Where the rubber hits the road

With council chomping at the bit to progress growth, the report on assessing the accuracy of growth-related costs and revenues is likely to be sobering. It costs more but we're getting less.

On Monday’s Built and Natural Environment Committee (BNEC) agenda is an update by staff on development charges (DC), which I discussed at some length in an earlier blog, Growing pains. In brief, DCs are paid by developers and homebuilders when building permits are issued and the cost passed along to the buyers of homes and commercial buildings to cover the cost of services (infrastructure) to their buildings. The city plans ahead by identifying all the needed growth projects such as roads and sewers and associated costs for the next 20 years, and then establishes a rate for new residences and commercial establishments to cover those costs. That way, taxpayers shouldn’t be on the hook for the cost of new developments.

When I joined to Board of Control in 2006, the issue of development charges was a very hot one, especially that part of development charges known as urban works.

London is the only city in Ontario, probably Canada, to have an Urban Works Reserve Fund (UWRF). This fund is used to cover the costs of smaller, local projects such as local streets, as opposed to the larger projects such as major arterial roads. Having a separate fund which, although administered by the city, is not subject to the budget process, allows developments to go ahead because builders (and their lenders) are assured that they will get paid back from the fund as the money becomes available from building permits. As long as new homes sales keep pace with the opening up of new developments, there shouldn’t be a problem. Providing that the initial projections are accurate of course.

However, by 2006, there was a growing gap between the money coming into the fund from building permits and the claims being made on the funds by developers who had put the works in the ground. And, unlike other cities where developers and builders are usually one and the same, in London, they are often separate and distinct. So developers were waiting longer and longer to get their money back, and their creditors were getting nervous. It was feared that by 2010, there would be a $50M “notional” deficit in the fund.

So in 2006, Council established a Blue Ribbon Panel to analyze and make recommendations on what to do to deal with the situation. Initially, the Panel suggested that the UWRF should be abolished, but, meeting resistance from Council and the development industry, eventually recommended some changes including taking some expenditures out of the UWRF and placing them in the City Services Reserve Fund (CSRF) where they would be subject to budget controls. Additionally, the Panel recommended an immediate increase of $2,000 to the DCs per residential unit, a recalculation of how much the various sectors (residential, commercial and industrial) actually contribute to growth needs, and a review of the actual vs the projected costs. Since by provincial legislation, a new background study has to be done every five years to make sure that the growth projections and actual costs are still relevant, a new working group of citizens, industry and staff was established to undertake this. Finally, the Panel recommended that regular reports be brought to council to keep elected officials updated.

All of this was completed in August of 2009. The net result was that the new rate established raised the DCs by $6,000 to $19,630 per new single family home. Predictably the development industry wanted a delay in implementation of the new rate, got one until January 2010 when, just as predictably, the industry asked for another postponement, labelled as a “phase in”. Every delay ends up costing the taxpayer money because the bills for public works still have to be paid. This time, they didn’t get the delay.

In the meantime, the industry, having agreed to the new arrangements as part of the working group that established the new development charges by-law, suddenly realized that, with more and more works being assigned to CSRF rather that UWRF, fewer building permit dollars were going into UWRF, and the wait time for payback to developers was taking longer and longer as there wasn’t enough money in the fund to cover the claims. They decided that they would appeal the new DC by law to the Ontario Municipal Board (OMB). Council, not being assured that the outcome of an OMB decision would necessarily favour the city, cut a deal with the industry whereby the payments would be speeded up by delaying the full implementation of moving works from urban works to city services.

That means, of course, that the CSRF is short changed for a while. To accommodate the reduced revenues, something has to give. That something is some of the road projects that had been planned but will now have to wait awhile. The city can’t afford it, not without raising taxes. As a result, the $655M the city had planned to spend over the next 20 years for arterial roads have been scaled back to $195M over the next 10 years. The agreement will have to be re-assessed in 2014 when a new council takes over and the DC by law has to be reviewed as it must be every five years.

The report to BNEC, and council next week, provides an update on where things stand and whether or not the cost projections made in 2009 continue to be realistic in light of actual experience in tendered projects since the fall of 2010. In short, what did we think it would cost and what will be the actual price tag?

For roads, estimates fell short of reality by 8 percent or $12.6M. One of the reasons may be the federal stimulus funding for infrastructure projects that increased the demand for materials and labour. If so, those costs should soften in the future as the funding comes to an end in October. But the city will also be faced with dealing with accommodating the projects that were put off in order to make more money available to developers to claim from the UWRF. Already, some work has started on two-thirds of the work to be done in the next ten years! And the bulk of the work has been deferred beyond that time period.

The report points out that the shortfall on transportation projects equates to $700 per new single family unit. If that rate increase is to be implemented, there will surely be an outcry from homebuilders and developers that such an increase will cripple their industry at a time when the new housing market in London has been under stress. The alternative, of course, is to stick it to the taxpayers, something that this council has vowed not to do.

The investments that are made in infrastructure should be complemented by the actual development that follows. Not much point in putting in roads and sewers if no houses or commercial buildings are built and sold. That kind of activity puts you in a cash crunch.

But that seems to be exactly what is happening; in the two years since the introduction of the DC by law, construction of housing has realized only about 70% of what was anticipated. No wonder the report suggests the following:

With the pace of growth lagging behind the pace of investments to serve growth, Council may wish to consider slowing the pace of investment in infrastructure to serve growth. If the current building trend continues, a weak revenue stream for DC revenues will also continue. This in turn will have an adverse impact on the cost of carrying investments in growth as more growth projects will need to be debt financed than originally predicted in the DC rate calculations.

Not a welcome message for a mayor and a council hell-bent on growing in all directions, especially along those provincially promised 401 interchanges that will need half a billion dollars in servicing costs, none of which were included in the DC calculations. And all to attract industrial developments that don’t even pay development charges!