Updated November 26, 2015 at 11:00 pm: A follow up article by Jennifer Pagliaro includes reactions from Mayor Tory. My comments appear at the end of this article.
The Toronto Star’s Jennifer Pagliaro reports that the Building Industry and Land Development Association (BILD) will challenge Toronto’s planned increase in Development Charges for the Scarborough Subway Extension (SSE) at the Ontario Municipal Board (OMB).
[BILD is] challenging the planning foundation for the three-stop subway — which council controversially approved last term over a seven-stop LRT that was fully funded by the province. BILD is raising red flags about the city’s ridership projections.
Bryan Tuckey, BILD’s president and CEO, says homeowners across the city should not be on the hook for a “political decision.”
“The ridership numbers that we have demonstrate that what’s needed in that area is light rapid transit,” Tuckey, whose background is in city and provincial planning, told the Star.
“We want to have fair and accountable use of development charges.”
This action has implications well beyond the Development Charges (DCs) for the Scarborough Subway and touches on the whole question of transit financing and planning that for years has been more about political gamesmanship than about the actual needs of the City of Toronto.
We know that the development industry does not like paying one cent more than they have to, and preferably less, in taxes. In that sense they are no different than other taxpayers.
However, while homeowners can only express their opposition by voting for politicians with vague promises to fight waste at City Hall, and hope that their “champions” like Ford and Tory will “do right” by them, their only real recourse is at election time. Elections are fought on signature platforms like SmartTrack and “Subways Subways Subways”, and voters don’t get to cherry pick the platform lines they really want. Elected politicians claim they have “a mandate” when their victory may simply depend on “not being the other guy”.
Development Charges, on the other hand, have specific rules about how they are calculated and an appeal mechanism neither of which is available for general property taxes (or many other taxes Council can or could levy of which the Land Transfer Tax is one obvious example). As the Star notes, most of the City’s share of the SSE ($910m) will come from the subway property tax yielding $745m. This tax will rise to 1.6% in 2016 and then stay on tax bills for decades. The amount coming from DCs ($165m) is much smaller, but developers have an appeal option through the OMB.
A Short Primer on Development Charges
Many civic assets are funded, in part, from charges against new developments, and the schedule of projects supported by the charges is updated from time to time for a ten-year plan. The most recent update was in 2013.
These charges must follow specific provincial rules including the provision of a background study showing the amount of development expected (residential and commercial) and providing a list of projects that should, in part, be funded from DCs because they are at least in part driven by new construction activity. For example, the Spadina subway extension (TYSSE) will partly improve the lot of existing riders, but to some extent it will enable or trigger development that will consume part of the line’s capacity. To the extent that it does so, part of the capital cost is recoverable through DCs. (The actual calculation is a bit more complex, but that’s the basic idea.)
The background study for the 2013 bylaw includes a detailed explanation of the calculation as well as a table showing all of the projects to which DCs will contribute. Links to this study are on the 2013 Development Charges Bylaw Review page (scroll down to the “Public Meeting at Executive Committee” for links to the Full Report, Technical Appendices, and other related materials).
In 2015, the Bylaw was updated to include charges for the SSE, and a new Background Study deals only with that project as an amendment to the 2013 report. It is this update which is the subject of the OMB appeal.
Within the list of projects funded by DCs are two categories in the 2013 Bylaw:
- The TYSSE
- Transit (Other)
That “Other” category includes many items, but a bit of digging is required to find out what they are. The Technical Appendix B.2 (starting at page 7 of the linked pdf) provides the details. This includes a long section on existing “service levels”, essential the current assets of the TTC to which new projects that might be eligible for DC funding will be added. These are addressed as “network” improvements benefiting the whole city and any development in it, rather than attempting to link specific projects to development in specific locations.
The list of projects to be funded from DCs begins on page 22 of the pdf, Table 2 in the appendix B.2. This includes:
- New vehicles (all modes) for increased ridership
- Resignalling projects on the YUS and BD subway lines
- Carry-over from the previous DC Bylaw of recovery of the Sheppard Subway construction costs
- Union Station revitalization (City share)
- Waterfront transit (Cherry Street, Queens Quay East, Union Station 2nd Platform)
- Port Lands transit
The SSE Development Charge Bylaw
The report to Council for the 2015 amendment adding the SSE to the projects supported by DCs makes the point that this project, like many others, is a network improvement and therefore should apply to all development in the city regardless of location. One could argue that this is a dubious claim, but that could trigger a debate on many other projects that might look to DCs including the alternative, the LRT network in Scarborough, or the several proposed lines in the eastern Waterfront. Getting into a situation where funding of large transit projects causes local taxes to rise, in effect turning a subway line into a “local improvement project”, would be dangerous because it could undermine the viability of projects in locations where new development subject to DCs is unlikely, but where a line is needed to serve demand originating elsewhere.
The rules about DCs do protect to some extent against this by looking at the proportion of demand that is due to new development versus simply improving travel conditions and capacity for the existing population, but the cost is still spread across the entire city. A new condo near STC, for example, does not have to bear the cost of the subway alone. Any change could add yet another layer to the difficulties of choosing between transit options.
There is an interesting parallel in the premise that areas served by rapid transit should be densified to both generate new tax revenue and to generate long-term demand. This has a local effect of destabilizing existing neighbourhoods and, ironically, giving an incentive to develop at a density to which Council might not otherwise agree. If you like your existing low-rise neighbourhood and want it to stay that way, then upzoning is a bad thing. If you look to make a killing on a house you bought decades ago when land was cheaper, you will welcome new development. This model obviously has problems because neighbourhoods will not be unanimous, and in a worst case situation residents might actually oppose a rapid transit project because of the effects it would bring. A good example of a transformed neighbourhood is Willowdale around the Yonge extension to Finch.
The Hemson study which is the background to the SSE DC is intriguing because it states, at p 3:
The ridership analysis estimates that, if the expanded subway line were currently available for use, approximately 5,500 single peak direction passenger trips would be taken each hour (PPHPD) during peak hours.
The number of PPHPD trips is projected to increase to 14,000 in 2041.
The delta in ridership, 8,500 passengers or 61%, is considered to be the effect of new development and hence the basis for allocating “benefit” for DC calculations. Obviously if the number is high, then the benefit is reduced accordingly and hence the amount recoverable through DCs. The build-up of ridership estimates is shown in more detail in Table 2 on p 16.
There is a fundamental flaw in the methodology here on two counts. The most obvious, and the one triggering the appeal, is that the ridership projection is inflated for political reasons to “justify” the subway project. It will certainly be interesting to have this challenged in a venue where chest-thumping politicians don’t get to hijack the proceedings. Moreover, updated ridership projections are likely to appear soon as part of the combined study of the SSE, SmartTrack, GO/RER and the Relief Line. (They have not yet shown up because the model is being “calibrated”.)
The second, and much more important issue, is the presumption that all of the increase (to whatever number might be appropriate) is actually due to development within Toronto (the scope to which the DCs apply). Two factors that are commonly cited regarding transit demand are not taken into account here:
- Growth outside of the 416 that adds riders to inside-416 services. A point made during the SSE debates was that some of the projected ridership would originate in Markham much as demand at Finch travels south across Steeles. The actual number may change once the new ridership estimates taking GO/RER and SmartTrack into account have been calculated. Even without parallel services to bleed off demand, there would be the basic issue that if, say, 25% of the new SSE demand originates outside of the 416, then this should reduce the 416-based development charge. However, Toronto has no recourse to north-of-Steeles development as a source of funding.
- Changes in travel choices will occur for various reasons including the relative popularity/affordability of car ownership and shifting demographics. Some of the growth on any transit line will (or at least might) occur as a result of a general shift toward transit as a preferred mode of travel, not because of new developments.
Given their absence from the background studies, it appears that the DC legislation does not include a mechanism for this sort of thing, and that’s a big flaw. DCs really should only pay for new demand that can be reasonably expected to arise from the development, not from other parallel factors, and by implication that the costs should be borne through broad-based revenues including from the 905 where applicable.
The increase in DCs for the SSE is not trivial – about 10% (see table, p5). If the amount of new ridership due to development were cut in half, this percentage would be correspondingly reduced. Therefore, the ridership projection is an important issue in the OMB appeal.
The 2013 list includes works that may or may not occur, notably those in the waterfront, but also the general expansion of the TTC fleets to handle increased ridership. To what extent does the presence of a project in the DC list commit the City to actually carry out the work, and is there recourse (possibly even retroactively) if this work does not take place? What if the City (as it did under Ford) decides to reduce its target for transit service quality thereby reducing the need for new vehicles that are growth-related?
It is one thing to have a project-specific DC charge such as those for the TYSSE and the SSE, but that “other” component includes improvements we might never actually see.
There is also the question of Tax Increment Financing (TIF) as a financing tool, something that was only yesterday the subject of a presentation at the Munk School (a video of this is not available online). As with DCs, the critical part is the presumption of an “increment” that is due to new development and through which infrastructure investments by the public sector can be recovered. There have been some quite outlandish projections of the amount of money available from this scheme, and TIF advocates often ignore the fact that new development triggers costs beyond basic enabling infrastructure.
The degree to which new development would happen anyway in the absence of public investment, and especially in areas such as the central business district which is already well-served by transit, brings us to the question of how one calculates the increment for a city with or without SmartTrack, and hence the delta from which TIF would be allocated. Improperly used, TIF is a sham designed to poach future revenues that should be in general revenues rather than paying down debt for a signature project. Its potential is badly overrated for political reasons, simply the lure of “free” money. If we can assume future TIF funding, we don’t have to bump current general taxes or DCs when we “commit” to a project because we are robbing future tax years.
There may be a place for TIF in brownfield developments that simply would not occur without the public investment, but it is quite another thing to talk of its application to existing areas such as the core and Liberty Village. A good chunk of waterfront development will probably happen simply because of its location, and only investments that really “unlock” development potential could reasonably be considered for TIF. This would include major works such as flood protection and the utilities needed to service a once-industrial area as high density housing and commercial space.
By analogy to “local improvement taxes”, if TIF were the mechanism for the SSE financing, we would be expecting, nay encouraging and demanding large-scale investment in development around the new stations to ensure that we get our money back.
In some cases, both for SmartTrack and for an earlier proposal floated by a Markham Councillor for rapid transit in the Stouffville corridor, huge swaths of Toronto were included in the TIF zone to generate revenue for the projects. This is blatant dishonesty wrapped in the currently acceptable neo-conservative financial mythology.
A situation where developers challenge tax regimes at court or the OMB is hardly new. Downtown office tower owners achieved a tax reduction on the premise that they were unfairly overtaxed, and there has been a multi-year project to rebalance commercial and residential property taxes in Toronto that is nearing completion. When it finishes, residential owners will stop shouldering the lion’s share of year-over-year tax increases, and commercial owners will have to find some new way to argue for tax relief.
What is unclear is how long this appeal will take to work its way through the OMB and reflect back into the Council debates about transit options for Scarborough. The cautionary tale is that a project cannot simply invent numbers out of the air to justify taxes that are targeted at a specific group. Pretending that the subway is the “best” option for Scarborough regardless of how the demand projections come out might continue, but charging taxes based on unsupportable figures is quite another matter.
Updated November 26, 2011 at 11:00 pm:
Jennifer Pagliaro has published a follow up article in The Star entitled “Mayor John Tory ‘surprised’ by developer opposition to Scarborough subway”. Some of Mayor Tory’s comments suggest that he is rather out of touch with just how Development Charges work.
Tory is quoted:
“I think the important thing to keep in mind here is that when you build transit, the land interests of those who own land around transit increases. And I think it’s only fair that those who are going to benefit pay some of the costs of servicing this land with new transit. That’s the principle we operated on. We operated within the law and the appeal will take its course.”
“Those who are going to benefit from the increase in the value of land because you put transit or other services there paid for by the taxpayers, should pay a fair portion of the cost of doing that,” he said. “They are going to be the beneficiaries, ultimately, when they sell that land whether it’s in the form of condominiums or houses, and so I just think it should be fair, fair to everybody, fair to the developers but also fair to the taxpayers who otherwise end up funding all of this on their own backs.”
Well, Mr. Mayor, what you don’t seem to know is that the new DC applies city-wide, not just in the SSE corridor. A new condo in Mimico pays just as much toward the subway extension as one built right at Scarborough Town Centre. Everybody pays into the pot whether they directly benefit or not. There is an underlying assumption that improvements benefit the network as a whole, but when they are so infrequent and highly localized (as are subway extensions), this is not the same as a collection of works scattered around the city, or a systemic change such as the provision of more capacity on the subway.
Also, of course, DCs only cover the portion of a capital project that is required for development-induced growth, and there are many other beneficiaries (notably homeowners in areas that become more attractive) who are not touched by DCs which would kick in only if their property were actually redeveloped. Indeed, given the geographic pattern of development in Toronto for the foreseeable future, it is the buyers of new condos in the core area where most growth occurs who will pay the DCs associated with the Scarborough extension which will be little used by most of them.
He said the city needs to be mindful of how development charges get passed down to home buyers, but called the new development charge a “modest adjustment.”
The adjustment is not exactly modest, and it increases the DCs by ten percent. This is hardly the sort of increase Tory would approve were in it the general tax rates.
Going into the 2016 budget cycle, it is distressing to see how much Mayor Tory doesn’t know about city finances after a year in office.