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City of Ottawa Staff point out funding shortfall if development fees dropped

M E M O / N O T E D E S E R V I C E


The purpose of this memorandum is to update Mayor and Council on the possible financial

impacts of Bill 23, More Homes Built Faster Act, 2022. This is in follow up to the memorandum

attached titled City of Ottawa Comments on Bill 23, More Homes Built Faster Act 2022, which

was provided to Mayor and Council on November 7th, 2022 and which provided broad summaries of the overall effects of Bill 23.


This update focuses on further analysis undertaken on the financial impacts of proposed

development charge changes.


Background

Bill 23, More Homes Built Faster Act, 2022, was introduced at the Provincial Legislature for First

Reading on October 25th, 2022 and implements additional recommendations from the Ontario

Housing Affordability Task Force. The Bill proposes extensive changes to several Acts and

regulations including the Development Charges Act, Planning Act, Municipal Act, and others. If

passed as proposed, these changes would have significant impacts on municipal finances as well as processes and operational matters across multiple business units.


City staff have continued their review of Bill 23 and have summarized their preliminary financial

impact analysis. Most of these impacts are a result of the proposed changes to the Development

Charges Act included in Bill 23.


Development charges are one-time fees collected from residential and non-residential land

developers. The Development Charges Act sets out a process and framework to determine

charges. Municipalities must undertake a ‘Development Charges Background Study’ to

determine the estimated amount, type, and location of development and the related calculations

of how growth will impact future infrastructure requirements. Once new infrastructure is built or

expanded, ongoing operational and lifecycle replacement costs of the assets must be funded by

existing taxpayers.


To / Destinataire Mayor and Members of Council File/N° de fichier: G00-11

From / Expéditeur Wendy Stephanson

Chief Financial Officer

Don Herweyer, Interim General

Manager, Planning, Real Estate and

Economic Development Department

Subject / Objet City of Ottawa Financial Comments on

Bill 23, More Homes Built Faster Act

2022


Date: 25 November, 2022


Currently, there are several benefits in applying development charges, which include: the timely

and orderly expansion of required infrastructure services, the avoidance of low service levels, the maintenance of acceptable levels of property taxation and user fees, and greater overall

acceptance by existing residents of property development and the growth it facilitates.

These benefits would be negatively impacted by the various amendments proposed to the

Development Charges Act and Regulations under Bill 23 as detailed below.


Financial Impact Analysis

1. Phase-in of Annual Development Charge Collections

Bill 23 calls for mandatory phase-in of Development Charge rates in new by-laws as

follows:

• Year 1 - 80%

• Year 2 - 85%

• Year 3 - 90%

• Year 4 - 95%

• Year 5 - 100%


Preliminary analysis of the financial impact and loss of revenue to the City from the proposed

phase-in periods based in the 2019 Interim Development Charge (DC) Study is estimated at

$26M per year or over five years, is approximately $130M or 10.19% of collections. Mandatory

reductions in Development Charge revenues over five years will create an infrastructure funding


gap between the collection of development charges and the financing of the required growth-

related capital projects needed to proceed with new development.


2. Removal of Affordable Housing as an Eligible Service Category

Preliminary analysis of the impact of removing affordable housing as an eligible service category

is estimated to have an impact on revenue at approximately $2M per year or $10M over ten

years. This estimate is based on actual growth-related funding over the last five years.

The 2019 Interim DC Background Study identified a preliminary estimate of the growth-related

funds needed to pay for additional units of affordable housing. This financing provides housing for the most vulnerable residents and would impact the City’s ability to fund affordable housing. The City anticipated expanded use of development charges to contribute towards the growth-related capital costs required to fund various affordable housing initiatives in a comprehensive 2024 DC Background Study based on the new Official Plan and Long-Range Financial Plan. This will no longer be a viable funding option as identified and a new funding strategy will need to be

identified.


3. Removal of Land as a Recoverable Cost for Certain Service Categories

Preliminary analysis of the financial impact of the removal of land as a recoverable cost for

certain service categories would create a $5.2M annual impact or $52M over 10 years based on

the 2019 Interim Development Charge Background Study and By-law.

Under Bill 23, the cost to acquire land for specific growth-related service categories can be

exempted as an eligible expense if prescribed. The removal of land will result in the use of other

sources of funding and will negatively impact the City’s ability to pay developers for this

component of capital projects needed for the provision of expanded growth-related infrastructure for such items as new arterial roads, park and ride facilities and public transit corridors.


4. Development Charge Background Studies

The proposed amendment of no longer funding DC background studies would create an annual

pressure of $2M based on average expenditures over the last 5 years. Exemptions for housing

services from DC recovery will result in a loss of capital funding of just over $1M annually. In

addition, there would be an undetermined loss of revenue from exemptions relating to gentle

intensification and attainable housing that is not fully understood at this time.


5. Other Financial Impacts

The proposed Bill would require municipalities to provide financial incentives through DC,

Community Benefits Charges and parkland exemptions for affordable rental and ownership

housing, attainable housing (criteria to be defined by regulation), Inclusionary Zoning units and

DC discounts for market rental units. The financial impacts of these incentives would still need to be analyzed.


Summary

The analytical observation that “as a whole, the new taxes and fees generated by residential

growth do not equal the new operating costs required to support these developments” was

presented to the Provincial Standing Committee on Heritage, Infrastructure, and Cultural Policy

on November 16th, 2022, by Watson & Associates, experts in municipal fiscal impact studies of

residential developments. This has also been substantiated by three Fiscal Impact Analysis

studies undertaken in 2009, 2013 and revised in 2021 by Hemson Consulting Ltd., as part of the

City’s Official Plan update. The 2021 analysis identified a shortfall in revenue needed to pay for

operational and lifecycle costs within the lower-density urban greenfield growth category of $465

per capita annually.


This transfer of cost to existing taxpayers will be combined with the proposed downloading of

growth-related capital funding, mainly to subsidize residential development, based on the

proposed new statutory exemptions, mandatory phase-in, removal of Affordable Housing

Services, cost of land and studies, revised level of service timeframe, and statutory

discounts. The City has relied (over 88% of collections over three years) on residential

development to generate growth-related revenues.


The Bill 23 amendments designed to increase housing supply will disproportionately impact the

increase in revenue required to service land in advance of future residential development to

2046. In the absence of equivalent and consistent funding by the Province, the options would be

to delay, reduce service, or seek other funding sources. The only readily identifiable source to

make up the significant funding shortfall are existing taxpayers, who would be required to fund the studies and capital investments necessary to deliver services, amenities and infrastructure

needed to support growth. The financial impact, once the comprehensive DC Background Study

and By-law are approved and new rates are in place, could be well over $60M annually or

approximately 25% of DC revenues starting in 2025 – meaning conclusively that growth will not

pay for growth.


Next Steps

City staff will continue to review and analyze impacts of the proposed bill and develop responses

to the Province through their Environmental Registry and Ontario Regulatory Registry

commenting portals, where comments are being received on various regulatory amendments and policy proposals related to the legislation.


Sincerely,

Wendy Stephanson

Chief Financial Officer

Don Herweyer, MCIP, RPP

Interim General Manager, Planning, Real Estate and Economic Development Department

cc. Steve Kanellakos, City Manager

Senior Leadership Team

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