Development charges… the very mention of the words has been observed to cause a glazing of the eyes. However, “DCs” are important to cities, for many reasons. And the Ontario government is currently reviewing its Development Charges Act, and looking for input.

Herewith the first instalment of some thoughts on the issue.

DCs are an important revenue tool for municipalities. However, the impact of DCs extends well beyond that of simply raising revenue, for example:

DC levels set are defacto important price signals that ultimately influence urban growth and development patterns
when not structured properly, DCs can create market distortions that result in inefficient urban development patterns and overspending on infrastructure; as well as hidden and unfair cross-subsidies
the infrastructure investments made using monies raised through DCs play an important role in shaping urban development patterns – which in turn are related to the viability and success of current and future transit investments, such as the $50 billion Let’s Move program
to the extent that the costs of new infrastructure are not borne by the DC and new development, they are picked up by existing residents and businesses within a municipality, adding to local tax burdens.
Development charges have these additional roles whether we like it or not, ultimately influencing important issues such as urban form, the success of planning policy, investment, transit viability, sustainability, and fairness. In my view it is best to recognize these broader roles up front and be deliberate about DCs rather than suffer negative unintended consequences.

The discussion below treats DCs in their broader context. In addition, the suggestions for changes to the DC Act that follow in this and subsequent posts are premised on the following principles:

growth pays for growth
efficient use of resources, including municipal and provincial financial resources
alignment of DCs with other provincial initiatives – such as Places to Grow and the Big Move
fairness and transparency.
Re: Allocation of growth-related infrastructure costs
Issue: Benefit to Existing
Under the “benefit to existing” provisions, a portion of growth-related capital costs identified in DC background studies can be deemed to benefit existing development. Such costs are removed from the DC “bill” and are not recouped through development charges. They are then typically passed on to existing residents and businesses through municipal property taxes and/or user fees.

Thus this deflection of costs from DCs has important implications for the degree to which the “growth pays for growth” principle is achieved. If significant portions of infrastructure costs identified in DC background studies are deflected from the DC, then the principle of growth pays for growth is not being achieved.

Infrastructure costs deflected from the DC through the “benefit to existing” mechanism are not insignificant. For example, York Region’s recent background study deflected $1.6 billion of identified infrastructure costs to existing development[1].

There are some planned infrastructure costs that can legitimately be deemed to benefit existing development. However, costs are often deemed to benefit existing development without adequate or in some cases any explanation of the rationale or methodology used.

This may stem in part from a lack of clarity around the whole issue of “benefit to existing”.

Presumably the concept stems from the “benefits model” used in public finance, which suggests that those who benefit from a service should be the ones to pay for that service. However, in some instances service improvements, such as road widenings for example, may be imposed without being either required or desired by existing development.

Some DC background studies interpret benefits to existing by applying this criterion: would the new infrastructure have been needed in the absence of new development? This is a clearer and fairer measure.

Another approach would be to allocate costs on the basis of cost causation: that is, development that causes or precipitates the need for new infrastructure is the development that should pay for it. This approach is closest to the growth pays for growth principle, and least likely to create distorted price signals (an important factor, to be discussed in a future post).

The issue is that at present there is little consistency regarding the interpretation and implementation of the benefit to existing provision. A revised DC Act should provide clear guidance regarding the intention, interpretation and implementation around the allocation of costs to existing development – considering carefully the principle to be employed.

The revised Act should then provide guidance on what are acceptable rationales and methodologies for allocating costs to existing development. These should be evidence based.

In addition, the rationales and methodologies used for allocating infrastructure costs to existing development need to be clearly documented in all DC background studies, along with supporting data. A summary of costs allocated to existing development for each service should be included in the development charges brochure.

These modifications could be implemented in the regulations to the Development Charges Act, for example, and/or through the use of policy statements (to be discussed in a future post).

Proposed reforms:
Provide clear guidance regarding the intention, interpretation and implementation around the allocation of costs to existing development.

Provide guidance on what are acceptable rationales and methodologies for allocating cost to existing development.

In DC background studies, require clear communication of the costs allocated to existing development, as well as the rationales and methodologies used.

[1] York Region 2012 Development Charges Background Study