Budget 2: Development Charges

Development Charges are an important part of the municipal budget, they’re very complicated, and the province is making big changes to how they work that could significantly reduce how much we can use. So as we go through it here, keep in mind that our goal is not to understand the technical details of complicated processes, but rather to contextualize the most relevant details to help us understand the issue in broad strokes and see how it will affect us here in Brighton.

What are DCs?

Development Charges, or DCs for short, are charged to developers in order to cover the cost of municipal services that would otherwise be paid for through property taxes – i.e., costs associated with new development that would otherwise be paid for by everyone else. The underlying principle is that “growth should pay for growth.” This includes obvious things like the roads and pipes that service a new neighbourhood, or the park and playground in the new neighbourhood; but also less obvious things, like services that need to grow to meet the demands of the growing population, such as expanding the library or adding new staff to the municipality.

“Growth should pay for growth.”

The formula for calculating DCs is absolutely arcane, and just got more complicated with the passage of Bill 23 and several other recent changes to the relevant provincial Acts. This is the part that’s highly technical, so don’t worry if you don’t feel like you fully understand it; the relevant experts do, and we rely on their calculations. The gist of it is that economists calculate the per capita (per person) value of municipal services (i.e., how much it costs per person to have the quality of life we enjoy in Brighton), estimate the amount of growth (number of new persons), and set a Development Charge amount that covers that cost based on a set of assumptions about the different types of developments. For example, Development Charges are higher for a 3-bedroom house than a 1-bedroom or studio apartment, because it’s expected that the house will use more services than the apartment. (Commercial and Industrial developments have different calculations, but let’s stick with residential for this explanation.)

An important principle of this calculation is that while growth should pay for growth, it’s not allowed to pay for anything else. The economists have to make sure that DCs are set at a rate that maintains the same service levels in the municipality. DCs from a new neighbourhood on the west side of town, for example, can’t pay for upgrades to a park on the east side of town, unless it can be demonstrated that the new residents will be driving across town to use that park and the upgrades are needed to accommodate their use of it. The criteria are very specific, and I really don’t know the finer details of the calculation. What’s most important for us to know here is that municipalities can’t set DCs to whatever they want; we have to do a study to determine how much we can collect, and what we’re allowed to spend them on. That study becomes the basis for our Development Charges bylaw, which expires next year.

Image borrowed from our neighbours in Port Hope 🙂

Why Do We Need DCs?

The principle of growth paying for growth makes sense, and is fair: without DCs, existing residents are subsidizing new neighbourhoods. With DCs, new residents are paying the set-up costs for their own homes, because developers factor the DCs into the cost of the homes.

But Development Charges only cover the set-up costs. They might cover the initial road paving and pipe laying, but when that infrastructure needs to be replaced, it’s done through property taxes. Brighton spends millions of dollars per year servicing our existing roads (about half of the capital budget goes to roads!); without DCs, when roads need to be widened or improved from low-traffic gravel roads to higher-traffic paved roads, those costs would be paid through property taxes too (and of course, portions of them are anyway). Because of the higher needs associated with growth, the type of growth becomes very important—because scaling up population density doesn’t always cost more, sometimes it brings greater efficiency. Without accessing the efficiencies of higher density, we end up either needing more and more taxes, or we get stuck in the growth ponzi scheme:

The gist of the video is that so long as we grow through sprawl, we’ll end up paying more and more for low-density development. We’ll put more of our budget into upgrading roads for high-volume traffic, which is a money pit if ever there was one (and makes for a less enjoyable community that makes us all dependent on cars). The way to become less dependent on Development Charges is to be strategic about how we service new developments, which means being proactive about ensuring that developments are increasing the density of, and adding value to, our neighbourhoods.

But in the meantime, without DCs all new development would come at a cost to existing residents.

Bill 23 and the Cuts to DCs

Ontario Bill 23: the More Homes Built Faster Act changes the rules for DCs in a few key ways:

First, it eliminates DCs for homes that are “Affordable” or “Attainable”. These definitions aren’t clear, and even the economists who trained us on DCs didn’t have a distinction between those two terms. I think the “affordable” applies to rental housing, while “attainable” applies to housing for sale. The important point is that the province set the same target for both: properties that cost 80% of market rate or less will no longer be charged DCs. There are a few major problems with this:

  • It ignores actual affordability. 80% of market value is an arbitrary amount. Actual “affordability” for housing is calculated as no more than 30% of the average monthly income of the bottom two thirds of residents in a given area. To calculate that, we’d look at the average income in Brighton, or the Quinte region, or Northumberland, adjust the average to exclude the wealthiest 1/3 of the population, and find 30% of that amount. “Affordable” rent or mortgage payments would fall within that 30% budget. Meanwhile, the average house price in Brighton this time last year was over $700,000, WAY above that 30% amount. 80% of that market rate would be $560,000, hardly affordable for the average person in Brighton.
  • It’s a moving target. Between February 2021 and the peak of the market in February 2022, the average sale price in Ontario outside the GTA and Ottawa rose from $675,000 to $875,000. (February 2019’s average was just $435,000! Prices doubled in three years!) As of January 1st 2023, the average price in the same region is back down to $640,000, and the ostensible goal of Bill 23 is to lower housing prices further. Calculating an “affordable” or “attainable” number, by region, on at least a monthly basis in order to remain accurate, still won’t help builders plan accordingly to aim for that quickly-changing threshold.
  • If developers take up the province on this deal of avoiding development charges at all, it will only work in certain categories of housing – i.e., developers would have to build smaller, lower quality housing in order to qualify for the reduced DCs. That’s likely to happen anyway, as the market is already declining and the return just isn’t there to build a lot of high-end homes. Unfortunately, the places where it will be easiest to cut the cost of homes will also be in the places where we’d like to see developers invest more: things like heat pumps and high-quality insulation that make houses more sustainable are still considered upgrades by a lot of people. If this works the way the province seems to want it to, we’re going to end up with more lower quality homes, not necessarily more density.
Image borrowed from the Alliance for Housing Solutions

Second, it changes the ways that we’re allowed to spend DCs. Two changes are especially important:

  • First, we’ll no longer be able to use DCs to fund planning studies. Municipalities commission studies to help us plan future spending, to make sure we aren’t wasting money on projects we don’t need or under-spending on what should actually be big priorities. One of the studies that we do regularly is the Development Charges study, the study we have to do to write our Development Charges bylaw. We can no longer fund those studies through Development Charges! Other studies we’d normally fund through DCs include studies to help us write our Official Plan, Stormwater Master Plan, Transporation Master Plan, etc. – all of the information we need to ensure that our growth is efficient and sustainable. We’ll still do those studies, but it will have to be funded by taxes moving forward. So while growth can still pay for growth, it won’t pay for SMART growth.
  • Second, and this is WILD, the More Homes Built Faster Act explicitly prohibits municipalities from using Development Charges to fund…housing. The act that’s supposed to be about increasing the supply of affordable housing prevents us from using DCs to fund affordable housing. In Northumberland County, truly affordable housing is subsidized through the County Social Services department; Brighton has several such subsidized units, and a six-year waitlist to get one. Northumberland County projects that over the next several years they’ll lose $17M worth of DCs that would have subsidized housing for those who need it most. Member municipalities like Brighton have agreed to the Affordable Housing Strategy that includes purchasing and donating land to the County for new affordable housing, but now we won’t be able to use DCs for that purpose, and neither will the County. All of our local efforts toward truly affordable housing will now have to be either funded through tax support, or cut.

Another key change is that any new DC bylaws, or any changes to DC bylaws, must be phased in over several years: 80% of the DC rate in the first year, 85% in the second, etc. That means that when our DC bylaw expires next year, if we kept the DC rates the same we would see a 20% drop in DC revenues even if we had the same amount of development, even without factoring in developments exempt from the bylaw if they meet that 80% of market rate threshold. When our bylaw expires in 2024, will we replace it with a new DC rate high enough to not result in lower rates for the first few years? It will likely result in DC rates being higher overall, and with less consistency for both the municipality and developers.

So What Do We Do?

These are all things that your Councillors will have on our minds as we deliberate about the 2023 budget. We’ll have to think carefully about how much of the services and development we continue, at the expense of taxpayers instead of developers, and what we decide to cut. I’d like to have a good discussion with the community about our values in light of the fact that we have high inflation and are losing a major source of revenue.

Ideally, we’ll be extremely proactive about encouraging development that doesn’t come with high growth costs and major ongoing costs. I’d love to see the roads budget take up a declining portion of the capital budget, for example, because more of our growth is happening through intensification (more population density, less car dependence). I’d love to see developments that include both commercial and residential, so that people can shop in the same neighbourhood they live in. It would be neat to see some commercial development that capitalizes on our proximity to the GTA, such as a shared workspace for digital commuters; this would allow us to grow our local workforce without jobs depending on major capital investment that comes with greater stress on our existing infrastructure. These types of approaches, especially in combination, could reduce our dependence on Development Charges by giving us better shared value for new growth.

A fun wordle full of good ideas!

What you can do is add value to the community that doesn’t require new pavement and pipes! Volunteer your time and energy with local committees, we should be taking applications for them next month. There are also plenty of volunteer opportunities in local nonprofits, like our thrift stores; in parks and rec, which needs sports coaches and organizers; and in new initiatives that maybe don’t even exist yet! The more value we add to our community, the less we rely on DCs and taxes to maintain and improve our quality of life here.

2 thoughts on “Budget 2: Development Charges

  1. If you dig hard enough you will find a study called “The Brighton Study” written about forty years ago that stated that development costs money and growth. Unless development is 100% paid for by developers it will always cost taxpayers. DCs have been a sop to the industry by not being realistic thus Munis subsidise development. This will get worse by Bill 123. DoFos response is to say that increased tax revenue from more homes will pay for the investments, I say “prove it.”

    What Munis should be doing now is to refuse to pay for the pipes and roads needed for subdivisions and developments. Bet they will not as most local Pols need development like addicts need drugs. Very few, and I include Brighton in this will have the balls to say no to increased growth.

    1. I agree that DCs are insufficient to actually have “growth pay for growth”, and I was sure to ask questions along those lines. That’s why we have a new DC Study every time we update them. The trouble is, municipalities are designed (by provincial law and regulation) to run lean: we have limited resources, strict rules on how we can use it, and depend on provincial funding for any significant growth. Bill 23 (among other bills from this government) increases the amount of micro-managing that the province can do, in part by further limiting our ability to collect and use resources on our own.

      In the backlash to Bill 23, municipalities and municipal organizations like AMO have repeatedly pointed out that this cut to DCs will significantly impact municipal budgets. The province’s response is that they’re going to audit our books, because they know that some municipalities have millions of dollars in reserve funds. I.e., if we have any money, we can’t charge DCs. But reserve funds are extremely necessary for municipal governments, because we can’t raise money fast enough to pay for big projects, contingencies, or emergencies. Our reserves look big on paper, but ever dollar is earmarked for a purpose. If we have to use our reserves for projects that should be covered by DCs, then the things that we need to save up for, like a sewage plant or a fire truck or a planned paving project, won’t happen.

      I’ll think more on the notion of refusing infrastructure for development. As per the video above, we ARE dependent (at least a little bit) on new development. But also, development is desirable: a good development adds value to the community, and not just in terms of dollars. We’ve already taken some steps in our Planning department to make that infrastructure contingent: a new development on the west side of town has an agreement in principle to hook up to municipal services, but must make an agreement for wastewater services as each phase of the development is built to ensure that we don’t go over the capacity of our wastewater treatment system (which is due for expansion). The developers there know that there’s a chance that, if they build too quickly, services won’t be there for them. Far from ideal for them and for us, but there’s wisdom in not taking municipal services for granted.

Leave a Reply

%d bloggers like this: