Sandy Levin on development charges and growth

Although I was not able to attend the meeting on Tuesday evening, Sandy Levin was there and has provided his observations. As a former member of council and someone who has participated as a representative of the Urban League in the development charges background studies, Sandy is uniquely positioned to offer an informed report. I can't think of anyone in the industry or outside it who has a better understanding of the concepts and the issues facing London in terms of development charges.

Here is a brief biography published by the London Community Foundation when Sandy was appointed to their board.

Sandy Levin – Since 1990, Sandy has been involved in efforts to protect London's natural heritage. Between 1991 and 1994, Sandy served on the local Board of then Canada Trust's Friends of Environment Foundation, which provided grants to local environmental projects. He also chaired the Urban League of London from 1993 to 1994. In 1997, Sandy was elected to city council, where he served until 2003. Since stepping away from Council in 2003, Sandy has kept active in environmental issues facing London. In 2006, he received the Green Umbrella Award from the Urban League of London, and in January of 2007, he was named to the Mayor's Honour's List for the Environment. In 2008, the London Community Foundation was pleased to present Sandy with the Ivey Award for Excellence which recognizes a local champion of the environment.

THE COMPLEX WORLD OF WHO PAYS FOR NEW GROWTH AND WHETHER THE COSTS ARE OUTWEIGHED BY THE BENEFITS
by Sandy Levin

There is probably no one element of municipal financing that bedevils council like development charges.  At the Committee of the Whole meeting of March 22^nd, the new Council received a very large helping of details about development charges.  Unfortunately, some may have left the table even more puzzled.  And that is a real danger as the Council decides what taxpayers will fund in order to set the table to attract new employment.

WHAT ARE DEVELOPMENT CHARGES?

Development charges (DCs) are a means for a city to avoid having existing taxpayers pay for all of the various infrastructure costs that come with turning “vacant land” (usually farmland) into new homes, big box stores, factories, or any new building.  A rate is set that is charged for each housing unit and square meter of commercial, industrial and institutional (hospitals, universities) space.  It is all set out in a provincial law called the Development Charges Act.

SO?

The development charge is collected when a builder takes out a building permit.  This becomes a cost along with the construction costs.  The builder generally passes along this cost to the new home buyer or the commercial property owner, but may not be able to do so in tougher economic times.  This means those in the land development industry are interested in a rate that is as low as possible.

HOW IS THE RATE DETERMINED?

It starts with a forecast in population growth and employment over a twenty year period.  Then a forecast of the number of new housing units and commercial, industrial and institutional space is created.  That is followed by detailed studies to come up with the estimated costs for the new sewers, roads, buses, storm water facilities, libraries, fire stations and the like that will be needed to support the growth. 

DOES THIS COVER ALL THE COSTS?

No.  DCs only are calculated on the construction costs.  The ongoing operating costs like policing, trash collection, and snow clearing come from property taxes.

And the province prevents municipalities from charging for all of the construction costs.  For example, 10% of the cost of new soft services such as libraries, fire stations, community centres and the like cannot be included in the rate calculation.  This means existing taxpayers have to pay that 10%.  The DC Act also prevents cities from including in the calculation the cost of a new city hall, arts and cultural facilities like museums, computer equipment, assets that last less than seven years, and most surprising, waste collection and landfill costs.  According to one of the experts at the Committee of the Whole meeting, on average, a city only recovers 75% of the costs of new infrastructure from DCs.  But London asks taxpayers to pick up even more costs.

MORE COSTS?

Yes, the city has policies that mean that taxpayers pay the DCs that a builder would normally pay in the following cases:

-          New residential development in the downtown and Old East

-          New industrial development

-          50% of new institutional buildings (hospital, university and college projects)

These subsidies plus the limits imposed by the province, amount to $10 million per year in London – meaning taxes are about 2% higher.  

BUT ISN’T THIS WORTH PAYING BECAUSE NEW TAXES GENERATED FROM NEW BUILDINGS more than covers it? 

Ah Cricket, that is the $64,000 question!  According to city staff at the Committee of the Whole meeting, the property taxes from new construction simply pays for the new operating costs – it doesn’t bring in a “profit.”  And what’s more complicating is that the constructions costs are very expensive in the beginning and the tax revenues low.  It is only over a longer period of time that the new property taxes get paid to the City.  This can cause a cash flow problem for the city.  Such a cash flow problem hit the city after City Council, from 1997 to about 2006, allowed new subdivisions to spring up around the city in what was described at the meeting as a “360 degree wagon wheel.”  This, and buying and servicing a lot of industrial land around the 401 and airport, cost a lot of money for the new sewers, wider roads, police cars, etc to cover all the new subdivisions.  And because the number of new units built is pretty much the same regardless if you have one new area growing or seven at the same time, developing many areas at the same time meant lots of costs up front.  This is one big reason why the City Council had to place a cap on its borrowing to get its financial house in order from 2006-2010.

DOES THIS HAVE ANYTHING TO DO WITH THE GOAL OF BRINGING MORE JOBS TO LONDON?

Ah, Cricket, you learn quickly!  There are those on Council that want to open up more lands for development.  If so, then a recalculation of the charge is required or taxpayers will have to cough up more if the development is for industrial uses.  If, for argument’s sake, the cost is $10 million and the revenue in taxes is only $600,000 per year, it takes about 8.5 years to break even.  Or, alternatively, the city takes on additional debt which either delays other projects or increases the city’s debt load and annual debt repayment. 

BUT IT MEANS NEW JOBS AND THAT’S A GOOD THING, RIGHT?

Maybe.  Every city in North America is looking for the same kind of businesses as the City of London.  Whether one new factory is going to make that big a difference and bring new people to live in London or put Londoners back to work is an open question.  That was the thinking of the 1997-2003 Council and all the money invested in industrial land in and around the 401 was very costly. Now, almost 10 years later, we have probably just kept pace with other cities. 

YOU DON’T SOUND VERY OPTIMISTIC!

The tough question is what influence a city has on business location decisions and the success of businesses.  A lot has to do with other forces such as the economy in general (it wasn’t just London that had a recession in 2008), what the federal and provincial governments are spending on, demographics and other factors that are not under the control of, nor dependent on, the city.  For example, hundreds of millions of dollars come into the city in the form of research grants to the university and hospitals.  City has nothing to do with that. 

Setting the stage to make London a place where people want to live and work means more than just creating new areas for land development.  Just ask yourself – “why did you move to or decide to stay in London?”  I think you will come up with a number of reasons that are outside the care and control of City Council and beyond what this Council is currently grappling with.