MUNICIPALITY OF CHATHAM-KENT CORPORATE SERVICES FINANCIAL SERVICES

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1 MUNICIPALITY OF CHATHAM-KENT CORPORATE SERVICES FINANCIAL SERVICES TO: FROM: Mayor and Members of Council Gord Quinton, MBA, CGA Acting Director, Financial Services/Treasurer DATE: December 5, 2013 SUBJECT: Development Charges in Ontario RECOMMENDATIONS 1. It is recommended that Council support MFOA s three recommendations to the Province to amend the Development Charges Act, 1997, being: a) Remove Section 5 (1), paragraph 8, the step in Determination of development charges that requires municipalities to reduce their capital costs by 10%. b) Update Section 5 (1) paragraph 4, which entails that the service levels development charges are based on is an average service level for the previous ten years, with a more flexible understanding of service levels. Municipalities should be able to adopt forward looking service levels, define the basis for service levels (inputs, outcomes, etc.) and broad service categories. c) Eliminate Section 2 (4), Ineligible service, so that all services are eligible for development charges. 2. The Mayor and Council send a letter to the Province and MFOA expressing its support for MFOA s proposed amendments. BACKGROUND On October 24, 2013, the Ministry of Municipal Affairs and Housing released a consultation document concerning the Development Charges Act, 1997 (DCA), which is included as an attachment to this report. The goal of the review is to make sure that costs to development are predictable, transparent, cost effective and responsive to the changing needs of communities. The DCA is the regulatory and legislative framework which municipalities must follow to levy development charges. Currently in 19 of Ontario s largest municipalities, development charges account for 44% of the gross capital expenditures related to growth. In some areas in the GTA development charges pay for over 60% of growth.

2 Development Charges in Ontario 2 As indicated in the Chatham-Kent Comprehensive Review (COPR) documents recently approved by Council at the November 25, 2013 meeting, development charges are an important strategy for financing capital expenditures related to growth. Currently Council has only approved DC s for Water and Wastewater. Council will be presented with options to introduce DC s for more services at a meeting in the 1 st quarter of The Association of Municipalities in Ontario (AMO) key message to the Province in response to the request for comments has been: Growth must pay for growth. Development charges are important to ensuring tax equity among property taxpayers. Discounted or nonexistent development charges drive up property taxes for all residents. Delaying infrastructure investments does not eliminate the problem, but can exasperate it more. If we devalue the public services which support our homes we shortchange our communities and their long-term future. The Municipal Finance Officers Association (MFOA) was tasked to bring together a working group of DC experts to review the current legislations and make suggestions for improvements to submit to the Province before the Jan 10, 2014 consultation deadline. The purpose of this report is to inform Council on the issues surrounding DC s and deliver MFOA s findings and recommendations. Additionally it is being recommended that Council support the MFOA position by passing a resolution and sending a letter to the Province in support of MFOA s top suggestions for amendments to the DCA. COMMENTS The term sustainability has been presented to Council a few times in recent months through the September 16, 2013 Community Development Forum and the many COPR reports to Council. In principal, DC s support sustainability by funding new public infrastructure to support population growth while maintaining community service levels. However due to many restrictions and limitations in the current DCA, the growth pays for growth principal cannot be fully achieved. These constraints cause the financial pressures of growth to be placed on existing taxpayers. Positive changes to the DCA and related regulations will improve Ontario municipalities ability to sustain growth. While in Chatham-Kent growth is slower than the GTA for example, the growth we do have is currently being funded by existing taxpayers for all categories except Water and Wastewater where a level of DC s are in place. Many taxpayers are voicing their concerns that taxation increases above inflation are unsustainable. One of the larger pressures on current taxes is the increasing costs of capital expenditures. A portion of these expenditures are on capital projects related to growth. A report presented at the December 9, 2013 Council meeting, the Chatham Western Transportation Link, is an excellent example of a growth related capital project. Without development charges future taxation from existing taxpayers will be used to fund the project. By using at least

3 Development Charges in Ontario 3 some level of DC s, reserves can be built up to fund the growth related component of these types of projects resulting in a fair cost distribution based on benefit. However under the current restrictive DCA, even if Council fully supported and implemented DC s, only a portion of future capital cost could be funded with them. MFOA s recommendations would result in the following improvements: Removal of the 10% co-funding requirement on soft services which currently would be funded by general taxation. Changes to the service level calculation methodology by looking at current cost instead of the average 10 year historic cost resulting in a more up to date real cost of growth which impacts the maximum allowable to be collected. Modifying the inclusions / exclusions to the development charges eligibility lists to include more types of growth related costs. For example, hospital support, waste collection, municipal administrative buildings and cultural facilities are currently excluded. The MFOA has provided two discussion documents that have been attached to this report. In addition Watson & Associates has provided their own commentary and advice to their clients. The positions expressed in these documents support the recommendation proposed. The documents are self-explanatory and are very educational. The Ministry has been hosting workshops across the province to engage the public, municipal government, and the development community. Municipal responses are required to be submitted to the Province by January 10, COMMUNITY STRATEGIC PLAN The recommendations in this report support the following Council Directions: Healthy, Active Citizens Growth Through Variety of Post-Secondary Institutions High Quality Environment Through Innovation Destination Chatham-Kent! Magnet for Sustainable Growth Prosperous and Thriving Community Has the potential to support all Council Directions Neutral issues (does not support negatively or positively CONSULTATION Planning staff were consulted and agree with the recommendations in this report.

4 Development Charges in Ontario 4 FINANCIAL IMPLICATIONS There are no financial implications from approving the recommendation in this report. The cost of growth causes significant pressure on the general tax base. It is widely accepted throughout Ontario municipalities that growth should pay for at least some share of the cost of growth. Council will have the opportunity in early 2014 to reduce the strain on annual budgets and tax rates on existing taxpayers by implementing Development Charges on more services than the current Water and Wastewater charges. Prepared by: Reviewed by: Gord Quinton, MBA, CGA Acting Director, Financial Services/Treasurer Gerry Wolting, B.Math, CPA, CA General Manager, Corporate Services Attachments: Development Charges in Ontario Consultation Document Fall 2013 MFOA Frozen in Time: Development Charges Legislation Underfunding Infrastructure 16 Years and Counting MFOA Dispelling Development Charges Myths and Misconceptions Watson & Associates Development Charges Review Consultation c. Ralph Pugliese, Director, Planning Services P:\RTC\F&PS\Finance\2013\RTC029 - Development Charges in Ontario.docx

5 Development Charges in Ontario Consultation Document

6 Development Charges Act, 1997 Review Consultation Document Ontario is reviewing its development charges system, which includes the Development Charges Act and related municipal measures that levy costs on development (i.e. section 37 and parkland dedication provisions of the Planning Act), to make sure it is predictable, transparent, cost-effective and responsive to the changing needs of communities. The Ministry of Municipal Affairs and Housing is consulting in the fall of 2013 with municipalities, the building and development industry and other key stakeholders on what changes to the system are needed. This document is intended to help focus the discussion and identify potential targeted changes to the current framework. Development Charges Act, 1997 The Development Charges Act, 1997 municipalities must follow to levy development charges. which This legislation resulted from negotiations with municipalities and developers and is based on the core principle that development charges are a primary tool in ensuring that "growth pays for growth". Development Charges Act, 1997 Processes To determine a development charge, a municipality must first do a background study. The background study provides a detailed overview of a residential and non-residential; the services needed to meet the demands of growth; and a detailed account of the capital costs for each infrastructure project needed to support the growth. The growth-related capital costs identified in the study are then subject to deductions and adjustments required by the legislation. These include: Did you know? development charges. $1.3 B in development charge revenue was collected in Development charges accounted for 14 per cent of municipal tangible asset acquisition financing in Identifying services ineligible for a development charge. The reason some services are exempt from development charges is that they are and not required for development to occur (e.g. entertainment and cultural facilities). Requiring a service level cap tied to a ten-year historical average. Capital costs for each service must be reduced by the costs associated with a service level greater than a 10-year historical average. This ensures new resident/business do not receive a service level greater than that provided to current residents/businesses. Development Charge Consultation Document Page 1

7 Reducing capital costs by the amount of growth-related infrastructure that benefits existing development. For example, installation of a new transit line needed to service growth becomes part of the overall municipal system and therefore also benefits existing residents. Municipalities must estimate the financial impact of this benefit and reduce growth-related capital costs accordingly. Reducing capital costs by an amount that reflects any excess capacity for a particular service. Municipalities must account for uncommitted excess capacity for any municipal service for which they levy a development charge. For example, if a municipality wants to construct a new library they must examine if the current municipal library system is at capacity. If the system is not at capacity, a deduction to growth-related capital costs for the new library must be made. An exception is made if a municipal council indicates that excess capacity at the time it was created is to be paid for by new development. Reducing capital costs by adjusting for grants, subsidies or other contributions. If a municipality receives a grant, subsidy or other contribution for a municipal service for which a development charge is being levied growth-related capital costs must be reduced to reflect the grant, subs - Reducing capital costs for soft services (e.g. parkland development, transit, libraries) by 10 per cent. The legislation specifically identifies seven municipal services for which growth-related capital costs are not subject to a 10% discount (i.e. water, wastewater, storm water, roads, electrical services, police and fire). All other services are therefore subject to a 10% discount. This measure was put in place so that a portion of growth-related costs is paid out of municipal general revenues. The deductions and adjustments attempt to identify the capital cost that can be attributed to the infrastructure needed to service growth and development. Therefore, revenue municipalities raise through development charges will help ensure growth-related capital costs are not borne by existing taxpayers. While the legislation provides for deductions and adjustments, in some instances the Act does not specify how these are determined by municipalities. For example, municipalities must account for the impact of growth-related infrastructure benefits on existing development but the Act does not say how this impact is to be calculated. Did you know? Based on an analysis of current background studies for 19 of the largest municipalities in Ontario (single and lower tier) capital costs recovered from development charges on average accounted for 44 per cent of gross capital expenditure estimates for services that would be eligible for development charges. At a regional level (Durham, Halton, York and Peel) development charges recovered 63 per cent of gross capital expenditures (See Appendix Figure 1). Hard services, such as roads, water, sewer and waste water, account for 67 per cent of all collection. Greater Toronto Area municipalities collect 70 per cent of all development charges in Ontario. Development Charge Consultation Document Page 2

8 Eligible Services The Development Charges Act, 1997 sets out specific services on which development charges cannot be imposed to pay for growth-related capital costs. This is a significant change from the Development Charges Act, 1989 which gave municipal councils the authority to pass by-laws imposing charges on all forms of development to recover the net capital costs of services related to growth. The scope of services funded under the Act was reduced by eliminating services which are not considered essential for new development and which benefit the community more broadly. Municipalities have argued that a number of services that are currently ineligible, such as hospitals and waste management should be made eligible services for a development charge. Municipalities would also like to recover the full cost of new growth associated with particular services that are currently subject to a discount, such as transit. Did you know? In 2011, 37 municipalities collected $74.2M in transit development charges; reserves stood at $259.4M. Without the 10 per cent discount applied to transit development charges, municipalities would have collected an additional $8.2M. The collection of development charges for transit is subject to a 10 per cent discount along with services such as parkland development, libraries, daycares, and recreational facilities. This broad category is ich are not subject to the discount. The 10 per cent discount is seen as a way of ensuring that municipalities do $30,000, $25,000, $20,000, Transit Development Charge Collections Selected Municipalities 2010 and $15,000, $10,000, $5,000, $0.00 Development Charge Consultation Document Page 3

9 Services for which a development charge is levied are also subject to the 10-year historical service average cap. Municipalities and transit supporters have suggested that transit levies be based on a peak or forward- looking service average. This would potentially allow municipalities to better co-ordinate transit infrastructure with planned growth. Did you know? A number of recent reports (i.e. Metrolinx Investment Strategy, Environmental Commission of Ontario and Environmental Defence) have advocated for amendments to the Development Charges Act, 1997, reflecting those made for the Toronto-York Subway Extension, for all transit projects in Ontario. Transparency and Accountability Public input Municipalities must pass a development charge by-law within one year of the completion of a background study. Before passing the by-law, a municipality is required to hold at least one public meeting, making both the by-law and background study publicly available at least two weeks before the meeting. The content of a by-law may be appealed to the Ontario Municipal Board (OMB) within 40 days of passing, after which the imposition of a specific development charge may be challenged within 90 days of the charge payable date. The OMB has broad powers to change or cancel (repeal) a by-law or to make the municipality do so. A number of appeals that are launched are settled between the parties involved before the Board makes a decision. If the Board orders a change to the by-law, it is considered to have come into force on the day that the by-law was passed. The municipality may then need to refund any amounts owed to anyone who paid the higher charge, with interest, within 30 days of the decision. Reserve Funds Municipalities must establish an obligatory reserve fund for each service for which a development charge is collected. The development charge funds must be spent on the infrastructure projects for which they were collected. In 2011, municipalities collected $1.3B in development charges and had $2.7B in obligatory reserves funds. Most development charges are collected for non-discounted services with roads, water and wastewater infrastructure accounting for the largest share. Each year the treasurer of a municipality is required to submit a development charge statement to council Development Charge Consultation Document Page 4

10 and to the Minister of Municipal Affairs and Housing, providing a detailed account of activities for each reserve fund. The statement must show the connection between the infrastructure project and the reserve fund supporting it. Despite the thoroughness of the development charge background study and the requirement to prepare and submit an annual development charge reserve fund statement, questions have arisen as to whether or not the funds collected are spent on projects for which they were intended. Planning Act: Section 37 (Density Bonusing) and Parkland Dedication The Planning Act allowing greater density (more compact form of development) and to require developers to contribute land for parks or other recreational use. Section 37 (Density Bonusing) Section 37 (Density Bonusing) allows local municipal councils to authorize increases in the height and density of development beyond the limits set out in their zoning by-law, provided they have enabling official plan policies, in exchange for providing specified facilities, services or matters, such as the Thousands $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 -in- Secured, Received & Spent: Toronto, $137,869 Out of the total 386 benefits received in Toronto between , 179 were in kind benefits and 207 were "cash-in-lieu". $63,569 $40,000 $20,000 Re $0 $10,990 Financial Compensation Secured Received to Date Spent to Date Finance and Governance) provision of public art, or affordable housing or other matter provided on or in close proximity to the Development Charge Consultation Document Page 5

11 property being developed. Municipalities often undertake planning exercises through extensive public consultation to identify how their communities will grow, resulting in the adoption official plans to reflect their vision. The application of section 37 (Density Bonusing) may be seen as departing from that approved community vision. Consequently, the application of section 37 (Density Bonusing) has sometimes been characterized as being ad hoc or unstructured. As well, questions have been raised about whether the payments are being used for the intended purpose and whether the appropriate accountability and reporting measures are in place. Parkland Dedication Municipalities have the authority to require that a developer give a portion of the development land to a municipality for a park or other recreational purposes either at the plan of subdivision approval or consent approval stage (Planning Act, subsection 51.1(1)) or as a condition of development or redevelopment of land ( Planning Act, section 42). Instead of giving over the land, the municipality may require the developer to pay an amount of money equal to the value of the land that would have otherwise been given. This is known as cash-in-lieu. In addition, municipalities have the ability to require an alternative parkland dedication rate, which is based on the principle that parkland dedicated should bear some relation to population and need. Under subsection 42(3) of the Planning Act, an alternative parkland dedication rate of up to a maximum of 1 hectare per 300 dwelling units may be imposed. In order to use this, a municipality's official plan must have specific policies dealing with the use of the alternative parkland dedication rate. The alternative parkland dedication rate was enacted to correct an inequity because parkland conveyances based on a percentage of lot area did not provide enough parkland for higher density residential areas. The philosophy of setting an upper limit for the Alternative Rate enables municipalities to set their own standards in relation to clearly demonstrated needs. These needs must be reflected in the goals, objectives and policies of the official plan to avoid unjustified use of higher conveyance standards. Concerns have been identified that the alternative parkland dedication rate in the Planning Act acts as a barrier to intensification and makes it more difficult to reach the intensification goals of the Provincial Policy Statement, set out in the Growth Plan for the Greater Golden Horseshoe. Overall, concerns have been raised that there is a need for more accountability and transparency with section 37 (Density Bonusing) and parkland dedication. Development Charge Consultation Document Page 6

12 Voluntary Payments p pay for infrastructure costs over and above development charges. Municipalities get additional funding from the development community to help finance capital projects so as to potentially reduce the impact of growth on tax rates and the debt capacity limits. Economic Growth Many stakeholders view the use of development charges as either a help or hindrance to economic growth in communities. Most of the discussion has focused on housing affordability and the development of transit, as mentioned above. The housing sector plays a significant role in economic growth in Ontario. This is a key sector that stimulates the economy through linkages with other sectors, and is a leading employer in the Province. A healthy housing sector can have positive economic and employment impacts in many other sectors. For example, new home construction can relate to expenditures for building Did you know? Based on information obtained from Will Dunning Inc. Economic Research, 322,100 jobs and $17.1 B in earnings resulted from the 76,742 housing starts in Ontario in In the same year, 25,416 Toronto housing starts created 89,000 jobs and resulted in $4.7 B in wages. materials, architectural services, construction crews and contractor services, in addition to other additional costs such as landscaping improvements, new furniture and moving expenses. Incomes generated from employment in this sector have a direct impact on consumer spending. Housing Affordability Since the Development Charges Act, 1997 was passed, development charges have risen steadily, leading some people to suggest development charges are having a direct impact on rising housing prices. Housing price increases can be due to several factors including (but not limited to) the general health of the economy, income levels, availability of financing, interest rate levels, cost of construction, material and land values. For example, from 1998 to 2009 the composite Construction Price Index for seven census metropolitan areas across Canada rose by 53.5 per cent. The index for Toronto has increased by 57.2 per cent and for Ottawa by 52.6 per cent. Subsequently, increasing construction costs would be one factor leading to Development Charge Consultation Document Page 7

13 rising development charge rates. risen substantially since 1997 (see Appendix Figure 3). Most of the municipalities experiencing larger than average increases in development charges are also ones which have experienced high levels of growth. Despite the increases, development charges as a percentage of the cost of a new home have remained somewhat stable (5 per cent to 9 per cent) since the Act first came into force. (See Appendix Figure 4) Non-residential Development Charges The Act also allows municipalities to levy charges for non-residential development. The way in which municipalities treat non-residential development charges may play a significant role in the attraction of industrial, commercial and institutional development. Such development can act as a lever in informing the location of employment/employers, residential neighbourhoods, transportation networks, and transit. Some municipalities provide exemptions for particular types of non-residential development to address job creation and growth in their municipality. For example, the Cities of Toronto and Kingston exempt development charges for all industrial development and the Town of Kincardine waives the development charges for all major office development. Growth, intensification and the Development Charges Act, 1997 Over the last decade, two provincial plans have been released that promote the importance of incorporating intensification in growth planning. The Provincial Policy Statement, integrates all provincial -wide, states that there should be sufficient land made available through intensification and redevelopment and, if necessary, designated growth areas, to accommodate an appropriate range and mix of employment opportunities, housing and other land uses. The Growth Plan for the Greater Golden Horseshoe, which was developed to better manage growth in the Greater Golden Horseshoe through compact, complete communities, support for a strong economy, efficient use of land and infrastructure, the protection of agricultural land and natural areas, seeks to focus growth within intensification areas. Intensification areas include urban and intensification growth centres, intensification corridors, major transit stations areas, infill/redevelopment/brownfield sites and the expansion or conversion of existing buildings and greyfields. The regional transportation plan, The Big Move: Transforming Transportation in the Greater Toronto and Hamilton Area (GTHA), released by Metrolinx in 2008, is consistent with the implementation of these Development Charge Consultation Document Page 8

14 provincial policies by helping to shape growth through intensification. Under the current Development Charges Act, 1997, municipalities may apply development charges in ways that best suit their local growth-related needs and priorities. A number of municipalities use local development charges as an incentive for directing land and building development through reductions and exemptions of development charges in areas such as downtown cores, industrial and commercial areas and in transit nodes and corridors, where higher-density growth is desired. Municipalities may also set area-rated development charges that reflect the higher cost of infrastructure needed to service lands that are distantly located outside of higher density, Did you know? To steer growth and encourage greater density, the City of Ottawa levies a lower development charge ($16,447 per Single Detached Unit) for development within the inner designated Greenbelt than areas beyond the outer boundary of the Greenbelt ($24,650 per Single Detached Unit). serviced areas. These charges reflect a localized need for development-related capital additions to support anticipated development. There is significant interest in using development charges more strategically by discounting development charges where growth and development is preferred, while setting maximum payable charges in areas outside of existing service areas (e.g. greenfields). Questions have been raised over whether this strategy is being fully utilized to achieve intensification in areas such as transit, nodes and corridors. There is concern that levying development charges generally halts growth in areas targeted for intensification and that waiving development charges in these areas should be considered to stimulate development. Development Charge Consultation Document Page 9

15 ISSUES AND QUESTIONS TO DISCUSS The Development Charges Process 1. Does the development charge methodology support the right level of investment in growthrelated infrastructure? 2. Should the Development Charges Act, 1997 more clearly define how municipalities determine the growth-related capital costs recoverable from development charges? For example, should the Act explicitly define what is meant by benefit to existing development? 3. Is there enough rigour around the methodology by which municipalities calculate the maximum allowable development charges? Eligible Services 4. The Development Charges Act, 1997 prevents municipalities from collecting development charges for specific services, such as hospitals and tourism facilities. Is the current list of ineligible services appropriate? 5. The Development Charges Act, 1997, allows municipalities to collect 100% of growth-related capital costs for specific services. All other eligible services are subject to a 10% discount. Should the list of services subject to a 10 % discount be re-examined? 6. Amendments to the Development Charges Act, 1997 provided Toronto and York Region an exemption from the 10 year historical service level average and the 10% discount for growth-related capital costs for the Toronto-York subway extension. Should the targeted amendments enacted for the Toronto-York Subway Extension be applied to all transit projects in Ontario or only high-order (e.g. subways, light rail) transit projects? Reserve Funds 7. Is the requirement to submit a detailed reserve fund statement sufficient to determine how municipalities are spending reserves and whether the funds are being spent on the projects for they were collected? 8. Should the development charge reserve funds statements be more broadly available to the public, for example, requiring mandatory posting on a municipal website? 9. Should the reporting requirements of the reserve funds be more prescriptive, if so, how? Development Charge Consultation Document Page 10

16 Section 37 (Density Bonusing) and Parkland Dedication Questions 10.How can Section 37 and parkland dedication processes be made more transparent and accountable? 11.How can these tools be used to support the goals and objectives of the Provincial Policy Statement and the Growth Plan for the Greater Golden Horseshoe? Voluntary Payments Questions 12.What role do voluntary payments outside of the Development Charges Act, 1997 play in developing complete communities? 13.Should municipalities have to identify and report on voluntary payments received from developers? 14.Should voluntary payments be reported in the annual reserve fund statement, which municipalities are required to submit to the Ministry of Municipal Affairs and Housing? Growth and Housing Affordability Questions 15.How can the impacts of development charges on housing affordability be mitigated in the future? 16.How can development charges better support economic growth and job creation in Ontario? High Density Growth Objectives 17.How can the Development Charges Act, 1997 better support enhanced intensification and densities to meet both local and provincial objectives? 18.How prescriptive should the framework be in mandating tools like area-rating and marginal cost pricing? 19.What is the best way to offset the development charge incentives related to densities? Development Charge Consultation Document Page 11

17 SUBMIT YOUR COMMENTS AND IDEAS You are invited to share your comments and ideas by January 10, You can: Share your views at a meeting. Submit your comments through an online version of this guide at Environmental Bill of Rights Registry Number: a submission to DCAconsultation@ontario.ca Write to us at: Development Charge Consultation Ministry of Municipal Affairs and Housing Municipal Finance Policy Branch 777 Bay Street, 13 th Floor, Toronto, ON M5G 2E5 Preparing an or Mail Submission Please structure your submission as answers to the question listed above or submit responses in each of the theme areas. Personal Information Personal information you provide is collected under the authority of the Ministry of Municipal Affairs and Housing Act. Development Charge Consultation Document Page 12

18 NOTES Development Charge Consultation Document Page 13

19 Appendix Figure 1 Potential Development Charges Recoverable as a Percentage of Estimated Gross Capital Costs Municipality Total All Services B.E.D.** GR Net Captial Costs BED/Total NET/Total Brampton * $ 1,678,874, $ 112,475, $ 1,566,399, % 93% Clarington $ 254,239, $ 20,571, $ 201,312, % 79% Oakville* $ 823,629, $ 107,088, $ 647,754, % 79% Ajax $ 179,644, $ 14,802, $ 132,178, % 74% Vaughan* $ 643,512, $ 36,829, $ 460,066, % 71% Mississauga $ 989,730, $ 30,593, $ 700,515, % 71% Whitby $ 440,855, $ 80,927, $ 272,745, % 62% Kitchener $ 390,672, $ 89,942, $ 228,426, % 58% Hamilton $ 1,781,878, $ 631,516, $ 1,033,155, % 58% London $ 1,729,685, $ 227,041, $ 967,697, % 56% Markham $ 1,494,277, $ 70,414, $ 818,602, % 55% Oshawa $ 193,128, $ 11,511, $ 104,370, % 54% Guelph $ 404,908, $ 95,688, $ 211,504, % 52% Kingston $ 190,705, $ 42,827, $ 79,647, % 42% Greater Sudbury* $ 221,107, $ 85,916, $ 90,886, % 41% Burlington $ 229,077, $ 45,917, $ 90,150, % 39% Barrie $ 748,574, $ 128,057, $ 287,251, % 38% Pickering $ 303,321, $ 84,875, $ 55,980, % 18% Toronto $ 8,728,196, $ 2,469,202, $ 1,560,139, % 18% Total $ 21,426,020, $ 4,386,198, $ 9,508,786, % 44% Peel Reion $ 5,409,160, $ 347,247, $ 4,422,521, % 82% Halton Region $ 4,393,600, $ 598,600, $ 3,576,100, % 81% Durham Region $ 3,941,500, $ 908,900, $ 2,505,300, % 64% York Region $ 14,368,403, $ 1,572,260, $ 7,134,128, % 50% Total $ 28,112,663, $ 3,427,008, $ 17,638,049, % 63% Total ST/LT/Regions $ 49,538,684, $ 7,813,207, $ 27,146,836, % 55% Note: Based on information contained in current municipal background studies. *Net of Subsidies. ** Benefit to Existing Development To determine a development charge, a municipality must first do a background study. The background study provides a detailed overview -residential; the services needed to meet the demands of growth; and a detailed account of the capital costs for each infrastructure project needed to support the growth. The chart is designed to show the how much revenue municipalities recover from development charges based on the infrastructure capital costs related for municipal services considered in the background study. Using Kingston as an example, the background study identified capital costs of $190.7 M. After making the deductions and adjustments required by the legislation Kingston was able to recover $79.6 M from development charges representing 42% of all capital costs identified in the background study. Benefit to Existing Development (B.E.D.) is highlighted to show the deduction municipalities must make to account for the benefit growth-related infrastructure provides to existing residents. Source: Based on information contained in current municipal background studies. Development Charge Consultation Document Page 14

20 Figure 2 Determining Recoverable Development Charge Costs ($ Millions) All Services Municipality Gross Ineligible B.E.D. Post Period Grants 10% Total Net/Gross Expenditure Service Level Capacity Discount Net % Toronto $8, $ $2, $ $2, $69.20 $1, % Uxbridge $26.00 $11.20 $3.00 $0.34 $ % Region of Waterloo $4, $10.10 $ $ $4.80 $3, % Transit Municipality Gross Ineligible B.E.D. Post Period Grants 10% Total Net/Gross Expenditure Service Level Capacity Discount Net % Toronto $1, $ $ $27.20 $ $33.10 $ % Region of Waterloo $ $11.80 $66.20 $2.20 $ % To determine a development charge, a municipality must first do a background study. The background study provides a detailed -residential; the services needed to meet the demands of growth; and a detailed account of the capital costs for each infrastructure project needed to support the growth. The chart above indicates the various deductions and adjustments municipalities must make to the capital costs for each infrastructure project needed to support the growth. Using Uxbridge as an example, the municipality is able to collect 44% of the capital costs identified in the background study from development charges. Source: Based on information contained in current municipal background studies for Toronto, Uxbridge and Region of Waterloo Development Charge Consultation Document Page 15

21 Figure 3 Historical Perspectives of Municipal Development Charges Municipality 2nd Gen (at enactment) 3rd Gen (at enactment) /2Gen Greater Sudbury $2, $3, $14, % Mississauga $3, $6, $16, % Toronto $4, $12, $19, % London $5, $13, $17, % Brantford $4, $9, $15, % Markham $7, $10, $22, % Cambridge $4, $7, $11, % Kingston $5, $9, $15, % Oakville T $9, $12, $25, % Barrie $13, $26, $30, % Guelph $11, $24, $24, % Waterloo City $5, $13, $11, % Windsor $9, $15, $17, % Clarington $8, $14, $15, % Brampton $14, $24, $25, % Richmonnd Hill $7, $11, $12, % Kitchener (Suburban) $5, $9, $9, % Vaughan $7, $12, $12, % Whitby $7, $10, $12, % Ajax $7, $11, $12, % Ottawa (inside Greenbelt) $10, $15, $16, % Hamilton $7, $10, $10, % Pickering $7, $9, $10, % Oshawa $6, $6, $7, % Burlington $7, $7, $8, % Chatham-Kent $1, $4, NA Average $4, $8, $16, % Rates are those for Single Detached units. When the current legislation came into force municipalities that wished to levy a development charge were required to enact a development charge by-law. The initial by-laws are referred to as first generation by-laws, generally enacted in 1998 to 2000 period. The legislation requires municipalities to undertake a new background study at least once every five years and enact a new by-law based on the new study. In the 2003 to 2005 period municipalities began the process of preparing new background studies and new by-laws. These by-laws are referred to as second-generation. Third-generation by-laws represent the renewal process municipalities undertook in the 2008 to 2010 period. Source: Based on information contained in current municipal background studies for Toronto, Uxbridge and Region of Waterloo Development Charge Consultation Document Page 16

22 Figure 4 Development Charges and Cost of New Housing 60, , % % 40,000 7% 9% 30,000 20,000 10,000 5% 5% 6% 5% 6% 7% 7% 8% 8% 4% 5% 4% 5% 8% 7% 6% 6% 6% 6% 5% 6% 5% 6% 5% 6% 6% 1% 1% 1% 0 Ottawa (Nepean) Durham (Whitby) Waterloo (Cambridge) York (Vaughan) Peel (Missisauga) Halton (Oakville) Toronto Note: Toronto data for 1996 and 1999 was not available. The chart indicates the impact development charge have on the cost of new housing. For example, for Mississauga development charges have historically comprised 5 to 7 percent of the cost of a new house. Source: Information for 1996, 1999, 2004 was compiled for the Ministry by CN Watson and Associates. Data for 2007 and 2010 was prepared by the Ministry of Municipal Affairs and Housing based on municipal development charge by-laws and housing price data from CMHC. Development Charge Consultation Document Page 17

23 Produced by the Ministry of Municipal Affairs and Housing, Municipal Finance Policy Branch ISBN (PDF) Paid for by the Government of Ontario Disponible en français

24 2013 Frozen in time: Development charges legislation underfunding infrastructure 16 years and counting Municipal Finance Officers Association of Ontario 8/23/2013

25 About MFOA The Municipal Finance Officers' Association (MFOA) was established in 1989 to represent the interests of Municipal Finance Officers across Ontario. MFOA promotes the interests of its members in carrying out their statutory and other financial responsibilities by initiating studies and sponsoring seminars to review, discuss and develop positions on important policy and financial management issues. MFOA represents almost all of Ontario's municipalities. The membership roll features Chief Financial Officers and designates whose duties are primarily of a financial nature. MFOA is an affiliate member of the Association of Municipalities of Ontario. Note from MFOA In 2011, MFOA assembled a team of municipal development charge experts from small and large municipalities across Ontario to form the Development Charges Working Group, an advisory body to the MFOA Board of Directors. The objectives of the Working Group were to: Share data, discuss key issues and help prepare drafts of this report. Mobilize support for development charge reform in light of new information about municipal infrastructure uncovered through the Provincial-Municipal Fiscal and Service Delivery Review and municipal tangible capital asset reporting. Our intention was to submit a report to the Ontario Government containing recommendations for reforming the Development Charges Act, 1997 that were broadly supported by the municipal finance sector. Members of the Working Group are recognized in Appendix A. MFOA is sincerely grateful for their contributions and this position paper benefitted from their views. This report received the support of MFOA s Board of Directors on November 20, 2013

26 Executive summary Although the Development Charges Act, 1997 introduced some positive elements to Ontario s development charges regime, municipalities have struggled with the cost recovery restrictions it brought forward, especially provisions concerning: 1. Ineligible services - Section 2(4) lists services for which costs are ineligible to be recouped through a development charge % discounts - Section 5(1), paragraph 8, indicates that a 10% discount will be applied to the development charge for a significant range of services (full list on page 18). 3. Historic average method of calculating service levels - Section 5(1), paragraph 4, indicates that DCs for all services will be calculated based on the average service level at which they were provided in the ten years leading up to the development charge background study. 1 These features of the Development Charges Act, 1997 are problematic because they create funding gaps for the infrastructure needed to enable growth. 2 It is counterproductive to limit municipalities ability to invest in infrastructure by limiting their ability to recover capital costs through development charges at a time when governments are focused on shrinking the infrastructure deficit and stimulating economic recovery through infrastructure investment. In the sixteen years since the Development Charges Act, 1997 was passed, provincial priorities have shifted, rendering the cost recovery restrictions neither financially, nor politically, affordable. The service funding framework is a barrier to the achievement of priorities related to transit expansion and land use intensification both in terms of restricted service eligibility and service level calculation. We were encouraged by Minister Linda Jeffrey s announcement that the Ministry of Municipal Affairs and Housing would be reviewing development financing legislation. Municipalities should be given maximum flexibility within the Act to set DCs at a level that funds growth costs in light of their own objectives. Provincial legislation related to municipal governance should be enabling and permissive. We agree with and require legislation that supports the following statement from the 2013 Development Charges consultation document: Under the current Development Charges Act, 1997, municipalities may apply development charges in ways that best suit their local growthrelated needs and priorities." Municipalities want to be a full partner in driving Ontario s prosperity through infrastructure development but they are hobbled by restrictive development charge legislation that undermines their ability to adequately invest in infrastructure and to grow 1 The sequencing of the three restrictions is not in order of reform priority. 2 Other parts of the Development Charges Act, 1997 also create funding gaps, including the definition of capital costs and index for charges but the three provisions mentioned are the most problematic restrictions for most municipalities.

27 in a financially sustainable manner. Three revisions to the Development Charges Act, 1997 are recommended to eliminate barriers to cost recovery: 1. Eliminate Section 2(4), Ineligible services, so that all services are eligible for development charges. 2. Remove Section 5(1), paragraph 8, the step in Determination of development charges that requires municipalities to reduce their capital costs by 10%. 3. Update Section 5(1), paragraph 4, which entails that the service levels development charges are based on is an average service level for the previous ten years, with a more flexible understanding of service levels. Municipalities should be able to adopt forward looking service levels, define the basis for service levels and broad service categories. Significant infrastructure investments are critical to Ontario s continuing growth. Eliminating the arbitrary revenue restrictions in the Development Charges Act, 1997 would make growth pay for a greater share of growth so that Ontario municipalities can get on with the timely business of investing in the maintenance, rehabilitation and renewal of local infrastructure the bricks and mortar of local economies.

28 Table of Contents 1. The need for meaningful development charges reform Principles to guide development charges reform Growth pays for 100% of growth Provincial legislation related to municipal governance should be enabling and permissive Responsibilities endowed to municipalities in one provincial Act should be respected in others Development charge legislation should support shared public policy objectives between the municipal and provincial spheres Provincial legislation should respect the relationship between municipal revenue capacity and local service outcomes State of the development charges regime Primer on growth, infrastructure and development charges Profile of municipal development charges in Ontario: Usage and collections Development Charges Act, 1997: Key changes and their impact Legislation limits eligible services and cost recovery Collections based on past average service levels Infrastructure development is critical to economic development The Development Charges Act, 1997 impedes provincial initiatives What reforms are needed Remove the list of ineligible services Remove mandatory discounts Change the service level standard Conclusion Works cited Appendix A: MFOA s Development Charges Working Group Appendix B: Municipal services development charges eligibility... 20

29 1. The need for meaningful development charges reform As the only substantial own source revenue tool Ontario municipalities have that is dedicated to infrastructure and the only tool designed to recover the cost of growthrelated infrastructure, development charge (DC) policy has a significant impact on the quality and quantity of infrastructure in Ontario. DCs are revenues dedicated to recovering the cost of building the infrastructure required for neighbourhoods to accommodate more commercial and residential units. They are a fiscal tool created to link those who demand growth and the cost of supplying the municipal infrastructure required to grow (roads, water pipes, recreation facilities, etc.). They were born under the tagline growth pays for growth and implicitly recognize that those who trigger changes to the physical structure of a community should cover the capital cost of those changes. Ontario municipalities have a long history of charging levies for growth-related capital works. In the 1950s, municipalities collected lot levies for new lots under the Planning Act, The first DC legislation, Development Charges Act, 1989 ( DCA 1989 ) codified many lot levy practices; it was brought forward in recognition of the fact that sustainable municipal growth and consistent service standards within a municipality depended on adequate and appropriate funding for growth. Between 1989 and 2013, the major shift in the DC landscape was the introduction of the Development Charges Act, 1997 ( DCA 1997 or the Act ) which altered the form and effect of its predecessor legislation. The objectives driving the original legislation were not preserved in an Act that arbitrarily limits the cost recovery capacity of municipal DCs and automatically creates funding gaps for municipal infrastructure. Shortfalls for funding growth-related capital were one inevitable consequence of the revenue restrictions brought forward in the 1997 Act. How much do DC restrictions cost municipalities? A case study of what was lost from one Development Charges Act to the next can be found in Watson & Associates 2010 study, Long-term Fiscal Impact Assessment of Growth: , for the Town of Milton. The gross cost of growth for the ten year period was $568 million; it was written down to $459 million on account of the three restrictions outlined in this report. $50 million was unrecoverable because certain service areas are excluded services $26 million was foregone through the 10% discounts $34 million was disallowed on account of service level reductions (Watson & Associates, 2010, p. 4-11) After all of the various DC caps introduced in the 1997 Act, DCs can now only pay for approximately 80% of the cost of growth-related capital. 1

30 The decision about how to manage development charge funding shortfalls puts municipalities between a rock and a hard place: To maintain the same level of service that a community had before a development permit was issued, the municipality has to look to other revenue sources to fill the gap. Usually shortfalls are addressed through increases in property taxes and user fees. Committing all of the residents in the community to paying for growth through general taxes and fees may present equity issues. If a municipality does not fill the 20% funding gap necessary to sustain existing service levels, then the level of service provided to citizens declines over time. Because services are a significant factor for people deciding where to live, work and do business, declining service levels may compromise a municipality s ability to attract future growth. This is not a decision municipalities should be forced to make. Given the economic value of public infrastructure investment and provincial interest in transit-oriented development and other smart growth principles, provincial DC policy should be amended to enable full cost pricing for growth-related infrastructure. This report makes the argument for DC reform. First, the report outlines the principles that guide our recommendations, which emphasize the need for financially sustainable growth. Second, the report describes the connection between growth, infrastructure and development charges, profiles DCs in Ontario, and reviews how the development funding regime has changed from the first Act to the second. Third, the report outlines the centrality of infrastructure development to economic development and how the current Act impedes provincial initiatives related to smart growth. More information on how development charges relate to service levels in other parts of a community and why development charges increase can be found in MFOA s report Dispelling development charge myths and misconceptions. 2. Principles to guide development charges reform The following principles should govern the current DC review process Growth pays for 100% of growth. Where the costs of service provision are attributable to a distinct group, legislation permits that costs be borne in full by that group through various fees and charges. Provincial legislation should consistently allow full cost pricing across municipal service areas so that municipalities can encapsulate the full cost of infrastructure related to development in DCs Provincial legislation related to municipal governance should be enabling and permissive. Provincial legislation that lists what municipalities may and may not do prescriptive and restrictive legislation removes decision making power from local authorities, chips away at officials ability to respond to local concerns and, as such, undermines the 2

31 purpose of local governments. In keeping with the formation of municipalities as an order of Canadian government and citizens inherent right to local self-government, the provincial government should encourage municipal innovation and flexibility in enabling legislation. In fact, this is the extent of local decision making authority recognized in the Municipal Act, 2001: The powers of a municipality under this or any other Act shall be interpreted broadly so as to confer broad authority on the municipality to enable the municipality to govern its affairs as it considers appropriate and to enhance the municipality s ability to respond to municipal issues (s. 8(1)). In a province that contains both the largest city and the least populated township in Canada, recognizing inter-municipal diversity and respecting local decision making authority were important milestones for the new municipal-provincial partnership articulated in Municipal Act reform in Allowing these fundamentals to trickle down through the breadth of provincial legislation affecting municipalities, including DC legislation, would create the enabling environment needed to realize the ideals of Municipal Act reform Responsibilities endowed to municipalities in one provincial Act should be respected in others. Municipalities are given broad powers in the Municipal Act, 2001, related to financial management, public assets, structures, the economic, social and environmental wellbeing of the municipality, and the health and safety and well-being of persons. An updated DCA should breathe life into these spheres of decision making authority by giving municipalities flexibility in decision making and the resources to carry out their Municipal Act responsibilities Development charge legislation should support shared public policy objectives between the municipal and provincial spheres. Responding to citizens service needs and ramping up infrastructure investment are mutually held objectives between provincial and municipal governments. DC reform ushers in many opportunities to deliver on these goals, including the creation of transit options, and support for affordable housing and homes for the elderly. Robust provincial DC legislation should lay the groundwork for funding solutions to these shared priorities Provincial legislation should respect the relationship between municipal revenue capacity and local service outcomes. Municipalities require revenue stability in their own fiscal house in order to pass on predictable bills to ratepayers and enable stable operating environments for businesses. If municipal revenue powers are changed, the alterations should enhance flexibility and revenue stability through diversification. Municipal infrastructure investments build economies and communities, as well as improve people s everyday lives; given the direct downstream impacts of municipal investment, it is critical to retain the integrity of the revenue tools that make service investments possible. 3

32 3. State of the development charges regime 3.1. Primer on growth, infrastructure and development charges As Ontario grows, some communities experience a shift from rural environments characterized by open fields, large wooded lots and farmlands to built-up neighbourhoods with more dense housing and retail outlets. Infrastructure is what makes this transition possible. Municipal infrastructure investments can be categorized into two streams: Building new infrastructure required to serve new residents and businesses Maintaining, operating and replacing existing infrastructure Why do new residents and businesses require new infrastructure? Service levels are often based on units or inputs per capita. To maintain existing service levels amid population growth requires more inputs. If the new infrastructure requirements are not met, service levels will decline over time. For example, a transit service level might be set at one bus per 10,000 people. If 10,000 new people move into the community and no bus is added, the transit service level declines for all users, manifesting as longer lines for buses, and more crowded buses and streets. New residents and businesses require new infrastructure so that growth does not compromise service levels and quality of life. DCs apply to the upfront infrastructure costs of a range of services, giving municipalities the financial capacity to bring new lots up to the service standard enjoyed in longer standing parts of the community. It is an enduring principle of DCs that growth pays for growth, and nothing else. 3.2 Profile of municipal development charges in Ontario: Usage and collections More and more Ontario municipalities are using DCs to fund their growth-related infrastructure needs. In 2005, about 170 municipalities, representing about 90 percent of the province's population, impose[d] development charges (Development Charges Subgroup, 2007, p. 4). By 2011, this figure grew to 210 municipalities (Watson & Associates, 2011). 3 Between 1997 and 2010, Ontario municipalities collected $9,924,892,427 in DC revenue to fund all or part of a range of capital projects across a spectrum of service areas (FIR) Development Charges Act, 1997: Key changes and their impact The 1997 Act s strongest contribution to the DC regime in Ontario was providing a predictable framework for municipalities to calculate and collect DCs. 5 Section 5 of the 1997 Act, Determination of development charges, added clarity to DC calculations by 3 DCs are less applicable in municipalities that are growing slowly, not growing or experiencing population decline. 4 At the time of writing, not all Financial Information Returns (FIRs) had been submitted; the data for these years may be understated. 5 References to DC legislation in this report include Ontario Regulation 82/98. 4

33 setting out a step-by-step calculation methodology not present in the 1989 DCA. MFOA supports the procedural amendments made to standardize how DCs are calculated. Several provisions of the, 1997 Act, however go too far, restricting municipalities from recovering 100% of their true growth-related costs. The 1997 Act: 1. Limited the number of services previously eligible for a DC. 2. Applied a 10% discount on the DC for a range of services so that only 90% of the cost is eligible to be recovered through DCs. 3. Confined the calculation methodology for DCs to a backward looking ten year average service standard Legislation limits eligible services and cost recovery Table 1 compares the funding models outlined in the 1989 and 1997 DC legislation. The size of the funding gap left by ineligible services and mandatory discounts is clear when one sees how many services were transferred from a full cost recovery approach to a partial or zero cost recovery approach from the first DCA to the second. Table 1: Decreasing revenue prospects from the 1989 Act to the 1997 Act Development Charges Act, 1989 Development Charges Act, 1997 Services 100% eligible for DCs (in these service areas, the full cost of providing a service could be recovered by using a DC). Water, sewer, storm water management, police, fire, ambulance services, hospitals, roads, transit, airports, provincial offenses act administration, parking, municipal vehicles and equipment, affordable housing, child care, public health, social services, shelters, homes for the aged, acquisition of land for parks, parkland development, recreation facilities, libraries, cultural and entertainment facilities (museums, theatres and art galleries), tourism facilities (including convention centres), waste management services, municipal administration buildings and computers. Water, sewer, storm water management, police, fire and roads. Services partially eligible for DCs (in these service areas, only 90% of the None. Ambulance services, transit, airports, provincial offenses act administration, parking, municipal vehicles and equipment, affordable housing, shelters, homes for the aged, child care, 5

34 cost of providing a service could be recovered by using a DC). Services ineligible for DCs (in these service areas, none of the costs of providing a service can be recovered through a DC). None. public health, social services, recreation facilities, parkland development and libraries. Waste management services, hospitals, acquisition of land for parks, cultural and entertainment facilities (including museums, theatres and art galleries), tourism facilities (including convention centres), municipal administration buildings and computers. Part of the reason that DCs recover a maximum of 80% of the cost of growth is because the cost of most of the services moved from being 100% recoverable in the 1989 Act to partial or ineligible recovery in the 1997 Act (see Appendix B for another visual breakdown of eligibility and discounts) Collections based on past average service levels DCs are calculated for individual services based on a service level. The 1989 Act based service levels on the highest service level a municipality reached in the ten years leading up to the DC background study; the 1997 Act bases service levels on the average service level provided throughout the ten years leading up to the background study. Population growth and a changing demographic profile can mean changing service demands. If a municipality was consciously ramping up service levels in response, the initiative would be reflected in DCs collected under the 1989 Act but it is suppressed through averaging provisions in the 1997 Act. This is another reason DCs no longer cover the cost of growth. After a certain population threshold, homes for the elderly, child care facilities, airport facilities and transit services become important services to provide. If a municipality has not needed, for example, a transit service in the past, it is difficult to introduce because no DC revenues are possible where the historical average service level is zero. For example, Lindsay needs its first buses, none of which are eligible for DCs because the service has not existed in past. The backward looking service level calculation in DC legislation is problematic for three reasons: 1. Time horizon misalignment: DCs do not pay for existing infrastructure, yet they reflect yesterday s capital costs. 6

35 2. Disregards evolving service preferences: A backwards looking calculation ties the preferences of future inhabitants to those of past inhabitants. 3. Thwarts municipal service responsiveness and relevance: The backward looking calculation suspends services and service levels in the past through diminished funding prospects in the present. For the same reason that no two municipalities services, fee and tax rates are identical, even if growth is capable of paying for growth, municipalities will not all pay for it identically. It is a Council s mandate to define how its community looks, feels and operates. Provincial legislation should not limit local choices by limiting local revenues. Individual municipalities are better positioned to determine how to pay for growth in DC background studies and bylaws than the provincial government in generally applicable DC legislation. 4. Infrastructure development is critical to economic development A cross-cutting consensus has emerged between the federal and provincial governments and building and development industry that infrastructure investment is tied to economic and employment growth. According to a Residential and Civil Construction Alliance of Ontario report on Public Infrastructure Investment in Ontario infrastructure investment supports GDP growth, higher wages and employment rates, corporate profits and public revenue (2011, p. 35). The state of municipal infrastructure relates to its growth prospects in the following ways: Certain infrastructure attracts newcomers; for instance, amenity services social, cultural and leisure facilities are known to attract creative and skilled workers. The state of a community s infrastructure is a litmus test for its investment readiness; viable transportation corridors in particular are vital to get goods to market for just in time delivery. Providing community and age-specific infrastructure is an important part of population retention strategies in some parts of the province. Investing in infrastructure is a form of job creation that produces spinoff effects in other industries, stimulating and sustaining growth. The last point about spinoff effects was the reason the stimulus phase of the federal Economic Action Plan focused on funding infrastructure projects. According to Ontario s long term infrastructure strategy, Building Together (2011), [i]nfrastructure investments will drive continued economic growth and enhanced quality of life (Executive Summary). Given that the federal government stimulated economic growth in a recession by building infrastructure and the Ontario Government has created several capital funding programs to sustain economic growth, it is short-sighted to impinge on municipalities ability to pay for the infrastructure that enables growth. 5. The Development Charges Act, 1997 impedes provincial initiatives 7

36 Provincial initiatives related to transportation and smart growth are examples of some of the paradigm shifts that have taken place since 1997 about how we pay for services and how we grow. The 1997 legislation is not only inconsistent with the new thinking, it also forms a barrier to achieving the policy objectives underlying these initiatives by underfunding key services and restricting the capital revenue streams needed for them to flourish. In 2006, the Ontario Government made an exception to the historic average service level calculation for the transit DC on the Toronto-York Spadina Subway Extension. Ontario Regulation 192/07, s. 3, identifies the planned level of service for the Extension as the build-out period until the subway is ready for use, a methodological change made in the name of increasing municipal DC revenues. Passing a one-off regulation to circumvent the funding deficiencies in the calculation methodology concedes that a historic average is not a relevant or appropriate basis for calculating DC revenues and results in underfunding newer services. Most importantly, however the regulation sets a valuable precedent for how to strengthen the calculation methodology. The smart growth principles captured in the Places to Grow Act, 2005, including transit-oriented development, environmental protection and preservation of open spaces, highlight the criticality of transit, waste management and parkland services to sustainable development. DC legislation undermines the achievement of smart growth ideals because it underfunds services critical to accommodating more compact modes of development. o Transit: Whereas the capital costs of road construction can be fully recouped through DCs, only 90% of transit capital can be recovered. Thus the DC framework gives municipalities a financial incentive to de-emphasize transit. o Municipalities have master service plans for broad service categories, including transportation, however DCs are collected based on the specific services outlined in the Act, including roads and transit. Revenue from discounted and non-discounted services cannot be combined in reserve funds. As such, it is difficult to adjust municipal service offerings in line with changing service demands and plan an integrated service network. o The backwards looking average service level is another major barrier to transit development. For municipalities providing transit services for the first time, no DCs are possible because the historic service level is zero. This is problematic because the use of DCs presupposes growth, which can lead to traffic congestion, which can be managed by introducing transit services, which DCs have not been legislated to support. For municipalities with experience providing transit, the backward looking calculation financially frustrates system growth, (thus the exception for the Toronto-York Subway Extension). o Environmental protection: Although eliminated in the 1997 Act, waste management DCs are needed more than ever to finance activities associated with an increased number of waste producers, including increasing investment in landfill space and recycling facilities. These are significant long 8

37 term expenditures and marginal growth costs need to be considered. Restricting funding for environmental protection programs like recycling and waste diversion can imperil the provision of these crucial services. o Preservation of open spaces: Exempting parkland acquisition costs from DCs fails to recognize that the increased population density encouraged by Places to Grow, 2005 will require more parks and open spaces to offset the loss of private backyards associated with traditional, lower density, single family dwellings. The thread of land use intensification runs through the Provincial Policy Statement, Watson & Associates were retained by the City of Guelph to analyze the financial impacts of various growth scenarios from A baseline, greenfield development scenario would accommodate 155,000 people in 13,613 units, 3% of which were from intensification areas. An intensification scenario would add 195,000 people in 29,613 units, of which 44% were from intensification areas. On a per capita basis, capital costs would be $5,391 in the greenfield scenario and $7,926 in the intensification scenario; the 47% increase would be reflected in DCs (Watson & Associates, 2007). Provincially designed growth funding tools should support more compact, and potentially more expensive, provincially designed modes of development. Both municipal governments and the provincial government understand the need for unprecedented infrastructure investment; major spending changes are, however unlikely without greater access to revenue. 6. What reforms are needed The driving rationale for instituting lot levies and the 1989 DCA was that growth pays for growth. Meaningful DC reform is imperative to reflect the original intentions of DC legislation to provide a framework for recovering all growth-related infrastructure costs across Ontario. Municipalities urge the Ontario Government to make the following legislative repairs as the key outcomes of the current DC review: 1. Eliminate Section 2(4), Ineligible services, so that all services are eligible for development charges. 2. Remove Section 5(1), paragraph 8, the step in Determination of development charges that requires municipalities to reduce their capital costs by 10%. 3. Update Section 5(1), paragraph 4, which entails that the service levels development charges are based on is an average service level for the previous ten years, with a more flexible understanding of service levels. Municipalities should be able to adopt forward looking service levels, define the basis for service levels (inputs, outcomes, etc.) and broad service categories. Table 2: MFOA s recommendations for reforming the DC Act, 1997 Areas for reform Existing legislation Recommendation Ineligible services Section 2 (4), Ineligible services, is a list of services Eliminate Section 2(4). 9

38 to which development charges may not be applied. 10% discounts Section 5 (1), paragraph 8, requires municipalities to reduce their capital costs by 10%. Backwards looking average service level Section 5(1), paragraph 4, entails that the service levels development charges are based on is an average service level for the previous ten years. Eliminate Section 5(1), paragraph 8. Section 5(1), paragraph 4 should indicate that municipalities are permitted to adopt forward looking service levels, define the basis for service levels and broad service categories themselves in DC bylaws Remove the list of ineligible services The range of services provided in a community are a significant consideration for people thinking about where to live and do business. People do not decide to settle in a community because of roads and sewers; however, the 1997 Act eliminated many of the services that make communities unique parks, cultural, entertainment and tourism facilities from being included in the cost of growth. All infrastructure services should be eligible for DCs so that newcomers can fully contribute back to the service fabric that drew them into a particular community Remove mandatory discounts Full cost pricing should be permitted for growth-related infrastructure such that all capital costs can be included in DCs. Arbitrary 10% discounts on the DC for many services mean that 10% of the cost of delivering those services either overflows onto other rates or goes unfunded and impacts services. Better DC legislation would ensure that municipalities do not have to make these tradeoffs automatically Change the service level standard The DC levied for one service should reflect the cost of providing that service in the time horizon in which it will be provided and be based on a municipality s service plans. 6 Knowing that new technology, growth and citizen demands will change how and which services are provided in the future, flexible service definitions and service categories should be established in DC legislation to permit maximum adaptability and responsiveness. Recommendation 3 endows municipalities with the power to: 6 Service levels anchored in council commitments are expressed in master plans, asset management plans, capital budgets or other similarly formal public documents. 10

39 I. Adopt forward looking service levels: For service firsts, the time horizon for the service standard could be the build-out period of an asset, the standard piloted in 2006 for the Toronto-York Spadina Subway Extension. II. Define the basis for service levels: Rather than a historic average service level, a more dynamic service level for transport services, for example, might be trip times. III. Define service categories: For example, a municipality might combine roads, Provincial Offenses Act administration, parking, airport and transit services in a transport services category or police, fire, emergency medical and public health services into a health and safety category. It should be noted that, in Volume One of his 2012 report, Building Momentum, the Environmental Commissioner of Ontario expressed support for the second and third recommendation. [B]oth the 10 per cent discount and the historic 10-year average service level standard should be closely examined and changed. The [Toronto-York Spadina Expansion Subway Extension Project] example where the government offered an exemption from the 10-year averaging and 10 per cent reduction rules is essentially an admission that the current framework is flawed and must be amended (2012, p. 35). Metrolinx has also cited the easing of DC caps as one of four transit investment strategies. By removing the provincially legislated 10 percent discount and 10 year historical cap, municipalities could implement additional development charges and dedicate the revenue to support the implementation of Next Wave projects within their communities (2013, p. 70). While the release of the Metrolinx investment strategy for transit in the Greater Toronto and Hamilton Area has garnered widespread support for eliminating DC restrictions as they pertain to transit, amendments are required for a wider spectrum of services in a wider range of municipalities. 7. Conclusion Given the inability of current DCs to fund the infrastructure needed for economic growth, and their inconsistency with provincial initiatives relating to smart growth, MFOA is duly concerned about the compromised state of Ontario s DC regime under the 1997 Act alongside the Toronto Board of Trade, Ontario Provincial Planners Institute, the Association of Municipalities of Ontario, Environmental Defense and the Pembina Institute. Despite provincial and public pressure on municipalities to re-think their role in infrastructure to re-prioritize services, manage assets and increase investment levels municipalities are still tied to an outdated funding model for critical growth-related infrastructure. The sixteen year old DC legislation needs to be modernized to reflect 11

40 what it could not at its inception the growing consensus on the economic benefits of infrastructure investment as well as new service priorities. We look forward to working with the Ontario Government and Ontario municipalities to update the 1997 Act in the months ahead. 12

41 Works cited Amborski, D. (2011). Alternatives to Development Charges for Growth-Related Capital Costs. Vaughan, ON: Residential and Civil Construction Alliance of Ontario. Association of Municipalities of Ontario, City of Toronto, & Government of Ontario. (2008). Provincial-Municipal Fiscal and Service Delivery Review. Toronto, ON: Government of Ontario. Association of Municipalities of Ontario. (2008). Working Paper of the Infrastructure Table. Toronto, ONAMO. Retrieved From: Content/Finance/PMFSDR/PMFSDR-Infrastructure-Table-Report-2008.aspx Blais, P. (2010). Perverse Cities: Hidden Subsidies, Wonky Policy, and Urban Sprawl. Vancouver: UBC Press. Building Industry and Land Development Association. (2008). Over the Top: The Impact of Development Charges on New Homebuyers. North York, ON: BILD. Retrieved From: %20Over%20the%20Top.pdf Burda, C & Allan, T. (2013). Re-tooling development charges into a sharp, effective revenue tool. Toronto, ON: The Pembina Institute. Retrieved From: Clean Water Act, 2006, SO 2006, c. 22 Commission on the Reform of Property Taxation in Ontario. (1977). Report of The Commission on the Reform of Property Taxation in Ontario. Toronto, ON. Dean, L. Does the Imposition of an Industrial Development Charge Affect Site Selection? Term Paper: Public Administration 913A Economics and Policy Development. Development Charges Act, 1989, SO 1989 Development Charges Act, 1997, SO 1997, c. 27 Development Charges Act, 1997, O. Reg. 82/98 13

42 Development Charges Subgroup. (2007). Report to the PMFSDR Infrastructure Table. Toronto, ON: Government of Ontario. Retrieved From: PDFs/Reports/2007/PMFSDR-Development-Charges-Subgroup-Report-August.aspx Environmental Assessment Act, RSO 1990, c. E.18 Environmental Commissioner of Ontario. (2012). Annual Energy Conservation Progress Report 2012 (Volume One) Building Momentum: Provincial Policies for Municipal Energy and Carbon Reductions. Toronto, ON: Environmental Commissioner of Ontario. Retrieved From: Conservation/2013v1/13CDMv1.pdf Federation of Canadian Municipalities. (2006). Building Prosperity from the Ground Up: Restoring Municipal Fiscal Balance. Ottawa, ON. Francine, R. (2007). From Roads to Rinks: Government spending on infrastructure in Canada, (No MIE). Ottawa, ON: Statistics Canada. Government of Canada. The Stimulus Phase of Canada s Economic Action Plan: A Final Report to Canadians. Government of Canada. Retrieved From: Hemson Consulting Ltd. Comparison of roads costs for projects carried forward from 2004 to 2009 development charge study: Town of Oakville. Unpublished raw data. Toronto, ON. Huffman, F. E., Nelson, A. C., Smith, M. T., & Stegman, M.A. (1988). Who bears the burden of development impact fees? Journal of the American Planning Association, 54(1), Ihlanfeldt, K. R., & Shaughnessy, T. M. (2004). An empirical investigation of the effects of impact fees on housing and land markets. Regional Science and Urban Economics, 34(6), Larsen, P., & Goldsmith, S. (2007). How Much Might Climate Change Add to Future Costs for Public Infrastructure. Anchorage, AK: Institute of Social and Economic Research, University of Alaska Anchorage. Metrolinx. (2013). Investing In Our Region Investing In Our Future. Retrieved From: Metro Planning. (1996). Industrial Land Strategy Study: Phase 1: Overview Report. Toronto, ON. 14

43 Ministry of Finance. (2013). Demographic Quarterly: Highlights of Second Quarter Queen s Printer for Ontario. Retrieved From: Ministry of Infrastructure. (2005). Historic Act Supports Planning For Economic Growth. Queen s Printer for Ontario. Retrieved From: Economic-Growth.html Ministry of Infrastructure. (2009). Understanding the cost of services [PowerPoint slides]. Toronto, ON: Government of Ontario. Ministry of Infrastructure. (2011). Building together: Jobs & prosperity for Ontarians. Toronto, ON: Government of Ontario. Ministry of Infrastructure. (2011). Building Together: Municipal Infrastructure Strategy. Toronto, ON: Government of Ontario. Retrieved From: Ministry of Infrastructure. (2011). Municipal Infrastructure Investment Initiative Capital Program. Toronto, ON: Government of Ontario. Retrieved From: Ministry of Infrastructure. (2012). More Support for Municipal Infrastructure McGuinty Government Strengthening Communities, Creating Jobs. Queen s Printer for Ontario. Retrieved From: Ministry of Infrastructure. (2013). Building Together: Jobs & Prosperity for Ontarians. Queen s Printer for Ontario. Retrieved From: Ministry of Municipal Affairs and Housing. (2000). Municipal Financial Tools for Planning and Development. Retrieved From: Ministry of Municipal Affairs and Housing. ( ). FIR [Data file]. Retrieved From: Ministry of Municipal Affairs and Housing. (2008). Municipal Act. Toronto, ON: Government of Ontario. Retrieved From Municipal Act, 2001, SO 2001, c. 25 Nelson, A. C., & Moody, M. (2003). Paying for Prosperity: Impact Fees and Job Growth. Washington, DC: The Brookings Institution Center on Urban and Metropolitan Policy. 15

44 Nowlan, D. (2004). Economic Effects of the Calculated 2004 City of Toronto Development Charges. Toronto, ON: August Trust Research Partnership. Retrieved From: Ontario Professional Planners Institute, Comments Submitted on Environmental Registry # Draft Update of Ontario s Transit-Supportive Guidelines (March 3, 2011). Ontario Public Transit Association & Canadian Urban Transit Association. (2013). Investing in Urban Transportation: The Growing Need for Urban Mobility. Submission to The Hon. Dwight Duncan, Minister of Finance, 2013 Pre-Budget Consultations. Places to Grow Act, 2005, SO 2005, c. 13 Planning Act, RSO 1990, c. P.13 RBC Economics Research. (2011). Housing Trends and Affordability. Royal Bank of Canada. Retrieved From: Risk Analytica. (2011). Public Infrastructure Investment in Ontario: The Importance of Staying the Course. Vaughan, ON: Residential and Civil Construction Alliance of Ontario. Risk Analytica. (2010). Public Infrastructure Underinvestment: The Risk to Canada s Economic Growth. Toronto, ON: The Residential and Civil Construction Alliance of Ontario. Retrieved From: Skaburskis, A. (1990). The burden of development impact fees. Journal of Property Research, 7(3), Toronto Board of Trade. (2011). Reaching Top Speed Infrastructure: Unleashing Ontario s Ability to Grow. Retrieved From: peed.pdf Watson & Associates Economists Ltd. (2004). Development charge impact policy paper. Mississauga, ON. Watson & Associates Economists Ltd. (2007). City of Guelph: Fiscal impact of proposed growth options. Mississauga, ON. Watson & Associates Economists Ltd. (2009). City of Hamilton: 2009 Development Charge Background Study. Mississauga, ON. 16

45 Watson & Associates Economists Ltd. (2010). Long-term fiscal impact assessment of growth: Mississauga, ON. Watson & Associates Economists Ltd. (2011). List of Ontario municipalities with DC bylaws. Unpublished raw data. Mississauga, ON. Water Opportunities Act, 2010, SO 2010, c. 19 Water Strategy Expert Panel. (2005). Watertight: The case for change in Ontario s water and wastewater sector. Toronto, ON: Ministry of Public Infrastructure Renewal. Retrieved From: York Region. (2012) development charge bylaw update: Presentation to finance and administration committee [PowerPoint slides]. Newmarket, ON. York Region. (2002). Making It Happen! The York Region Centres and Corridors Study. Newmarket, ON: York Region. 17

46 Appendix A: MFOA s Development Charges Working Group The members of MFOA s Development Charges Working Group are recognized below. Ed Archer City of Barrie Calvin Barrett Region of Waterloo Lori Beecroft Town of Huntsville Sara Beukeboom City of Kawartha Lakes Ferrucio Castellarin City of Vaughan Dan Cowin Municipal Finance Officers Association of Ontario Emily Harris Municipal Finance Officers Association of Ontario Jonathan Janzen Town of Fort Erie Margaret Karpenko City of North Bay Samuel Malvea City of Toronto Warren Marshall The Regional Municipality of York Ken Nix Town of Whitby Lloyd Noronha City of Brampton Keshwer Patel City of Mississauga 18

47 Jay Pausner Town of Saugeen Shores Sylvia Rammelaere Town of Lakeshore Shirley Siu City of Toronto Kelly Struby The Regional Municipality of York Ed Zamparo Regional Municipality of Peel 19

48 Appendix B: Municipal services development charges eligibility This table lists types of municipal services and gives a yes/no indication about whether or not its costs are eligible to be recovered in DCs. It further breaks the service categories down into individual services and gives the rate at which DCs can be recovered (0%, 90% or 100%). CATEGORIES OF MUNICIPAL SERVICES ELIGIBILITY FOR INCLUSION MAXIMUM POTENTIAL SERVICE COMPONENTS IN THE DC CALCULATION DC RECOVERY % 1. Services Related to a Highway Yes 1.1 Arterial roads 100 Yes 1.2 Collector roads 100 No 1.3 Local roads local service Yes 1.4 Traffic signals 100 Yes 1.5 Sidewalks and streetlights Other Transportation Services Yes 2.1 Transit vehicles 90 Yes 2.2 Other transit infrastructure 90 Yes 2.3 Municipal parking spaces - indoor 90 Yes 2.4 Municipal parking spaces - outdoor 90 Yes 2.5 Works Yards 100 Yes 2.6 Rolling stock Storm Water Drainage and Control Services Yes 3.1 Main channels and drainage trunks 100 Yes 3.2 Channel connections 100 Yes 3.3 Retention/detention ponds 100 No 3.4 Localized works local service 4. Fire Protection Services Yes 4.1 Fire stations 100 Yes 4.2 Fire pumpers, aerials and rescue vehicles 100 Yes 4.3 Small equipment and gear Outdoor Recreation Services (i.e. Parks and Open Space) Ineligible 5.1 Acquisition of land for parks, woodlots and ESAs 0 Yes 5.2 Development of area municipal parks 90 Yes 5.3 Development of district parks 90 Yes 5.4 Development of City-wide parks 90 Yes 5.5 Development of special purpose parks 90 Yes 5.6 Parks rolling stock 2 and yards Indoor Recreation Services Yes 6.1 Arenas, indoor pools, fitness facilities, community centres, etc. (including land) Recreation vehicles and equipment 2 Yes Library Services Yes 7.1 Public library space (incl. furniture and equipment) 90 Yes 7.2 Library materials Electrical Power Services Ineligible 8.1 Electrical substations 0 Ineligible 8.2 Electrical distribution system 0 Ineligible 8.3 Electrical system rolling stock Provision of Cultural, Entertainment and Tourism Facilities and Convention Centres Ineligible 9.1 Cultural space (e.g. art galleries, museums and theatres) 9.2 Tourism facilities and convention centres 0 Ineligible Waste Water Services Yes Yes n/a Yes 10.1 Treatment plants 10.2 Sewage trunks 10.3 Local systems 10.4 Vehicles 2 and equipment local service Water Supply Services Yes Yes n/a Yes 11.1 Treatment plants 11.2 Distribution systems 11.3 Local systems 11.4 Vehicles 2 and equipment Local Service Waste Management Services Ineligible Ineligible Ineligible 12.1 Collection, transfer vehicles and equipment 12.2 Landfills and other disposal facilities 12.3 Other waste diversion facilities Police Services Yes Yes Yes 13.1 Police detachments 13.2 Police rolling stock Small equipment and gear Homes for the Aged n/a 14.1 Homes for the aged space Child Care Yes 15.1 Child care space Health Yes 16.1 Health department space Social Services Yes 17.1 Social service space Ambulance Yes 18.1 Ambulance station space 90 Yes 18.2 Vehicles Hospital Provision Ineligible 19.1 Hospital capital contributions 20. Provision of Headquarters for the General Administration of Ineligible 20.1 Office space (all services) Municipalities and Area Municipal Boards Ineligible 20.2 Office furniture Ineligible 20.3 Computer equipment 21. Other Services Yes 21.1 Studies in connection with acquiring buildings, rolling stock, materials and equipment, and improving land 3 and facilities, including the DC background study cost 21.2 Interest on money borrowed to pay for growth-related capital Yes Source: Watson & Associates Economists Ltd.,

49 Dispelling development charge myths and misconceptions A few myths and misconceptions about municipal development charges (DCs) have held up the pressing matter of DC reform in Ontario. This is a companion piece to MFOA s report Frozen in time: Development charges legislation still underfunding infrastructure 16 years and counting. That report articulates the case for reforming the Development Charges Act, In this backgrounder, we unpack the following misconceptions: 1. DCs are high because municipalities provide services at gold plated service levels that were not provided to existing residents. 2. Residential DCs can increase the price of some kinds of housing. 3. Non-residential and industrial DCs can make municipalities less economically competitive than they would be without DCs. 4. Some growth-related capital should be paid for through property taxes. 1. Development Charges are high because municipalities provide services at gold plated service levels that were not provided to existing residents. DC critics suggest that municipalities use DCs to increase service levels in newly developed areas of a community. They suggest that these gold plated service standards are higher than those provided in established communities. The Development Charges Act, 1997 ( DCA 1997 or the Act ) prevents gold plating. 1 If gold plating is suspected, a DC bylaw can be appealed to the Ontario Municipal Board. The ten year average service standard articulated in the 1997 Act depresses, not inflates, service levels. DC increases are driven by general cost escalation, elimination of conditional grants for infrastructure and new provincial legislation and regulations. General cost escalation Significant capital cost increases have forced many municipalities to update their DC rates early to ensure that they are collecting enough revenue to fund the works identified in their DC background studies. Table 1 compares the capital costs for works identified in the Town of Oakville s 2003 DC background study with the identical works in the 2008 study. The table shows an average cost increase of 67% with a number of projects showing over 100% cost increases within the five year period. 2 Table 1: Comparison of Roads Costs for Projects Carried Forward from 2004 to 1 References to DC legislation in this report include Ontario Regulation 82/98. 2 Table 1 also highlights the inability of the development charge index to reflect this steep level of price escalation. As demonstrated by column six, 19% of the cost escalation from is not captured by the index. 1

50 2009 DC Study: Town of Oakville Gross Gross Adjusted for Change Cost Cost Nominal DC Index Beyond 31/12/ /12/2003 Change 40.2% Index Project $Mil $Mil % $Mil % Chartwell Road $ $ % $ % Cornwall Road $ $ % $ % Eighth Line $ $ % $ % Eighth Line $ $ % $ % Fourth Line $ $ % $ % Fourth Line $ $ % $ % Great Lakes Boulevard $ $ % $ % Iroquois Shore Road $ $ % $ % Iroquois Shore Road Exten. (Part A midtown) $ $ % $ % Lakeshore Road West $ $ % $ % Lower Base Line $ $ % $ % North Service Road $ $ % $ % North Service Road (Part C - Mid-Town) $ $ % $ % Sixth Line $ $ % $ % Sixth Line $ $ % $ % South Service Road $ $ % $ % South Service Road $ $ % $ % South Service Road $ $ % $ % South Service Road (Part B - Mid-Town) $ $ % $ % Speers Road $ $ % $ % Third Line $ $ % $ % Third Line $ $ % $ % Third Line $ $ % $ % Third Line $ $ % $ % 2

51 Wyecroft Road $ $ % $ % Wyecroft Road $ $ % $ % Wyecroft Road $ $ % $ % TOTAL $ $ % $ % Source: Hemson Consulting. Comparison of roads costs for projects carried forward from 2004 to 2009 development charge study: Town of Oakville. Unpublished raw data. Toronto, ON Elimination of conditional grants There is a broad consensus that upward pressure on development charge revenue is a result of fiscal pressure that municipalities face due to reduction in funding from senior levels of government (Amborski, 2011, p. 5). Conditional grants reduced DCs because the 1997 Act requires that they be applied to the total, gross cost of a project, lowering the project costs to which DCs would apply. The loss of growth-related capital grants meant that more of the cost of growth-related works is paid for by DCs. New legislation and regulations New provincial legislation and regulations can increase municipalities infrastructure costs by mandating the provision of new services or increasing the standards at which existing services are provided. Because most municipal services involve infrastructure, the cost of compliance to new requirements often manifests in the cost of infrastructure. The infrastructure costs associated with new legislation and regulations will continue to be reflected in DC rates. 3 The DC regulations recognize that, in many cases, the service levels prescribed in the 1997 DCA fall below the service levels required in other legislation. If the average level of service determined is lower than the standard level of service required under another Act, the standard level of service required under the other Act may be deemed for the purposes of paragraph 4 of subsection 5 (1) of the Act to be the average level of service (O. Reg. 82/98, s. 4 (3)). In other words, there is one instance in which the 1997 DCA permits municipalities to exceed the backward looking average service standard for calculating DCs: where other provincial legislation requires a higher service standard to be met. 2. Residential DCs can increase the price of some kinds of housing. Some critics suggest that DCs make newly built housing (new builds) less affordable. The premise of this argument is that DCs are fully captured in the price of new builds and thus paid by new home buyers. The extent to which developers can pass on DCs 3 See pages 8-9 in the MFOA report Frozen in time: Development charges legislation underfunding infrastructure 16 years and counting for specific examples of provincial policies that increase municipal infrastructure costs. 3

52 depends on a number of factors that vary over time, place and housing market (Nowlan, 2004; Huffman, Nelson, Smith, & Stegman, 1988; Ihlanfeldt & Shaughnessy, 2004; Skaburskis, 1990). Many studies question the assumption that 100% of a DC will be passed on to 100% of unit purchasers. Many factors influence the cost of housing. Land costs (supply and demand), construction costs, housing demand by type, real interest rates, availability of mortgage financing, speculation, income levels, consumer confidence, government regulations and broader economic conditions can all be significant drivers of house prices. One study that looked at a broad range of factors driving housing costs concluded that development charges represent a minor component of overall housing costs when compared to land and construction costs (Watson & Associates, 2004, p. 12). Graph 1 is a pro forma of development costs for apartments in York Region. DCs represent approximately 6% of the total cost per square foot. 4

53 Graph 1: Apartment condominium pro forma Source: Making It Happen! The York Region Centres and Corridors Study prepared by The Planning Partnership for the Region of York, November, Other critics argue that significant fluctuations in DC rates have affordability implications. Table 2 shows the variation in house prices and DC amounts in certain high growth areas over fourteen years. As a percentage of new house prices, DCs increased 0.2% in Ottawa, 2.1% in Durham, 4% in Waterloo, 1.8% in York, 1.8% in Peel and 2.2% in Halton from 1996 to Table 2: Summary of development charges as a percentage of housing price for a single detached executive two-storey (in current dollars) Municipality/ Year Housing Price Development Charge DC as a % of Housing Price Ottawa (Nepean) ,000 11, % Ottawa (Nepean) ,000 12, % Ottawa (Nepean) ,000 18, % Ottawa (Nepean) ,000 20, % 5

54 Ottawa (Nepean) ,000 22, % Durham (Whitby) ,000 12, % Durham (Whitby) ,000 15, % Durham (Whitby) ,000 20, % Durham (Whitby) ,611 23, % Durham (Whitby) ,200 30, % Waterloo (Cambridge) ,000 6, % Waterloo (Cambridge) ,000 10, % Waterloo (Cambridge) ,500 14, % Waterloo (Cambridge) ,020 15, % Waterloo (Cambridge) ,669 23, % York (Vaughan) ,000 19, % York (Vaughan) ,000 18, % York (Vaughan) ,000 23, % York (Vaughan) ,500 27, % York (Vaughan) ,000 41, % Peel (Missisauga) ,000 12, % Peel (Missisauga) ,000 15, % Peel (Missisauga) ,645 20, % Peel (Missisauga) ,200 25, % Peel (Missisauga) ,000 34, % Halton (Oakville) ,000 14, % Halton (Oakville) ,000 14, % Halton (Oakville) ,000 21, % Halton (Oakville) ,000 25, % Halton (Oakville) ,250 50, % Source: Development Charges Subgroup. (2007). Report to the PMFSDR Infrastructure Table. Toronto, ON: Government of Ontario; municipal development charge bylaws; Housing Now CMA reports from Canada Housing and Mortgage Corporation. Graph 2 illustrates the percentage of household income allocated to home ownership, one measure of housing affordability, in Ontario as of May Notwithstanding recessionary spikes in the early 1990s and late 2000s, the cost of home ownership as a percentage of income has remained relatively stable, averaging approximately 35% of household income from 1987 to Under the 1989 DCA s full cost recovery regime for DCs, house prices, as a percentage of income, fell almost 20% across three housing types. 6

55 Graph 2: Affordability of housing in Ontario Source: RBC Economics & Research, Housing Trends and Affordability, May 2011 Many factors influence the affordability of new housing; it is not productive to isolate DC rates from the larger context of the economy, housing market and other influences on affordability. Further, suggesting that DCs make new builds less affordable obscures homebuyers choice about which kind of housing to purchase, which municipality to live in as well as the financial impact of not levying DCs on other municipal tax and fee rates charged to all tax and ratepayers. 3. Non-residential and industrial DCs can make municipalities less economically competitive than they would be without DCs. Critics argue that DCs impact economic development prospects directly and indirectly. According to critics, DCs on employment lands, (non-residential DCs) impact location decisions for employers and, consequently, relatively high DCs may put a municipality at a competitive disadvantage to attract non-residential development. The indirect impact builds on the premise that residential DCs increase house prices. Critics argue that higher house prices lead to a lack of affordable housing for people in lower paying 7

56 jobs. They argue that employers may not want to settle in areas where they do not have access to an appropriate labour force (Amborski, 2011). 4 Regarding the argument that DCs impact economic development directly, a large body of literature is devoted to investigating how firms make locational and business expansion decisions. While DCs could be one of many factors influencing a firm s decision to locate or expand in a particular community, it does not appear that current non-residential DCs are a barrier to economic development. In her paper, Does the Imposition of an Industrial Development Charge Affect Site Selection, Dean argued that There does not appear to be any correlation between industrial construction activity and the development charge. An examination of the cost of land in selected municipalities does not seem to suggest any relationship to the development charge amount. The information gathered thus far would suggest that there is no correlation between the amount of development charges and location decisions (Dean, p. 13). The scatter graph below plots the non-residential DC rate per square foot and the value of non-residential building permits per capita. The dispersion of the data points suggests that the correlation between DC rates and economic development, seen through the lens of non-residential building permit value, is not statistically significant. 4 As the issue of whether or not DCs impact the affordability of new builds was addressed in section 2, this section will focus on the first claim about competitive disadvantage. 8

57 Graph 3: Scatter graph correlating non-residential DC rates and the value of nonresidential DC permits Source: Dean, Linda. Does the Imposition of an Industrial Development Charge Affect Site Selection? Term Paper: Public Administration 913A Economics and Policy Development. 9

58 Rather, factors such as the quality of services and infrastructure, among others, appear to be much more significant when firms make locational decisions, as the following quote echoes, Statistical analyses have not identified any clear and direct linkage between the level of development charges and construction activity for non-residential development Development charges are part of the overall project cost and locational decision, but rarely appear to be critical to the decision to locate in one municipality vs. another. Each company s decision is the result of an interplay of their own unique requirements, and market conditions The municipality should consider its strengths and weaknesses with respect to the non-financial factors in competing municipalities (e.g. available well located serviced land, access to transportation, quality of life, cost and quality of labour), as these are often the most significant considerations in business location decisions (Watson & Associates, 2004, p. 5, 9-10). Graph 4, below, shows a pro forma of the costs of building new office space in York Region. Development charges account for 2% of total costs. Graph 4: DCs as a percentage of costs for office space 10

59 Source: Making It Happen! The York Region Centres and Corridors Study prepared by The Planning Partnership for the Region of York, November, Many Ontario Government funding programs and capital plans have articulated the economic value of infrastructure investment. In regard to impact fees, the American version of DCs, sources note that impact fees act as an investment in the community, spurring economic growth through the timely provision of new infrastructure and the expansion of buildable land (Nelson & Moody, 2003, p. vi). Relatively high DCs can be positively correlated to high growth. An example was given in Phase 1 of Metropolitan Toronto s Industrial Land Strategy Study. It was based on: [a] compendium of official plan industrial and related policies summarizing industrial land use policies in the 43 local and seven regional municipalities in the study area The analysis suggests that while development charges may have a modest impact on the distribution of industrial activities within the study area, the impact on location decisions is moderated by a number of more important criteria including: the relative location of customers, suppliers and employees, access to inter-regional expressways, local roads that can easily accommodate truck traffic, public transit access for employees, proximity to similar firms, attractive and visible sites, room for on-site expansion, and proximity to business services, restaurants and ancillary retail activities. The municipalities with lower development charges only benefit when there is a virtual saw-off among the other factors affecting industrial development decision making. Since development charges are a one time charge they have little impact on the decision making of many industrial tenants except to the extent that the development charge may be capitalized in a tenant's rent. The pattern of recent industrial development activity bears this out since some municipalities with high development charges have also had high values of industrial building permits issued in recent years (Metro Planning, 1996, p. iii, 29). There are costs of doing business in any community. If DCs were a major barrier, then we would expect to see higher rates of development in the communities that do not use DCs. The proposition that DCs could be a competitive disadvantage for a municipality can also be tested against non-residential building permit data for Ontario municipalities. The provincial Financial Information Return houses data on the number and value of building permits issued by municipality per year. Many municipalities with comparatively high non-residential charges issued many high value building permits for both residential and non-residential development in Brampton, for example, has the second highest charge in Peel Region and it has the fourth highest number of permits issued and third highest permit value in the Region (FIR data). Overall, we could not find evidence indicating that current non-residential DCs are a barrier to economic development. 11

60 4. Some growth-related capital should be paid for through property taxes. Groups concerned by DC amounts often cite alternative financing sources for growthrelated capital that could be employed to reduce the DC amount. One of the most common alternatives considered is property taxes. DC critics phrase this argument in terms of funding certain services through property taxes and others through DCs. If we consider property versus people-related services, it is the people-related services that may be most appropriately financed via property taxes rather than property-related services (Amborski, 2011, p. 37). According to this perspective, property taxes are more appropriate to pay for people related services because there are broad and indirect community benefits associated with people-related services. Attempts to divide services into people-related and property-related service categories are contested. In 1977, the Blair Commission on Taxation reached the following conclusion: [I]t is evident that the differentiation between so-called services to land and services to people is wholly irrelevant: there is, in any perspective whatsoever, no such thing as "services to land"; there are only services demanded by people. While the nature of these services may require digging or other similar activity, it is the presence of people and their concomitant demands that give rise to an expenditure (Blair Commission, 1977, p. 3). The use of property taxes to fund growth-related capital was an issue the implementation of lot levies and DCs was meant to resolve. The adoption of DCs was intended, in part, to be an improvement upon the old way of doing things, when growthrelated infrastructure was paid for out of general municipal taxation revenues (Blais, 2010, p. 92). The pre-lot levy regime was seen as unfair to existing ratepayers, who could neither choose nor control growth, but had to pay for it through taxes and other municipal rates. Unit purchasers in newly developed areas, on the other hand, choose to locate in newly developed areas in full view of the costs. American research has found impact fees to be more appropriate tools to fund growthrelated capital than property taxes. Property tax revenues increasingly fail to cover the full costs of the infrastructure needed to service new development...impact fees, like user fees, offer a more efficient way to pay for infrastructure than general taxes, and ensure benefits to those who pay them (Nelson and Moody, 2003, p. vi). The Region of Waterloo determined that current taxpayers will replace $6 billion of existing assets over the next fifty years. The Region also needs to add $1 billion of assets for growth over the next ten years. While DCs will be used to implant the $1 billion of growth-related capital, it will need another $1 billion for replacement through the property tax base. Existing ratepayers may not be able to pay a greater share of growth-related capital because they have large bills already; they are paying the operating, maintenance repair and replacement costs of the first round of growth-related capital, the full lifecycle costs of the municipal asset base and 1997 DCA restrictions, 12

61 including ineligible and discounted services and a backward looking service level calculation for growth-related infrastructure. Conclusion This report has dispelled several DC myths, including 1) DCs foster gold plated service standards that were not provided to existing residents, thereby inflating DCs, 2) Residential DCs increase the price of some kinds of housing, 3) Non-residential and industrial DCs can make municipalities less economically competitive, and 4) Growth-related capital should be paid for through property taxes instead of growth itself. The development industry has conveyed the need for sustained investment in infrastructure and the economic benefits of construction and development to the Ontario Government. Municipalities are in agreement about the need and the benefits; it is with the financial sustainability of growth in mind that we now urge the provincial government to view DC reform as the middle ground to satisfying the need for investment with the need for sustainability. 13

62 Works cited Amborski, D. (2011). Alternatives to Development Charges for Growth-Related Capital Costs. Vaughan, ON: Residential and Civil Construction Alliance of Ontario. Association of Municipalities of Ontario, City of Toronto, & Government of Ontario. (2008). Provincial-Municipal Fiscal and Service Delivery Review. Toronto, ON: Government of Ontario. Association of Municipalities of Ontario. (2008). Working Paper of the Infrastructure Table. Toronto, ONAMO. Retrieved From: Content/Finance/PMFSDR/PMFSDR-Infrastructure-Table-Report-2008.aspx Blais, P. (2010). Perverse Cities: Hidden Subsidies, Wonky Policy, and Urban Sprawl. Vancouver: UBC Press. Building Industry and Land Development Association. (2008). Over the Top: The Impact of Development Charges on New Homebuyers. North York, ON: BILD. Retrieved From: %20Over%20the%20Top.pdf Burda, C & Allan, T. (2013). Re-tooling development charges into a sharp, effective revenue tool. Toronto, ON: The Pembina Institute. Retrieved From: Clean Water Act, 2006, SO 2006, c. 22 Commission on the Reform of Property Taxation in Ontario. (1977). Report of The Commission on the Reform of Property Taxation in Ontario. Toronto, ON. Dean, L. Does the Imposition of an Industrial Development Charge Affect Site Selection? Term Paper: Public Administration 913A Economics and Policy Development. Development Charges Act, 1989, SO 1989 Development Charges Act, 1997, SO 1997, c. 27 Development Charges Act, 1997, O. Reg. 82/98 Development Charges Subgroup. (2007). Report to the PMFSDR Infrastructure Table. Toronto, ON: Government of Ontario. Retrieved From: PDFs/Reports/2007/PMFSDR-Development-Charges-Subgroup-Report-August.aspx Environmental Assessment Act, RSO 1990, c. E.18 14

63 Environmental Commissioner of Ontario. (2012). Annual Energy Conservation Progress Report 2012 (Volume One) Building Momentum: Provincial Policies for Municipal Energy and Carbon Reductions. Toronto, ON: Environmental Commissioner of Ontario. Retrieved From: Conservation/2013v1/13CDMv1.pdf Federation of Canadian Municipalities. (2006). Building Prosperity from the Ground Up: Restoring Municipal Fiscal Balance. Ottawa, ON. Francine, R. (2007). From Roads to Rinks: Government spending on infrastructure in Canada, (No MIE). Ottawa, ON: Statistics Canada. Government of Canada. The Stimulus Phase of Canada s Economic Action Plan: A Final Report to Canadians. Government of Canada. Retrieved From: Hemson Consulting Ltd. Comparison of roads costs for projects carried forward from 2004 to 2009 development charge study: Town of Oakville. Unpublished raw data. Toronto, ON. Huffman, F. E., Nelson, A. C., Smith, M. T., & Stegman, M.A. (1988). Who bears the burden of development impact fees? Journal of the American Planning Association, 54(1), Ihlanfeldt, K. R., & Shaughnessy, T. M. (2004). An empirical investigation of the effects of impact fees on housing and land markets. Regional Science and Urban Economics, 34(6), Larsen, P., & Goldsmith, S. (2007). How Much Might Climate Change Add to Future Costs for Public Infrastructure. Anchorage, AK: Institute of Social and Economic Research, University of Alaska Anchorage. Metrolinx. (2013). Investing In Our Region Investing In Our Future. Retrieved From: Metro Planning. (1996). Industrial Land Strategy Study: Phase 1: Overview Report. Toronto, ON. Ministry of Finance. (2013). Demographic Quarterly: Highlights of Second Quarter Queen s Printer for Ontario. Retrieved From: Ministry of Infrastructure. (2005). Historic Act Supports Planning For Economic Growth. Queen s Printer for Ontario. Retrieved From: 15

64 Economic-Growth.html Ministry of Infrastructure. (2009). Understanding the cost of services [PowerPoint slides]. Toronto, ON: Government of Ontario. Ministry of Infrastructure. (2011). Building together: Jobs & prosperity for Ontarians. Toronto, ON: Government of Ontario. Ministry of Infrastructure. (2011). Building Together: Municipal Infrastructure Strategy. Toronto, ON: Government of Ontario. Retrieved From: Ministry of Infrastructure. (2011). Municipal Infrastructure Investment Initiative Capital Program. Toronto, ON: Government of Ontario. Retrieved From: Ministry of Infrastructure. (2012). More Support for Municipal Infrastructure McGuinty Government Strengthening Communities, Creating Jobs. Queen s Printer for Ontario. Retrieved From: Ministry of Infrastructure. (2013). Building Together: Jobs & Prosperity for Ontarians. Queen s Printer for Ontario. Retrieved From: Ministry of Municipal Affairs and Housing. (2000). Municipal Financial Tools for Planning and Development. Retrieved From: Ministry of Municipal Affairs and Housing. ( ). FIR [Data file]. Retrieved From: Ministry of Municipal Affairs and Housing. (2008). Municipal Act. Toronto, ON: Government of Ontario. Retrieved From Municipal Act, 2001, SO 2001, c. 25 Nelson, A. C., & Moody, M. (2003). Paying for Prosperity: Impact Fees and Job Growth. Washington, DC: The Brookings Institution Center on Urban and Metropolitan Policy. Nowlan, D. (2004). Economic Effects of the Calculated 2004 City of Toronto Development Charges. Toronto, ON: August Trust Research Partnership. Retrieved From: 16

65 Ontario Professional Planners Institute, Comments Submitted on Environmental Registry # Draft Update of Ontario s Transit-Supportive Guidelines (March 3, 2011). Ontario Public Transit Association & Canadian Urban Transit Association. (2013). Investing in Urban Transportation: The Growing Need for Urban Mobility. Submission to The Hon. Dwight Duncan, Minister of Finance, 2013 Pre-Budget Consultations. Places to Grow Act, 2005, SO 2005, c. 13 Planning Act, RSO 1990, c. P.13 RBC Economics Research. (2011). Housing Trends and Affordability. Royal Bank of Canada. Retrieved From: Risk Analytica. (2011). Public Infrastructure Investment in Ontario: The Importance of Staying the Course. Vaughan, ON: Residential and Civil Construction Alliance of Ontario. Risk Analytica. (2010). Public Infrastructure Underinvestment: The Risk to Canada s Economic Growth. Toronto, ON: The Residential and Civil Construction Alliance of Ontario. Retrieved From: Skaburskis, A. (1990). The burden of development impact fees. Journal of Property Research, 7(3), Toronto Board of Trade. (2011). Reaching Top Speed Infrastructure: Unleashing Ontario s Ability to Grow. Retrieved From: peed.pdf Watson & Associates Economists Ltd. (2004). Development charge impact policy paper. Mississauga, ON. Watson & Associates Economists Ltd. (2007). City of Guelph: Fiscal impact of proposed growth options. Mississauga, ON. Watson & Associates Economists Ltd. (2009). City of Hamilton: 2009 Development Charge Background Study. Mississauga, ON. Watson & Associates Economists Ltd. (2010). Long-term fiscal impact assessment of growth: Mississauga, ON. Watson & Associates Economists Ltd. (2011). List of Ontario municipalities with DC bylaws. Unpublished raw data. Mississauga, ON. 17

66 Water Opportunities Act, 2010, SO 2010, c. 19 Water Strategy Expert Panel. (2005). Watertight: The case for change in Ontario s water and wastewater sector. Toronto, ON: Ministry of Public Infrastructure Renewal. Retrieved From: York Region. (2012) development charge bylaw update: Presentation to finance and administration committee [PowerPoint slides]. Newmarket, ON. York Region. (2002). Making It Happen! The York Region Centres and Corridors Study. Newmarket, ON: York Region. 18

67 Plaza Three Argentia Rd. Mississauga, Ontario Canada L5N 1V9 Phone: (905) Fax: (905) November 29, 2013 To our Development Charge Clients: Re: Development Charges Review Consultation As you are probably aware, on October 24, 2013, the Ministry of Municipal Affairs announced public consultations on the Development Charges Act (DCA). The announcement indicated that Ontario is reviewing its development charges system, which includes the Development Charges Act and related municipal measures that levy costs on development (i.e. section 37 and parkland dedication provisions of the Planning Act) to make sure it is predictable, transparent, cost-effective and responsive to the changing needs of communities. A discussion paper was released (copy attached) with the announcement as a focal point for issues to be discussed. Nineteen questions are posed. Comments are invited to be submitted by January 10, Since the announcement was made, a number of our clients have contacted us regarding our perspectives on the questions posed and have asked if we would be responding to this document. On behalf of our clients, we are responding in several ways: We have had initial discussions with, and have offered our assistance to, MFOA and AMO as they develop their respective positions on the consultation document; We have been retained by several clients to assist in developing their response to the policy questions posed; We will be attending some of the consultation meeting(s) set up by the Province; and As a consulting firm which prepares a substantial number of the development charge by-laws in Ontario, we will be preparing our own individual submission to the Province. In addition to the above, we are providing our clients with our initial perspectives on the 19 questions posed. These comments are not exhaustive and are not as technically detailed as our final submission is expected to be; however, they do provide our clients with an initial perspective. We hope that this will assist you in formulating and submitting your own response to the Province. Response to Questions Posed A. The Development Charges Process 1. Does the development charge methodology support the right level of investment in growth-related infrastructure? It is unclear what the Province determines to be the right level of investment. Based on fiscal impact studies undertaken in the past, we would estimate that the present Development Charges Act only allows for recovery of about 75% of the cost of growth. This results from exemptions, reductions and limitations provided in the current Act, as follows: H:\DCA-GEN\DC Provincial Review - gds.docx