The City of Toronto Executive Committee will discuss the matter of a new Development Charges Bylaw at its meeting on July 3, 2013.  This is a statutory requirement as the current bylaw expires in April 2014, and it must be replaced in order for the city to continue collecting these charges.

Already press reports show a real estate industry apoplectic at the possibility that these charges will double.  With all the concern over a possible softening of the market for new units, the last thing they want is yet more cost added to the purchase price.  However, what we are seeing is a combined effect of the rising population and the exhaustion of surplus capacity in existing infrastructure, notably transit and water.  Much of the new development is concentrated in the central city in former industrial areas that do not possess the infrastructure needed to support their coming new populations.

(Chief Planner Jennifer Keesmaat observed at the “Feeling Congested” session earlier this week, about 70,000 people will call places like Liberty Village and the waterfront neighbourhoods their new home over the coming decade.)

There is bound to be lively debate, especially from the “no new taxes” brigade on Council, but the simple fact is that the city cannot have new development without some way to pay for the supporting infrastructure and services.  In this article, I will talk only about the transit component which is the single largest piece of the new DCs rising about 150% from the previous level for residential development.  (DCs overall will go up 86% because other categories have lower increases.)

How Development Charges Are Calculated

There are strict rules for this process.  Council cannot simply say “we need a few billion dollars” and set the DC levels to bring in the loot.  The process is described in detail in the background report, but in brief, works like this:

• For each major spending envelope (transit, police, water, etc.), the city identifies projects that are at least in part triggered by population and/or employment growth.
• Each project has a gross cost including financing that, for the purposes of DCs, is reduced to allow for
  • other sources of revenue such as subsidies and corporate reserves,
  • the degree to which the benefit extends to developments that will occur beyond the 10-year window,
  • the degree to which the project benefits existing residents and businesses.
• The net cost attributable to growth over the decade 2013-2024 is apportioned to the residential and commercial base in rough proportion to the area that triggered the need for the spending.
• The total dollar value to be raised is allocated to various types of residential units based on presumed occupancy, and to commercial building based on square footage.

(Well, yes, it’s a tad more complex than that, but I have tried to simplify things so that we can get on with the transit details.)

A Special Case: The Spadina Subway Extension

The Spadina extension has its own line in the DC calculations because, under the provincial Development Charges Act, some of the standard rules don’t apply to this project.  In the background study, it has its own section (starting on the page numbered 81 which is actually page 93 of the pdf).

This project is already under construction with cost shared between Toronto, York Region, Queen’s Park and Ottawa.  Toronto’s share is $526-million, but the development that will pay for this lies mainly in the future, and the city must finance most of this.  The gross cost including financing is $1.124-billion.  This illustrates the advantage of projects where pay-as-you-play financing is workable either from reserves built up in advance, or because the spending is affordable within current revenue.

Of the $1,124m, 35% or $430.9m is attributed to the “replacement and benefit to existing” share.  This gets us down to $693.1m.

Previous DC revenue provided $58.3m, and a further $100.9m is lopped off thanks to a legislated 10% discount (intended to place a part of the capital costs on the general tax base), plus Council decisions on exemptions and phase-in.  Finally, $201.73m is allocated to the period beyond 2023 leaving $332m to be funded from the next decade’s worth of DCs.

This amount is allocated 2/3 to the residential sector and 1/3 to commercial, and within each of these flows through the formulas to set unit costs applicable to each type of construction.  The entire process is summarized in Appendix B, Table 1, on page 98 of the pdf.

Although this may seem complicated, it is a legislated process to ensure fair allocation of capital costs to new development and to existing taxpayers roughly in proportion to where the benefit lies.  It is also worth noting that, for advocates of new taxation streams, we are already getting a substantial amount from new development, although at a much lower level than municipalities in the 905.

Other Transit Projects

The section on transit projects other than the Spadina extension begins on page 87 (pdf page 99).

The calculations begin with a long enumeration of existing assets and spending over the past decade.  This is needed because there is a legislated cap on the amount by which a component of the DC can rise in the new bylaw compared to historical spending.  At the end of the calculation, the “cap” turns out to be a number somewhat higher than the projects that are to be funded through the new DC bylaw.

As in the Spadina extension example, each project is evaluated relative to its need and benefit stemming from development, and only the “growth” component is included for DC calculations.

The major groupings of transit projects are:

• Buses, streetcars and subway trains for increased ridership ($622m gross, $417.3m net on DCs)
• YUS and BD resignalling projects ($291m gross, $139m net)
• Sheppard Subway (carry forward from previous period) ($215m gross, $58m net)
• Union Station Revitalization ($400m gross, $104m net)
• Waterfront Toronto (Cherry Street LRT, Queens Quay East LRT, Union Station 2nd Platform) ($491m gross, $316m net)
• Port Lands ($55.2m gross, $50m net)

Port Lands costs are comparatively low because a great deal of the new population and transit infrastructure in that area will not exist during the 10-year window for the current DC bylaw.

This gives a net total of $1,085m in transit to be financed through development charges of which $896m falls in 2014-23 and $189m in 2024-2033.  The $896m is allocated $593m to the residential and $304m to the commercial sectors.  The residential share translates to a per capita (new population) value of $2,452 which is allocated to each type of unit based on presumed occupancy.

The table showing the buildup of costs is on pages 102-103 of the background paper (pages 114-115 of the pdf).

What is quite remarkable about the cost buildup here is that a large proportion of the total pays for projects already well underway and for growth within the existing system.  Development charges pay a substantial share (because these projects have a strong link to actual growth rather than to maintenance of what we already have), but not all, and the city is left to find the remainder from other sources.  The headroom for even more new projects is quite low, and that does not even consider political pressure for vanity transit schemes, nor the effect that a decision to reduce the total “ask” for DC funding would have on the project list.

This is an arcane subject, but the debates at Executive and Council will affect the planning of new transit projects and financing for years to come.