The Real Reason for Ottawa's Fiscal Crisis

Part 2: The Mayor's recent Special Announcement failed to acknowledge that our finances are in bad shape because of how the City has chosen to grow.

The street where I grew up. If we want to keep property taxes low in Ottawa, we’ll have to stop building new sub-divisions like this.

Read Part 1 of my analysis of the Mayor’s special announcement on Fairness for Ottawa.

Next week, I’ll conclude with Part 3 outlining two other fiscal shortcomings of the City.

Recap of the Mayor’s ‘Fairness for Ottawa’

I’ve written that, before pleading poverty to the federal and provincial governments, Mark Sutcliffe should take responsibility for the fiscal mess this City is in, which he has contributed to.

He blames the federal government for shortchanging the City on its payments in lieu of property taxes. (PILTs!)

He also blames the provincial government for not doing as much for Ottawa as it does for Toronto on transit funding.

The federal and provincial governments should be supporting transit operations — but they mostly don’t.

Except in exceptional circumstances such as when Mayor Olivia Chow requested and received $330m in transit operations funding as part of her New Deal for Toronto from the Ontario Government.

Sutcliffe could have made the same request for transit operations funding in his New Deal for Ottawa. Instead, he prioritized new money for policing and a highway interchange.

Help is not coming

Sutcliffe is blissfully optimistic that higher levels of government will come to the rescue. When cornered, Prime Minister Trudeau and Premier Ford mumbled that they were ready to keep talking.

But read the room, Mr Mayor. The federal and provincial governments have blown you off.

The feds might throw the City a bone. For example, something on PILTs.

I could see the federal government committing to greater stability and predictability in future PILTs, as requested by the City of Ottawa. That was a good ask and one area where we could see progress.

But it’s not the real issue.

Smokescreen

Blaming other levels of government is a smokescreen to distract us from why city finances are in such bad shape.

Catherine McKenney, my partner in CitySHAPES, saw this coming two years ago with their famous “I found a hole in your budget” line.

The problem is not PILTs. The problem is not our transit deficit.

This Council is making some bad spending decisions, such as half a billion to rebuild the Lansdowne stadium.

Those poor spending decisions are not even the main problem.

Our development choices caused this mess

The main problem is Ottawa’s growth pattern.

It turns out that urban sprawl is expensive. Really expensive.

The high cost of sprawl comes down to three factors.

1. Building new infrastructure costs a lot

Paving new roads and extending water pipes out to new sub-divisions is costly. In many cases, it should be cost-prohibitive.

For example, the City approved creating a new sub-division, Tewin, in the south of Ottawa. But to build Tewin, the city first needs to bring services across the greenbelt. Extending water pipes out to Tewin will cost $600m.

The crazy thing with Tewin is that $170m of that $600m is to service potential future homes outside the urban boundary. We are asking taxpayers to pay $170m for pipe capacity to homes where it is not even legal to build homes.

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New homes are supposed to pay for these upfront costs through Development Charges. DCs in Ottawa are a roughly $50,000 charge that is added to the price of a new home to pay for the expected infrastructure costs of growth.

To make a long story short, DCs are way too high inside the greenbelt and way too low outside the greenbelt. DCs collected on new inside the greenbelt growth pay much of the cost of road widenings outside the greenbelt. (The article below is the long story.)

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2. Repairing and replacing infrastructure is expensive

We can build new infrastructure today. But it will need to be repaired and eventually replaced.

Water mains will hopefully last for a century. Roads have about a 20 year lifespan before they need to be redone. “Other infrastructure” such as libraries, parks, fire stations might be good for 40-60 years.

Our city has a plan for repairing and replacing ‘other’ infrastructure — other than roads and pipes. But that ‘other’ infrastructure replacement plan is underfunded by $3 billion.

That’s concerning, because it’s taxpayers across the city who pay. And we have no plan for filling that $3 billion hole.

But more concerning is that the $3 billion number does not include the deficit on roads and water pipes. The City hasn’t told us that deficit.

Adding in the funding shortfall on roads and pipes, Ottawa could have an infrastructure deficit of $10 billion.

The City of Toronto did a recent analysis on the state of its infrastructure. Like Ottawa, Toronto already earmarks a share of future taxes to pay for infrastructure renewal. But Toronto found it has a $26 billion deficit over the next ten years in paying for the renewal of decisions made twenty, forty, even sixty years ago.

3. Servicing spread-out neighbourhoods is expensive

The third reason that suburban sprawl is expensive is that servicing spread-out areas also costs a lot.

Not surprisingly, the cost of providing many city services goes up in proportion to the distance travelled to provide those services. Distance travelled is a function of how spread-out houses are.

Think of plowing our roads in the winter. Or picking up the garbage. Or sending a crew out to fill a pothole.

As a city, we pay for many city services by the kilometre. The City of Ottawa has over 6,000 kilometres of roads. Every new sub-division increases that number.

It’s no surprise that it’s more expensive to service a new home in a brand new sub-division than in an already built-up area. But how much more expensive?

Thanks to the good work of Councillor Menard, the City had Hemson Consulting answer this question. Hemson produced the following analysis:

• A new home built in an already established neighbourhood (i.e., infill) generates the City $606 in tax revenues per person per year MORE than that household consumes in services.

• A new home built in a brand new sub-division (i.e., greenfield) generates the City $465 in tax revenues per person per year LESS than that household consumes in services.

This is incredibly important analysis that Ottawa has done, but which few other cities have replicated for themselves.

Let me make this point crystal clear, and simplify these numbers on a per home basis, assuming 2.3 people per home on average in Ottawa.

• Every new infill home creates a $1,400 annual surplus for city taxpayers.

• Every new greenfield suburban home creates a $1,000 annual deficit for city taxpayers.

Every 20,000 new greenfield homes requires a $20m annual subsidy from other taxpayers. To raise that $20m, the City needs to increase property taxes by 1%.

Every 20,000 homes we build in new sub-divisions results in a 1% citywide property tax increase to subsidize the cost of city services to those homes.

Jim Watson famously kept tax increases to 3% or less. That’s why our roads and sidewalks are crumbling. All of those tax increases went to inflation and subsidizing sprawl. Anything of note that he did — such as the LRT or the central library — was built through debt.

The penny is dropping across the country

Cities across the country are experiencing first hand the costs of urban sprawl and it is reflected in property taxes. Consider a few examples of 2024 property tax increases:

• Toronto 9.5%

• Edmonton 8.9%

• Calgary 8.6%

• Vancouver 7.5%

• Halifax 6.3%

• Montréal 4.9%

These cities are not engaging in lavish vanity projects. They are increasing property taxes to service sprawl.

What does this mean for Ottawa taxpayers?

Simply put, Ottawa taxpayers cannot afford more sprawl.

If we want to keep taxes from rising, we need to stop building new sub-divisions. We can achieve our housing targets through infill and building on vacant or underused lands within built-up areas. (BuildingIN is one specific housing solution, of which CitySHAPES is a part, to meet housing targets without more sprawl.)

Developers will hate that idea (which means Mark Sutcliffe will dismiss it) because there is a lot of money to be made turning farmers’ fields into housing developments.

Take the Barrhaven Conservancy as an example. The developer Caivan acquired 66 acres of land on a flood plain (which in itself is another whopper for another day). They are building 942 homes on the site. If Caivan sells those homes at the average Ottawa home price of $680,000, with a profit margin of 15% on each home, they stand to make over $96 million in profit.

Development charges will pay for the infrastructure costs. But after the homes are built, taxpayers across the city will collectively pay about $1 million a year to subsidize the services going to the 942 homes in the Barrhaven Conservancy.

Don’t get me wrong. Risk takers should be rewarded with profit. Fortunes favours the bold.

Where I have a problem is when that profit is based on a growth model that requires a hidden taxpayer subsidy.

Looking forward, not backwards

I want to pause for a minute and be clear that I’m not bashing the suburbs.

People have the choice to live wherever they want.

I grew up in the suburbs. In Bay Ward. I understand why many make the choice to live in a suburban home. My parents chose that location because it was a great place to raise kids.

I know that people across this town, from Orléans to Kanata to Osgoode, are proud of their neighbourhoods and wouldn’t want to live anywhere else.

What has been built has been built. Those homes aren’t going anywhere. We’ve already paid for their infrastructure. The operating subsidy required is already factored into our city budget.

Rather, this is about looking forward. Where are future homes going to be built?

Subsidize 151,000 new homes?

The City of Ottawa has a target of building 151,000 new homes by 2031. If we were to build all those homes as new greenfield sub-divisions, it would require a future tax increase to cover $151 million in annual subsidies to these homes. Property taxes would have to rise by 7.5% to cover the operating deficit for the city to service those homes.

Our civic leaders get to decide where future homes are built. Our official plan says half as greenfield, half as infill.

Our target for infill is too low. And furthermore, Ottawa has no strategy for achieving its infill targets. My concern is that, without a specific strategy for infill, we will simply revert back to the sprawl that we know.

That’s what this Council is indicating with its decision to build excess infrastructure out to Tewin. Ottawa will keep building out.

Last year in Hamilton, 90% of new homes were built as infill. It can be done.

We created this mess

The Mayor says “we didn’t create this mess”. We did.

This Council has made some poor spending decisions. But more importantly, this Council — through its actions and despite our official plan — keeps building out.

Building out is the high cost model for growth. Every 20,000 homes we build in new sub-divisions represents a 1% citywide property tax increase.

Big developers love it. They’re typically making north of a $100K profit on each of those homes.

Few of us like paying taxes, but there is only one solution to keeping taxes low.

Stop building our city out. Focus on building new homes in already built-up areas.

That’s the only real solution to Ottawa’s fiscal mess.

UPDATE 23/08

A reader brought to my attention that there was a misinterpretation in Section “3. Servicing spread-out neighbourhoods is expensive” of this analysis. It comes down to whether Development Charges pay for the first 10 years of infrastructure capital costs, or both the infrastructure capital and operating costs.

I checked with the experts and the first of those two interpretations is correct. The revision is not material to the basic argument of this note, that we cannot afford to build new sub-divisions without raising taxes. In fact, it actually strengthens the point. It’s all a bit in the weeds, but I wanted to be transparent that there have been edits to this note to incorporate the revised understanding of Development Charges.