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Sunday, February 23, 2014

Development charges and campaign funding

It was not a fun meeting at Strategic Priorities and Policy Committee on Thursday. 

On the agenda was the matter of development charges (DC), a concept that is difficult to grasp at the best of times, and one that always upsets the players in the development industry. And, since about half the council is dependent on the goodwill of the industry for their campaign expenses, it's not something you really want to deal with on the eve of an election. As it was, the meeting started late and a couple of councillors gave their regrets, Paul Hubert because, as he tweeted, he was proudly attending his son’s graduation, and Nancy Branscombe for an unspecified reason. Joe Swan was missing as well, no regrets noted.

The purpose of the meeting was to update council about the projections for the development charges by-law that is due in early August. That by-law will set the costs assigned to new homes and businesses erected in the city to cover “hard” services like roads and bridges and sewers and stormwater management and "soft" services like police and fire protection and libraries. That by-law has to be reviewed every five years and you have to get it done by the deadline or the city can’t issue any building permits. Development would come to a halt.

The bulk of buildings covered by the development charges by-law are residential. In London that means mostly single family houses. New single family homes are all assigned the same rates since it is assumed that they all get the same services in the form of roads, sewers, electricity and so forth. So whether your house cost $150,000 or $500,000, the development charges are the same. Under the Development Charges Act, you can’t charge more for one so that another can get a break. Commercial DC rates, including apartment buildings, are assessed on size of the building.

In London, some buildings don’t pay any development charges. Industrial buildings, for example. And institutional buildings tend to get a fairly favourable rate. They still get the services however, the roads, the electricity, the sewers. So someone has to cover that cost.

Guess who. The taxpayer, of course.

When I was on council, I heard time and again that growth pays for growth. It’s nonsense of course; if you give some a freebie and you can’t charge the others more to cover it, how can growth pay for growth?

So how do development charges get set?

Basically, you start with a forecast of your population growth over the next 20 years; in London that has been less than one per cent per year although a few on council, the two Joe’s in particular, wanted the forecast to be higher. That’s like asking the weatherman to raise the predicted temperature. It may sound better, but don’t leave your sweater behind!

Next, you figure out how many houses will accommodate that growth, as well as commercial and industrial development, and what the city will have to provide in the way of roads and other hard services (and some soft services). The further out you go, the more it’s going to cost. You add up all the costs of those projects and subtract a bit here and there as dictated by the rules. For example, when a new big box development goes in, it’s not only the new subdivision nearby that benefits; a lot of downtown people and people from right across town will probably drive there. So you have to deduct the part of the cost that benefits people in general. That’s called the non-growth portion.

Who pays for that? Right again. The taxpayer.

So now you have a final number. That gets divided by the number of anticipated developments in the various categories--residential, institutional, commercial--and a number is established.

The number is not perfect. The growth projections may be off; the estimates of the costs of the projects may be overly conservative or optimistic; there may be an economic slump. If needed, you can revise a year or two down the road. But you have to come up with a rate or you won’t have any development, and if the rate you set doesn’t cover the cost, someone is going to have to pick up the difference.

Yep. That’s you, the taxpayer.

The number that staff brought forward was a bit of a shock. Where currently the DC for a new single family house is $$23,716, staff projected a cost of $40,334. That’s a bit of a hike for sure.

Why such a big increase?

The bulk of it was predicated on the inflationary costs of hard services, particularly roads. Labour costs, costs of asphalt and there are all those road widenings that people are clamouring for. Four lanes aren’t enough; we want six. And many of the projects had already been deferred previously in order to accommodate developers who had challenged the city at the Ontario Municipal Board. That’s what happens when you put things off.

Included was also the plans for bus rapid transit (BRT) to which council is committed. The expectation is that the higher levels of government will be subsidizing that heavily, but you never know.

There was also the addition of something that isn’t currently included, the cost of supplying water to new areas. At present, those added costs are picked up by the ratepayers. That’s part of the reason why you keep getting big increases in the water rates; you’re covering the cost of extending those services to new development.

Then there is also the cost of providing a new operations centre for the north part of the city where so much development is taking place. Probably a good investment in the long run, but expensive to build.

If you take out those two things, and cut out a lot of the road widening, the DC for a single family detached could be cut to $31,021. Still a bit of a hike, but not quite so bad.

There had been an unprecedented number of meetings with the development industry, staff reported. Lots of opportunity for input. None of this should come as a surprise.

Still, as with one voice, they decried the estimates. Definitely get rid of the road widening, they urged. Forget the costs of providing clean water; let the ratepayers handle that. And no operations centre; make do with what you have.

How could they possible compete with surrounding areas—St. Thomas, Woodstock, Ilderton, Arva—with those kinds of charges? Staff should get back to the drawing board and find efficiencies. Home-building is the backbone of economic activity. Get the rates down to under $30,000 and put citizens back to work! If council wanted affordable housing, it sure wouldn’t happen with DC’s like these.

The charges cited didn’t include picking up the costs of the exemptions for industrial and downtown, Joni Baechler pointed out. That would have to be covered by taxpayers, people who had already paid for their own services. And what if the grants for BRT didn’t come through ? What then?

That attracted the attention of Harold Usher, who along with Baechler sits on the London Transit Commission Board. Whether or not they got government money, they would have to stick with the BRT plan. More road widening would be even more expensive.

Then Sandy White got into the debate. “This is a tough one,” she proclaimed. Affordable housing was important. So was the economy. The city needs to grow. As for the BRT, “it depends where you come from in life,” she continued. They had to make things more affordable and get back to the basics.

What exactly she meant by that was not clear. She had been at a meeting earlier in the day where people wanted a school but not enough homes were being built; the whole community was suffering. 

“We’re culpable,” she claimed. “We’re in a recession.”  She didn’t seem to realize that if you don’t cover the cost of development by DC’s, you have to bill the general taxpayer. Someone has to pay.

Dale Henderson, who has been rather quiet since his return after a brief stint in hospital, had the solution. They had to do things differently, cheaper. Maybe substitute cement for asphalt, don’t put in any curbs or gutters, do some wheeling and dealing, maybe get the contractors to absorb the costs.  Just change the rules and save some money.

Which rules he wanted changed, he didn’t say. The projects get the go ahead from council, but most of the rules—the Building code, the Planning Act, the Development Charges Act, the Provincial Policy Statement—come from the province. Wages are negotiated by the Building Trades Unions with the industry. City projects are put out to tender for the best price.

Matt Brown wondered whether the increases couldn’t be phased in but, as staff pointed out, you’d still have to find the extra money somewhere. Putting it off just means that you have higher costs and debt down the road.

Denise Brown was worried about how they could compete with surrounding communities for the tax dollars that buying new homes brings. “Growth has to pay for growth,” she agreed, “but you have to be reasonable.” What she meant by that, I’m not sure. It’s as if the whole lot of them didn’t realize that development costs money and it has to be paid for. Either you come up with the money, or you cut back on the development.

Fontana was adamant. A 30% increase in DC’s was not on for him.  His “comfort level” was in the $27,000 to $28,000 range. Steve Orser, Paul VanMeerbergen and Bud Polhill agreed. The increases were outlandish, they would kill the industry, all the business would go to Woodstock, Stratford and St.Thomas. The DC’s would kill the goose that laid the golden egg.

Yes, indeed. It could certainly annoy the goose that lays the golden eggs in councillors’ war chests. 

As I described in more detail in Hey, big spender , many councillors rely heavily on developers and corporate donors to sponsor their campaigns. For some, like Paul VanMeerbergen and Bud Polhill, it accounts for almost all of it. In fact, the only ones who receive little or no developer money are  Joni Baechler, Judy Bryant, Paul Hubert, Nancy Branscombe and Bill Armstrong.

Judy Bryant spoke. With respect to affordability, she was concerned about the balance between those buying new homes and those trying to hang on to the homes they already had.  Making taxpayers pick up the shortfall in DC revenue could tip that balance.

Baechler had a bad cold, but she didn’t let that stop her from speaking up. She was surprised, no shocked, at what she was hearing from some of her colleagues. “Staff don’t just sit around with a technical review  committee and throw projects in the mix willy-nilly and say this is the total number of capital projects and see what spits out!” she told them.  There had been much deliberation and discussion with the industry, at least 40 meetings. But some on council didn’t seem to realize that every time they approved a project, they were feeding into the costs. The whole Southwest Area Plan has innumerable costs associated with it. So they could shelve the Southwest Area Plan but “I didn’t think that was what you wanted to do!” she continued. Yes, their cost were higher than neighbouring communities, but the difference was roads. London has four and perhaps soon even six lane highways running through it. That’s not the case with the neighbours. Roads are expensive. Furthermore, she had voted against extending services to Arva unlike those who were now complaining about competition. They were talking out of both sides of their mouths!

She was losing her patience. They were talking about deferring some of the roads projects, but where did thing think they were going to go? They’d come back in the next go round and they’d be dancing the same dance! “Look at Kitchener and Waterloo,” she urged. They were having the same problem. 

Growth hadn’t paid for growth in the past 20 years, she continued. Right now, taxpayers were paying 2.5% to cover the shortfall in development charges; $242M  over 20 years, $ 12.5M was going to the industry from the taxpayers this year  alone. That was money from the homeowner to the new home buyer. And that new home was worth a whole lot more, on average, than that of the home owning taxpayer. Talk about affordability!

Sandy White didn’t like being taken to task by Baechler. But she had an idea. She moved that staff develop a sliding scale for DC's based on how wealthy the buyer is. No one seconded her motion, perhaps because they understood there was no way of doing that legislatively or politically.

Fontana was incensed at being “lectured to for 15 minutes,” as he put it. He re-issued his comfort level: $27,000 to $28,000.

That meant a shortfall of $4,000 per house, Baechler pointed out. How would that be paid for? And she didn’t appreciate him interjecting and editorializing from the chair.

A belaboured debate about who should pay for the costs of providing water to a new home ensued. Few thought the homebuyer should pay. But they weren’t happy about increasing the rates for existing homeowners. What to do?

Defer, of course, in the hope that staff could provide more information that would make the decision easier. And while they were at it, staff  should also bring back a report on "the whole picture" including the impact of DC’s on home-building and jobs and the economy, Sandy White suggested, adding “Sometimes I do have wisdom.”

“The numbers are what the numbers are,” city treasurer Martin Hayward informed them. And, if staff had to do entire analysis of the economic impacts as White wanted, well then they had better put up some money for hiring a couple of economists. Staff had enough to do trying to get everything done before August.  Because if they didn’t meet the deadline, “we will have no growth,” Hayward said.

It was a sobering response.


Dean Sheppard said...

I am so pleased to see staff giving Council straight up blunt answers that even the dim-witted among them have can understand. It places responsibility where it belongs - on the elected officials - to understand how the City finances work and the implications of their decisions.

Frank L. said...

Thanks for explaining how DCs work.

If I live in a modest home without fancy features in an older part of town why should I pay extra taxes so that others can buy a new home that they can't afford? If they cannot afford to pay the full and complete costs of servicing that new home then they cannot afford that new home.

I have a great idea. I want a new car. I want a fancy car. My older car is getting a bit worn and new cars are better. I can't afford a new and fancy car but building cars is good for the economy, isn't it? Building cars creates jobs.

That is why all of you should help me to buy a new car. You won't mind pitching in to help me buy a newer, better car will you? After all, it will be good for the economy.

Lily Tomlin said...

Re the Fontana group:

As I may have said once or twice before -- we have the best politicans money can buy!

Anonymous said...

If a developer has land in London to develop, they can't move that land to Woodstock or St. Thomas. If someone wants to buy a home in London, they aren't looking to Woodstock or St. Thomas. These arguments are non-sense.

Growth should pay for growth. Another $15,000 on a $500,000 home isn't going to send buyers to the next community.

Deal with it already.

Sandy Levin said...

small point Gina. The water DC would be on the Lake Erie and Huron system,not on the pipes to new homes. That part is already in the water rate, as is the costs of expansions to the Huron and Erie supply. The question is should all 100 thousand or so households and businesses subsidize that cost for the 1400 or so new homes built each year?

Anonymous said...

so let me get this straight. all new home buyers will not spend $10,000 more on a house but would rather sit in their cars longer year in and year out to live in Woodstock, or St. Thomas, or wherever? yeah, right. And only our city councillors are too stupid not to see how silly this is??