for information. The report identified cost
overruns at the current stage of construction of $42.5 million with a further potential $14.4
million being incurred over the next year for a total of $56.7 million. At its meeting on
October 1, 1998, the Strategic Priorities and Policies Committee requested the Chief Financial
Officer to report on the impact of financing the three options identified by the TTC to deal
with these cost overruns.
At its meeting on October 13, 1998, the Budget Committee received a letter from the TTC
that outlined three options relating to the Bessarion Station and recommended that the
awarding of the relevant contract proceed as scheduled.
Comments and/or Discussion and/or Justification:
Based upon the revised budget of $875.0 million (before cost overruns), it was projected that
the City's share of the financing was $297.0 million. This amount has been approved to be
provided, before considering development charges, from the issuance of debentures for a
term-to-maturity of twenty years. Annual debt charges are projected to be approximately
$32.79 million at an interest rate of 6.50 percent from 2003 onwards, including debt charges
for funds previously expended for the Eglinton Subway and Wilson Yard projects which were
also part of the Rapid Transit Expansion Program. At present, there is a projected cost overrun
of $56.7 million. Several options exist to deal with this projected cost overrun such as: 1)
award the contract to build the Bessarion Station by November 2nd and finance the entire cost
overrun by the issuance of debentures, 2) delay the construction of the station until May 1,
1999, 3) defer construction until the future that would increase the costs from $33.9 million to
approximately $70 to $80 million, or 4) advance the use of funds in the Sheppard Subway
Project Reserve Fund.
If the projected cost overrun of $56.7 million is entirely financed through the issuance of
debentures over the next three years, annual debt charges, based upon current market
conditions, are projected to be an additional $5.4 million for a term of twenty years by the
year 2002.
It has been suggested in the TTC Sheppard Subway Budget Briefing, dated July 9, 1998, that
an option would be to increase the construction budget by the amount of the overrun, resulting
in increased annual debt charges of $5.4 million over the original $32.79 million forecast for a
total of $38.19 million, as detailed on the attached exhibit. A portion of the annual debt
charges could be offset by approximately $5.0 million, based upon the current projection of
development charges that are predicated upon the completion of the Bessarion Station. Since
it is anticipated that the development charges will be received after the construction of the
station, it is being suggested that they be applied to future debt charges, as they may not be
available to be applied against capital expenditures when they are actually being incurred.
The third option would defer the construction of the Bessarion Station to early 1999 or after
2002 with a possible cancellation. If the station is deferred, then an immediate saving would
reduce the budget overrun by $33.9 million, leaving a net shortfall of $22.8 million. The cost
of construction at a later date has been estimated at between $70 million to $80 million by the
TTC as stated in their budget briefing report dated July 9, 1998. This is shown on the attached
as Option 3. It should be noted that there also would be a risk that interest rates could increase
when the financing is required, given that they are currently at historically low levels.
A fourth option is to proceed with Bessarion Station and advance use of funds in the Sheppard
Subway Project Reserve Fund which contains moneys transferred to the City by the Province
in July of 1998 as part of the conclusion of the 5 year subsidy agreement. This option would
mitigate impacts in 1999 and 2000, but would increase later impacts, depending upon future
capital market conditions. However, this option would essentially shift debt charges to future
operating budgets by using funds that would be earning interest in the Reserve Fund.
The RTEP Reserve Fund is receiving an annual contribution of $11.8 million during the past
two years. Regardless of the decision to issue debt to finance the estimated over-run, it is
projected that the Reserve Fund will still require an increase in contribution in the 2000.
Other financing options, including sale/lease back of components of the State of Good Repair
capital budget and other scenarios will be more fully explored in the pending Debt
Management Plan which will be presented to Budget Committee for consideration with the
overall financing strategy for the 1999 Capital Works Program.
Conclusion:
The funding of the projected cost overrun of $56.7 million can be financed through the
issuance of debentures for a term of twenty years, resulting in additional annual debt charges
of $5.4 million. If the Bessarion Station were deferred, then the projected cost overruns would
be reduced by approximately $33.9 million. However, the level of development in its vicinity
and related charges would also be reduced and the TTC has stated that construction costs
could double if the station is built at a later date with a similar increase in future interest and
principal repayments.
It is recommended that the financing options contained in this report be received for
information at this time and be considered as part of Council's deliberations on the overall
1999 Capital Works Program.
Contact Name:
Martin Willschick, Manager, Treasury - 392-8072;
E-mail: mwillsch@mta1.metrodesk.metrotor.on.ca
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Projected Debt Charges for the Sheppard Subway
($Millions)
