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Wednesday, October 28, 2009

Should development charges be phased in?

A week ago at Board of Control we had a delegation from the London Home Builders Association (LHBA). Their concern is the implementation of the Development Charges By-law on January 1st which will increase development charges by nearly $6,000 per new unit so they are asking for a phase in of half in January and the remainder the following December. Among the arguments that were put forward by LBHA were the current economic recession, the high rates of unemployment in the building trades, the competition from the re-sale market, and the anticipated provincial Harmonized Sales Tax (HST).

What are development charges (DC)?
DC's are charges that are designed to cover the costs of providing infrastructure to new development such as sewers, roads, street and traffic lights, public transit routes, police and fire, and libraries. To determine how much new development costs, background studies are undertaken which estimate the cost of all the development needed to accommodate projected population increases. If any of the projects identified have a component that benefits the existing population (e.g. a road improvement) that portion is taken out of the calculation and is identified as non-growth. The remaining costs are then apportioned among the various sectors: residential, commercial, institutional and industrial and, in the case of residential, a per unit rate is identified. These rates are paid by the home builder at the time of taking out the building permit and are reflected in the selling price of the home. In this way, growth is supposed to pay for growth. But does it?

In London, development charges have been flawed for many years. The background studies have underestimated the costs of works needed to accommodate growth with the result that more and more of the growth-related projects had to be subsidized by taxpayers' dollars. In other words, residents in the older parts of London were paying higher taxes to subsidize the price of new houses on the periphery while jeopardizing services in the older parts because there were fewer people to justify their existence. In addition, in order to re-vitalize downtown and create jobs, exemptions were given to downtown residential development and to developers of industrial land. Still, somebody has to pay the cost of that development and that somebody by default is the residential taxpayer.

An additional problem is that in London we have something called an "Urban Works Reserve Fund" (UWRF) which allows developers to go ahead with local residential projects and get their money back from the fund without being subject to the budget process. A lot of problems were identified with the process resulting in longer and longer waits for getting paid back because the claims exceeded the revenues.

How were the DC rates determined?
When I joined the Board of Control in December of 2006, we had a serious problem in terms of a shortfall in development charges. Council had approved the hiring of a consultant who told us that we had to immediately increase our DC's and, if we weren't prepared to get rid of the UWRF entirely, at least cut back on how and when it can be used. We raised DC's by about $2,000 and established a DC Implementation Team consisting of representatives from the City, the London Development Institute (LDI), the construction trades (London and District Labour Council and London and District Building Trades) and taxpayers (Urban League) to complete a new background study and prepare a by-law for Council's approval.

The team got underway in 2007. There were many meetings, public participation meetings and reports back to Council. Finally, in June 2009 the by-law was presented to Council. By then, the economy had already gone into decline and new home building, which had been at an all time high, declined with it. While we all recognized the need to pass the by-law in accordance with provincial legislation, a number of councillors were reluctant to increase DC's when new home sales were down. Others were equally unhappy with asking taxpayers to continue to subsidize the development industry. After much wrangling, a compromise was struck: the by-law would be in effect starting August 2009 but the rate increase would be delayed to January 1st, 2010. Only controller Polhill and Councillor Caranci voted against this motion.

Why not just wait till the economy improves?
As long as we postpone charging the full cost, taxpayers will have to pick up the difference. To date, the cost of this subsidy since August has been about $3 million, or about 3/4 of 1 per cent on the tax levy. To accede to LHBA request would cost the taxpayers about another $3 million. And this is in addition to the subsidies we already pay for DC exemptions for downtown and for industrial development, another $6 million per year.

Then there is the issue of fairness. The average London taxpayer lives in a home assessed at less than $200,000. Why should he or she subsidize someone to buy a new house with an average price of more than $300,000?

There is also the concern that providing subsidies for new houses when there are plenty of re-sale home available simply encourages sprawl rather than the use of existing infrastructure. It's not sustainable to build on greenfields when population increases don't warrant it. And while keeping people employed is a laudable goal, there are many other businesses that are in an equally difficult position.

Six thousand dollars is a lot of money, but it represents only about 2% of the selling price of a new home. For those who need to buy a new home, the solution might be to forgo a couple of options. Maybe a granite counter is not essential.
And maybe the builder will settle for a smaller profit margin. That's how supply and demand works. At the Committee of the Whole meeting in June, I asked the Home Builders what is a usual markup or profit on a new home. Everyone looked shocked that I dared ask such a question, but I think it is a fair one. Why should the taxpayers of London who face the same economic uncertainties and challenges that we find across the province be asked to subsidize one group of consumers, one group of workers, one type of business?

Although I am happy to get a report back from staff about the options available as directed by the Board of Control, I see no need to re-visit this issue. It is a decided matter of Council. We don't need to re-consider it.

Even with the implementation of the new rates, growth won't pay for growth; there will still be subsidies. But we will be a little bit closer to fairness for the residential taxpayer.

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