Suburban Sprawl Adds Salt To Maple Ridge’s Infrastructure Deficit Wounds

Series: Urban sprawl municipal budget impact

Apart from its commonly known costs, suburban sprawl is hitting municipal governments with hidden costs as a result of misguided policies.

In a growing city such as Maple Ridge, BC, leapfrogging suburban developments are adding more inventories to the city’s asset base and making its infrastructure deficit worse than it already is.

A real life example is used to illustrate how the discipline of a business case analysis can and should be applied to determine the implications of a new development project to the finance of a municipality.

See how a blighted and run-down block built in a traditional pattern compars against a shiny and new auto-oriented block built for a drive-through fast food chain restaurant when it comes to tax revenues to the city.

Lured by no-money-down and an immediate boost in property tax revenue, a city often approves development projects which end up with negative returns down the road. This concept only becomes obvious after digging into the income and expenses over a lifecycle of a project.

In our previous article we presented how suburban sprawl is piling additional tax burdens onto existing residents who have to pay for the shortfall between what the municipal government gets from development cost charges (DCCs) and incremental property tax revenue and what it needs to pay to initially build, forever maintain and eventually replace the infrastructure which comes with the new development.

In this article we will frame this discussion numerically using the data from Maple Ridge, BC, a city of about 80,000 people on the eastern edge of the Metro Vancouver region. Within commuting distance from Vancouver (can be painful at times), it is one of Metro Vancouver’s bedroom communities. The east side of the city is relatively undeveloped, and it is where new subdivisions within the urban boundary and, increasingly, leapfrogging new subdivisions beyond the urban boundary pop up.

State of Infrastructure Deficit In Maple Ridge

There are multiple definitions of infrastructure deficit. For the purpose of our discussion here, infrastructure deficit is defined as the difference between the funding needed for maintenance and replacement of existing infrastructure and the funding available from all sources, including taxes and grants.

Currently, the infrastructure items, including municipal roads, water/sewer lines, parks, fire hall, etc., which are listed as asset items on its balance sheet, total $1.7 billion. The cost to maintain that infrastructure when it was worth $1.3 billion in 2006 was $30 million a year, according to Paul Gill, GM of Corporate and Financial Services at City Hall.

Like humans, the healthcare cost of aging infrastructure does not go up in a linear fashion. One needs to spend a constant amount to maintain it in order to keep it under good health. Failing that, as in a deficit situation, the cost of repairing or replacing crumbling infrastructure is multiple times the regular maintenance amounts.

infrastructure phases

State of infrastructure over time (source: Canada’s Looming Infrastructure Deficit)

It is a case of pay me $100 now, each and every day, or pay me megabucks later.

Megabucks as in this:

crumbling infrastructure 4(credit: Canada’s Looming Infrastructure Deficit)

Or this:
crumbling infrastructure 2(credit: Canada’s Looming Infrastructure Deficit)

Remember maintenance eats up about 80% of the entire life cycle cost of a piece of infrastructure. So the initial build-out costs, even if completely covered by DCC, constitute only a down payment.

So how has Maple Ridge been dealing with the infrastructure deficit? Is it setting aside $30 million annually to maintain its infrastructure? Nope, it has been spending roughly 1/10 the amount.

In order to address the growing deficit situation, the city introduced a 1% annual tax increase to close the gap in 2008. The hope is that, by increasing tax 1%, cumulatively, each and every year, and putting it into the Infrastructure Sustainability Fund, it will help close the gap by half by 2031.

Maple Ridge Infrastructure Deficit 1Maple Ridge’s plan to plug unfunded infrastructure deficit (source: Maple Ridge Financial Plan 2014-2018)

The increase amount was subsequently reduced to 0.5% in 2013. A round of applause went to the councilors who brought relief to the taxpayers. The downside of this dispensation is that the deficit gap will remain big. The city just managed to kick the can farther down the road.

Impact Of Sprawl On Infrastructure Deficit

Whereas much discussion and debates have been waged over whether taxpayers should be hit with an annual tax increase of 1% or 0.5%, another equally fundamental question which escapes more scrutiny than it deserves is the growth of the infrastructure asset base as a result of new development projects.

DCCs collected from new projects cover the costs of the initial build-out, but do not cover replacement costs or maintenance costs. And as the developer hands over the key to the city, the project adds yet another chunk of assets liabilities to the overall infrastructure inventory. Such infrastructure additions are especially problematic in leapfrogging subdivisions as more brand spanking new infrastructure needs to be added. In Maple Ridge’s 2014 Financial Plan, Laura Benson, Manager of Sustainability and Corporate Planning, sums up the issues faced by the city:

“.. subdivision infrastructure turned over by developers becomes the responsibility of the District and over time contributes significantly to the infrastructure inventory. In 2004 it was almost $10 million and in 2005 it was another $26 million. Where do we get the money to sustain an asset base that is growing at this pace?”

The Business Case For A New Development Project

So leaving aside any other second order costs and benefits, the math is fairly basic. On the one side you receive DCC and incremental tax revenue. On the other you need to pay to provide additional services and maintain, and eventually replace, additional infrastructure.  If the expenses exceed revenues then it is a negative investment.

It is not to say that all new projects will end up net negative to the city, but based on those municipalities who were curious and checked, the results do not look good. From our previous article here’s a recap of what they found:

  • Greater Golden Horseshoe, Ontario – Municipalities don’t collect enough money through development charges to cover the full cost of building the infrastructure needed to service new developments, leaving existing taxpayers on the hook for up to 39% of the costs.
  • Edmonton – The city realizes that the costs of new subdivisions are exceeding revenue it collects from these developments. Across just 17 of the more than 40 new developments underway or planned, net costs have been projected to exceed revenues by nearly $4 billion over 60 years.
  • Region of Peel, Ontario – “Staff has given us all kinds of financial statements proving that development is not paying its way,” said Mississauga Mayor Hazel McCallion. “The facts are on the books. We are going into debt in a big way in the Region of Peel.”
  • Calgary – A similar study concluded that the denser pattern would use 25% less land and would be 33% less expensive to build, resulting in a savings to the city of more than $11 billion in capital costs alone.

Cost-benefit analyses are so fundamental in Business 101 that it would be shocking if they are not carried out as part of the new development approval process.

References and further reading

 

 

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