The City of Winnipeg’s recent release of Hemson Consulting’s Review of Municipal Growth Financing Mechanisms followed by the subsequent release of a draft Impact Fee By-law represents a critical milestone in the discussion about how development will be managed into the future.

The City has made clear its resolve to change the existing funding framework by introducing a new development Impact Fee by taking this step. The Impact Fee contemplated by the draft by-law will be collected prior to a development permit or building permit being issued. It will be applied consistently to all areas of the City with a different fee basis established for office, commercial, public/institutional, industrial and residential uses. Revenues generated from the fee will establish a Reserve Fund that will be used to offset the growth related costs for a defined set of infrastructure projects and services. The mantra is that “growth needs to fund growth” with the underlying rationale that “developments have not paid their share of the broader costs of regional servicing” necessary to support them.

In contrast, most developers point out that the direct costs of new developments are completely funded through a negotiated development agreement. They also highlight that new development has contributed to an overall increase in the City’s tax revenue because they increase property values. Increased property value results in increased assessment levels to drive growth in tax revenue. From this perspective, the introduction of new development related charges is seen as an additional tax. Most developers suggest the real motive is to shift the discussion away from structural budget deficits caused by the City’s own long term policy of zero property tax increases.

The global discussion needs to move past these polarized arguments to look more closely at what is being proposed for Winnipeg in comparison to our existing funding tools and the experience of other jurisdictions.

As a planner, the critical issues that need to be introduced into the discussion include :

The scope of change to the existing system that the proposed Impact Fees are being considered to address;

The method of introducing Impact Fees to ensure that the expected benefits are achieved and unintended consequences are avoided; and,

The proposed governance framework to align the City administration, development stakeholders, and the public.

This is about developers, why should I care?

All development is driven by market forces. It is a well-established finding that the value of land is directly tied to its development status. Raw agricultural land may be very productive but it is not as “valuable” as land that has been approved for development which in turn is not as valuable as serviced land that has been subdivided for sale to homebuilders. This continuum applies to all developed property including industrial, institutional, and commercial/office uses. Each step in the process towards the end consumer involves considerable investment in terms of financial resources and time necessary to secure the necessary approvals and undertake required consultation, design, and construction activities. Over time this required investment is normalized as part of the cost structure in each market.

The impact of new or significantly higher costs on the development process is well documented. They have the impact of lowering land and property values across the entire development lifecycle, particularly on a short term basis, until the new cost structure is absorbed. Because developers pass these costs on to their customers, higher intensity projects like commercial or office projects experience changes in the cost structure through higher rents while residential homebuilders will face increased lot prices.

Since any municipality’s largest source of revenue is based on land value through the property tax, negative changes to the cost structure of development have a direct relationship to revenue. In effect, changes in the development cost structure that do not adequately consider this principle can inadvertently result in a greater funding gap than existed before their introduction.

Beyond these financial impacts, increased development costs have been directly related to changes in the supply of available development sites and to changes in the mix and location of specific types of development. This ultimately has impacts on the type of communities that result. It also has a critical impact on the effectiveness of policy-related objectives to change the makeup of specific parts of a city through densification or to attract a particular use or to prevent additional urban sprawl. In short, if the cost structure does not align with those objectives the development will not occur regardless of the policy. Winnipeg only needs to look to its own successful experience with Tax Increment Financing to encourage development in downtown to be reminded that economics dictates the pace and scale of development.

What is possible with the tools Winnipeg has now?

Winnipeg’s current development funding tool kit includes property tax, frontage levies for water and sewer services, utility rates, negotiated development agreements that set out the financial responsibility for the costs of a project between the City and developer as well as numerous permitting and approval fees. These are in addition to processes to secure a parks or open space contribution, drainage, municipal water, sewer and transportation service contributions as part of the approval process as set out in the City’s various by-laws. These tools all provide for a process for investments to be made ahead of requirement so that costs can be recovered by future participants in a new or expanded service over time. In many cases, these funding sources are augmented by targeted investment in strategic infrastructure by the Provincial and Federal government in cost sharing programs.

The operating principle of this model is that all costs of a development are supported through the development agreement and that property taxes and other fees support the cost to operate and maintain this infrastructure into the future.

Proponents of the Impact Fee will highlight that development agreements are not adequate tools because individual agreements that are not easy coordinate to achieve a consistent impact, they require significant upfront planning to be completed in order to establish appropriate costing, and they are sometimes difficult to enforce - particularly when the developer is another level of government. The resulting effect is that there ends up being a shortfall in growth related costs that the municipality needs to support development.

A key factor impacting Winnipeg’s experience is its sustained policy of zero percent property tax levels. According to the City of Winnipeg, property tax levels have increased by 7% between 1996 and 2015. This is significantly below the cost of inflation and far below increases experienced in other jurisdictions. This policy has resulted in significant pressure to maintain current services while balancing the costs to maintain core infrastructure. Recent increases in capital spending for road repair and revitalization are one way that the current administration has taken to address this issue.

What is the experience in other jurisdictions?

Experience with development related cost charges is well established in other parts of Canada. The experience of these jurisdictions is similar despite some differences in the implementation approach. The Province of British Columbia’s Development Cost Charge Best Practice Guide identifies six principles that should be considered by any municipality introducing this type of fee:

Integration of the development cost charges with the other growth management and development planning tools available to the municipality including the official community plan, zoning and development by-laws and other tools including the development agreement;

Ensuring that those that benefit from using infrastructure should be responsible for their costs;

Fairness and equity in the distribution of costs between existing users of infrastructure and new development and in order to distribute costs in a balanced way between different areas of the city and for different types of uses;

Accountability of the overall process to develop, implement and manage development cost charges in a transparent, accessible and understandable process;

Certainty in the definition of development cost charges so that the City administration and development industry can realize a predictable, level of growth in alignment with the approved community plan; and,

Consultation to create opportunities for input into the implementation of the development cost charges from the public and interested stakeholders.

There is a wide variation in implementation approach between jurisdictions.

While not universally adopted, the benefitting area model is recognized as a standard. Under this method, the improvements, costs and benefitting properties are identified in advance. This improves the visibility and accuracy of costs contained in the fee structure. The process to implement this model often includes a review of the benefitting areas and projects included in the calculation as part of a by-law approval process. This is recognized as a fair method of defining growth costs and for managing their apportionment between new and existing property owners. There is a relatively well established body of case law that reinforces the principles associated with the benefitting area approach. This method requires investment in capital planning and engineering works to accurately ascertain offsite infrastructure costs. Some municipalities take the position that a benefitting areas model is harder to administer but researchers like the Munk School for Public Affairs find no direct relationship between the model and its administrative complexity.

There is alignment across most jurisdictions to ensure that developments that do not have a net impact on existing services are exempted in some way from the Impact Fee. Specific examples include exemptions for infill developments on existing lots with established services as well as more comprehensive policies to align the development related cost charges with other planning tools.

It is well documented that many municipalities are working to expand and extend the application of a fee based model to address increased growth related costs. Some research suggests that municipalities are moving forward rapidly to make these changes in an effort to increase revenues without consideration for the longer term planning implications and resulting in appeals through established processes or legal action.

There is clear evidence that a minimum level of public benefit is assessed for all projects through policy or through specific legislative requirement. This underscores the fact that any investment in infrastructure has some benefit to all citizens with a given jurisdiction.

Consultation and collaboration with the public, industry stakeholders, and other levels of government is a key part of the governance process for development related charges in many jurisdictions. This includes the establishment of joint working groups to guide development cost charge development and to establish policy around their application.

How will the proposed Impact Fee be implemented in Winnipeg?

The City of Winnipeg released a second Hemson Consulting report that outlines a proposed method to establish regulatory growth fees. The Hemson report documents the assumptions that have been made to arrive at the calculations for a “maximum fee” but it is clear that the responsibility to finalize the cost basis for the Impact Fee rests with the council.

This report incorporates a development forecast together with an assessment of candidate projects evaluated by the City of Winnipeg administration to establish a baseline.

Baseline projects are organized by 9 service areas – Parks and Open Spaces, Community Services, Solid Waste, Public Works, Transit, Fire & Paramedic, Police, Water, and Wastewater. The estimated gross cost of each service was adjusted to remove the impact of grants or subsidies normally received from other levels of government to arrive at a net cost to the municipality. This net cost was then adjusted to reflect the portion of that project’s benefit to the existing community (BTE) resulting in the final development related cost. These development related costs were adjusted in some circumstances to reflect an apportionment of the budget to past growth impacts.

I conducted an analysis of the costs and in particular to relative level of Benefit to Existing factors applied between service areas and between individual projects. This analysis included an evaluation of the effective Benefit to Existing values after adjusting for prior growth impacts.

This analysis was useful for gaining insight into the underlying policy associated with the proposed Impact Fee. Some of the key conclusions from this analysis are:

The proposed Impact Fee will change development cost structures in two ways: When comparing past projects to future projects, there is a clear policy direction to reduce the benefit to existing factor by up to 13% after prior growth effects. This means that costs that have traditionally been funded by other revenue sources and primarily through property taxes are proposed to be supported by the Impact Fee. 18% of the proposed Impact Fee includes recovery of past projects that have already been approved in whole or in part by the City. It is unclear how the previous project approvals and funding associated with them have been factored into the Impact Fee except as a recovery. There is no mechanism to direct the funding from a recovery to the operating budget of the City of Winnipeg through a Reserve Fund.

A number of projects have been included in the baseline with a level of benefit to the existing community that is lower than expected: Upgrades to the Winnipeg Water Treatment Plant were announced by the City of Winnipeg in order to comply with changes in Provincial regulatory requirements and annual capital maintenance. These types of upgrades reflect benefit to the entire city. Under the proposed Impact Fee, 20% of the cost of the project is included in the baseline after adjusting for prior growth impacts. This is lower than could be expected based on the justification for the project. It is not clear how changes to frontage levies and utility rates associated with approval of this project are related to the proposed Impact Fee. The project to replace the police Headquarters was justified by the City of Winnipeg to replace the Public Safety Building that was at its end of life. This type of project is not directly related to growth. The baseline Impact Fee includes $18.5M in cost for the calculation after adjusting for prior growth. Expansion of Fire Station 1 and 2 are included in the base calculation with 0% benefit to existing. These stations are a key part of the Department’s overall emergency services capacity. It is inconsistent that no benefit has been included in the calculation which contribute $6.0M to the baseline Impact Fee calculation. Projects like the Disraeli Bridge replacement or planned Arlington Bridge replacement are included with low benefit to existing values. These projects and others contained in the list impact the integrity of the overall transportation system and they require attention even if there is no further growth in the City.

The project and service list is significantly weighted to projects in the south and west of the City. This appears to be motivated to underscore the narrative to justify the Impact Fee in the first instance. Critics of the process to implement the fee have been quick to point out that these areas contribute the greatest share of property tax revenue. Further analysis needs to be undertaken to determine if there has been any bias in the project selection.

There are inconsistent rules for applying benefit to existing factors between services and between projects within a service area. This makes it difficult to interpret the allocations and introduces a level of subjectivity into the calculation that need not exist.

The proposed Impact Fee includes an extended investment program in Bus Rapid Transit for new and additional corridors. It also includes costs of additional busses for these new rapid transit service areas and expansion of the existing fleet. Public transportation funding has typically been funded through a multi-level funding agreement with other jurisdictions because of its significant public policy implications. The assumed benefit to existing community for these investments is 73%. This is significantly higher than current ridership or projections from published Winnipeg Transit. This results in $365M in cost be attributed to growth through the proposed Impact Fee.

There has been a significant reduction in the benefit to existing for projects identified as strategic infrastructure in Winnipeg’s Transportation Master Plan. Specifically, 70% of the costs of the planned Kenaston expansion and 100% of the costs associated with establishing the connections to establish the “inner ring” road are included in the proposed Impact Fee. This represents a significant policy shift with respect to these particular projects. This allocation seem inconsistent with the public perception of the required changes to transportation infrastructure as it exists today. This contributes almost $1.0B to the Impact Fee after adjusting for prior growth.

There is evidence of lack of alignment of the benefit to existing allocation with respect to established City of Winnipeg policies. For example, 50% of the proposed recreation centers and 68% of the cost of the proposed South Winnipeg community center are included in the impact fee. Established City of Winnipeg policies indicate that there is existing demand for these facilities at levels higher than the benefit to existing contribution included in the proposed fee calculation.

Areas for improvement

Based on the above analysis, the following opportunities for improvement should receive consideration before finalizing the Impact Fee By-law:

Delay the implementation of the Impact Fee until appropriate consultation and collaboration has been completed. Consider the consequences of Impact Fees on the viability of approved developments and the merit of providing a longer phase-in period to accommodate market impacts into Winnipeg's real estate market. Follow the model of other jurisdictions to establish joint working groups including industry stakeholders together with city administration stakeholders and the public.

Commit to the implementation of a benefitting areas approach to guide the implementation of the Impact Fee. Specify a timeframe to define benefit areas and where necessary prioritize sectors or areas of the city for the determination of benefitting areas on a priority basis. Establish a schedule for completion of required infrastructure plans to support this approach. Develop and implement a timetable to complete the infrastructure plans on an accelerated basis. Consider opportunities to align this work with the development of asset management plans in most city departments.

Consider implementing an interim Impact Fee with a substantial reduction to the maximum rate defined in the Hemson Report and in the proposed fee schedule provided in the draft By-Law. Key considerations in making this adjustment include removing past projects in the calculation and reviewing the Benefit to Existing factor associated with all projects to ensure that they are consistent with approved City policies and expected service levels. Consider implementation of an allowance for future growth instead of incorporating recovery of past projects until an improved basis for the Impact Fee calculation as future recovery to improve clarity of direction and intent. This recommendation will allow for the phasing in of the concept while the necessary policy and administrative processes are developed.

Establish and incorporate a standard guideline for assessing the Benefit to Existing factor that is subject to review as part of the by-law review process.

Establish and incorporate a process to review and confirm projects including the Impact Fee calculation as part of the by-law review process and for subsequent changes to the rates under the by-law.

Expand responsibility for the administration of the Impact Fee Reserve Fund to include representation of Planning Property & Development, Public Works, and Community Services Departments. This will improve the transparency of the process to manage the Impact Fee as well as reinforce the connection between the baseline projects and service delivery mandates.

Consider the policy related consequences of Impact Fees on land uses and development priorities that are stated objectives in OurWinnipeg. Special consideration should be given to downtown development, major infill projects, and special development area impacts. Similarly, an assessment of Impact Fees on Public and Institutional uses needs consideration and, in particular, the cost impact on projects that are relied on by the City to fulfill its service objectives in recreation and open space delivery through partners and public service organizations.

In addition to those stated in the draft by-law, develop a guideline to manage exemptions from the Impact Fee to administered by the PP&D for: Development on single infill lots where the proposed development is consistent with the established zoning and represents no increase in demand to established infrastructure and services Development of small infill development where the proposed development represents intensification within and established use and represents no increase in demand to established infrastructure and services

Make explicit the relationship of the Impact Fee to other funding sources available to the City of Winnipeg including frontage fees, utility levies and other costs. Ensure that the Impact Fee is defined so that it does not include other revenue sources in its baseline calculation and that there is a clear delineate the Impact Fee as compared to other charges incorporated into the development agreement.

Conclusion

Impact Fees are one method of funding municipal development that have been employed successfully in other jurisdictions. As a planner, I support their introduction to the existing mix of tools available to the City of Winnipeg provided they are supported with the underlying policies to govern their implementation. Most in the development industry would also support their introduction with the same condition.

Winnipeg’s Mayor and Council have the opportunity to make some adjustments to the proposed Impact Fee to ensure that they meet their stated objectives and also function well over the long term. This will require some refinement of the draft by-law to bring it in line with established best practices and to avoid some of the mistakes of other jurisdictions.

The City’s long term policy of zero property tax increases has contributed to a funding shortfall. Impact fees have a role to play in the solution but they should not be promoted as a silver bullet and their implementation should not be rushed in a drive to build revenues.

It is important to shift the discussion about Impact Fees to their core purpose and start having a frank conversation about the City’s overall “infrastructure deficit” and what it will take to address that. In addition to the Impact Fee, it may mean an increase to the property tax. It may also involve leverage or support from other levels of government. It is critical in this discussion to ensure that the fundamental responsibility for base infrastructure of the City is balanced and that it incorporates all property owners – and does not shift this responsibility unfairly to new development.

By default, the proposed by-law and methodology to define the fees incorporate considerable changes to the existing policies and processes governing development within the City. Close examination identifies some of the potential impacts for the citizens of Winnipeg resulting from that proposed model. These policy changes deserve debate and careful consideration.

It is unclear what the end game is for a strategy that does not involve significant consultation, collaborative problem solving and consensus to make sure this concept is well-implemented.

The current approach is creating division when the scope of the issue is very integrated and involves many stakeholders not the least of which is the Province of Manitoba, from which the City of Winnipeg derives all of its authority.