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Development Charges to Bolster Funding for Subway Extension Excluded Municipalities Call for Equal Treatment
May, 2007
By Barbara Carss
New rules give the City of Toronto and York Region more latitude to raise funds for a proposed subway extension. The Ontario government recently adopted amendments to the Development Charges Act to revise how the two municipalities can calculate development charges for the project and to increase the percentage of project costs they can recover through development charges.
Thus far, the federal and Ontario governments have committed approximately $1.4 billion to the subway project, leaving the municipalities to come up with the remaining one-third of the required capital funding. Based on an agreed to 60/40 split of that projected $700-million tab, Toronto will need $420 million and York will need $280 million.
The Act's formula for calculating development charges has been based on the replacement costs for the average level of service a municipality has provided in the previous ten years. Under those rules, York Region would not have been able to collect any levies for the subway project since it has not had the service previously. Subways, rapid transit rail lines and bus rapid transit systems are classified as "higher order" transit for the purposes of the Development Charges Act and are distinct from street-based services that merge with traffic.
The new amendments allow the two municipalities to use the planned level of service for the forthcoming 10 years as the benchmark for calculating development charges for the subway extension. The amendments also exempt the project from cost recovery restrictions that were added to the Act in 1997. Municipalities now collect development charges for a maximum of 90% of the capital costs of transit projects, but Toronto and York Region will be allowed to recover 100% of the growth related costs of the subway extension.
"For municipalities that are on the cusp of having to make a switch from a road based transportation system to a transit based system, the lack of manoeuvrability in the Development Charges Act is a real problem," observes Dan Cowin, Executive Director of the Municipal Finance Officers Association (MFOA) of Ontario. "This has the potential to be a huge benefit, particularly if they are going to start applying it broadly across York Region."
Other Ontario municipalities are asking for the same considerations. "Our position is: why is the Province doing this just for Toronto and York?" says Rob Rossini, the Director of Finance in the City of Mississauga, where the first phase of a bus rapid transit (BRT) system envisioned to ultimately stretch from Oakville to Pickering is now in the works. "There are a number of municipalities that are getting into higher order and new service levels for transit."
Meanwhile, advocates for the development industry maintain that the new amendments are too open-ended. They have called for transparency and accountability measures that would provide Toronto and York Region with access to development charges but include some restrictions to ensure that they cannot collect in excess of the expenditure required for the project. "Conceptually, we're not disagreeing with the objectives; we're debating over the technicalities," says Neil Rodgers, Vice President, Policy & Government Relations, with the Greater Toronto Home Builders Association/Urban Development Institute (GTHBA-UDI).
RESTRICTIONS ON COST RECOVERY
Ontario municipalities and the development industry have both been calling for a comprehensive review of the Development Charges Act - something that the current provincial government promised in its election platform in 2003. Municipalities have been highly critical of many of the amendments that the previous government introduced into the Act in 1997, while the development industry has asked for some changes in the way municipalities prepare the background studies that justify their development charges.
The Development Charges Act was first adopted in 1989 on the premise that growth should pay for itself. The original version of Act gave municipalities the ability to collect levies to recoup 100% of the cost of new infrastructure to serve growth, based on the replacement cost of the highest level of service a municipality had provided in the previous 10 years.
That highest level of service typically occurs when infrastructure/facilities are new, and then erodes as the population increases and more people use the services. "The service level is essentially falling all the time until the addition of the next facility," Cowin says.
The 1997 amendments to the Act revised the formula for calculating development charges, pegging them to the average level of service provided in the previous 10 years. Municipal officials contend that this constrains the ability of rapidly growing municipalities to keep pace with infrastructure needs as population influxes quickly lower the average service levels.
The 1997 amendments also narrowed the scope of services for which development charges could be levied. Municipalities had to begin contributing 10% of the capital costs of transit projects, libraries and community centres, and they were prohibited from collecting any development charges for hospitals, municipal administrative buildings or cultural facilities such as recital halls.
"That was something the development industry wished for and achieved because, in that era, we were growing concerned with the building and construction specifications that were being designed by municipalities for various community infrastructure," Rodgers recalls. "They were increasing both the level of service and the quality of the amenity and it wasn't clear whether municipalities had any regard for what the facilities would cost to operate and replace in the future. The amendments were trying to instill municipal prudence in how they specified various materials and facilities."
Municipalities were still allowed to recover full costs of most of the infrastructure related to the so-called hard services, such as roads, sewer/water mains, water/wastewater treatment facilities and fire stations, so the required 10% municipal contribution for transit related infrastructure is somewhat of an anomaly. "Transit was the one hard service that was included in an otherwise soft service basket. We're not fundamentally opposed to having transit taken out of the 10% co-payment category," Rodgers says.
"It was a mistake, and you'd have to ask the Province what the rationale was," Rossini asserts. "The amendments that came in, in 1997, were just bad public policy."
BUDGETARY CHALLENGES
Toronto and York Region will now be able to tap into a significantly larger pot of funds with their new freedom to set development charges based on planned service levels into the future. "It's possibly even more generous than the 1989 Act was," Cowin says.
Even so, the municipalities face a considerable financial challenge in raising their required share of the project costs. The subway extension has also been designated as a pilot project under Ontario's new Tax Increment Financing Act, which will allow Toronto and York to borrow against the future increases in property tax revenue that the subway will generate. However, the legislation sets a cap on the size of tax increment available to the municipality, fixed at 1% of its tax revenue.
"Right now there are still quite a lot of questions about how significant tax increment financing is going to be for them," Cowin notes. Development charges are expected to cover a greater share of the capital costs.
Since the proposed subway line will also benefit existing development, municipal officials will have to gauge what portion of the project costs can be funded with development charges. They must complete a background study - prepared in accordance with the requirements of the Development Charges Act - to justify the development charges that will be levied, and their Councils must pass a by-law to enact the new charges.
"We will be ready to go forward with the by-law this spring," reports Ed Hankins, the Director of Policy, Risk & Treasury for York Region. "It could be at least one third [of York's contribution] that we'll be able to raise through development charges over the next 20 years or so."
Meanwhile, Mississauga's share of capital costs for the first phase of the bus rapid transit system is estimated at about $65 million, but current legislation prevents the City from raising any of those funds through development charges. The BRT is considered a new "higher order" service so there is no historical level of service on which to base the levy.
Municipal proponents say the two distinct categories for transit service no longer make sense. "As you grow, you reach a critical mass and all of a sudden you need a different level of service, but the Development Charges Act looks at this evolution and says it is a different type of service," Hankins notes. "That has been York Region's experience as a high growth municipality. We are starting to see some major infrastructure being required all of a sudden, and it is required to deal with growth."
In Waterloo Region, where an environmental assessment process is now underway for a rapid transit system to link the municipalities of Kitchener, Waterloo and Cambridge, officials are at least heartened that the rules have been amended for the Toronto/York subway project. "That's good news," says Yanick Cyr, Project Director for Waterloo's Rapid Transit Initiative. "It gives the ability to look forward instead of looking back."
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