The importance of adequate, well operated and well utilized municipal infrastructure as a tool of economic stimulation and as a component of a prosperous economy cannot be underestimated. Constructing, operating, maintaining and upgrading municipal infrastructure systems requires the deployment of enormous sums of capital. Historically, the financing of such infrastructure came to a large extent, from the public purse. With each passing year however it becomes more and more difficult for governments to keep up with the demand. This has resulted in the development of some alternative infrastructure funding mechanisms.
Different infrastructure financing mechanisms are not necessarily substitutes for one an other. Some financing mechanisms may be more appropriate for certain types of public infrastructure assets than others. Some infrastructure assets are best financed utilizing a combination of methods. Similarly, over time, some methods fall out of favour with governments and the private sector, while other, new and innovative methods are developed and evolve.
In the past, funding of municipal infrastructure in North America typically occurred in one of two ways. Infrastructure funding was either development related or it was non-development related. Development related financing techniques have included: development charges, lot levies, conditions of development approvals (site plan and subdivision), development permits, parkland dedication, bonusing agreements, developer cost sharing agreements, front ending agreements, DC credit agreements.
Non-development related financing techniques have included: debenturing, municipal grants, federal/provincial/municipal cost sharing programs, capital allocation from federal, state and provincial budgets, community improvement plans, conservation of heritage assets, brownfields initiatives, local improvements, special district financing, pooled borrowing, user fees, bonds, funds, municipal capital facilities, privatization and public-private partnerships.
Philosophically, development related methods of financing tend to be involuntary and confrontational (the vinegar); thus the developer has no choice, but to finance the infrastructure in order to be permitted to develop. Non-development related methods tend (although not always) to be more voluntary and persuasive. Incentives are provided to the private sector, usually in the form of profit, in the hope that it will (like flies to honey) be attracted to the investment.
This paper will examine most of the tools of infrastructure financing available to municipalities in Ontario today. Some contrast with the American experience has been included. Recent initiatives of the provincial government, in Ontario (related to infrastructure financing), are reviewed as well. Ontario has seen fit to utilize both vinegar and honey to catch its flies.
Development Related Financing Methods:
a. Lot Levies and Development Charges
Development charges are used to finance public infrastructure facilities required to accommodate growth. Development charges were first introduced to Canada to provide for private funding of "hard services" such as roads, water systems, and sewage collection in rural areas. Development charges have since been expanded to urban areas. Development charges are an alternative to property taxes, so that new residents, who are the principal beneficiaries of the infrastructure, will incur the costs of the service.
Development charges are attractive because new infrastructure will be built only if there is demand, which on the face of it, implies that money will be spent efficiently. However, development charges do not cover operating or maintenance costs, and since development charges are usually passed on to the consumer, they likely also affect the affordability of housing. There may be an element of double-taxation in the use of Development Charges as a means of financing infrastructure construction.1
In Ontario, development charges have been used since the 1950’s. Prior to 1989, Ontario municipalities utilized what were called "lot levies" and "impost fees", with varying degrees of success (considering that no specific legislation existed at the time authorizing them). In 1989, the Ontario government passed the Development Charges Act (the "DCA"), which permitted municipalities and school boards to charge for different classes of development that increased the need for municipal or school services. Since then, the use of lot levies has fallen out of favour.
In the United States, development charges are particularly popular in Colorado, California, and Florida, where growth has been strong.2 In Canada, Ontario, British Columbia and Alberta, for example, have some form of development charge regime.
i. Development Charges Generally
The philosophy of the DCA is that development should pay for any increased capital costs that results from an increased need for services arising from that development. It is triggered by a development approval.3 However, not all types of services are recoverable. There are some very important exclusions in the DCA, namely: cultural or entertainment facilities, tourism facilities, parkland acquisition, hospitals, waste management services, city halls, and any other services prescribed by regulation.4 As well, if a service is a "local service", as defined by the DCA, then it must be taken as a condition of subdivision or provisional consent, and cannot be taken as a development charge. Core services, such as water supply distribution and treatment, waste water collection and treatment, storm drainage, public highways, electrical services, police and fire, are completely recoverable. Other services are partially recoverable.
Development charges are authorized to be collected by by-law. The DCA sets out a detailed process to be followed in the enactment of such a by-law by municipal councils. It includes the undertaking of a development charge background study, a public meeting, a right of appeal to the Ontario Municipal Board and a complaints process (with a separate right of appeal to the Ontario Municipal Board).
In Ontario, it must be demonstrated, through the background study, that the anticipated development will increase the need for identified categories of services. This estimate of need may not include any increase that would result in the level of service exceeding the average level of service experienced by the municipality during the ten year period preceding the imposition of the charge.5 In addition, the estimate of need may not include needs which will arise more than ten years following the imposition of the charge.6 There are reductions as well for benefits which will accrue to existing development and for the use of existing excess servicing capacity in certain cases.7 The development charges by-law may provide for exemptions for phasing and it may be indexed as well.8
The DC limits what capital costs may be included in the development charge.9 A development charge by-law can only remain in effect for up to five years.10Therefore a new study and a new process must be initiated at least every five years.
Development charges are usually paid upon the issuance of a building permit, but the by-law can provide for earlier payment in the case of the "core" services identified above (upon execution of a subdivision or consent agreement) or the parties may agree to an earlier payment.11 The DCA allows the withholding of the building permit until the development charge is paid and it permits unpaid charges to be collected in the same manner as taxes.12
There are limits as well as to how development charge monies may be spent. Development charges must be segregated into service specific reserve funds and may only utilized for the needs for which they were collected.13
The DCA allows credit to be given against the development charge otherwise payable for work performed by the developer. The work must relate to a development charge service.14
The government is considering amendments to the DCA as a way of assisting municipalities in the financing of municipal infrastructure, as part of its "Places to Grow" initiative.
ii. Front-Ending Agreements
Another useful tool in the infrastructure financing tool box of municipalities is the front-ending agreement. Front-ending agreements allow the timing of the construction of services to be coordinated with development growth by authorizing the municipality to enter into an agreement with a willing developer which allows the developer to "up front" the cost of construction of infrastructure. The advantage to the developer is that the construction of the infrastructure may permit the development to proceed more quickly than the municipality’s schedule would otherwise have allowed.
Front-ending agreements can be entered into with respect to services covered by a development charges by-law. The front-ending agreement may provide for the collection and reimbursement of the amounts front-ended from developers who subsequently develop in the "benefiting area" (as defined in the agreement).
The front ending agreement may only apply to the core services identified in subsection 5(5) 1,2,3,4 or 5.15 The front-ending agreement can require a non-party within the benefiting area to pay when they develop their land.16 The agreement may also be "tiered" so that reimbursing parties can also subsequently be reimbursed themselves.17
Since these agreements rather unusually bind non-parties to the agreement,18 the DCA affords non-owners and owners some level of procedural fairness and due process. There are notice and objection provisions in the DCA which provide all owners of land within the agreement area to be notified when such an agreement has been entered into and which permit any owner to object to the agreement. The objection is heard by the Ontario Municipal Board, which may approve, terminate or (effectively) repeal the agreement.19
Again the DCA authorizes the withholding of a building permit unless the payments required under the front ending agreement are made.20 If the amount of the work being front-ended under a front ending agreement exceeds the amounts to be reimbursed by subsequent developers, then the front ending agreement may provide that the front-ending developer receive a credit against development charges otherwise payable, for the excess amount.
The combination of the "credits for work" provisions (Section 38) and the front ending agreement provisions (Part 3) of the DCA provides excellent flexibility to municipalities in the financing of growth-related municipal infrastructure. It allows some measure of matching development pressures to the construction of key elements of the infrastructure system. It allows projects to proceed before they otherwise would without tying up scarce and precious public capital.
b. Conditions of Development Approval
Development charges can effectively deal with major growth related infrastructure required in large parts of the municipality or across the entire municipality. However, it has no application (or very little) within, or immediately adjacent to, development plans. The infrastructure required to service local needs, whether it be within a draft plan of subdivision, as a result of a consent to sever a parcel of land or the approval of a site plan, are secured utilizing the mechanisms contained with the Planning Act. Sections 41, 51, and 53 of the Planning Act provide municipalities with the power to require infrastructure improvements that are reasonably related to the developments proposed.
Plans of subdivision are approved pursuant to section 51 of the Planning Act. Two principle subsections of section 51 relate to the issue of municipal infrastructure. In approving a plan of subdivision in Ontario, the approval authority must have regard to a list of criteria enumerated in the Planning Act. The criteria that are particularly relevant to municipal infrastructure are the following:
- whether the proposed subdivision is premature or in the public interest;
- the number, width, location and proposed grades and elevations of highways, and the adequacy of them, and the highways linking the highways in the proposed subdivision with the established highway system in the vicinity and the adequacy of them;
- conservation of natural resources and flood control;
- the adequacy of utilities and municipal services; and
- the area of land, if any, within the proposed subdivision that, exclusive of highways, is to be conveyed or dedicated for public purposes.
In addition, the approval authority is given the power to impose conditions (subject to appeal) of approval. Subsection 51(25) requires that the conditions be "reasonable, having regard to the nature of the development proposed for the subdivision, including the following:
- dedication of land, and other requirements for park or other public recreational purposes;
- dedication of highways;
- widening of highways; and
- agreements dealing with such matters as the approval authority considers necessary, including "the provision of municipal or other services."
These sections are widely used in Ontario to ensure that all of a subdivision’s capital infrastructure needs are provided by the developer, at no cost to the municipality. These typically include the following, which are generally considered "local" to the plan of subdivision:
- storm water management facilities, including water quantity and quality ponds and storm sewers;
- sanitary sewers;
- water mains;
- easements for services, including the conveyance of storm, sanitary and water service;
- nitrate dilution areas;
- school sites;
- dedication of highways within the plan;
- widenings of highways within the plan;
- street lighting and electrical plant;
- upgrades to electrical service;
- 0.3 metre reserves;
- street signage;
- traffic control measures, including traffic signals;
- road improvements;
- improvements to parks;
- boulevard and other public lands;
- provision for gas, electrical, television, fiber-optic and telecommunication equipment within the trenching in the road allowance;
- fire hydrants;
- conveyances of environmentally sensitive or hazard lands to public authorities, including conveyances to conservation authorities;
- provisions for the protection of environmentally sensitive lands;
- restrictive covenants related to the environment;
- protection and widening of rail and other transportation corridors; and
- protection of fisheries.
The consent provisions of section 53 of the Planning Act cross reference the criteria and condition sections of the subdivision approval sections of the Planning Act.21 Therefore, all of the same considerations apply to consents as well. Similar conditions (in theory) can be applied to consents.
The provisions related to approval of site plans and what may be secured by way of municipal infrastructure, are somewhat more restrictive than those related to plans of subdivision and consents. In the case of site plans, the Planning Act specifically enumerates what may be required by way of site plan condition, and the courts and the Ontario Municipal Board have circumscribed the extent to which municipalities may require contributions to infrastructure at no cost to the developer.22Specifically, an Ontario municipality can require the following as a condition of site plan approval:
- widening of highways that abut the land;
- facilities to provide access to and from the land such as access ramps and curbings and traffic direction signs;
- off-street vehicular loading and parking facilities, either covered or uncovered, access driveways, including driveways for emergency vehicles, and the surfacing of such areas and driveways;
- walkways and walkway ramps, including the surfacing thereof, and all other means of pedestrian access;
- facilities for the lighting, including floodlighting, of the land or of any buildings or structures thereon;
- walls, fences, hedges, trees, shrubs or other groundcover or facilities for the landscaping of the lands or the protection of adjoining lands;
- vaults, central storage and collection areas and other facilities and enclosures for the storage of garbage and other waste material;
- easements conveyed to the municipality for the construction, maintenance or improvement of watercourses, ditches, land drainage works, sanitary sewage facilities and other public utilities of the municipality or local board thereof on the land;
- grading or alteration in elevation or contour of the land and provision for the disposal of storm, surface and waste water from the land and from any buildings or structures thereon; and
- conveyance of land for the purposes of a public transit right of way.
Often, a developer will be required to oversize a service such as a sanitary sewer, a storm pond, or a storm water management facility, so that it can accommodate not just the development then under consideration, but some additional future growth nearby. The additional infrastructure improvement may not have been included in the last development charges by-law because of changes in the servicing scheme or because estimates in the study turned out to be incorrect. In these cases, a front ending agreement may not be possible either because the development charge is not included in the by-law or because the services being considered are still "local services" and therefore prohibited by the Development Charges Act.23
In these cases, a municipality may still enter into a "best efforts" arrangement with the oversizing developer whereby the municipality agrees to utilize its best efforts to recover the cost of the oversizing from subsequent developers. The best efforts clause does not guarantee recovery by the municipality, but it is a form of moral obligation and does provide some measure of comfort to the developers. The municipality can then impose a repayment obligation on the subsequent developer, under section 51(25) of the Planning Act by way of a draft plan of subdivision condition or section 53 as a condition of consent.24 The cost sharing is done on as equitable a basis as possible, often utilizing frontage or acreage calculations to determine the benefits. In my view however, this approach is less justifiable for site plans under section 41.
With respect to local services at least, the Planning Act provides sufficient authority for municipalities to ensure that the local municipal infrastructure is in place to service the immediate needs of the development. Obviously, this method of financing, from the municipality’s perspective, is the preferred one. However, as with development charges, the higher the cost of these services, the less affordable housing becomes.
c. Parkland Dedication
As a condition of subdivision or consent approval, and as a condition of development or redevelopment of land, a municipality may require the conveyance of land for park or other public recreational purposes.25 The amount of land that may be taken in all cases is limited to two percent for industrial and commercial development and five percent, in all other cases.26 If the municipality’s official plan specifically authorizes it, the municipality may take parkland up to the rate of one hectare for each 300 dwelling units.27 As an alternative to the conveyance of land, the municipality may instead require the payment of cash in lieu of the conveyance. The amount to be paid to the municipality in such case is the value of the land that would otherwise be required to be conveyed under the section. In the case of subdivisions, the municipality must value the land as of the date prior to the day of approval of the draft plan of subdivision. This would represent the unserviced value of the lots.
If however, the municipality elects to proceed under section 42 of the Planning Act, then it may elect to value the cash in lieu of parkland as of the day prior to the issuance of the building permit. This would apply regardless of whether the development proceeds by way of site plan or plan of subdivision. This valuation date by contrast, would result in a much higher value than utilizing the day before draft plan approval because the lots would be fully serviced the day before the building permit issues. This would result in a significantly higher parkland dedication payment. This approach has been confirmed recently by the Ontario Municipal Board.28
If land is conveyed to a municipality under section 43, 51.1 or 53, it must either be used for park or other public recreational purposes or it may be sold. Money received from any sale, and any cash in lieu of parkland contributions must be deposited into a special parkland cash reserve fund and can only be utilized for the acquisition of land for park or other public recreational purposes, including the erection or repair of buildings and the acquisition of machinery for park or other recreational purposes.29 The money in the reserve fund can only be invested in certain securities and the auditor for the municipality must report about the activities and status of the account.30 For a municipality which regularly expends general revenues on parkland capital expenditures, these restrictions are meaningless; if they wish to divert parklands dollars, they simply re-direct general revenues to other purposes. For smaller municipalities whose only parkland expenditures come from reserves, the restrictions are onerous.
d. Bonusing Agreements
Section 37 of the Planning Act authorizes Ontario municipalities to pass zoning by-laws which permit developments to have greater heights and densities than they would otherwise have under the zoning by-law, in return for the "provision of such facilities, services or matters as are set out in the by-law". The by-law can only be enacted if there is an official plan policy in place which authorizes it.31 The taking up of the additional height and density is voluntary, however if the owner elects to utilize the bonus, the municipality may require the owner to enter into an agreement which secures the provision of the "facilities, services or matters".32
The provision is utilized by municipalities that typically permit higher densities of development. This tends to be cities with larger populations. The City of Toronto makes extensive use of the provision in its urban centers and on the waterfront. The provision is used less for "hard" infrastructure and more for "soft" services. The obvious reason for this is that hard infrastructure tends to already be in place in urban areas. The City of Toronto has used bonusing to secure the provision of a wide range of services.33
The one difficulty with the bonusing provision is that a planning determination must be made that a certain amount of height and density is "otherwise" supportable from a planning point of view without the giving of certain "facilities, services of matters" and that a greater amount is supportable with the dedication. This is not a traditional planning analysis and therefore it is no surprise that the utilization of section 37 involves a significant amount of "horse trading" between developers and municipalities rather than pure planning. Some have called it the "sale" of development rights. Nonetheless, in terms of financing municipal infrastructure, it is a very powerful tool in denser urban areas. It has little application in more suburban and rural areas and in greenfield situations.
e. Developer Cost Sharing Agreements or Developer Group Agreements
Many Ontario municipalities have begun requiring that development in greenfields occur on a more co-ordinated basis. Traditionally, developers only advanced their own interests before Council and, where conflicts arose, they were resolved either at Council, before administrative tribunals, or even the courts. The problem with this traditional approach was that often, a key piece of infrastructure controlled by a developer could hold up large tracts of development, sometimes only for the purposes of economic advantage. Thus, an owner whose lands were required for a key piece of the sanitary sewer, or road connection, could delay all other owners reliant on that servicing if he or she was unwilling or unable or not ready to develop those lands. The reason for the unwillingness could be legitimate (no resources, no interest in developing, disputes with partners) or they could be not so legitimate (trying to delay other owners, trying to extract some benefit or payment, trying to gain a competitive advantage). Either way, it was an impediment to efficient, co-ordinated development.
The other problem with allowing development to occur in a piecemeal fashion was that non-developing owners, especially less sophisticated ones, were often left to bear a disproportionate share of the infrastructure on their lands, leaving the developing, participating owners with a greater yield, and therefore a greater profit on their lands.
Thus, the developer group agreement was born, almost entirely extra-legislatively. It became the vehicle of choice for more coordinated development and financing of municipal infrastructure within areas of the municipality that were larger than individual subdivisions. Thus, conveyances of land and the construction of critical storm and sanitary sewers, storm ponds, transportation and network improvements, school sites, parks, landscaping, studies, planning approvals and other infrastructure improvements could be planned in advance. More importantly, their cost could be distributed among property owners more equitably than was previously the case. Participation in developer group agreements is voluntary, however most municipalities now impose as a condition of draft plan approval, under section 51 of the Planning Act, a requirement that if a developer has not yet joined a developer group, that they do so prior to the plan being released by the municipality for final approval.
The developer group agreement is normally administered by a trustee, and one set of consultants (usually engineers and planners) are appointed for the group and provide advice to the group with respect to the agreement. Services are identified in advance, usually through undertaking of a master servicing analysis or study. The agreement deals only with services which are of "community benefit" (i.e. benefit more than one owner and usually the group as a whole). The agreement schedules (prepared usually by the group engineer) will estimate the cost of the community benefit, factoring in the land cost, the cost of design, the cost to construct, permit costs, and consulting fees. Each owner’s contribution is similarly calculated based on the proportion of land they own within the benefiting area. It is normally calculated using gross acreages. Community benefits can include a wide range of municipal infrastructure.34 The trustee then determines whether an owner is an over-contributor or an under-contributor, and adjusts for the imbalance as moneys are collected from under-contributors and from other sources such as sales of school sites to school boards and development charge credits for works done. To deal with land conveyancing issues, most agreements now give trustees power of attorney to grant and register conveyances of community benefits lands on all participating owners’ lands.
Non-participating owners are dealt with as well in these agreements. There is provision for the addition of new parties as new developments within the benefiting area proceed. A non-participating owner is required to pay all arrears of contributions, with interest, and execute a counterpart agreement before final plan registration can occur. It is generally well accepted that this condition would be authorized by section 51(25) of the Planning Act as being "reasonable" given the nature of the development.
There are a number of other important clauses that are essential to an effective and functional developer group agreement.35 Developer group agreements are often utilized in conjunction with Development Charge Credit and Front-ending Agreements, although municipalities will be signatories to the latter type of agreement, but not the former.
Developer group agreements facilitate municipalities securing municipal infrastructure within large development areas at little or no cost to the public.
f. Development Permits
Section 70.2 of The Planning Act authorizes municipalities to establish a development permit system that would streamline the development approvals process to a certain extent. In a development permit system, the municipality can utilize development permits in matters involving zoning, minor variances, site plan control, exemption from parking requirements and parkland dedication matters. Where the bylaw applies however, the municipality is prohibited from applying the provisions of the Planning Act with respect to bonusing (Section 37) and Site Plan Control (section 41).
The provision is not yet in general application across the province. It is being pilot project tested in Hamilton, Oakville, Lake of Bays, Waterloo and the Central Waterfront in Toronto. If fully implemented, the system would integrate several processes into one (zoning, site plan control and minor variances), which should increase flexibility, reduce approval times and result in better development generally.
Because the development permit system can permit not only as of right uses, but also discretionary uses, the issuance of a development permit could also be used as a means of securing the provision of municipal infrastructure. The issuance of a permit for a discretionary use will depend on satisfying certain criteria as set out in the by-law. Such criteria could include servicing related matters, such as waste management, sewer and water servicing, transportation improvements, etc.
The difficulty with the section as it is currently written, is that it appears to have been drafted in an overly restrictive manner. There is some vagueness in the way in which the conditions imposing powers have been granted in various places in the Regulation which implements section 70.2 (For example, see Subsections 2(b), 3(3)(f) and 3(4) of Ontario Regulation 246/01). Of greater concern however, is the restriction against using section 37 (bonusing) under the Planning Act where the development permit by-law applies. This could potentially hamper a municipality’s ability to secure all of the public benefits which were described above in the discussion on the bonusing provisions of Section 37.
There has to date been no judicial consideration of the meaning of the sections. However, given the outright prohibition on the use of Section 37, it is unlikely that development permits will be used very widely, unless the government further amends the Act or the regulation.
g. Cash in Lieu of Parking
Section 40 of the Planning Act authorizes a municipality to exempt owners of land from providing off-street parking that the owner is otherwise required to provide pursuant to a municipal by-law. There is provision for the entering into an agreement to secure the payment and to set out the extent to which the exemption applies and the basis upon which the payment was calculated.
Most municipalities enact such a by-law only after completing a parking inventory analysis, either municipal wide or on an area basis, which establishes the value of the parking spaces to be exempted. The money that the municipality collects must be deposited into a special account36 and must be treated as a reserve fund. The money can only be invested in certain securities and the Planning Act contains provisions for the audit of the reserve funds.
At first blush, this provision appears to be a vehicle for the financing of public parking lots. Even though in theory, the money raised from these exemptions should only be sufficient to pay for the extra parking spaces required because of the parking standard reductions granted by the municipality, in practice, there is likely not a straight line correlation between the number of parking spaces exempted and the number of new spaces created by the parking reserve fund. If a municipality does a brisk trade in parking space exemptions, it can probably make a serious contribution to parking lot construction in the municipality.
h. Use Prohibition in the Absence of Service: Section 34(5) of the Planning Act
Although not specifically related to the financing of municipal infrastructure, this section indirectly gives municipalities leverage to require the provision of infrastructure at not cost to the municipality. A municipality can prohibit uses unless certain specified services are available. In some cases, the prohibition may lead to a developer paying for the service that will permit the development to proceed. Since the section contains no procedure for this, such a scenario would likely result following a negotiation between the developer and municipality.
Non-Development Related Financing Methods
A debenture has no precise definition, though it can be described as an instrument that constitutes a promise by the corporation to pay the stated principal sum at a fixed date and place and to pay interest thereon at a stated rate and at stipulated times during the term. A debenture is a self-contained obligation that is enforceable in the hands of third persons according to its terms.
In Ontario, the Municipal Act37 permits municipalities, except lower-tier municipalities located in regional municipalities, to issue debentures by by-law,38 for municipal purposes.39 Ontario Municipal Board approval is required where the debt exceeds the prescribed limit and where the term of the debt exceeds the term for which the council was elected.40
Upper tier municipalities, lower-tier municipalities in counties, and single tier municipalities may finance infrastructure via debentures. A lower-tier municipality in a regional municipality may finance infrastructure via debentures if the regional municipality approves the issue.41
b. Municipal Grants
Under the Municipal Act municipalities are authorized to make grants to persons or entities for any purpose their councils consider to be in the interest of the municipality.42 However, municipalities are precluded from assisting any manufacturing business or industrial/commercial enterprises by giving money, municipal property, a lease below market value, a debt guarantee or an exemption from levies, fees or charges.43
c. Cost Sharing Programs
The Municipal Act authorizes municipalities to enter into agreements with other municipalities to jointly provide, for their mutual benefit, any matter over which they have jurisdiction.44 There are also numerous provisions throughout the Municipal Act that authorize cost sharing with the province,45 with the First Nation,46 and with respect to private services.47
d. Capital Budget Allocation
This form of financing is the most straight forward and requires the least explanation. Capital dollars are allocated out of general revenues, based on budgets which are prepared early in the year. In the case of infrastructure, the spending is prioritized, although usually on a service by service basis (i.e. roads needs study, sanitary sewer capacity master plan, water needs study) and thereafter are allocated according to need and often, political priorities. The biggest difference over the last ten years however has been the shrinking (disappearing?) contributions, in the form of grants and loans, of senior levels of government.
Section 290 of the Municipal Act requires municipalities to balance their budgets and therefore, they cannot run deficits to finance their operations. However, the Municipal Act48 does permit a municipality to incur debt by borrowing, by using debentures or by investing in certain prescribed securities. Municipalities therefore can, and have in the past been able to borrow or debenture for infrastructure improvements. The new Municipal Act has loosened somewhat the restrictions on municipal borrowing, including the widening of the range of debt it may utilize in certain situations, changes to the Debt Limit Regulation, changes to temporary borrowing rules and the management of debenture debt.49
A new power was given to municipalities last year. Ontario Regulation 276/02 permits bank loans to be made to municipalities primarily for the funding of municipal infrastructure improvements. The loans are secured with bank loan agreements. The municipality is prohibited however from giving any security for the debt.
e. Community Improvement Plans
The Planning Act authorizes a municipality to designate an area within the municipality as a Community Improvement Area.50 These areas are called "community improvement project areas". The provisions are intended to deal with areas which, because of their age, dilapidation, overcrowding, faulty arrangement, unsuitability of buildings or because of environmental, social or community development reasons, require some form of improvement.
Although private buildings and structures are not usually considered to be "municipal infrastructure", many communities are coming to realize the economic importance of their downtowns as economic catalysts. If viewed in that perspective, they can serve the same function for a community that infrastructure does; they can act as a backbone for economic growth. This is why municipalities implement and fund community improvement plans for their downtowns. The Planning Act permits funding by utilizing direct loans and grants, or through the granting of tax relief in the case of contaminated properties.51 The tax relief provisions were proclaimed in force on October 1, 2004 and they provide for either a cancellation of the taxes in whole or in part, or for a capping of taxes at their current level during the "rehabilitation period" or the "development period". They apply to lands which do not meet the standards for a record of site condition under the Environmental Protection Act, following a Phase II record of site condition.
However, because the definition of "community improvement" does clearly include infrastructure works,52 it is clear that the community improvement plan can have as one of its objectives, the improvement of municipal infrastructure. In most cases, the plan will be structured in a way that rewards private investment in infrastructure in the community project area with grants, loans, and with respect to contaminated properties, tax relief that can be used to improve private property.
In the case of contaminated lands, the tax relief provisions are limited in time. In the case of the "rehabilitation period" it is limited to the earliest of 18 months after the tax assistance is begins and the date that a record of site conditions is filed and the date that the remediation costs equal the amount of tax relief provided.53 In the case of the "development period", it is limited to the period between the end of the rehabilitation period and the earlier of the date set out in the by-law or the date that remediation costs equal the amount of the tax relief provided.54
In some ways, the community improvement plan provisions have some elements of the tax incremental financing provisions which are currently utilized in the United States and which are being considered in Ontario (discussed below). However, with respect to non-contaminated lands, the program requires direct municipal financing as the driving force.
f. Conservation of Heritage Assets
Conservation of heritage assets falls into the same category as Community Improvement Areas when considered in the context of municipal infrastructure. Municipal Heritage assets are not "infrastructure" in the strict sense, but undeniably add to the well being and character of most communities. Heritage legislation continues to be strengthened and therefore, understandably, so do the ways in which a municipality may financially influence heritage decisions made by the private sector. One of the biggest criticisms raised by municipalities in the past with respect to heritage preservation legislation is not only that it was not strong enough (not enough vinegar), but that the municipalities lacked the financial ability to persuade owners to preserve properties voluntarily (not enough honey). In other words, "we have not been given the legislative teeth to adequately protect heritage buildings and we can’t afford to buy or move them elsewhere.
Enacted in 2002 Section 365.2 of the Municipal Act was a small measure on the honey side. It permits municipalities to give tax relief for owners who volunteer to protect heritage properties. The section provides for tax reductions and refunds. In order to be eligible, a property must be designated (not merely listed) under the Ontario Heritage Act (or be part of a heritage conservation district), it must be subject to an easement or agreement with either the municipality or the Ontario Heritage Foundation and it must comply with any additional eligibility criteria established by council.
The amount of the refund or reduction is limited to between 10 and 40 per cent of the taxes for school and municipal purposes that are levied on the eligible property (land, buildings or structures).
g. Local Improvements and Area Rating
Section 326 of the Municipal Act sets out the services for which a municipality may "area rate". This provision allows a municipality (within the limits prescribed by regulation) to identify a "special service". "Special service" is defined as a service or activity of a municipality or local board that is not being provided or undertaken generally throughout the municipality, or is being provided or undertaken at different levels or in a different manner in different parts of the municipality. Ontario Regulation 305/02 sets out the services that a municipality may area rate. They are:
- culture, parks, recreation and heritage systems;
- waste management systems;
- fire protection and prevention systems;
- parking systems, except on highways;
- transportation systems, other than highways;
- sewage systems;
- water systems;
- drainage and flood control systems, including storm sewers; and
- street lighting
The new Municipal Act has eliminated the requirement to obtain Ontario Municipal Board approval for the establishment, amendment or dissolution or an urban service area.
The amount payable by each owner in the service area is determined on the basis of the person’s assessed value, rather than on a frontage or benefit basis.55
Local Improvements, which have been a part of the Municipal Act for some time, are now governed by Regulation. Ontario Regulation 119/03, enacted pursuant to section 400 of the Municipal Act continues the Local Improvement system in Ontario. The range of municipal infrastructure works that may be financed in this way continues to be quite broad.56 There is a comprehensive set of procedures set out in the Regulation which are prerequisites to the enactment of a local improvement by-law, including notice, petition against, application to the Ontario Municipal Board, petition in favour, calculation and allocation of the costs and hearings by the court of revision.
Some significant changes have been made to the local improvement legislation, the more significant of which are as follows:57
- allowing upper tier municipalities to undertake local improvements;
- eliminating appeals to the Ontario Municipal Board (from the court of revision);
- partial per metre charges are now permitted;
- no longer limited to abutting properties only;
- non-abutting properties can be charged based on different level of benefits;
- allows exemptions from the per metre charge;
- private works may, for the first time, be constructed as local improvements;
- allows sewage and water treatment plans to be undertaken as local improvements;
- eliminates maintenance costs as local improvement charge; and
- standardizes procedures.
h. Municipal Capital Facilities
The Municipal Act now permits municipalities to enter into agreements for the provision of "municipal capital facilities" by third parties.58 The agreements may allow for the lease, operation or maintenance of such facilities and exempts municipalities from the bonusing provisions of the Municipal Act.59 The provision permits municipalities to provide financial or other assistance at less than fair market value, including the "giving, lending, leasing or selling of property".60
The Municipal Act authorizes a municipality to exempt these facilities from some municipal and school taxes61 and from Development Charges.62 Municipalities may establish reserve funds for the renovation, repair or maintenance of such facilities.63
Ontario Regulation 46/94 defines what a "municipal capital facility" is for the purposes of the Municipal Act. It is limited to:
a. Facilities used by the council.
b. Facilities used for the general administration of the municipality.
c. Municipal roads, highways and bridges.
d. Municipal local improvements and public utilities, except facilities for the generation of electricity.
e. Municipal facilities related to the provision of telecommunications, transit and transportation systems.
f. Municipal facilities for water, sewers, sewage, drainage and flood control.
g. Municipal facilities for the collection and management of waste and garbage.
h. Municipal facilities related to policing, fire-fighting and by-law enforcement.
i. Municipal facilities for the protection, regulation and control of animals.
j. Municipal facilities related to the provision of social and health services, including homes under the Homes for the Aged and Rest Homes Act.
k. Municipal facilities for public libraries.
l. Municipal facilities that combine the facilities described in paragraphs 1 to 11.
m. Parking facilities ancillary to facilities described in any of paragraphs 1 to 12.
n. Municipal community centres.
o. Parking facilities ancillary to facilities described in paragraph 14.
p. Municipal facilities used for cultural, recreational or tourist purposes.
q. Municipal general parking facilities and parking facilities ancillary to facilities described in paragraph 16.
r. Municipal Housing project facilities.
The Regulation contains other restrictions on the use of these kinds of agreements. For example, agreements related to municipal capital facilities for "cultural, recreational or tourist purposes" and for "general parking facilities", must provide for the ownership, purchase or reversion of the facility and the land and further, the facility must be for public use. Similarly, before a municipality can enter into a municipal capital facility agreement for a municipal housing project, the municipality must enact a municipal housing facility by-law, the housing units must be "affordable" and the municipality must be a "delivery agent" under the Ontario Works Act, 1997.64
The Regulation sets out important new controls respecting the ability of municipalities to finance the construction of municipal capital facilities by utilizing financing leases. The new controls include:
! a pre-requisite that the municipality adopts a statement of the municipality’s lease financing policies and goals, which must set out the financial and other risks of financing leases
! a requirement that the financing lease contain a schedule of all fixed amounts of payment for the lease term and any extension or renewal thereof
! a requirement for a report by the treasurer assessing costs and risks, comparing them to other forms of financing and including a statement setting out:
• effective rates of interest
• variability of the rates
• method of calculation of rates
• financing rate charges
• contingent payment obligations
• lease termination provisions
• equipment loss and replacement options
• guarantees and indemnities
• summary of assumptions
! a requirement to obtain financial and legal advice with respect to the proposed financing lease (independent if necessary)
! a requirement to advise an upper tier municipality (where applicable)
! a requirement that the treasurer report to council, at least once a year, as to the number of financing leases in existence and as to the proportion that they are of the total long term debt of the municipality65
"Financing Lease" is defined as:
""financing lease" means a lease allowing for the provision of municipal capital facilities if the lease may or will require payment by the municipality beyond the term for which the council was elected;"66
These controls are put in place most likely as a result of recent judicial inquiries related to long term financing arrangements, entered into by several municipalities throughout Ontario. Rather than prohibit lease financing contracts (which can have distinct commercial benefits), the regulation tries to ensure that a proper and public analysis of the potential benefits and risks has been undertaken by the municipality and that the municipality has been properly advised about these matters.
i. Municipal Business Corporations
Under the Municipal Act, business corporations may be incorporated by municipalities under the Business Corporations Act67 or Part III of the Corporations Act68 for any of the following purposes:69
- construct, own, operate and maintain a public transportation system;
- operate and maintain a waste management service for residential waste;
- operate and maintain a municipal capital facility; or
- construct, own or operate a nursing home or charitable home, recreation, tourism or cultural facility (but not libraries) and general parking facilities (but only new ones)
The Municipal Act sets out a special process for the incorporation of a municipal business corporation, including restrictions on investing, governance and structure, procurement of goods, the acquisition, holding and disposition of shares, bonusing, and the assistance that can be provided.70 Ontario Regulation 168/03 requires the municipality to undertake a business case study before it can incorporate and the study must address financial risk, options, public accountability, how the public interest will be protected and how provincial performance standards will be met by the municipality.
The most notable exclusions as they relate to infrastructure financing are highways, waste management (other than residential) and water and waste water services. The government has proceeded cautiously with the municipal corporations provisions, but has signalled a willingness to revisit the issue. As a result, very few municipalities have utilized these powers.
j. Special District Financing
Similar to development charges, special district financing is usually used to finance hard services that will benefit specific and identifiable homeowners in order to avoid imposing costs on the wider community. Special district financing is often used in concert with development charges.
This financing method involves the creation of a designated urban district (also known as a local improvement area, community facilities district or community rehabilitation district), the sole purpose of which is to finance new infrastructure.
The benefits to special district financing include that new infrastructure can often be financed at better rates and over the infrastructure asset’s useful life, resulting in less impact on housing affordability and increased intergenerational equity. This form of financing, like development charges, is considered efficient because the principal beneficiaries of the infrastructure pay its cost. However, special district financing also adds a new layer of administrative costs.
In Ontario, as in most U.S. states, the approval of the province or state is required to create a special district. Special district financing is more common in the U.S., and some states have used incremental property tax increases, in what are called tax increment districts, as a means of financing infrastructure necessitated by new development.
Tax increment financing (TIF) is an alternative available in the U.S. to enable municipalities to directly intervene in the economic development of their communities. TIF has been around since the 1940s, with California (1952) and Minnesota (1960) pioneering the concept. TIF has been increasingly utilized since the 1970s as a result of federal government cutbacks in the late 1960s. Most states now have some legislation dealing with TIF.
TIF works by identifying the projected property tax revenue stream that would result from community rehabilitation, and using that revenue stream to provide capital for the redevelopment. When a municipality adopts a TIF district, the assessed valuation of real property is frozen at its pre-rehabilitation levels. The TIF district is created for a fixed period of time, usually ranging between 15 and 20 years. As improvements to the district are made, the assessed value of the property in the TIF district increases above the frozen level. A tax increment is produced by applying the tax rates of all taxing authorities with taxing jurisdiction over the TIF district to the increase in the assessed value of the improved property over the frozen level. This tax increment is collected over the life of the TIF district. This growth in property tax revenues is used to finance the rehabilitation.
The criteria and eligibility requirements for TIF use vary from state to state, but generally TIF programs are used to redevelop areas in older business centers, which tend to have the greatest potential for property value growth.71
At the outset, TIF projects were limited to "substandard" or "blighted" areas, enterprise zones, or to parts of area-wide redevelopment plans. However, over time, political and economic pressures have loosened or abandoned these traditional requirements, and some states, such as Indiana and Iowa have removed the "blighted" and "substandard" criteria.72 The result of this loosening of requirements is a broader range of eligible projects, such as public golf courses and parks, and private hotels and skywalks. To counter-balance the loosening of requirements, some states have placed new requirements on TIF projects. For example, in Texas, municipalities with populations over 2.1 million are required to dedicate one-third of the resulting tax increment to low-income housing.73 As the range of possible TIF projects widens as a result of the loosening of restrictions, the range of possible purposes for TIF proceeds also widens. These possible purposes for TIF proceeds include:74
- construction costs for infrastructure;
- planning, architectural, engineering, legal and other services;
- property acquisition costs;
- demolition of buildings and the clearing and grading of land;
- rehabilitation of existing public buildings and fixtures; and
- staffing costs.
TIF proceeds can also be used for incentives to encourage private sector investment, such as:75
- the costs associated with the acquisition of land and the construction of buildings;
- the costs associated with the acquisition of obsolete buildings or structures;
- the development of overhead pedestrian walkways and parking facilities;
- traffic engineers and mass transit improvements;
- the costs of rehabilitation, repair, reconstruction or remodelling existing buildings and fixtures;
- interest costs incurred by redevelopers;
- training costs for employees in the redevelopment area; and
- relocation costs.
Questions to ask in considering the creation of a TIF district include:76
- How does the project help the municipality as a whole?
- Are new jobs created or simply relocated?
- How much is the debt and what is its retirement schedule?
- How long will the TIF district be in effect?
- Does housing exist for new employees?
- Are there any negative transportation impacts?
- Is the incoming company stable and viable?
- What wages are being offered to new employees?
- Will the new jobs be filled locally or by relocation?
- What municipal services might be impacted by the new business?
- Is the municipality prepared to develop a plan for incentives for all requests?
Proponents of TIF cite the following benefits:77
- TIF can be a successful self-financing mechanism;
- TIF allows municipalities to retain control over the revitalization program;
- TIF does not impose any new taxes;
- TIF does not involve federal or state oversight, unless same are providing funding;
- TIF is equitable because the risks associated with redevelopment are borne by TIF district property owners
- TIF generally does not require public/private sector funding ratios;
- TIF can permit municipalities to target specific redevelopment areas;
- TIF does not require voter consent; and
- in some cases TIF surplus funds can be distributed to overlapping tax jurisdictions.
Critics of TIF point out the following:78
- loss of control of tax base;
- the expanded tax base may fail to generate sufficient revenue to cover the costs of increased municipal services; and
- tend to target poor neighbourhoods
Ontario has begun a pilot project tax incentive program under the Tax Incentive Zones Act (Pilot Projects), 2002,79 that would see taxes, fees and charges in designated zones reduced or cancelled.
Under the Tax Incentive Zones Act (Pilot Projects), 2002, the Lieutenant Governor in Council is authorized to establish tax incentives zones80 and the Minister of Finance is authorized to, by regulation, reduce or cancel certain provincial taxes, fees and charges and in those zones.81 School taxes may also be reduced or cancelled by regulation in tax incentive zones.82
The Tax Incentive Zones Act (Pilot Projects), 2002, also permits municipalities to pass by-laws reducing or cancelling municipal taxes83 with the prior approval of the Minister of Municipal Affairs and Housing. Regulations may also provide that municipalities can reduce of cancel fees and charges paid or payable to them under statutes identified in the regulations.84
Where a person enters into a tax incentive agreement85 under the Tax Incentives Zones Act (Pilot Project), 2002, but fails to comply with the agreement, he or she will be required to pay either the full amount of the taxes, fees and charges that he or she would have been liable for in the absence of the agreement or a lesser amount as determined by the Minister of Finance.86
Making, participating, assenting or acquiescing to a false or deceptive statement in a tax incentive agreement may result in imprisonment for not more than two years and/or a fine of not more than $100,000.00.87
To date, no regulations have been made under the Tax Incentive Zones Act (Pilot Project), 2002, and therefore no tax incentive zones have been established.
This program falls well short of constituting a TIF, however the government is considering a true TIF system as one of the "tools" available for the financing of municipal infrastructure as part of its "Places to Grow" initiative.
k. User Fees
The premise behind user fee financing is that people who directly benefit from the public infrastructure asset should pay for it. User fees will be more appropriate where some people make greater use of public infrastructure asset than others, as in the case of public transit for example.
Innovations to user fees include charging higher fees at peak hours to reflect the fact that operating costs during peak hours are higher. While this may encourage people to use the public infrastructure asset at non-peak hours, it may, as in the case of public transit for example, result in people using their cars over public transit. In the case of toll roads, traffic could be pushed to non-toll roads, resulting in increased traffic and increased maintenance costs on those roads.
Los Angeles, California charges higher user fees for water during the dry season to reflect peak load pricing. It has been suggested that this type of user fee could be applied to Ontario.
User fees in Ontario are for the most part governed by sections 390 to 400 of the Municipal Act. The authorizing sections are quite broad in scope, permitting a by-law imposing fees and charges for "services or activities provided or done by or on behalf of it" and for the use of property. However, both the Municipal Act and Ontario Regulation 244/02 go on to impose some very important restrictions, especially as they relate to municipal infrastructure. The more relevant restrictions related to infrastructure financing are:
- the generation, exploitation, extraction, harvesting, processing, renewal or transportation of natural resources;88
- supply of natural gas beyond Ontario Energy Board approved limits;89
- no fees or charges for recovery of capital cost if a development charges by-law or front-ending agreement covers the capital cost;90
- waste management services except for collection by the municipality or disposal at a municipal facility;91
- no changes on telecommunications operators for use of highway and for trenching (but may charge a permit fee);92
- no charges on hydro generator, transmitter, distributor or retailer or on gas companies for use of the public highway;93
- with respect to charges for the use of a waste management system or a water system, the charge:
- cannot exceed the cost of providing the service;