Re: O. Reg. 82/98, under the…

Re: O. Reg. 82/98, under the Development Charge Act, 1997 related to Schedule 3 of the More Homes, More Choice Act, 2019.

Thank you for the opportunity to comment on the Development Charges (DC) Act regulations, accompanying the More Homes, More Choice Act, 2019. The Region appreciates the Province’s commitment to the principle of growth paying for growth. However, there are several unintended consequences with the proposed regulations resulting in significant financial and growth implications.

Potential consequences include reduced municipal credit ratings, reduced debt capacity and the possibility of stranded debt. For the Region, this problem is compounded, as debt capacity is a two-tier system, placing both the upper and lower tiers’ credit and debt capacity at risk. To avoid these outcomes, the Region may be forced to either raise property taxes and utility rates or slow its growth through delayed investment – the opposite of the Province’s desired outcome.

Our external DC consultants, Watson and Associates, project a loss of approximately $157 million in unrealized revenue potential, resulting from the mandatory exemption of new secondary suites and/or ancillary units from DCs (between 2020 and 2031). A significant uptake could place additional demands on supporting infrastructure. The Region has received an external legal opinion that it will be unable to roll the resulting costs forward into future DCs and will instead have to recoup costs through increased property taxes and/or utility rates.

There also exists a constitutional concern, where only the Federal government may charge an indirect tax (a tax passed on to a downstream consumer). With no link to the cost of services, the land-based Community Benefits Charge (CBC) appears to be an indirect tax. Introducing DC deferrals (and explicit recourse to a property tax lien) that may pass “hard” DCs on from the developer to a later “occupant,” creates a similar problem. Both changes open the door to constitutional challenge.

With respect to the proposed regulations, staff now estimate:

• a range of $420-$466 million in increased debt financing requirements, resulting from extended payment timelines and creating the risk of stranded debt (up from $346 to $393 million as a result of the extended deferral payment timelines for non-profit housing developments), between 2020 and 2031; and
• a potential exposure of $37 million as a result of the migration of “soft service” DCs to the new CBC regime (down from $48 million as a result of the inclusion of paramedics as a chargeable DC service), between 2020 and 2031.

In addition to immediate financial impacts, Peel is concerned the Act and its regulations:

• add considerable “red tape” to development processes, due to the significant administrative and coordination efforts required. Higher planning and building permit fees may result;
• contain no instruction as to how the Act will be implemented in a two-tier governance context; and
• lay the new CBC and the updated DC Act open to constitutional challenge, with respect to the jurisdiction of the municipalities to level such charges (that resemble an indirect tax).

Staff previously submitted comments to the Ontario Legislature’s Standing Committee on Justice (May 31, 2019) and to the Province (June 1, 2019), on the More Homes, More Choice Act itself. The Region requests that the Province consider the recommendations provided previously (included as appendices), as well as the comments herein.

In addition to this letter, the Region supports the Municipal Finance Officers Association’s Submission on Regulatory Changes implementing the More Homes, More Choice Act, 2019.

DEVELOPMENT CHARGES ACT RECOMMENDATIONS

Due to significant unintended financial and growth implications, we recommend the province update its proposed regulation, giving effect to the following changes as they relate to mandatory exemptions, deferrals, rate freeze and prescribed interest rate:

MANDATORY EXEMPTION

1. Municipalities may recover from future development, the costs incurred from the exemption of Secondary Suites and/or Ancillary Units.
The absence of this authority would result in municipalities having to increase property tax and utility rates, which are already strained.

2. Developers may build a maximum of two secondary suites and/or ancillary units per property.
Specific limits should be outlined to control the impact of the otherwise unrestricted exemption of such development forms. A significant uptake in these units will create additional demands on infrastructure, creating additional costs.

3. The 1% cap on other existing residential units, will be limited to affordable rental units.
Currently, the regulations propose that within other existing residential buildings, the creation of additional units comprising 1% of existing units, would be exempted from DCs. MFOA submission outlines that not all rental housing is affordable.

4. Municipalities shall maintain the authority to define specific built forms within their jurisdiction, such as stacked or back-to-back townhomes or retirement and long-terms cares homes.
Currently, the Region treats stacked and/or back-to-back townhomes as two separate units, requiring two separate charges. Should one or the other of these be classified as a secondary suite, it would effectively halve the revenue collected. The proposed regulations also define retirement and long-term care homes as Institutional developments. Such a definition will further reduce municipal revenues.

DEFERRALS

5. Municipalities may require submission of satisfactory security to cover the cost of the deferral, such as letters of credit.
Introducing deferrals (and explicit recourse to a property tax lien) that may pass DCs from the developer to a later “occupant,” weakens the defensibility of DC “hard” services, laying the deferral open to constitutional challenge.

6. Any change to the status of Rental housing and Non-profit housing may result in the immediate payment of deferred DCs, plus appropriate interest.
This would help to limit tax payer subsidization of for-profit activity.

MIGRATION OF “SOFT SERVICES” TO THE COMMUNITY BENEFITS CHARGE

7. The CBC regime will come into force two years from the filing of the regulation.
This time is needed to: (1) allow municipalities to plan for an orderly transition; (2) obtain clarity regarding potentially significant financial impacts; and (3) minimize confusion and disruption at a time when so many DC by-laws are being updated.

8. Municipalities will shall have the sole authority to provide CBC exemptions and exclusions within their jurisdictions.
Currently, the proposed regulation mandates exemptions from the CBC, including the development of long-term care homes, retirement homes, and non-profit housing. It also excludes services, such as cultural or entertainment facilities, hospitals, administration offices, landfill sites, etc. from CBCs.

9. Municipalities shall have the authority to set rates for and within their jurisdiction and set maximums (caps) to achieve full cost recovery.
The CBC is capped at a percentage of land value. Preliminary analysis shows costs as a percentage of land values vary widely (5% to 100%+). The highest ratios are associated with high-value land. Any broadly-based cap would disproportionately reduce revenues for high-density jurisdictions – contrary to the Minister's pledge for revenue neutrality. A land value-based cap also gives the CBC the character of an indirect tax, rather than a charge, raising the question of constitutionality.

10. Municipalities may recover the additional costs associated with administration of the CBC regime.
The cost of developing, monitoring and implementing the CBC program will be high, and will likely involve the building of additional internal capacity.

RATE FREEZE

11. The DC rate shall be maintained for no more than one year prior to development taking place.
This will reinforce the province’s encouragement to developers to begin building quickly, while preserving the intent of the freeze and lessening the detrimental impact on municipal finances.

12. Municipalities may apply a rate that corresponds with a change in development type.
Without this clarity, it is possible that some developers may attempt draw out the freeze by making minor adjustments to their original applications.

13. The recovery of municipal costs shall take precedence over other liabilities against a property.
The risk to municipal credit ratings, and debt capacity requires that municipalities be given some additional guarantee of payment to cover capital infrastructure costs.

PRESCRIBED INTEREST RATE

14. Municipalities may apply an indexing rate to compensate for any change in the capital cost environment.
This will ensure that the “interest rate” charged on the rate freeze reflects the changing cost environment faced by municipalities and developers alike over the course of the freeze.

15. Municipalities may apply an indexing rate from the point at which the first payment would normally have become due (building permit).
Without this, it is hard to understand how municipalities can apply interest on a charge that has not yet come due.

16. Municipalities may recover additional costs incurred as a result of deferred payment through future charges.
The cost differential between what the Region can recoup through interest and the actual cost of the deferral should be recoverable from future DCs.

We look forward to continuing to work with the Province to increase the housing supply and address the issue of housing affordability in the Region of Peel. Staff would be pleased to provide clarifications or provide additional comments as required.