Re-evaluating stormwater run-off costs

Toronto contemplates user-pay rate formula
Tuesday, August 7, 2012
By Barbara Carss

Advocates for the commercial real estate industry are united in opposition to a suggested new formula for calculating Toronto’s stormwater service charges.

The fee is still conceptual and just one of the discussion items in a more wide-ranging public consultation on the City’s need to augment capital funding for its water infrastructure but is envisioned as a user-pay approach based on a property’s impervious surface area and the resulting volume of stormwater run-off.

City staff see it as potential means to raise additional revenue and/or create a better balance between the rates property owners pay and the stormwater services they receive. Currently, stormwater management is funded through the water rates, tying ratepayers’ contribution to the volume of water they consume.

“For every dollar collected, about 15 per cent of it goes to stormwater management and that’s expected to increase to about 30 per cent in the next 30 years, so it’s a growing part of the (water) program,” says Adir Gupta, manager of financial policy in Toronto’s corporate finance department. “But there is inequity. There is no relation between water consumed and the run-off.”

Meanwhile, the public consultation occurs in the broader context of a capital funding shortfall. Toronto’s long-range water infrastructure program, which city council approved in 2006, was to be financed through nine successive years of nine per cent annual increases in the water rate, commonly known as ‘9 for 9.’ Now, after seven years of rate increases, last decade’s economic prognosis is off target, partly due to newly emerging priorities and lower than anticipated revenue.

Funding gap
In particular, the City needs to upgrade and/or replace its water and wastewater assets, including aging combined sewers that discharge storm overflow into Lake Ontario and the Don River. Other capital budget items introduced since 2006 include a program to address the chronic problem of system backup and basement flooding during severe weather, the switchover from chlorination to ultraviolet light for wastewater treatment and new infrastructure to serve the redevelopment of the Regent Park and Lawrence Heights communities.

At the same time, a reduction in water consumption from the levels foreseen in 2006, translates into a 1.5 to two per cent drop in projected annual revenue. The public consultation will contemplate possible additional funding mechanisms, including ongoing rate increases, debenture financing and a new stormwater utility charge that could be separated out from the water rate and apportioned differently.

“Council asked staff to consult with stakeholders. We haven’t recommended anything; we’re just putting out some ideas,” says Gupta. “There is $1 billion in funding pressure on Toronto Water’s budget. The way that’s been managed so far is by deferring capital spending and the depletion of what was once a reasonable reserve fund.”

In a joint letter, four of Toronto’s prominent real estate associations have declared their preference for continued water rate increases in the period beyond 2014.

“By extending rate increases over the next several years and thereafter reducing rate increases to a yearly inflationary level, our respective members hope Toronto Water will be able to avoid impacts to the quality of their water service and trust that revenue generated will enable the City to raise the $1.1 billion in additional funds required to reinstate the original capital plan,” states the joint submission from the Building Owners and Managers Association (BOMA) of Toronto, the International Council of Shopping Centers (ISCS), NAIOP (National Association of Industrial and Office Properties) Toronto Chapter and the Real Property Association of Canada (REALpac).

Equity and incentives
In contrast, the four organizations reject the proposal for a targeted stormwater management charge, which would shift costs between property classes and within the various classes. They argue many larger retail and industrial facilities would suffer for complying with the parking design standards that the City enforced in the era when the projects were built.

“Existing developed properties are not able to reduce their impermeable area without prohibitive retrofit costs. Therefore, an impermeable rate structure is not an effective incentive to reduce run-off,” the letter contends.

Toronto’s Green Development Standard, adopted in 2010, now places restrictions on the volume and quality of stormwater run-off from a site, requiring developers and owners to implement on-site features and strategies to hold and filter rainfall. At a minimum, new ICI (industrial, commercial, institutional) and multi-residential development must be capable of retaining the first five millimetres from each rainfall or at least 50 per cent of the annual rainfall, while 80 per cent of total suspended solids must be removed from run-off leaving the site. Development complying with these standards would presumably have a lower quotient of impervious surface, which would be reflected in the calculation of a stormwater fee.

Many industrial ratepayers are disproportionally contributing to stormwater management through the current funding formula and likely would benefit from a separate rate tied to the property’s impermeable area. Citywide, stormwater management costs currently average out to 61 cents per square metre of impervious surface area.

“A large industrial (water) user is contributing about $12 per square metre,” says Gupta. “A large commercial shopping centre doesn’t consume a whole lot of water but it has a huge square footage of impervious area so it might be paying 25 cents per square metre, which is well under the average.”

A separate stormwater fee would be somewhat analogous to the way the reassessment process redistributes the property tax burden. Some property owners would pay more than they currently do for stormwater services but if the City simply needs to raise the same amount of money as it now collects through water rates, some ratepayers would pay less. Much would depend on how council would choose to use the fee.

“A new fee structure might just be used to deal with the equity issue and as an incentive for site upgrades rather than to raise additional revenue,” suggests Gupta.

That said, the City’s public consultation documentation does state funding is “not fully in place for projects dealing with combined sewer overflows and improving water quality in the Don River and waterfront,” and the consultation is an exercise in looking for that money.

Administrative extras
Gupta says it’s premature to speculate how such a new fee would be assessed and administered but it seems inevitable that it would require staff, IT and administrative resources – costs the four real estate associations highlight in their objections.

“A charge to impervious area will require the creation of a new costly administration to measure and calculate charges based on impervious area, including the creation of an impartial dispute resolution process to handle area disagreements. The database will have to be maintained and constantly updated to reflect physical changes,” their letter predicts.

Other Canadian municipalities that levy a dedicated stormwater charge include Kitchener, Ont., Saskatoon, Regina, Calgary and Edmonton.

Barbara Carss is editor-in-chief of Canadian Property Management magazine.

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