Canadian Water Network’s (CWN) CEO Nicola Crawhall sat down for an in-depth interview with Craig Binning and Andrew Mirabella of Hemson Consulting. The firm specializes in planning policy, municipal finance, demographic and economic forecasting, land needs assessment, real estate advisory, and transportation impact analysis.

Craig is a partner at Hemson Consulting. He leads the firm’s municipal finance practice, which encompasses a range of services, including development charges, fiscal impact analysis, water and sewer rate studies, asset management, and long-range financial sustainability studies.

Andrew is an associate partner at Hemson Consulting. He heads up asset management plans, utility rate studies, development charge studies, and long-range financial planning.

National housing target and servicing challenge

Nicola: With a housing target of 5.8 million housing units by 2030, municipalities across the country are tasked with planning for, approving and servicing for this growth. FCM’s analysis estimates that it will cost $ 107,000 per household in housing-supportive infrastructure, including water and wastewater, for a total of $600 billion in infrastructure investment across the country.

Setting aside the challenge of building that much infrastructure that quickly, from a purely financial point of view, do municipalities have the financial levers to enable this level of investment over such a short period of time?

Craig: Everyone now acknowledges that we won’t hit that housing target within the next five years. It was going to be a challenge anyway, but with tariffs and the economic uncertainty around trade with the US, it has had the effect of slowing down the housing markets, particularly in the Greater Toronto Area, but also in the Lower Mainland of British Columbia (B.C.). This is actually a good thing from an infrastructure perspective because it gives us more time. The price tag is huge. It’s great that the Government of Ontario recently announced another $1.6-billion in funding for housing enabling infrastructure, but within the context of the overall spend, it’s not a lot of money. Large municipalities are already assuming significantly more debt, and are spreading it out over a longer term, but there are restrictions in Ontario (e.g., debt cannot exceed 25 percent of own-source revenues). So, there will be more challenges in how to use that money as there are very few levers. Municipalities and municipal utilities will need to be creative in how they use their reserves. And we are just talking about new assets when we still have to invest in state of good repair (SOGR).  Many large municipalities are in better shape in terms of keeping up with SOGR, but the competition between SOGR and investing in new assets will put more pressure on utility rates. Hemson has seen rate increases of five to 10 percent over the last 10-15 years. Some larger municipalities are now increasing rates closer to the level of inflation.

Andrew: Unlike parks or other soft services, water and wastewater infrastructure can’t be delayed. It has to be in place before housing is built, so the municipality is taking on a significant amount of risk. There is also great uncertainty about how and when it will be able to recoup its expenses. This adds another layer to how long municipalities carry debt.

Large municipalities with significant reserves, like the City of Toronto, may be able to take advantage of the economic slowdown to build out more capacity. And they are good at leveraging SOGR at the same time. Some municipalities with significant greenfield areas may not have the reserves to move forward with building more capacity until the housing market picks up.

Impact of changes to development (cost) charges policy

Nicola: Amendments to the Ontario Development Charges Act have changed what is eligible and the timing of recovering development charges. Other provinces have made changes to their development charge regimes as well. How do these development charge changes help or hinder the above financing challenge?

Craig: The development charge policy environment continues to change. Many in the municipal sector have asked for stability. Often when Ontario makes changes, these changes roll across the country.

The development sector in Ontario has said, “you’re asking us to pay too early. We want to pay when units are occupied, rather than at the point of issuing the building permit.” So with recent changes to the Development Charges Act, development charges may be collected at occupancy. The City of Toronto has estimated that this change will result in a $1.9B cash flow hit over 10 years.

In B.C., the government recently announced a similar policy. Alberta may be looking at a similar change.

These changes will create greater financial strain on municipal cash flow, and will require an increase in the use of debt financing.

Municipalities address this cash flow challenge in different ways. Halton Region has relied on developer front-end financing historically. The Region of York debt finances infrastructure, then recovers the investment through development charges. Peel Region is trying to find a balance between the two. Mid-sized municipalities in Ontario, like Barrie and Innisfil, are fostering relationships with the development industry to figure out creative approaches. For instance, asking more than one developer to front-end infrastructure, and the municipality picking up a share of the cost.

Municipal financial strategies

Nicola: Notwithstanding the legislated financial constraints that municipalities face, what strategies can municipal water departments/water utilities employ to expand their financial capacity and/or smooth out the cash flow gap between when infrastructure is built and when financial revenues are generated?

Andrew: Given the current challenges with financing infrastructure, we recommend keeping municipal utility rate studies and all planning-related studies as current as possible to ensure costs are recovered while meeting asset management obligations. Another cost-saving strategy we are interested in exploring is how to extend the life of existing infrastructure.

Craig: With these ongoing pressures, we are seeing an increasing use of debt. There is some wiggle room regarding the length of the term. It’s best to extend it out within the allowable period corresponding to the useful life of the asset. There is a 40-year limit in Ontario. Some municipalities use 15-20 years and some are looking at 25-30 years now. We don’t see many past the 30-year mark. Using longer debt amortization periods for linear infrastructure may be more beneficial, while shorter periods may be more suitable for assets with a shorter lifespan.

Another strategy involves timing asset management and state of good repair, which can be smoothed out to extend the life of existing assets through rehabilitation work. Municipalities are finding ways that are fiscally worthwhile to extend the life of their assets.

It is also worth noting that there are increasing rumblings around municipal service corporations (MSC). Some provincial governments think that a change in governance and more regional, even superregional, delivery of services could be the solution to the problem of financial sustainability of public infrastructure. We may see this happen in Peel Region. Some believe you can be more efficient in planning and delivering capital, find efficiencies, and gain access to different sources of funding like pension funds. What is forgotten is that some regional governments already have the highest credit rating possible and, as a result, enjoy very low rates of financing. What we observed in the energy sector when energy distribution transitioned to an MSC structure was that their cost of financing increased. If we move in this direction, it will take a while to figure out if it does help with the cost of housing enabling infrastructure. However, at the end of the day, any increase in investment will have an impact on the end user, the ratepayer, whether it is an MSC or not.

Cooperation amongst land use developers, planners, and public works

Nicola: How can developers, land use planners, and public works cooperate to reduce water servicing costs associated with growth?

Craig: Certainly, over the last 15 years, most municipalities have undertaken municipal servicing studies, which involves public works in discussions about servicing new developments earlier in the process. The Regions of Halton and Peel undertake urban structure reviews that include planning alternative development forms and an assessment of costs under different development patterns and densities. The teams involved included public works engineers, roads, water, and wastewater. So good progress has been made.

However, in Ontario, the planning authority has been transferred from the regional government level to the lower-tier level, putting this progress at risk. There is concern that this change will detract from good, comprehensive regional planning.

Andrew: I agree. By removing the regional planning authority, land use and water allocation plans will get disjointed. These are relatively new changes, so we haven’t yet seen the full impact.

Growth outlook projections versus actual growth

Nicola: Multi-million dollar water servicing planning decisions are based on assumptions of future growth. These are often extrapolated from historical data on growth. However, shocks like COVID, a severe economic downturn, or changes in policies with respect to the number of housing units permitted per property can shake up these assumptions. For example, cities like Halifax had a growth surge during COVID that far exceeded their assumptions. What can municipalities learn from Halifax and other cities that have seen growth that far exceeds or lags behind assumptions?  Is there a more adaptive approach to planning for growth that can better match projections vs actual growth?

Andrew: A few thoughts. These are projections. We can never plan for a COVID-like event. In the short-term, we emphasize keeping studies current by using the best available information, consulting regional growth plans and targets, keeping a good handle on development permit activity, applications in the pipeline, talking to a lot of people across the municipality (e.g., finance, planners, engineers, etc.), and keeping an ear to the ground. Over the longer term, it’s important to keep studies up to date.

Craig: Ontario requires municipalities to report annually on their water and wastewater treatment capacity. When it gets to 80 percent, they are required to start planning for expansion. Accelerated growth through COVID in some regions is levelling out. Overall consumption patterns per capita have also levelled off. Over the past 15 years, Peel Region has not realized any increase in billed water consumption despite growth, because of the steady drop in per capita consumption. This has provided it with additional capacity.

Current economic instability and its effect on municipal finance

NC: Due to global economic instability, higher interest rates coming out of COVID, and U.S. tariffs, costs are escalating and economic growth is expected to slow. How should municipalities/ municipal utilities prepare for this continued economic turbulence?

Craig: I’m concerned that municipalities are underestimating the impact of tariffs — direct and indirect. Uncertainty is impacting investment decisions of industry — not housing, but those related to employment lands. The automotive industry in Ontario has been hit badly. We see an immediate impact on cities like Windsor. Even smaller places like New Tecumseth have an auto plant. Tariffs and policy changes in the US that are pivoting away from supporting electric vehicles are having an immediate impact on investment decisions in many municipalities that expected EV car and battery manufacturing, and this has a direct impact in terms of not attracting population, assessment growth, and housing, so there are real consequences. The threat of additional tariffs and uncertainty with the renegotiation of the CUSMA trade agreement will have an impact. We are uncertain about the exact impact and it will take years to figure this out. But the consequences are potentially significant, especially with regard to assessment growth.

Andrew: The non-residential construction price index rose quite substantially during COVID, in the range of 15-17 percent per annum at the peak. It is now down to about 3-4 percent per annum. Hopefully the trend stays low, so there is some relief there.

Even so, the downturn in the housing market means that in many municipalities, we have seen development charge revenues fall dramatically, even close to zero. So, delivery of infrastructure that is dependent on development charges becomes exceptionally challenging. Seeing the drop in development charge revenues and anticipating a decline in assessment growth, I expect municipal councils will be particularly cautious at budget time this Fall. Especially in Ontario and B.C., where we are entering an election year; that usually dampens rate increases.