Provincial housing policy blows $28.5 million hole in London's municipal budget

City hall is on track to deliver a massive budget surplus this year, but the windfall is already being earmarked to fill a new financial shortfall.

On Wednesday, Mayor Josh Morgan attended the Corporate Services Committee (CSC) meeting to warn colleagues about the growing cost of provincially approved exemptions to development charges (DCs).

According to the principle that growth should pay for growth, DCs are fees charged on new construction to offset the cost of additional growth-related infrastructure and servicing, including new garbage trucks, fire halls, and sewer pipes.

However, the province’s Bill 23 More Homes Built Faster Act (2023) included a new set of exemptions to development charges for the construction of affordable housing and purpose-built rental units.

Those waived costs that were previously charged to developers and homebuyers are now landing on the city’s budget.

“Where we don't have enough budget is on the statutory exemptions that the province put in place,” explained Morgan. “And these are a combination of recent [exemptions] within Bill 23 and other legislation and long-standing statutory exemptions where we see more than we have in previous years.”

There were already exemptions in place for the construction of schools and university buildings.

The total cost of the development charge exemptions in 2024 is projected to reach $28.5 million.

The city had only earmarked $5 million in the budget to fund its own incentive programs meant to spur development in areas including core business districts and industrial park.

The mayor said purpose-built rental units are the fastest growing reason behind the DC exemptions begin granted in London.

“This is the most significant emerging financial issue,” Morgan added. “We have to find a pathway to deal with this because the development in these areas isn’t going away in a fast-growing city. The pressure on the property taxes is only going to go up unless we have an avenue to seek relief.”

In 2023, then-Housing Minister of Ontario Steve Clark committed that municipalities would be “made whole” for the additional costs incurred from the More Homes Built Faster Act.

So far, no money has flowed to offset the DC exemptions.

“We're again reliant on if the province decides whether or not to make us whole,” lamented Coun. Corrine Rahman. “We don't fully understand at this point still what the criteria is to do so.”

In a report, city staff recommend using surplus dollars generated from budget savings and interest on investments to offset much of the shortfall in development charges.

The total projected surplus in 2024 is $29 million (3.6 per cent).

The treasurer is redirecting $13.9 million of staffing-related savings towards a reserve fund of future liabilities related to personnel.

The remainder of the surplus will offset development charge exemptions

• $15.1 million from the Operating Budget surplus
• $1.2 million from the Wastewater Budget surplus
• $600,000 from the Wastewater Budget surplus

It would still leave a $6.6 million unfunded shortfall heading into deliberations of the 2025 Budget Update.

If council decides not to use the surplus dollars, the development charge exemptions would add another two per cent to the property tax increase next year.

“This is an unsustainable problem, and we need a solution to it,” warned Morgan. “That solution isn't going to be hoping we have enough surplus every year to backfill [development charge exemptions] on an annual basis. We need a permanent solution.”

In most years, the Budget Surplus Policy redirects 50 per cent of the funding towards debt reduction, 25 per cent towards the Infrastructure Gap, and 25 per cent to council’s reserve fund that is utilized for one-time expenses and pilot projects.

After the meeting, the mayor said he will continue to lobby the province in a collaborative manner to address the growing financial impact of the exemptions — particularly in fast-growing cities like London.

“These exemptions are a growing concern that absolutely have to be part of the discussion now to ensure that the province fully realizes the implications and the pressure on municipalities,” he added.

The More Homes Built Faster Act was intended to streamline the approval process and remove hurdles to meeting the provincial government’s target of 1.5 million new homes by 2031.

The total amount of the budget surplus won’t be finalized until early next year.