ANNUAL REPORT, PROVINCIAL AUDITOR, 1992
MINISTRY OF HOUSING
CONTENTS
Tuesday 9 March 1993
Annual report, Provincial Auditor, 1992
Ministry of Housing
Daniel Burns, deputy minister
Toni Farley, manager, housing programs
Suzanne Herbert, assistant deputy minister, housing operations
STANDING COMMITTEE ON PUBLIC ACCOUNTS
*Chair / Président: Mancini, Remo (Essex South/-Sud L)
*Acting Chair / Président suppléante: Callahan, Robert V. (Brampton South/-Sud L)
*Vice-Chair / Vice-Président: Cordiano, Joseph (Lawrence L)
Cousens, W. Donald (Markham PC)
*Duignan, Noel (Halton North/-Nord ND)
Frankford, Robert (Scarborough East/-Est ND)
Haeck, Christel (St Catharines-Brock ND)
*Hayes, Pat (Essex-Kent ND)
Johnson, Paul R. (Prince Edward-Lennox-South Hastings/Prince Edward-Lennox-Hastings-Sud ND)
O'Connor, Larry (Durham-York ND)
Sorbara, Gregory S. (York Centre L)
*Tilson, David (Dufferin-Peel PC)
*In attendance / présents
Substitutions present / Membres remplaçants présents:
Abel, Donald (Wentworth North/-Nord ND) for Mr O'Connor
Cooper, Mike (Kitchener-Wilmot ND) for Mr Johnson
Fletcher, Derek (Guelph ND) for Mr O'Connor
Harrington, Margaret H. (Niagara Falls ND) for Ms Haeck
Kormos, Peter (Welland-Thorold ND) for Mr Frankford
Marchese, Rosario (Fort York ND) for Mr Johnson
Poole, Dianne (Eglinton L) for Mr Sorbara
Wilson, Fred, (Frontenac-Addington ND) for Mr Hayes
Also taking part / Autres participants et participantes:
Otterman, Jim, Assistant Provincial Auditor
Peall, Gary, director, ministry and agency audit branches, Office of the Provincial Auditor
Peters, Erik, Provincial Auditor
Clerk / Greffiére: Manikel, Tannis
Staff / Personnel: McLellan, Ray, research officer, Legislative Research Service
ANNUAL REPORT, PROVINCIAL AUDITOR,
1992
MINISTRY OF HOUSING
The Chair (Mr Remo Mancini): The standing committee on public accounts is called to order. Yesterday the committee members were offered a briefing. I understand that the briefing went well and that the information provided was adequate for the members.
Mr Noel Duignan (Halton North): We missed you.
The Chair: Mr Duignan says that he missed me. I missed all of you. I want you to know that. I spent most of the afternoon worrying about each and every one of you and hoping you were all getting along fine. I wanted you to know that.
Today, in open session, we'll be dealing with section 3.12 of the 1992 annual report of the Provincial Auditor, specifically dealing with non-profit housing. Members will recall that during the last session of the Legislature, while we were at our regular Thursday sittings, the committee decided on a number of areas we wanted to follow up in depth. Non-profit housing was one of those areas, particularly as it related to the auditor's report. Following up on the committee's desire to do so, we have made arrangements to have appropriate officials from the Ministry of Housing join us today.
For the committee's information, today's sitting will be until 1 pm this afternoon. We'll adjourn and come back at 3 pm, as I'm told that in the interim the deputy minister has some important meetings to attend. So today is from 10 am to 1 pm. We'll then adjourn and we'll return at 3 pm and sit until 5 pm or thereabouts.
Before the committee today we have the deputy minister, Mr Daniel Burns, and other staff people with him and in the audience. What I'd like to do is introduce Mr Burns to all the committee members. I'd like to welcome you, Mr Burns, to our committee. I would like to ask you, at the appropriate opportunity, to introduce appropriate staff you have with you. You may want some of them to join you if you are going to rely on them on a regular basis. For the Hansard record, we need to know who they are and what they do. The other thing I'd like to ask is whether you have an opening presentation and how long it will be, so that members can organize their thoughts and their morning appropriately. Unless there are any questions -- I don't believe there are -- I'd like to turn the meeting over to Mr Burns, the Deputy Minister of Housing, and await his presentation.
Mr Daniel Burns: Thank you, Mr Chair. First let me say how much I appreciate the schedule of the committee being altered a bit to accommodate my problem, which arose only yesterday. It's very helpful to me. Before I turn to making a presentation, I will introduce the senior officials of the ministry who are here with me. From time to time they may join the discussion if the topic touches on areas that they are responsible for and have particular expertise in relation to.
Anne Beaumont is the assistant deputy minister for housing policy and planning, Arnie Temple is the assistant deputy minister for corporate resources and Suzanne Herbert is the assistant deputy minister for housing operations and the chief executive officer of the Ontario Housing Corporation. They are the senior staff of the ministry.
Peter Schafft is the executive director of housing field operations, Toni Farley is from the central region of housing field operations, David Martin is director of program design and Brad Singh is the director of our own audit branch in the Ministry of Housing.
Finally, with me is Patricia Redmond, my own executive assistant, who is going to help with the presentation part of what we would like to do.
I would like to begin with the presentation. My own estimate -- I suppose it partly depends on how fast I talk -- is that it will take about an hour. We'll cover the background of the program, its administrative design, the principal issues addressed in the audit and the work we are doing on those items.
The Chair: Past experience tells me that the members can't sit still for an hour, meaning that during the course of your presentation they're going to be interested, and I or even the Provincial Auditor may be interested, in asking questions, so I'd like to set the ground rules now with the members if it's okay. Are we going to allow questions during the presentation, and if so, for how long? Are we going to allow other members to do supplementary questions, and if so, is one going to be satisfactory? I don't believe we can go through the whole presentation, if it's an hour long, without members being able to ask questions.
Mr Rosario Marchese (Fort York): I want to suggest that Mr Burns do a presentation first and that we keep our questions till later. If the presentation could be less than one hour, it might be preferable. If not, I would still recommend that he deal with the presentation. Otherwise, as we noted yesterday, we'll be jumping all over the place. That would be my suggestion.
Ms Dianne Poole (Eglinton): Mr Chair, I'd appreciate it if we could have the opportunity to ask questions as we go along. We are in a slightly different situation here in public accounts than we normally are. Normally, when you have a ministry come in, it would be for two to three hours, in which case it's extremely important it have time to go through its entire presentation. I believe we have the ministry officials here for two and a half days, so we certainly do not have to fear running out of time and not getting their points in. I think it's extremely important that, as issues arise, we have a full discussion and then go on to the next item. It would seem to me it's much more logical to do it that way.
The Chair: My intent was not to allow full discussion during Mr Burns's presentation; my intent was to allow questions for clarification, the odd supplementary. That type of question may be limited to a couple of minutes. My intention was not to allow full discussion during this presentation.
Mr Tilson, do you have any comments?
Mr David Tilson (Dufferin-Peel): You're doing a fine job, Mr Chairman.
The Chair: Thank you. Mr Kormos, then Mr Duignan.
Mr Peter Kormos (Welland-Thorold): I'm simply in that most unnatural position of suggesting that compromise position you spoke of, and that is that the Chair use his discretion to control the length and direction of the comments if they interrupt the deputy minister. It's not difficult.
Mr Duignan: This is to suggest the same, Mr Chairman: Limit it to points of clarification and control the length of --
The Chair: I think it's fair for our witnesses to know how we're going to handle the situation too. I want to make it very clear that we're not going to indulge in full, comprehensive policy questions during this presentation. We're going to ask for points of clarification, maybe a question or two and that's it. Then we're going to move on.
Mr Robert V. Callahan (Brampton South): Just one further item. If this is going to be an hour-long brief, is there a brief available for the members?
The Chair: Is there a written brief we could have so we could follow along with you, Mr Burns?
Mr Burns: We don't have a full version of my remarks, but we will be using some overheads, and I believe we have copies of those things which I'll be touching on as collateral material as we go.
Mr Callahan: We don't have those yet, Mr Chair.
The Chair: We're just checking.
Mr Burns: We just put these together in the last couple of days, so if people would like to follow with those --
The Chair: We'd like to have those distributed before we start. Thank you, Mr Callahan. We'll get started in about 30 seconds.
Mr Callahan: In view of the fact that it's most unusual, at least in my experience, that when a ministry comes before a legislative committee and is going to give a presentation that is not in fact reduced to writing and provided for us, I would ask, in light of what the deputy minister has said, that perhaps we could arrange to have Instant Hansard available certainly tomorrow, if that's possible, so that we will have those comments to refer to in any questioning that might take place.
The Chair: That's a very good suggestion, Mr Callahan. We'll ensure that it takes place: Instant Hansard for tomorrow am.
That should clarify all the matters at this point. Mr Burns, we'll turn the floor over to you, sir.
Mr Burns: Thank you, Mr Chair. I'll try to resist, in my remarks, the temptation to be overly elaborate and leave those things for questions that may come later.
Let me begin by saying that we think the audit of this particular program took place at a very appropriate time in the delivery of non-profit housing in the province of Ontario. Not only were we in the midst of trying to finalize arrangements for the largest program the province had ever administered; we were examining, at the same time, some of the policy questions associated with the program and doing a detailed evaluation of the program's costs, a process known as a program review.
Many of the items the audit touched on, many of the areas the audit findings suggested we should focus on are the same areas that we ourselves had felt were important to focus on as a result of public consultation on the non-profit and cooperative program and of our own internal program review. In fact, the three processes overlapped to a very large extent in terms of what they looked at, what they concluded and what they thought was important.
Before I turn to looking at the situation in 1990-91 and the specific areas that were looked at by the auditor, I want to take a couple of minutes to lay a bit of historical foundation, to place the programs that were audited in a little bit of historical context.
In this country we began fostering what we now call social housing, that is, housing provided by charitable groups or public sector organizations, in 1938 when the Parliament of that day passed the first National Housing Act, reinforcing it in 1945 with the establishment of the Canada Mortgage and Housing Corp. In that period immediately after the war, many municipalities in particular began to try to tackle their own housing problems and create local charitable or municipal housing institutions. Many of you will know that in 1947 the city of Toronto began a renewal process that created what we now know as Regent Park, and by the 1950s, Ottawa, Windsor, Hamilton, Metropolitan Toronto and a number of other municipalities were active in the direct provision of housing.
That locally based process ran until 1964. In 1964 the federal government, as part of a series of reforms related to the welfare state, totally overhauled the National Housing Act and introduced a new funding formula, a new program, a new method of delivering publicly supported housing, a form of housing we now call public housing. From 1964 to 1972 or 1973, that was the national emphasis.
In the province of Ontario, the Ontario Housing Corp was organized very quickly by the government of that day and the province of Ontario was tremendously successful in capturing national funding for the development of that institution, to the point where other provinces actually complained about it quite a lot.
From 1966, when it really got rolling, to 1972 or 1973, when we stopped doing public housing, only in those six years, the Ontario Housing Corp went from a standing start to its current state where it directly owns and operates 88,000 units and funds another 35,000 or 40,000 through collateral programs.
Many of you will know from your own personal history or your experience in this particular field that the success bred some hostility -- coins have two sides -- and public housing ran into a few problems by the time we got to the early 1970s. The scale and volume of development evoked local hostility. The amount of money that was required to operate at that scale began to create a problem in the federal world, from its perspective, and there began to be concerns about the model from the point of view of how the communities that were created worked as communities.
The federal government stopped funding public housing as the model in the time of Paul Hellyer and caused a national discussion to take place about what the appropriate alternative would be, a discussion that took place in 1971-72-73 and led to the National Housing Act changes of 1973 which provide the basis for the approaches that have been taken to the provision of publicly supported non-profit and public agency housing since; that is, for the last 20 years. Those principles were:
(1) The communities that were created should be diverse. They should house a spectrum of households by characteristic and by income, a mixed-income approach.
(2) The sponsorship of that form of housing was to move from very large provincial agencies to organizations rooted in community life. The principle was that funding should flow to local government, community organizations and cooperatives which would operate right at the community level.
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Those principles have been followed in one way or another by the myriad of programs that have followed since 1973, whether national-provincial partnerships or provincial unilateral programs in this province or elsewhere.
From 1974, after those amendments to the act, until 1986, the support for non-profit and cooperative housing was essentially managed by the federal government. Many provinces had some collateral and support of program activities in place, but they related fundamentally to a federal effort.
Into 1986, the federal government decided in a number of fields, including housing, that it wanted to take a look at whether or not there was an appropriate balance in program administration, delivery and funding between the federal government and the provinces. In the case of housing, in 1986 they entered into a series of agreements with the provinces that made the provinces responsible for the delivery of non-profit cooperative housing to those institutions I alluded to before.
This was an important turning point in Ontario's housing efforts and in the organization of our institutions. The ministry in the province of Ontario, of course, dates from the early 1970s, but fundamentally was organized around the Ontario Housing Corp as an institution; that was its major function. That changed after 1986, with the province assuming responsibility for program delivery in the non-profit and cooperative field. That meant creating a new organizational structure and new administrative practices, creating the ability within the institution to deliver programs.
Slide number one -- you've got it in front of you -- just shows you what has happened in our delivery relationship with the federal government since 1986, when the global agreement was signed and when there was the major change in program administration and delivery. In 1986 and 1987, the federal government was still cost-sharing with us, as it had before, the delivery of a fair number of new units in the province. You can see that in those two years it was 2,700 each year. It was slowly falling over the 1980s, but then in the last few years that fall has accelerated as the federal government has essentially withdrawn from the funding of additions to the non-profit and cooperative housing stock.
On the provincial side, the same period of time saw the beginnings of what we call unilateral programs; that is, programs the province itself funds wholly and delivers wholly to community housing organizations in the province. In 1986, the first of the province's own unilateral, fully funded and delivered programs was announced, called Project 3000, for 3,000 units. It had a special focus on people who had problems beyond housing: the hard-to-house, the need for support services.
In 1987, a second program, called Project 3600, was announced by the province. It was targeted to two issues felt to be important at that time. One was that some housing markets in the province were heating up and they wanted to balance them a little bit. The second was to begin to compensate for the change in federal funding you could see in that other slide. Administratively, what was going on in the ministry in 1986-87 was taking on the responsibilities that had been launched at the federal level and designing the delivery of two provincial programs of that scale.
The next event in the development of the ministry's delivery of non-profit and cooperative housing programs was the announcement in the spring of 1988 of the Homes Now program. The Homes Now program introduced some substantial administrative challenges to the ministry. First of all, its scale: It's a 30,000-unit program, which meant 10 times larger than the ones from the last two years, but also several times larger than the whole annual administrative effort that had been undertaken before.
Secondly, there was an effort to look at alternative methods of administering the delivery of the program. I think the government of the day decided that at that scale it really had to take a look at some options. As we went through the later parts of 1988 and into 1989, the first thing that happened was a comprehensive examination of the possibility of privatizing the program delivery, a process that took 9 or 10 months. In the interim the ministry operated essentially on the base of resources and practices that it had developed up to that point. In the end, a decision was made not to privatize the program delivery, but to do it with ministry resources.
Along with that a decision was made to try and find ways to minimize the administrative burden on the ministry by changing some of the delivery practices. I'll touch on those in a minute. The delivery resources that the ministry would have to deliver the program were based on minimum compliance; that is, they were based on the minimum administrative practices required for good program delivery and cost-effectiveness, but they were not at the level that the ministry submitted was required for a full set of administrative and backup practices to be in place for the delivery of the program.
When we get to 1989-90, which is just behind the period where the audit took place, just behind the events that the audit was looking at, that was the situation. We were administering the federal-provincial program based on a set of administrative practices agreed with the federal government, and two provincial programs that essentially were using the same format and delivering Homes Now, a very large program, in a somewhat different administrative format and at a scale that the ministry had not dealt with before.
I'm going to turn at this point to actually look a little bit at the stages that a non-profit or cooperative housing project goes through between its initial conception and completion. I don't propose to grind through this in detail, but only to touch on it.
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The Vice-Chair (Mr Joseph Cordiano): Order. Mr Tilson, do you have a question?
Mr Tilson: Before you get into that area, Mr Burns, you explained the history very well and I thank you for that. When Homes Now was first introduced by the then Liberal government to now, the administration of Homes Now has not changed. Is that a fair -- because you seemed to stop. You stopped then. You said that was the end so I assume, because you stopped, that the administration, the operation of Homes Now essentially remains the same as it was when it was first implemented.
Mr Burns: The program was announced. Then, as I said, there was an assessment done of whether privatization of program delivery was a live option, which took that 9 or 10 months. At the end of that, a decision was made not to do that, but to deliver the program through the ministry, based on the principles I just outlined.
I didn't dwell on it, but there were also decisions made not to deliver it in a way that was identical to the federal-provincial programs before. I'm going to come back to some of the differences later. For instance, what's called the allocation process -- that is a process by which the local group gets some level of commitment from the government -- was different in Homes Now than it was in the federal-provincial program, partly in order to reduce the administrative burden but partly also to respond, I think, to the need rightly expressed by people in this business of a better planning horizon than they were getting from the other program practices.
Mr Tilson: My question really was that Homes Now was implemented in what? Was it 1987?
Mr Burns: It began in 1988 and the program was closed December 31, 1991; that is, fully delivered at that point.
Mr Tilson: But the processes to non-profit housing as started in 1988, essentially, with the exception of different needs, is the same administration, the same process?
Mr Burns: With the exception of the allocation process, most of the processes are very similar or identical.
I could show you eight different program designs. That would, I think, be a waste of your time. I'm only going to show you one, which is the federal-provincial program. It contains all the main steps that we go through looking at a particular project. Essentially, they are the steps that are followed for any particular project proposal.
Ms Poole: A point of clarification: Just before you leave the chart on the non-profit programs status, you ended at P10,000, even though in the budget of last year there was an announcement of 20,000 units with the Jobs Ontario Homes program. I would take that to mean that between the budget almost a year ago and when this chart was compiled at the end of January 1993, no units were allocated, no units were committed and no units were delivered under that budget announcement of a year ago.
Mr Burns: I'm going to come to the administrative design principles of the new program, because they reflect a lot of the thinking we've been going through here, a little later in my presentation. The delivery status is close to what you just said. I believe the minister announced the first group some time in the last few days.
The Vice-Chair: Perhaps we could go on then, and apart from points of clarification, we'll continue with the presentation.
Mr Burns: Okay. What we're looking at here are the stages that are followed by a project using the federal-provincial process. In April of a particular year, a call is issued inviting proposals for what is normally called the federal-provincial program of the following year's number. So in April 1993, you would issue a call for the federal-provincial program of 1994. The application package has to include a whole set of backup documents related to the proposed sponsoring group, the group they hope to serve, its incorporation, its schedule of development and all the documents you'd need to evaluate a proposal.
It goes through an evaluation process in our regional offices, where it's assessed against a series of criteria which are summarized on that chart, and against a backdrop of broad regional allocations of the available amount of funding.
We get to the summer, and successful groups in that evaluation process are told they have initial selection status. At that point we've actually issued selection letters to somewhat more projects than are in the total funding envelope, because in this process not every proposal survives to the end. There is some attrition as you go along.
We then reach the fall of the first year of this cycle. This is essentially an 18-month process. At that point, confirmation of site and the details of the development strategy are what are focused on: provincial approvals, design, any other issues that have to get dealt with locally, such as site contamination, correlation of the development proposal with other proposals and so on.
If you survive that process, the next level of commitment that a proposal gets occurs in the January of the year of the program, if I can put it that way. So for the one we're in now, the federal-provincial 1994, we get to next January or February. We'll be confirming people who have survived the next stage of evaluation. They can then proceed to do the next round of development work, which is the detailed development work required for a building permit and the final arrangements for the construction of a project.
At this point, proponents are deeply locked with the technical sides of our assessments for a look at the proposed design of the building, the proposed approach to construction --
The Vice-Chair: On a point of clarification, Mr Tilson.
Mr Tilson: You're going through the process. Will you be telling us how you arrive at that point -- in other words, how you arrive at whether a particular municipality or a particular area is going to receive an allocation? So far you're talking about the project; you've chosen a site. But before you choose a site, you've got to determine how you're going to do that.
Mr Burns: We start with a regional planning base, if you like, for program delivery based on regions. For that we use a model that the federal government developed for the federal-provincial program, and we've continued to use it, as most other provinces do, up to this point. I'm going to get to a point where I say that we don't want to use it in the future because we believe it needs to be revised in the Ontario context, but we've used the federal-provincial model for program delivery in the sense of how much in each region.
Mr Tilson: Somewhere in your presentation, Mr Burns, I would like, and I'm certain other members of this committee would like, an elaboration of the process as to --
Mr Burns: Of that model?
Mr Tilson: Well, what we'd like to know is how you arrive at choosing a particular area, a particular municipality or a particular region that is going to have non-profit development.
Mr Burns: At this stage, I think if it's of interest to the committee to delve into that in more depth, we'll make a separate, detailed presentation of that in a second. But just to use eastern Ontario as an example, the regions for planning program delivery are determined between ourselves and the federal government. Eastern Ontario is a region, so the starting point is that some level of program delivery is allocated to eastern Ontario, and then proposals are invited from within that region.
Mr Tilson: I think we're going to need more than that. Let's just take the example in the press that came up. Mr Chairman, I know you want to restrict us on questions, but --
The Vice-Chair: We are pressed for time, so one final clarification.
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Mr Tilson: Just before we get to the area that he's getting into now, I think it's very important to know -- for example, Burlington -- I think it was Burlington -- just made an announcement of a substantial non-profit housing development. Somewhere in your presentation, whether it's now or later, I hope you would explain to us how you would choose, for example, Burlington or any other municipality.
Interjection.
Mr Tilson: If it's the same old rules, they need to be changed.
The Vice-Chair: Order, please. If I may, in the interest of saving some time, perhaps we could have a separate presentation within that overall presentation in which you will address that specifically.
Mr Burns: We will do that at an appropriate point.
The Vice-Chair: Mr Callahan, point of clarification.
Mr Callahan: The question that was being asked was about how you prioritize. That's the first step, I gather. Is that the thing that's done by the regional office? It prioritizes proposals and recommends projects?
Mr Burns: I think Mr Tilson was one step before that, which was how we set that up. Let's say it was the provincial program of 3,000 units. How did we start off by saying, for example, that 500 of that was going to be in eastern Ontario? To get to that 500, we use a measure of housing need, regionalized, that's been developed essentially in the federal-provincial context for national application.
Mr Callahan: Is this application we're going through the one the feds used and you mirror-imaged it?
Mr Burns: Yes.
Mr Callahan: If in fact that is the case, can I conclude as we go through this that in every application every one of these steps was followed? I have to ask that because I recall, I think it was in some of the briefings we had, that there were problems that arose after the fact, after you'd concluded a contract, that the land was contaminated and there had been no provision for the cleanup of that soil. I can't believe that would happen if you'd followed the application to the letter.
The Vice-Chair: I'm going to advise that we move on, because really what we're getting into is a great deal of detail. We're going to be pressed for time in terms of the presentation, so I would appreciate it if we could go on and then ask detailed questions after we're finished with the overall presentation.
Mr Burns: At the appropriate time, I'll be happy to address the question that Mr Callahan's put on the table.
The Vice-Chair: Okay. Perhaps we can carry on.
Mr Burns: The approval process we just very briefly looked at is the one that's used for all the federal-provincial program delivery and was used for the 3,000- and 3,600-unit programs. For Homes Now, there are three important differences.
The first one is that we didn't hold proponents to the 18-month decision cycle. That is, if you didn't fully complete all the work by December 31 of the second year, you wouldn't get a commitment under the federal-provincial process; you'd have to reapply at a future date. But Homes Now was designed as a four-year delivery program, without that cutoff date in the middle of it but rather at the back end.
Second, there was no first-stage screening, of the type I just described, for Homes Now, only the second and third stages.
Third, established, capable producers were given a broad allocation envelope to work with. For example, under Homes Now the city of Toronto's non-profit housing company, Cityhome, in the first announcements got three or four projects approved and a general, broad allocation of 700 units. It could then, within that envelope, propose particular projects for approval. It allowed the major operators in the non-profit and co-op field a framework to plan program delivery.
Homes Now had those three significant distinctions from the others in how decisions got made about who was funded. On the operating side, the structure of funding and budgeting arrangements is quite similar among all of the programs.
I want to take a little look now at the capital cost side of a non-profit housing project so we're all familiar with that. Before I do, it may be clear to everyone, particularly after yesterday's discussion, how this works, but I just want to say to everyone that this is funded differently from most public programs you look at. The reason is this: The capital financing associated with the project is borrowed in the marketplace during the process of development and finally ends up being a mortgage on the real property. We, the province of Ontario and the federal government, do not provide that capital, the mortgage, at the end of the day. What we provide each year are funds to cooperatives and non-profits to ensure that they can provide access to low-income households and to bridge the cost difference between market rents and economic rents. We are not providing the mortgage financing. That's provided by the private sector.
The Vice-Chair: One point of clarification I have: That mortgage financing is guaranteed by the government, however.
Mr Burns: In effect, yes, because the mortgage is given because the non-profit or cooperative has an operating agreement with the province.
Mr Callahan: Can I have a point of clarification on that as well, Mr Chair?
The Vice-Chair: A short point of clarification.
Mr Callahan: You asked, and I'm just asking another one. We had heard during briefings that there was some rush to get in under a window of opportunity of money from the feds. Are you saying that's not capital money; that's operating?
Mr Burns: You may recall, on the program delivery slides, that when you get to the fall of the second year, you get to the point where people have to make their final arrangements and we have to issue our final commitments, and the feds close their programs every December 31. What happens each November and December all over Canada is that an assessment is done of whether all the projects that are in some stage of development can be committed in that six-week period. Every year the feds do a national reshuffling in November and December, taking funding commitments away from provinces that can't fully commit.
Mr Callahan: But it's operating you're talking about, not capital.
Mr Burns: Annual dollars; that's right. It's not the actual mortgage; it's the funding commitment to support. We get into a shuffle every December because, if projects in this province are in a state to get committed, the approach that's been taken is to try and capture a little extra funding if there are other provinces that haven't been able to fully commit their programs.
Mr Tilson: Mr Chairman, just on that same point.
The Vice-Chair: Very briefly.
Mr Tilson: You also front-end any costs before the mortgaging.
Mr Burns: We provide some interim financing, yes.
Mr Tilson: Interim financing. And the guarantee resources are through what source? Canada pension?
Mr Burns: A part of Homes Now was funded using capital derived from the Canada pension plan, but that was done just at the height of the boom; before and after, we rely on conventional lenders in the marketplace: life insurance companies, trust companies, banks.
On the slide you see a breakdown of the capital costs of one particular family project in Metropolitan Toronto from 1991. This is not intended to indicate what the average costs are across the whole program but just to give you a snapshot of what the capital costs are for a particular project.
Construction and land are the largest components. The other elements are carrying costs during construction, fees, the GST, organizational expenses for organizing the development.
The next one is the same kind of pie chart, only a seniors' project, also in Metro Toronto and also from 1991. The breakdown is similar, but that gives you a sense of what the main components are for the capital costs of a project.
Now we're going to take a quick look at the structure of operating costs.
The Vice-Chair: Just on a quick point of clarification --
Mr Tilson: Just a short one.
The Vice-Chair: Is the total cost per unit on the bottom of this slide for a two-bedroom unit?
Mr Burns: This is a family project. In 1991, for family projects in Metro, the dominant unit size was two bedrooms, but there likely would be threes and maybe some ones in it as well. This one is very likely to be mostly two-bedrooms.
The Vice-Chair: So you don't have a breakdown of that in any more detail?
Mr Burns: I'm sure we do; I just don't have it right this second. But will make a note of that and answer it.
This slide shows the basic operating costs of a non-profit cooperative. This one happens to be drawn from a very broad sample of projects. A little over 60% is dealing with the mortgage, debt service, and then you've got the rest of it on the right: municipal taxes, administration, insurance, materials and services, contingency, utilities, vacancy, allowance against vacancy rates, labour costs, and funding to be placed in the replacement reserve, which is an account that's held against major investment that may be needed in the future.
Now we're just going to talk a little about the market conditions that surrounded program delivery in the 1988-91 period, because through the period, as the auditor noted and as we've noted in our documents, we went from a very inflationary real estate market to a very deflationary real estate market right in the middle of the program delivery, and that had consequences for administrative practices and for costs.
This slide shows the pattern of total housing starts in the province. You can see the shape of the boom.
Ms Poole: On a point of order, Mr Chairman: Does the ministry have a chart similar to that, but which would show just rental starts, comparing non-profit and --
Mr Burns: We don't have a chart with us.
Ms Poole: Could you provide something like that?
Mr Burns: I don't know how long it would take, but we can break down ownership starts, private rental, non-profit rental.
Ms Poole: That's what I think would be a very good indicator, if we had the non-profit rental versus the private sector rental to see who's building what.
Mr Burns: Okay. I'll try very hard to get you that in chart form in the course of our discussions this week.
This just takes a number of municipalities in the province and compares the vacancy rate in 1988, when the boom was on, to October of last year, when it wasn't.
This is the shape of change in resale house prices through the same period of time, 1989, and it has declined since.
There's the shape of construction prices in the apartment sector: Again, a strongly rising market followed by a decline, but a decline which itself changed shape as it went along.
Mr Tilson: On a point of order, Mr Chairman: Those are private apartments, for construction of private apartments? What does that include?
Mr Burns: This is construction costs per square foot for all apartments.
Mr Tilson: Which would include non-profit housing?
Mr Burns: Yes.
Mr Tilson: Do you have a breakdown of what the average construction cost would be of strictly private apartments, excluding non-profit housing?
Mr Burns: I suppose we could do it by deduction, because we have our own costs, which show a similar shape but are below it, because condominium construction costs went through a much more exaggerated curve. But I'm not sure we've actually got it broken down that way.
Mr Tilson: I suspect a large portion of that is non-profit housing.
Mr Burns: Certainly by the time you get to January 1991 to January 1992, that's true in apartment construction, but in 1989 and 1990, the great bulk of apartment construction was condominiums. I think the shape of that change will be shown if we can get the charts Ms Poole just asked for.
The non-profit program: We're just going to show you three or four slides that track the evolution of the delivery of the non-profit programs through this same 1988-91 period, which were examined in the audit and which experienced these dramatic changes in external conditions. This is just a summary, if you like, of the movement of program delivery through the phases of allocation, commitment and then to operation and annual subsidy payments.
These are the annual expenditures by the ministry in support of operating non-profits and cooperatives. Obviously, from what I said before about scale of programs and growth, this number has grown substantially.
This is a slide that looks forward to the consequences of the completion of the delivery of the programs we are now administering. I should say that compared to the forecast you would have seen in the last year or two, our current forecasts show considerably reduced total expenditures two or three years out from what we were forecasting before. We've got significant reductions in construction costs, interest rates, land costs and, particularly in the last 18 months, we've applied quite strong constraints on the growth of operating costs. These all reflect in the significant reduction in the level of expenditure we're forecasting for three or four years out.
It's hard to get at the workload consequences of not just this kind of program delivery but what happens when you actually have close to 2,000 operating non-profits and cooperatives and you have to manage a relationship with them. We've got a couple of charts just to give you a sense of the change in volumes externally, of transactions that we're involved in, compared to the changes that have been made in the base administrative cost of the ministry. This chart compares the growth and the total volume of transfers to the --
Mr Callahan: Mr Chairman, on a point of order: I don't believe we've got that chart in there.
The Vice-Chair: About four pages from the back.
Mr Callahan: Oh, here it is. Okay, fine.
The Vice-Chair: Carry on, then.
Mr Burns: Of course, this is not a perfect measure of the relationship between our base ministry costs and our transactions, but it's one picture of it.
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I just want to divert for a second to place our programmatic expenditures in non-profit and corporate housing in the broader context of total provincial government expenditure on housing, which is what this chart shows. This is 1991-92. The next one is 1992-93: non-profit housing subsidies and support, $600 million; public housing, $200 million; shelter allowances paid by the Ministry of Community and Social Services, $2.2 billion; tax credits of various sorts, roughly another $1 billion. In that particular year, I think it was about $3.5 billion in total expenditures on housing in all its dimensions, of which $600 million was support for non-profit and $200 million support for public housing.
Mr Kormos: Excuse me, Chair. I'm looking at 1991-92 and then 1992-93. I wonder if there are any obvious explanations for some of the changes in those respective percentages.
Mr Burns: The two items that change the most are: program support for non-profits and cooperatives, and that's principally the impact of Homes Now projects being completed, opened and eligible for annual support; and on the other side, the continuing dramatic increase in social assistance case load, which increases the amount of money the province is spending on shelter benefits to the level that you see there, to well over $2 billion.
The Vice-Chair: A point of clarification, Ms Poole?
Ms Poole: Just a point of clarification on these two charts: We see in 1991-92, non-profit housing, $428 million; and on the 1992-93 chart, non-profit housing, $605 million. I'm looking at those two figures. This is not including the subsidies as well as the capital? Is this the whole ball of wax?
Mr Burns: These are our annual expenditures. As I explained earlier, the capital is borrowed from the private sector and eventually rolled into a mortgage, so that never appears. It's not a public expenditure. We do not raise and spend that money.
Ms Poole: So all those funds that came out of the Canada pension fund, for instance, don't show up here.
Mr Burns: That's right.
Ms Poole: So this is not really a true picture of what is being spent, total capital and operating in the non-profit sector, because a very major component of that has been taken out. Do you have figures available for that?
Mr Burns: It's a complete picture of the annual expenditures of the province as they're carried on the accounts of the province to support housing in various forms. The capital side does not appear in the expenditure accounts of the province.
Ms Poole: But because it's borrowed from the Canada pension plan, for instance, is that not deferring the showing up of that expenditure, but it doesn't mean the money hasn't been spent?
Mr Burns: Again, that's not an annual expenditure of the province. There was a one-time arrangement made to take about $1.3 billion of Canada pension plan funds --
Ms Poole: For the Homes Now.
Mr Burns: -- to use it to mortgage properties, because for a while it was more cost-effective than going to the marketplace.
Mr Callahan: Is this bridge financing?
Mr Burns: No. This is for the permanent financing.
The Vice-Chair: If I might make a suggestion, perhaps we'll deal with this as well in a separate section, because I'm sure there are quite a number of questions with regard to that.
I have Mr Duignan on a brief point of clarification.
Mr Duignan: It's on the same subject, Mr Chair.
The Vice-Chair: Then I think we should deal with it later.
Mr Burns: Okay. I'll come back to the capital side at your convenience.
For 1990-91, we undertook what we call a program review of the non-profit co-op programs, looking for ways to make the program more cost-effective. At the same time, the government completed its assessment of the consultation process on the policy basis, if you like, of a non-profit co-op program it had undertaken in 1991.
The policy review, the program review and the audit have all provided really valuable foundation material for the design of the new program Ms Poole alluded to before. You'll see later in the discussion that we've made considerable changes already in program administration for the new program, and we are in the middle of a program that will result in more changes later this year.
I think, in the interests of time, because I've been moving a little slower than I'd hoped, and we've been diverted a little bit, I'm going to truncate some of the -- I was going to touch a little bit on the important content of consultation and the program review for administration practices. I don't think I'm going to do that by walking through all the elements. Perhaps I should just say that there were important parts of both those processes that have looked at administrative practices and, along with the audit, have caused us to reflect on a change and continue to work on some of the basic administrative practices in the program.
The Vice-Chair: Perhaps I might suggest that if there are questions regarding that area, we may come back to it again as one of the separate subjects that you may wish to address a little more at length this afternoon or tomorrow.
Mr Burns: Yes, thank you.
The Vice-Chair: I thank you for allowing some time for members to ask questions now. I think we'll begin our rotation.
Mr Burns: I'm sorry, Mr Chairman; I'm not totally done.
The Vice-Chair: Oh, you've not completed; I'm sorry.
Mr Burns: I just cut the middle out. I think it's important to touch specifically on some of the main items in the auditor's report and to end my history lesson and tour of administrative practices.
The Vice-Chair: I'm sorry for attempting to cut you off like that.
Mr Burns: I appreciate your reasons for wanting to hustle me along, so I will move along.
The Vice-Chair: It's difficult to get members to sit quietly for this long, but they've been very cooperative.
Mr Burns: Yes, I appreciate that.
The Vice-Chair: I think we can carry on from here.
Mr Burns: I'm going to turn at this point to the audit itself. The audit was extensive and touched on a wide range of administrative practices within the program. I don't think it would be helpful at this point for me to walk through every single one of those. What I'd rather do is talk a little bit about the context of the time that the audit was undertaken and then touch on a few of the principal findings for which we think our comments will be particularly valuable.
You can tell from everything I've said up to now that 1990 and 1991 were absolutely extraordinary years in the Ministry of Housing, delivering the largest volume of program delivery that the ministry has ever seen and the largest volume since 1970 in the province at large at a time when the market conditions we were dealing with were undergoing rapid change. The boom peaked; it turned. At the time it turned, the government introduced the GST and we had a whole series of changes in our environment at the same time when our volumes had never been higher.
I think I said before that Homes Now was closed out on December 31, 1991. So were the other two programs I touched on earlier, P-3000 and P-3600. At the time the audit was undertaken, we were working towards closing out completion of those programs, at the very tail end of them.
I want to touch a little bit on the comments that the auditors made on whether adequate need-and-demand studies were done for each and every project that got financial support from the ministry. I think there are three sides to this I want to touch on.
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First, it is true that this part of the assessment process was not required in every single case. The ministry made a decision that in some marketplaces the case for rental supply increase had been made a number of times and did not have to be made over and over again. For example, a general case had been made in the city of Toronto by a number of people about conditions in the city of Toronto. It then did not require every single application in 1988 and 1989 to Homes Now to repeat that. So that observation is valid and that was the reason for it.
Second, the auditors observed that even applying the fair-share model or the assessment-of-need model that the feds use --
Mr Callahan: You've indicated that one of the reasons was because of Metro Toronto. Were there any other reasons why it wasn't done -- for instance, by direction of the minister?
Mr Burns: Not to my knowledge. That's several ministers and several deputies ago, and at that moment in time I was on the other side of the process making applications. Clearly, as a matter of administrative practice, for some markets you didn't have to resubmit and resubmit need and demand. If you were in a market that had 0.1% vacancy and growing waiting lists for social housing providers, there was a period of time when you didn't have to do that.
Mr Callahan: Okay, fine.
Mr Burns: Second, the auditor looked at a number of particular markets, compared them to the federal-provincial fair-share model I alluded to before and concluded on the evidence he had, rightly, that we had seemed to commit more projects in those places than would have been called for by the model. We have since gone back and looked at the data that we provided to the auditor, and we provided inaccurate information about those markets. We have recalculated based on actuals and provided that material to the auditor and to you.
Mr Tilson: Just on this process of not reviewing each particular area each time -- let's say you're in Toronto and you say you don't want to do it over and over -- does that policy still exist?
Mr Burns: No.
The Acting Chair (Mr Robert V. Callahan): That's a simple answer. You may continue, unless you've got a follow-up on it, Mr Tilson, and I don't know how you could.
Mr Burns: In fact, Mr Tilson, I should go further. In the federal-provincial model at the moment, under the federal-provincial framework, there are a number of marketplaces where no applications will even be accepted.
Mr Tilson: I'm glad you're saying that, because that was one of the major slams of the auditor against what you were doing. The auditor was very critical of the fact that you were almost willy-nilly in processing these applications.
What you have just said now isn't what the Provincial Auditor has said in his report, and to simply say no, I think we'll need more explanation than that.
Mr Burns: I was about to go on and say a couple of more things.
The Acting Chair: I just thought N-O was a short way of ending that issue, but go ahead.
Mr Tilson: No way, Mr Chairman.
Mr Burns: It implied a follow-up question about what happened. The auditor was looking at projects that got their first level of commitment in 1988 and 1989, because he was looking at projects that were under construction or close to commitment in 1990 and 1991. So most of those people got their allocation commitments in very different market conditions than we now face, and a lot of them from Homes Now. In Homes Now there were different allocation practices. I mentioned those to you earlier. For example, if you give the city of Toronto a bulk allocation of 700, or Peel Non-Profit Housing Corp a bulk allocation of -- I think it got 700 as well.
The Acting Chair: A good organization, Peel Non-Profit.
Mr Burns: It is. Then within that bulk, the ministry did not require every single subproject to redo a need assessment. A judgement had been made that a large chunk would be delivered in Peel or in the city of Toronto or in the city of Ottawa and things operated within that framework. The question is, in 1991, as market conditions changed, did we change our practices? The answer to that question is yes, we did, because there were no more situations where people didn't have to demonstrate need when you got to the new program delivery.
Secondly, the application of the federal-provincial model: When we got to this year's federal-provincial program, I think there are 30 municipalities we didn't accept applications from for any program that we were dealing with in the last eight or nine months.
Mr Tilson: Why?
Mr Burns: Because the market conditions in those communities were such that there was not a case for adding the kind of supply that the program delivers.
The Acting Chair: You can get back to this at a later stage, Mr Tilson. I think, in fairness to the other members of the committee, we're going to move on. Would you like to continue, Mr Burns?
Mr Burns: We went back and recalculated, based on real numbers. The result of that is that in the assessment made in the report using the federal model, we had dramatically overallocated in some markets. That inaccuracy is rooted in our numbers, not in anything the auditor did.
Third, however, we think the point the auditor made in the report, that there's something less than fully adequate about the federal-provincial model and the need-and-demand process we've been using, is a fair comment. For the new program, we are trying to ensure that we've got a better technique for assessing local market conditions and for need-and-demand assessments that are submitted by proponents than we've had in the past.
If I can put it this way, we're trying to create a made-in-Ontario methodology and not use what is a very blunt instrument, the federal-provincial methodology, which applies on a very large scale. In relation to that part of the auditor's report, we accept the fundamental point that this is a part of practice that requires some revision or change.
The second area that is discussed in the auditor's report that I want to touch on is the one that has to do with vacancy rates and income integration. This is a tough problem. Income integration and a diverse tenant population is a fundamental goal of every non-profit program -- has been since the beginning -- but over time, things have shifted.
The first non-profit program in that history I gave you had 25% of its inhabitants' households in poverty and 75% at market, and over the last 15 years essentially we've reversed that, so you've got a quarter or a third market tenants and the rest are households in poverty or working-poor households.
Some level of vacancy is a feature of the rental housing market. In fact, in its largest sense, it's normally the object of government policy to try and create significant vacancy in every rental market. That's what disciplines rents. It creates a situation that gives consumers choice in the marketplace, and we do have a number of markets in the province with quite significant vacancy rates now, and that applies to some parts of our stock.
Now, what do you do about that? The non-profit renters in the market sector are going to have to do what private folks do, and that is address their terms of leasing, address their rent levels. But in some cases they've come and said, "We'd like to raise the number of households in poverty in our projects." Our practice at the ministry has been to look at those situations. In some cases, there's a case for it, even within the framework of diversity and mix.
Just to name a particular example, some of the folks who built 15 years ago, who have by today's standards relatively low proportions of households in poverty, the province has allowed them to raise the number of households that have rent-geared-to-income and in fact set a couple of programs to assist in that process. There's a balancing act here, there's an issue here, and I think the auditor's quite right to point at it and say, "This is something you ought to be pretty careful about," because it raises issues of financial stability in the program as well as issues of tenant mix and program objective.
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The third item in the auditor's report I want to touch on briefly is titled "Expected Decline in Costs Not Realized." Put in its essentials, it's the proposition that, as the market turned, we didn't respond to it quickly enough because we weren't well enough organized or well enough informed to track that market as it changed. The auditor in his report used a particular sampling and methodology to try and get at what that cost might be. We had quite a discussion last year about how to get at this issue during the actual audit itself, and when the audit was prepared and we wrote to the auditor, we raised again some of the issues about getting at this measurement.
What we've been able to do this winter is go back to the actuals with the projects we were looking at, as opposed to trying to measure indirectly through a sample and a surrogate measure, and while we believe that there was some slippage on our side as the market conditions changed, it was not huge. That graph just shows the difference in conclusions that you can reach if you use actuals as opposed to the surrogate measures of last year. The audit conclusion was that, using the methods applied at that time, there was $200 million in capital costs that we could have avoided if we'd used different practices. Our view is that, based on actuals, that number is actually under $20 million.
However, having said that, I want to explicitly acknowledge the importance of the issues raised by the auditor. They were also raised in the program review about our capital cost control system. The non-profit program delivery, federally, provincially and our own, has relied on a very blunt measure called the maximum unit price to control capital costs. It's a hard thing to devise a fair, general capital cost control. It's a hard thing to have it move with the market. In 1987 and 1988 there were markets where you just couldn't build under the capital cost control, and then, as the market turns, you have to respond to that.
In response to, I think, a lot of legitimate questions about the way we deal with capital cost controls, including those raised in the audit, we're going to redesign them for the new program, so that they're much more based on cost components and on tracking real costs and less on one number applied to very broad marketplaces, the kind of number we've used in the past.
While I'm here to say that I don't think that the number in the audit report is a fair representation of what happened, because of the use of the methodology and the sampling that was done at the time, the fundamental point is that the capital cost controls we use are a blunt instrument and are not moving well with the marketplace. We accept that. We think it's valid and we do have to overhaul the way we do that part of our business.
The audit raised some questions about the best use of highest appraisal practice. Our view is that this is a generally accepted business practice. But we have gone back, as a result of its being asked, and ensured that the appropriate training, if it isn't in place for our staff, is in place and that we revisit all of our basic audit practices.
A similar comment applies to the question of procurement methods, whether you use full tenders or turnkeys or modified turnkeys. There are important questions of business practice in that which are part of our ongoing work plan.
The audit comments on a number of our practices, and the relation to operating non-profits and co-ops indicates that the absence of fully executed operating agreements for the large number of non-profits and co-ops is a problem. It is a problem. It's a problem we are addressing. It indicates there is a backlog in reviewing budgets, financial statements and final capital cost statements for projects, and certainly there was a very substantial backlog in some areas when the audit was undertaken. We have since reduced that backlog very substantially and are in the middle of a program which I expect will eliminate it within this year.
Audit comments that it's sometimes hard to understand the variations. There's quite a wide variation in operating co-ops and non-profits on the elements of operating costs. That's a perfectly valid observation. It was made in the consultation count process and the program review process as well, and we are embarking on an exercise this year to try to establish fundamental norms for operations across the whole program.
I think I'm going to skip a little bit more and draw my remarks to a conclusion. I've taken a bit more time than I'd promised at the beginning, but I do want to say a couple of things in conclusion.
The administrative challenge to the ministry was to deliver an enormous increase in program activity in a challenging market and with modest resources. In that context the ministry has sought to be efficient, to be effective, to be cost-effective. We've drawn on federal-provincial practice and tried to improve it in places where we could.
We believe, and I said this at the beginning, that last year, 1991, was a very good year to do a big assessment of where we were, the condition of our practices, and to ensure that what we learned from all of that was fed into the design of the new program. In that context the work that the auditor did and the material that was provided to us as a result of the auditor's work has been incredibly helpful. Audits at their best bring real changes in practice, and this one is doing precisely that in our practices.
Looking ahead a little bit, we've rolled a lot of the work that was needed to re-evaluate what we were doing at the front end of the program into the first proposal call under the program that was announced in the budget that Ms Poole alluded to. More of it will be reflected in the proposal call that's coming in the next few weeks, and over the course of this year we will complete the work needed to overhaul the operating relationships, which also need work, as everyone has agreed and as has been pointed out in the audit.
Finally, I just want to say, on behalf of the ministry, that relationship we've had with the auditor through this process has been exceptionally good. It was not an easy time to audit what we were doing, given our workloads. When we came, in the last number of weeks, to want to examine some of the base documents and do some other work, the relationship remained tremendously cooperative, so I'd also like to finish by thanking the auditor not just for the work that was done but for the way in which it was done.
At that point, Mr Chair, I'd like to conclude my opening remarks. I'd be delighted to go on and talk about subjects that are of interest to members of the committee for as long as people would like.
The Chair: Mr Burns, thank you for your presentation. We'll start a 20-minute round. Who's speaking for the official opposition? Mr Callahan.
Mr Callahan: I'd like to just start off, and then my other colleagues, I'm sure, will have questions. The one thing that concerns me, Mr Burns, and I'm trying to find it in my material here -- you've got a policy, or there was a policy in place and I understand it's still in place, because as of 1992 it was reissued and we have a copy of it here, called Highest and Best Use. I note that this is the one we've been given. It has April 12 on it, so I assume it's still the policy of the government to pay on the basis of the highest and best use.
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One can understand how this might have been acceptable during the hot real estate market, but that's been over for some considerable period of time, and one can understand how you might have to add a little more to the pot to try to get the land to develop the housing for this to look after the people because of the low vacancy rates. But I can't for the life of me understand why this would continue to be the policy of the government.
The reason I say that is that it is my understanding that under the Expropriations Act if the city or some governmental body comes along and expropriates my house, under the specific legislation it provides that you can seek compensation for the highest and best use. But it seems to me to be absolutely incredible that one would get a piece of land to put a non-profit building on by a developer or whomever and would allow that price to be generated by the fact that it might be able to have built on it a density much higher than is proposed when you know for a fact that it has probably been zoned by the local municipality for a specific density and to pay a higher price. It's like my going out into the marketplace buying a car and agreeing to pay twice the value of the car.
Can you explain to me why the ministry continues to have this policy in place? As I say, it could be understood in the 1980s, probably up as far as 1988, 1989 or 1990, but to continue it afterwards is absolutely looney tunes and I as a taxpayer, let alone a representative of my riding, find it absolutely unbelievable that this policy could be continued.
Mr Burns: The practice is standard appraisal practice. I take it from your line of remarks that you believe current conditions of highest and best use would produce values that diverge substantially from the marketplace. Reality is that what we've accepted in the program has tracked the shape of market conditions. The appraisals we're now seeing, using highest and best use methodology, are dramatically down from where they were three or four years ago, as you've mentioned.
Mr Callahan: Are you suggesting to me, Mr Burns, that if there is a willing buyer and a willing vendor, the willing vendor can put the price of that piece of property at the highest? Let's say, for instance, that I'm selling my house, which is on a residential lot. I could conceivably say, "We could rip down the house and we could put up a fourplex or we could rip down the house and, if we've got a large enough lot, we could put up a high-rise."
When the government comes to me and wants to buy my land for a non-profit building, you would pay me -- assuming it was a large enough lot that I could put up a high-rise, even though I had a house on it and I was living in it -- for the highest value that land could possibly -- I mean, I wonder what would happen if you bought a 200-acre farm. Would you give them the price that perhaps a -- I can't think of the highest value that could be put on that.
Mr Burns: It's not our practice to speculate against the planning frameworks of local governments, if that's your question.
Mr Callahan: Well, no, but isn't that what you're doing? In some of these cases I presume that there were pieces of vacant land that probably hadn't even been rezoned yet. Would that be correct?
Mr Burns: In some cases that's right.
Mr Callahan: All right. In fact, would these offers be made conditional upon rezoning being able to take place?
Mr Burns: Sometimes they would be conditional offers, sometimes they would be parcels owned by the sponsor, a church or a municipality, and at some point in the process you have to come to a settlement on the value of the property. We use standard appraisal practices for that.
The appraisal has to be done by someone who's licensed in that particular line of business.
Mr Callahan: Let me take the case where you find a piece of land that's in an acceptable area of the city to build non-profit housing and you want to buy it. There's no zoning on it yet. You go in and make an offer which is not conditional upon it being rezoned. In that case, do you pay the price at the highest and best use? In other words, do you pay a price for that assuming that it has already been rezoned?
Mr Burns: Well, market conditions change over time in terms of what people are willing to risk in relation to that particular process.
Mr Callahan: That's not my question. I thought it was quite clear. My question is, if you wanted a piece of land for a non-profit building, and it hadn't been zoned yet and you didn't make it a condition of the offer, would you offer to buy that land as though it had been rezoned?
Mr Burns: You're asking me to make a marketplace judgment. If I were looking at it, if the official plan were in place and the path from the current zoning to a higher zoning was perfectly clear in the plan, personally I'd take those kinds of things into consideration. But we're not looking at whether I'm buying land or not. We're looking at whether, as a matter of administrative practice, we require a professional appraisal report before we confirm land cost components to particular projects. That's what we require. We require them based on industry practice.
Mr Callahan: My colleague wants to ask a supplementary, but before that, I want to draw your attention to something, and I don't know whether there's any relationship to this. In the auditor's report, it indicates that a non-profit group paid $2.85 million for less than two acres of land, based on both an outside and a ministry appraisal, yet the land had been purchased two weeks earlier by a related sponsoring group for $250,000 per acre. This indicates that the sponsoring group realized a $2.3-million profit. Is this what we get for doing it on the basis of highest and best use? Has that been changed? Is that ever going to happen again, or is that a once-in-a-lifetime proposition to create a millionaire?
Mr Burns: The instance you're pointing to was raised by the auditor. It's important to understand the timing of events related to that particular file. I'm going to ask Ms Farley to walk through that particular issue for you.
Ms Toni Farley: Before I walk you through that, maybe we'll have a short discussion about highest and best use. What it simply does is determines what the property can be used for. If I'm a land owner, I'm going to want to realize as much money as I possibly can from the sale of that piece of property; I'm there as a private land owner to make money. Therefore, the concept of highest and best use is to determine what that piece of land can be used for.
Having determined what it can be used for, then you use numerous appraisal techniques to determine value. Once we've decided that this piece of land can bear a multi-unit residential building -- you know, a four-storey, walk-up apartment -- then you say, "How much am I prepared to pay for that?" Then you look at the market comparison approach. You look at the sale prices of similar pieces of land. You can look at the replacement costs to do that. So there are different appraisal techniques.
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Mr Callahan: Is that always done?
Ms Farley: Absolutely.
Mr Callahan: It wasn't done in this case. According to the auditor, they did a search of titles around the two-acre, $2.85 million one, and found it was $300,000 maximum per acre.
Ms Farley: You were dealing with two pieces of property, and at some point in time they were both unzoned. They were vacant land. The price of raw land was going at $4,000 or $5,000 unit an acre. Our non-profit sponsor paid for land which was rezoned to bear a multi-unit residential building.
Mr Callahan: Are you saying the price increased within two weeks. Is that what you're trying to tell me on this specific --
Ms Farley: No. They optioned the site several years before.
Mr Callahan: Well, that's not what the auditor says. The auditor says that the land had been purchased two weeks earlier, by a related sponsoring group, for $250,000 per acre. To take it to what you're saying about the policy of the ministry, that in addition to this highest and best use, it would investigate recent sales within the area of that property, it was not done in this case, in any event, because the auditor said, "We conducted a title search of similar land in the surrounding area, including an adjacent parcel of land" -- adjacent, right next door -- "and noted that all previous recent sales were under $300,000 per acre."
Ms Farley: But you're dealing with an apple and an orange. You and I make a deal --
Mr Callahan: This seems like apples and apples to me.
Ms Farley: No. You and I make a deal two or three years prior that I'm going to buy your vacant land from you at $5,000 or whatever an acre, and I'm going to assume the responsibility of getting that site developed, rezoned: attending OMB hearings, whatever it takes to get it rezoned. I simply have an option with you that if I am successful in doing this, I will then pay you what we had agreed to, okay? But then I'm going to turn around, because I got it rezoned etc, and sell it to my non-profit group for what its market value is as a zoned site that can bear a certain density.
Mr Callahan: Is that what happened here?
Ms Farley: Absolutely. Based on the auditor's comment, I went to an independent appraisal firm and I had them review the entire matter. In fact, I have that report.
Mr Callahan: There's no response, which I find interesting, from the ministry. There's not even a response saying you're going to stop doing it; I presume you're not going to. There's no mention of that at all. It says, "In future, staff will be trained to ensure that all ministry appraisals include the examination of recent land transactions" -- I presume that was not being done, as you responded that way -- "and events pertaining to the site within the catchment area of the subject site."
You've told us that you did do examinations, yet the ministry has responded to the auditor's comments on this specific project by saying that in future it will do this, so I presume you didn't do it before.
Ms Farley: No, we have always paid fair market value on a property.
The Chair: Bob, you have six minutes left.
Mr Callahan: I think you've been overly generous, quite frankly. My colleague wants to pursue a supplementary and we only have about six minutes left, so I'm going to waive in favour of my colleague.
Ms Poole: My colleague Mr Cordiano wants some time, so I'm just going to ask one quick follow-up on the highest and best use appraisal method. I can really understand that method being used in a boom economy, because you didn't have any choice, the ministry had no choice. But if you're talking about a declining market like we've had the last couple of years, to me it doesn't make any sense. To me it means that you're paying twice for your zoning. You're paying the vendor the price of rezoned land, if that land is eligible for rezoning, and second, you're then going to pay all the costs: the architectural costs, the legal costs, the cost of going to the OMB and actually doing the rezoning.
Ms Farley: No. This is where you distinguish between situations. A turnkey situation is where we negotiate a contract, where you come to me and say, "Look, Toni, I have a piece of land and I have the right zoning to put up a building." All I pay for is simply the value of that; I don't pay for all of your costs. But if you come to me as a non-profit group and say, "Toni, there is a piece of vacant land; it's worth $500,000," we will then determine its value on the basis of its use as vacant land, that yes, this is what it's worth, this is what the comparables indicate that the site is worth. Then I will cover your costs of taking it through that process. I don't pay twice for that. I only pay once.
Ms Poole: But if it's highest and best use appraisal, then you would be paying for what could be put up on that, the potential.
Ms Farley: No, no. If you come to me and say, "Toni, I have a piece of vacant land and I want to develop housing on it, and you are prepared to pay for that now," then we value that based on its current use. Then we pay for your costs of taking it through the municipal rezoning process, the legal fees etc.
Mr Burns: Even if the appraiser said, "I think highest and best use is something that's not in the zoning but is in the plan," or maybe even something that's not in the plan, they have to discount all the costs of getting from here to there before they get to a number. Highest and best use does not roll straight into the number as if it were all in place. Highest and best use is almost like a planning or a land economics general construct; there are steps to be taken between that and a dollar figure.
Mr Joseph Cordiano (Lawrence): Mr Chairman, how much time is left?
The Chair: Approximately four and a half minutes.
Mr Cordiano: My colleague has indicated that we are dealing with a different economic climate. Everyone understands that, I hope; certainly it has largely been made clear to all of us in government by now that we are dealing in different economic times.
As a result of that, it has also been noted that with respect to construction costs, with respect to the marketplace and what's available out there, in fact you could purchase buildings or units that have already been constructed much more cheaply than you could start construction on them. As a result of the fact that the wanted units are at least available out there in existing buildings, could you indicate to me what you have done, as a matter of policy in terms of the entire ministry, to purchase or acquire buildings that are already constructed and completed? How many of those units have been purchased that way, going back to 1990, 1991 and 1992? Has there been a policy to acquire units that are already completed?
Mr Burns: If you wish to purchase existing rental property, there have been times when that was an eligible project. You could propose to do that and receive funding.
Mr Cordiano: I'm asking whether it has been done, and to what extent. What are the numbers involved?
Mr Burns: It has been done over the last number of years.
Mr Cordiano: To what extent? What kinds of numbers are we looking at compared to the construction of new units?
Mr Burns: I don't think I can answer that question right this minute, but I'll get you an answer in the course of the discussion. It's a relatively modest proportion of the total program delivery, if that's your question.
Mr Cordiano: Well, that's what I was going to suggest. Obviously, the point I'm trying to make here is that you're continuing to build these units at prices which far exceed the marketplace price according to anyone's standard, yet we could go out and acquire these units much more cheaply. Is the question of what's more efficient not involved in the decision-making, that it would be more efficient to acquire units that are already existing out there than to actually go out and start new projects?
Mr Burns: It's been true for 15 years that buying existing apartments would be cheaper than building new ones.
Mr Cordiano: No, I would contradict you on that, because during the boom years you couldn't acquire anything out there. What was being built, in fact, was only being built by governments. Condominiums were being built by private developers, but they couldn't build them fast enough because they were being sold. I think the economic times have changed rather dramatically, and what's out there and available is much more significant than what was out there and available during the boom period.
Mr Burns: There were purchases made through the non-profit programs even in the boom years, but I guess the policy choice that's embedded in all these non-profit programs, and before that, the public housing programs, had to do with the balance between helping people and creating new rental supply. All these programs from the beginning have related to that kind of policy objective.
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Mr Cordiano: No, I understand that, but we're talking about --
Mr Burns: You're raising a question of broad policy choices and not program administration.
The Chair: Do you have a very short question, Mr Cordiano? Your time has expired.
Mr Cordiano: Yes. Now you're talking about creating a buffer. Obviously there are units out there which are in excess of what's required, perhaps, and is that why you are now referring to the creation of a buffer of rental housing stock, because in fact you don't have all of these units being filled when you're building them now? I don't quite understand what it is that you're referring to when you say you're going to have a buffer.
Mr Burns: Did I say "buffer"? I don't think I said "buffer."
Mr Cordiano: I don't know if you've said that, but we certainly have response to the auditor's comments. Your minister said that.
The Chair: Thank you. Mr Tilson, 20 minutes.
Mr Tilson: I'd like to continue to some extent with the policy of purchasing land, which I appreciate of course is done by a non-profit housing corporation but in fact approved by the ministry. It can't take place without the ministry's approval.
The auditor has talked about in one of his reports -- and it really is contradicting statements you made, with due respect. It had to do with a section called "Risky Land Purchases." They talked about the ministry's desire to expedite the approval of projects in desirable areas. In other words, it's going to get back to my initial question as to, how are some areas favoured over other areas? How do we arrive at what particular areas are going to get non-profit housing, whether it's a municipality or a region? I have yet to hear that process, and I'm sure in due course you will tell us that, but I would first of all like you to comment on some remarks that were made by the Provincial Auditor which I will read to you:
"The ministry's desire to expedite the approval of projects in desirable areas where there was limited available land meant that approvals to purchase the land were sometimes given before the soil and other tests had been thoroughly done."
In other words, there's a number of things that have to be done before we arrive at a price. Somehow, in the urge to acquire these sites, a number of things weren't taken into consideration, and one of them was soil and other tests.
The auditor went on to say that:
"Such tests are normal business practice, as the land is worth significantly less if, for instance, the soil is found to be contaminated. In fact, in three of the 40 projects reviewed, the soil was subsequently found to be significantly contaminated after the land had already been purchased and the costs of removing the contaminated soil were $900,000, $600,000 and $100,000 respectively. We noted in one project, which was opposed by the local municipality" -- and this is in Toronto -- "because the site was located on a 100-year-old floodplain but which the ministry approved without conducting a proper assessment despite the risk of flood damage, in the spring of 1991, shortly after completion, about one third of units were flooded for three months."
I guess I'm following along the same line of questioning of Mr Callahan as to how you arrive at prices when obviously, if I were a private developer purchasing land at that amount of money, I would do a number of things, and I might make the offer conditional upon a number of things. I wouldn't close the deal until a number of things had occurred. I wouldn't get into that situation. When you're spending that kind of money and haven't done soil tests, that's inexcusable. Private enterprise wouldn't do it. Why would the Ministry of Housing do it?
Mr Burns: Mr Tilson, you've raised a number of important questions, so I think I'd like to touch on them in order. First, it's important to remember that by and large the acquisitions we're talking about here took place in 1988-89, and there are two things about that era that I want to touch on.
First, in the delivery of Homes Now, one of the big concerns in designing program delivery was whether or not suitable sites could be found to deliver the program. It's one of the reasons why there was a choice made to do the bulk allocation method that I alluded to before, but it also led to the practice of guaranteeing purchase sites in some particularly hot markets. That was alluded to in the auditor's report as well.
Between 1988-89 and now business practice with relation to contamination has changed very substantially, and the last proposition you made, which was that no prudent purchaser would operate without fully assessing environmental conditions and taking those into account in price and timing, is absolutely accurate. The program guidelines we've issued for this program, the ones we issued in December, have absolutely strict and clear business practice requirements that are virtually identical to what you just mentioned.
But back in 1988 and 1989 business practices on those issues were not as clear or well established, and it was not only non-profit sponsors but private sector folks who got caught by the changes in environmental norms and in the array of remediation options available to deal with a particular condition. I worked in a context where we were in that marketplace. We changed our business practices twice in this period we're just talking about here to accommodate the fact that there were changes in standards and, even more difficult, changes in what was acceptable as remediation.
In the 1970s and early 1980s, a lot of times you could stabilize conditions on a site and isolate them and leave it at that. Now the norm is that you must fully deal with the conditions you find there. As you well know, you often have to take stuff away or even apply special treatment practices on site.
There were some sites purchased without knowing what would be needed to deal with those environmental practices as they changed, and they cost us some money in the program, but the ministry, along with everyone else who operates in some relation to the land market, has revised its practices as we've gone along. We've now put in place a set of business practice requirements that are essentially identical to what you concluded your remarks with.
Mr Tilson: This isn't the only place in the auditor's report where the auditor speaks of almost an urgency to acquire a particular site. In the section under "Competitive Procurement Practices," on pages 131 and 132, they talk about how the ministry is so determined to acquire certain sites that it overlooks a number of things. In this specific example, again, I guess, to be fair I should really read part of it. Pages 131 and on to 132 of the auditor's report say:
"In 1990 many developers who had speculated on the housing and condominium boom up to 1989 were left holding land and/or completed buildings that they could not sell. As a result, many developers submitted their projects for non-profit housing. With the developers being squeezed by interest and the other carrying costs, the climate was ripe for the ministry and project sponsors to get very competitive prices from competing developers.
"Accordingly" -- and this is the auditor speaking -- "we expected that competitive procurement practices used in the building industry such as public, invitational and pre-qualification tenders would have been fully utilized. However, we noted that to accelerate the process" -- and again those words are used throughout the auditor's comment -- "the ministry and groups often negotiated with those developers who submitted proposals rather than providing an equal opportunity to all qualified developers.
"To assess the impact of this approach, we converted all" -- and then they have a table we can all see. But the important thing is the next paragraph that comes after that table, which compares the central, eastern and southern regions.
"If all three regions had been able to obtain their non-competitively-acquired projects at unit prices comparable to those acquired competitively, the capital cost savings would have been approximately $64 million." That's rather an astounding statement. Can you comment on that specific point that was raised by the auditor?
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Mr Burns: Again, Mr Tilson, you've asked a chain of questions, so I think it's important to touch on each of the elements.
I think I said a couple of times in my remarks that the delivery of Homes Now, which is a very large program, took place in very difficult conditions and a number of steps were taken to try to ensure that the program could get delivered in reasonable time. One was the change in allocation practices; the other was the guaranteeing of certain purchases, which I've alluded to.
The look for alternative business practice in the actual acquisition and construction of a site was another one of those elements. It was particularly tough in 1988-89 and into 1990 to find the good-quality sites that were the objective of the program.
As the market turned, a number of good-quality sites that had been planned for condominium development became available. As you mentioned, that's quite true and we began to see people making proposals to have non-profit or cooperative housing instead of their former ambitions.
It's a different kind of business practice to deal with a turnkey or a modified turnkey than with a tender. That's quite true and you have to apply a different set of disciplines.
Mr Tilson: Not really. You're trying to find the best price available. That's what you're trying to do.
Mr Burns: I don't disagree with that, within the context of the policy goals you've got, but you actually go about it in a different way. It's a negotiation process rather than a bidding one.
The proposition that modified turnkeys are or were, at least in the Metro or the central region area, substantially more expensive than tendered projects, which is at the root, if you like, of the assessment you just quoted from -- we believe is a partial kind of assessment; partly the use again, as I mentioned before when I was talking about the $200 million -- a sampling and analogy method was used to try and reach the general number, not the actuals.
We've tried to go back and look at all the actuals since we kind of expected we might be asked this question here today. Unfortunately, the full assessment of the actuals is not here so I'm just going to make some general comments about the situation.
When you're comparing those two techniques in Metro Toronto, it is very important that you take account of the fact that there was a different distribution of sites geographically between the two procurement techniques, a different mix of units and a different time in the marketplace. We think, as we did in the other capital cost comment, that there may well have been situations where it was more expensive to use a modified turnkey, but I don't think, in general, across the whole program, all the business practices, that we would agree that the capital cost penalty was of the order mentioned there and when we wrote back to the auditor last July, that's what we said.
Having said that, there are issues of business practice here as well. Doing that type of business as efficiently as possible is an important objective and we've made some reconsideration of those practices and there are some changes on the way for the new program.
Mr Tilson: Mr Burns, I guess all I can say is that the auditor has simply found it inexcusable that you negotiated -- the ministry, not you -- specifically with certain developers, to use the words of the auditor, as opposed to "providing an equal opportunity to all qualified developers."
I'm asking this question because it's going to be a trend of questioning that I'm going to be asking throughout these proceedings, almost a suggestion of favouritism. I get into that with consultants, with engineers, with lawyers and indeed with developers. The suggestion has come forward that there are individuals who have made a tremendous amount of profit in this whole process at the expense of the very people we're trying to help, and this is only the first of many examples. Instead of making these decisions available to all or these opportunities available to all, you have only zeroed in on several specific developers, as opposed to the Provincial Auditor's words, "providing an equal opportunity to all qualified developers."
Mr Burns: I think it's important, Mr Tilson, to disentangle a little bit what each of the parties does in this process, one of the reasons why I wanted to walk through the stages in a project approval.
We don't issue tenders for the construction of projects.
Mr Tilson: But you approve them.
Mr Burns: Non-profit sponsors issue them.
Mr Tilson: No, Mr Burns, I can't let you say that because you know perfectly well that the developer cannot build on a particular site without approval from the ministry. You know that.
Mr Burns: But that approval comes in relation to an application or a proposal made by a non-profit sponsor. Non-profit sponsors may own a site. It may be the Catholic church, in which case they can go ahead and proceed on that basis; they may not.
Mr Tilson: But you have the right to say which developer can be used and which developer cannot be used.
Mr Burns: No, we don't. That's absolutely wrong. We have the capacity to assess the proposal made by the non-profit sponsor.
Mr Tilson: I can tell you, Mr Burns, I was on a non-profit housing corporation and that specific process went through. The Ministry of Housing had to approve a specific developer. It was put forward by the non-profit housing corporation.
Mr Burns: We have to approve the business transaction at the end of the day, but it is the sponsor who proposes.
Mr Tilson: You could reject that specific developer.
Mr Burns: On a business basis.
Mr Tilson: On whatever basis you wish, because that's the direct criticism --
Mr Burns: We do reject applications, or we say that they must be modified before they can be acceptable, but that's based on program practice and business practice.
Mr Tilson: Mr Burns, that's the very point, though, that the Provincial Auditor is saying that if you feel that a non-profit housing corporation is not making this available to all, you have that ability, you hold the purse. A non-profit housing corporation is incorporated, it has absolutely zip, you set the thing up. I'm simply saying -- I believe it's a legitimate request, particularly when we're looking at a cost saving that would have been $64 million -- you have the capabilities of making that saving, and the Provincial Auditor has come forward saying that you didn't do that, so that's happened.
We're looking into the future. Having read the Provincial Auditor's report -- and there has been a series of reports from the draft to a report in June, which you've had an opportunity to look at; it goes back for some period of time, I think April 1992 was the first opportunity you had, looking at the draft report, to stop this from happening in the future -- what actions are you taking?
Mr Burns: At the risk of repeating a little bit what I just said, our assessment of the situation that we're in, and that's embodied in the letter we sent to the auditor about this issue, was that we don't think the scale and the dollar value attached to the question which is reached by the use of the methods that were used last year is accurate or fair as a total representation -- one.
Two, we don't make judgements about who non-profit corporations, cooperative corporations do business with. That's not what we're doing. What we make judgements about is whether the proposals they make meet the program's objectives and are credible in terms of tests that have to be applied to cost, timing and quality of the proposal.
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Third, every business practice is capable of being improved, and I think philosophically, on program administration, we believe in continuous improvement as an approach to business practice. There are things about modified turnkeys and turnkeys that can be better done, and there are requirements in our last proposal call that are clearer and I guess some people out there thought are tougher than they have been in the past. So we are, without question, trying to make that business practice better and as best we can make it, but we're not making judgements in the ministry about who non-profits and cooperatives do business with.
The Chair: Thank you. We have Miss Harrington, then Mr Marchese, then Mr Duignan.
Mr Duignan: And Mr Kormos.
The Chair: He seems to always work his way to the top all the time. Mr Kormos.
Mr Kormos: Thank you. I'm especially concerned about the auditor's comments about overallocation. He cited three areas, one of them of course being St Catharines-Niagara. I don't want to be overly parochial, but the comments about St Catharines-Niagara cause me concern for a whole pile of reasons, especially when your letter of March 5 would refute the auditor's conclusions.
Let's talk specifically about St Catharines-Niagara.
The auditor based his conclusions on the data he received from various ministry offices, and the inference to be drawn from your letter is that these data were incorrect. What happened?
Mr Burns: I think I'm going to let Miss Farley explain the mechanics of it, but perhaps just to comment on the language of all this, our letter was not intended to refute the auditor. If we were refuting anybody, we were refuting ourselves. He relied on our data and that's where the errors were, but I think it is worth looking a little bit at that circumstance, so I'll ask Miss Farley to look at St Catharines-Niagara specifically.
Ms Farley: When I saw the auditor's report, I was quite surprised. Being at that end of the business and actually being responsible for recommending allocations, I was surprised at that. So I went back and I found the original document the auditors used and, sure enough, there were the numbers, and I was still unsatisfied.
Then I undertook a very simple exercise. What the auditors looked at was a consolidated report which added up all the individual totals for the individual client groups: families, seniors, singles, special needs. I did a check; I went back and I added up numbers on the same report and they didn't add up to the totals which were on the consolidated. I apologize, but we can't add. It was that simple.
I then investigated further, thinking they were still not appearing correctly, so I questioned some of our staff in terms of what is included in those numbers. What I was able to determine was that according to an agreement we had with the CMHC office, in the early years, in 1986, 1987 and 1988, the rolled-up numbers also included projects which were cancelled. For any number of reasons we can lose a project -- it may not get its rezoning; the group may lose interest -- so we replace those units. But the rolled-up numbers also included the replaced units and those units that were cancelled. In the latter years, in 1990 and 1991, we didn't. It was a pure figure, ie, only those projects that actually proceeded. I went back and recorrected for that. I took out, in the early years, the projects that were cancelled. So what you have is in fact actual planned production.
Mr Kormos: That begs the question that the people who provided this information were aware that it was the auditor and should have been reasonably aware of what the reasons were for wanting those data.
Ms Farley: It was a bound report. Until I went back and looked at the information, we were not aware that it was not accurate.
Mr Kormos: So this was the first time that the Ministry of Housing has been audited in this particular area of it?
Ms Farley: That's correct. This is our first audit.
Mr Kormos: In how many years of operation?
Ms Farley: In my time with the ministry since 1979 we have never been audited. The program has never been audited.
Mr Kormos: Not only by the Provincial Auditor, but what about internal audits?
Ms Farley: There have been periodic reviews of certain aspects of the program, but not a full-fledged audit in terms of our operation and our compliance to policies and procedures.
Mr Kormos: So there have been some problems in maintaining and reporting or documenting data?
Ms Farley: No. I don't understand, I'm sorry.
Mr Kormos: The auditor relied upon the data that had been recorded.
Ms Farley: That's correct.
Mr Kormos: And they didn't, from your position, provide an accurate view of what was actually happening or what had actually happened.
Ms Farley: That's correct. The data did not provide that.
Mr Kormos: So there had been a problem in recording and maintaining data.
Ms Farley: Exactly. That's correct.
Mr Kormos: And this goes all the way back to 1979.
Ms Farley: For this one particular section, yes.
Mr Kormos: In this instance it goes back to 1986, because that's what the auditor looked at. But there's nothing to suggest that things would be any different in the years prior.
Ms Farley: No. I don't think you can make a generalized statement of that nature in terms of everything we do. This particular report that they used was inaccurate.
Mr Kormos: You say the auditor reported an overallocation of, what, 15% for Niagara region.
Ms Farley: Yes. In actual fact it is a 7% variance, which is not at all unusual if you look at the nature of our program. There is the fair share allocation model, which decrees that so many units go into a particular area, St Catharines-Niagara. That's the first-level geographical distribution. But because the program is very much community based, you then have to rely on groups to come forward in those particular areas, and then to come forward with the exact project and with the exact number of units serving the exact client group. You're not going to get that; you're always going to have a variance.
Mr Kormos: It's because the fair share allocation formula is but a rough guideline.
Ms Farley: It's the first cut in terms of what the areas of greatest need are. So you target your units in that area, and then you rely on groups to come forward with projects in those areas. It could very well be that you may not get a group coming forward.
Mr Kormos: In which case you'd underallocate it.
Ms Farley: Then you underallocate a particular area, but you don't want to lose, so then you look to another area that could absorb more need and you redistribute the units. That goes on during the course of the year. So at the end of the day, you could very well end up with, and we do end up with, situations where you don't have that perfect fit.
The Chair: Thank you. We've got a long list.
Mr Kormos: I understand that. At 7% beyond the fair share allocation, in fact Niagara region isn't overallocated; at 7%, it's well within the guidelines. Isn't that fair to say?
Ms Farley: Absolutely true.
Ms Margaret H. Harrington (Niagara Falls): I would really like to continue on in that vein as well with regard to the Niagara region.
First of all, I want to say how timely and important this is, having the auditor and the ministry looking at this. The delivery of non-profit housing is so important to this government that we want it done very efficiently. From what we've just looked at, the whole overview of housing, the fact that non-profit housing is approximately 15% of the provincial dollars spent on housing shows that it's part of a much larger program of housing. I think we've seen that there is definitely a need for change, both from what the ministry has said and what the auditor has said.
It's very interesting to hear you say that the MUP, maximum unit price, is a blunt instrument, and I'm looking forward to hearing how that will change. I think that's key, as well as even how we treat the community groups out there that are putting up the housing. That's a very important process because it's so much red tape for some of these groups, and it has got to be done more efficiently.
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There are two areas that I was concerned with. First of all, from your answers to Mr Kormos, I think you've made it very clear that the allocations to various parts of the province -- the figure of the 15%, what they call over-allocation, to the fair share model in St Catharines-Niagara was obviously wrong, and that it's 7%. I want to get again a confirmation from you whether or not that 7% is significant, because Niagara has the highest unemployment at the present time. People are very much in desperate situations and to have affordable housing there is so important. Would you say that 7% is significant?
Mr Burns: I think, as Ms Farley said, 7% is within the norms of the distribution of programs as we've done them, and if you want to express it in absolute terms, it's 47 units in a sort of group of communities which have almost a million people. So we're not talking about something that's going to, by itself, disrupt local market conditions.
Ms Harrington: It's something that I think we will have to be looking at further. The auditor, I believe, has made it clear that need-and-demand studies are going to be very important in the future. That's the direction in which he is pointing for the ministry. In fact, last night at city council in Niagara Falls they dealt with the need, whether or not there was a need at this time for further non-profit housing. So that is going to be a very important issue, I believe, across the province.
The other item I want to touch on is the unit cost and the model the auditor has used, which I call a two-bedroom equivalent model. Can you explain whether or not that's a valid procedure to evaluate the cost of a unit, an equivalent two-bedroom model?
Mr Burns: I think I'd go back just to start to touch again on what I said at the beginning about that particular thing. In order to try and track whether we've been able to respond to market conditions, at the time the assessment was done, a sample was used and then an effort was made to standardize from that sample a set of numbers that might give you a picture of the whole program. We believed at the time that this was not going to be an easy bridge, from the sample to the actuals, and said so in our letter back. What we've been able to do since, very much with the help of the auditor's staff, is to try and use actual numbers to get at whether our costs track the change in market conditions, and we've found, using actuals, that we were fairly close to market conditions. The variance is not enormous.
The two-bedroom equivalent as the bridge between the sample and the universe: I can understand why people try to construct a simple bridge, but it ended up predicting something which was at significant variance from actuals. It's not a technique that I've seen in real estate or housing assessments before, so I think one of the things we may wish to do in relation to future audits, with our own internal auditors and with the audit staff, is try and find a methodology that would bridge from samples to the whole on a fairly consistent basis. I think that's worth doing as a follow-up to all of this.
Ms Harrington: Would you be able at this particular time to state what the cost would be in your estimation?
Mr Burns: Using that particular methodology, the estimate was that for the part of the program that was being looked at, the capital costs were $200 million higher than would have been predicted if you had followed market conditions. Our assessment is that that number is something under $20 million. That's for a capital cost of about $1.6 billion; that's the universe we're looking at. Even within that $20 million, there was a great deal of uncertainty, and it took a while to shake down the impact of the GST, which began in the middle of this particular year. We've now plotted monthly, as opposed to using annual numbers, how our commitments lined up with changes in the construction price index, and the shape of the curve. They're pretty close.
The Chair: Mr Duignan and, if there's any time left, Mr Marchese.
Mr Duignan: I want to go back to the earlier presentation, the whole issue around capital cost, what the sponsoring group does to obtain a mortgage. I want to dispel a myth, in fact, that it's the government that gives the money for the capital cost. In fact, it's the non-profit group that goes out to the market and secures the mortgage on the market, a term they call "tender the lender" -- in fact, the call for a tender on the lowest interest rate in the mortgage. Isn't that correct? Is that still a practice?
Mr Burns: Several different practices have been used over the years to have those mortgages arranged. The mortgages are on the individual properties and therefore are the obligation of the non-profit and cooperative. For a while we used a very decentralized system, but about two years ago, in a cost-effectiveness exercise essentially, a borrowing practice was put together where in effect proposals or tenders are issued for mortgaging at a particular period of time. We've been receiving very competitive prices for mortgaging in the whole non-profit sector for the last two years. In fact, I think for part of that time we've actually been doing better than the federal system in terms of interest rates.
But to go back to your first point, the capital costs in the end are reflected in a mortgage. The mortgage is held by the individual non-profit or cooperative. It is their obligation to deal with the Bank of Nova Scotia, Canada Life, First Line Trust or whoever it happens to be who's arranged the financing. They in turn have with us an operating arrangement.
Mr Duignan: Part of the capital cost, I think, is a fee for CMHC for the insurance fee to cover the insurance costs of that mortgage, which is roughly about 3%?
Mr Burns: All our stuff is operated within CMHC's NHA mortgage insurance program.
Mr Duignan: So in fact it's really no different with a home owner who secures his mortgage on the CMHC. It's the same principle.
Mr Burns: In those terms, it's similar. In fact, I think we get better interest rates than a lot of home owners.
Mr Duignan: Very briefly now, I'll get on this other topic, another point during the next couple of days. The auditor makes reference to the effect of contaminated sites and costs. He particularly zeroed in on a couple of particular sites. From my reading of the issue, it appears the issue is more than the extent of contamination that was found out after the purchase. I was wanting to know what the ministry is doing to address this issue so the purchase price of land would at least be able to reflect the contamination. There has been some tightening up of the rules.
Mr Burns: This is a ground similar to that raised by Mr Tilson, and I said that in the proposal call that we issued for the beginning of the program that was announced in the last budget we'd put in a very different set of rules and business practices. Those rules include not just testing but an acceptance by the vendor of the property that it's his or her obligation to deal with the conditions before there is any final transfer to a non-profit or cooperative sponsor, which is a far tougher practice than was the industry norm even four or five years ago, let alone the norm in the program.
Mr Duignan: Part of the process is that you have to do soil tests. How many bore samples do you require on a test of a site?
Mr Burns: You're now one step past me.
Ms Farley: Normally, we require five bore holes on a vacant piece of land, three of which have to be under where the building will be located. That's the minimum requirement. We also require a site history, and that helps us determine whether more bore holes would be required. If in fact the results of the initial core samples indicate really problematic soils, then we can do more sampling.
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Mr Duignan: I would at this point yield to Mr Marchese and I will follow up later.
The Chair: There isn't any time left for Mr Marchese, but I'm sure the committee will allow him to ask one question.
Mr Marchese: Thank you, Mr Chair. I'll follow up on one question that Mrs Harrington asked on the methodology used to determine the developmental costs. You're not disputing the fact that the auditor used the two-bedroom equivalent as a way of determining those costs?
Mr Burns: No.
Mr Marchese: The other comment that was made was that the unit cost, if you use one single unit cost, also does not determine correctly the developmental costs either. Is that correct?
Mr Burns: I'm having trouble following your question here, to be frank.
Mr Marchese: At the moment, it seems to me there's no one methodology at all to determine the developmental cost, and any method that's used so far yields a different number, perhaps an incorrect number. Why not actually use -- which is what I thought you said -- the actual project, which gives a combination of single units and two-bedroom units, and determine the cost instead of playing around with methodology that yields a very inaccurate conclusion?
Mr Burns: We had doubts about the two-bedroom methodology last year and, as I said to you, when we had a chance to use actuals, we've gone from that. I think you should use actuals whenever you have them. They were not fully available at the time the audit was done, so it's perfectly reasonable to try to erect some methodology in that circumstance.
We tried just to see whether using a similar analogy using a one-bedroom equivalent would produce a number that was closer to the end. It didn't, so I guess that just reinforces my earlier comment that this particular form of trying to bridge from a sample to the actuals is not a good predictor. However, I think it's worth trying to create a good predictor because it's a heck of a lot simpler to track costs if you can use a sample and predict from it than trying to use the universe, especially when the universe is this large. So I think one of the things we would like to do is to try to work a little bit and, if it's possible, to have some more dialogue with the auditor about that. I'd like to try to get a better methodology for that one. Both those didn't work, the two-bedroom or one-bedroom.
The Chair: I have one question for the witnesses before we start our final round for this morning. I had just taken a moment to kind of refresh my memory. I looked over what was in the auditor's report and I kind of looked over what you had provided us dated March 5. Actually, Mr Kormos's questions twigged my memory on this and that's why I looked at it.
I take you to page 6 of your letter, under (d) at the top, where you admit that the ministry's database "was both inadequate and contained mathematical errors," and those are your own words.
Mr Burns: Yes.
The Chair: Are we to assume that this information would not have been forthcoming to the auditor had we not had these hearings?
Mr Burns: At some point we would have needed to revisit our data collection on that side, because it's connected to our need to get better at modelling and predicting local market conditions and some of the things that Mr Tilson was asking about earlier. We wouldn't likely have done it right at this moment in time without the process of preparing to come to a public discussion. I think that's a fair comment.
The Chair: So it could have been a year from now or two years from now?
Mr Burns: It might have been a year from now if it hadn't been for our need to go back and say, "Okay, let's prepare to make a presentation."
The Chair: It could have been two years from now?
Mr Burns: I don't think it would have been that long, because we do have to answer the question of a made-in-Ontario local assessment process now, not a year from now.
The Chair: How is it possible that this slipped through when you had eight weeks to respond to the auditor? As a matter of fact, just in reviewing the information that was there, there was absolutely no comment made on the over-allocation of units to areas with high vacancy rates, and it's an eight-week response time, which I understand is twice the norm.
Mr Burns: As Ms Farley said, when you look at the first cut, which was the same material the auditor used, you have to actually go behind it. We didn't do that until we began to get ready for this particular discussion.
The Chair: You'll agree with me that it's pretty sloppy.
Mr Burns: I've acknowledged that several times already.
The Chair: Okay, thank you. Ms Poole, 10 minutes.
Ms Poole: Obviously, not enough time. I'd like to look a number of things. First of all, you mentioned the Jobs Ontario Homes fund later, after I asked you why it wasn't on the chart when your chart went to the end of January 1993. In the budget, this government said it was going to create 2,400 jobs in this fiscal year, 1992-93, through the Jobs Ontario Homes fund. Yet when looking at what is in the report and your comments earlier, it becomes obvious that with three weeks left in the fiscal year and the proposals just going out, they are not going to create any jobs. Was the Ministry of Housing consulted before the budget was put together promising 2,400 jobs coming out of the 20,000-unit Jobs Ontario Homes fund program?
Mr Burns: Yes.
Ms Poole: Did you estimate at that time that 2,400 jobs would result in this fiscal year from that program?
Mr Burns: Yes, we did, based on the assumption that the consideration of program design for this program, which was to be founded on the results of the consultation process that ended up in the document Consultation Counts, would finish and that the program design changes we would make would be relatively small compared to previous programs. In the end, that consultation process took somewhat longer and the program design process has led to more changes in the program than we forecast back in February 1992 or whenever it was that we would have been asked about job forecast. Frankly, part of that also has to do with some of the issues raised in the audit report and our interest in reflecting some of those things in program design.
So the first proposal call for that program, as you know, came out about December 1. It would have had to have been out several months earlier than that to have a significant level of construction in this fiscal. The first round are all projects that are very close to construction, so the group that is just being announced now will be under construction very quickly.
But that's the origin of our forecast and the reasons for the change.
Ms Poole: At the time of the budget last year, I said it was a scam, that the announcement was made for PR, that jobs would not be created in the fiscal year, certainly not in the calendar year. Given the time lag that you look at, even with an expedited process, I think it was totally unrealistic to expect that we would get jobs resulting from that program when it was announced in the budget last year. I stand by that. I accept your explanation that there were extenuating circumstances and that you were reviewing the program, which certainly needed to be done, but I think the government got its bang for the buck. They announced a program and said, "Look at the wonderful things we're doing for job creation," knowing full well that delivering 2,400 jobs in the fiscal year was highly unlikely, if not impossible.
I'd like to go on to some of the costing, because one of the criticisms by the auditor has been the comparison of the private sector and the non-profit sector in the delivery of the program. The auditor, I believe, said that in 1991 a two-bedroom apartment of 800 square feet delivered by the private sector would be approximately $106,000 on average. I'll just check with the auditor. Is that the correct figure?
Mr Erik Peters: Yes, $106,000. Page 130.
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Ms Poole: Yes, at the top of page 130 in the auditor's report. They're using a ministry study that said an 800-square-foot, two-bedroom apartment that cost $156,000 in 1989 could be built for less than $106,000 in 1991, including a 20% profit for the developer.
I've done a little bit of independent homework on this. I've talked to a number of private developers who have been putting up private sector rental units. They have confirmed that $106,000 is a fair analysis of what it would have cost the private sector to put up a two-bedroom unit in 1991, including the profit margin.
When I look at what the auditor has calculated for the two-bedroom equivalent in the non-profit sector, which is also included on page 130, the auditor has said it was $158,000 per two-bedroom equivalent unit, which is a significant difference.
We have touched on the difference in methodology that the ministry and the auditor have relied upon, yet yesterday when we talked to the auditor, he said their methodology was based on what the ministry used in the housing framework document, so he's relying on a methodology that the ministry has relied upon. Yet now, according to this, the ministry has disputed this figure and said that the auditor's methodology is wrong, that it's based on bulking up the square footage from a one-bedroom to a two-bedroom equivalent.
I just wonder if you would go into that fairly thoroughly. Of your non-profit projects in 1991, what proportion were two-bedroom? What was the average MUP, maximum unit price, in 1991? And judging that, could you give a rough estimate of what the ministry believes was the average cost of putting up a two-bedroom, non-profit unit at that time? If you want to give us actuals, that's fine, even if you can't give the broad spectrum. But I want to see what you're comparing and what you as a ministry would say it would cost to put up that two-bedroom.
Mr Burns: Some of the general reasoning I alluded to before, we can certainly walk through now. If you want it matched to some of the specific questions you asked, then I think we should take a few minutes to put the documents back together in the right order. If it's not offensive, then I think it would be more helpful to you if we answered your two-part question all at once rather than now and then. If you'll just give us a couple of hours, we'll do it for you at the beginning of the afternoon.
The Chair: Is that okay, Ms Poole?
Ms Poole: Okay. We'll go on to that this afternoon.
The Chair: Your 10 minutes have expired. It's 12:45 and you started at 12:35. Mr Tilson, 10 minutes.
Mr Tilson: Mr Burns, the Provincial Auditor has raised a subject dealing with consultants and architects specifically: the subject of potential conflicts of interest, the fact that "The ministry should consider compensation alternatives to provide incentives for development consultants and architects to control project costs." In other words, many of these project costs have got completely out of hand because of the great costs that are being paid to consultants and architects.
Specifically, the auditor has said, "Architects are responsible for the preparation of plans and specifications of the building and to ensure the contractor follows through on these designs. While a group of directors can select the architect, it is usually the development consultant who recommends either a particular architect or who provides a short list of architects for the group to choose from." In other words, the auditor is saying that this is all prearranged, that this is all set up, that the consultant says, "This is who you should be choosing." I would go one step further: not just architects, but lawyers and anyone else who's involved. These groups are citizens trying to perform a benefit to their community. They're not experts: They rely on these consultants, and the consultants have a list of architects and lawyers etc.
The difficulty is, of course, as the auditor has said, that both the development consultants and the architects are paid on a percentage-of-cost basis. The consultants receive 1.5% to 2% of the total capital cost of the project, including the cost of the land; architects are paid between 5% and 8% of the construction costs only. The auditor therefore suggests that there has been no incentive to minimize the capital cost of the project, particularly for these development consultants, to say nothing of potential conflicts of interest. That is the most startling part I noted in one of the auditor's comments.
He said: "In five of the 12 projects reviewed in the central region, the development consultant and the architect were the same individual or firm or were otherwise related. While such a relationship can be beneficial, the potential for conflicts of interest is high and contributes to higher costs. In one of these projects, the development consultant had the following involvement: acted as a real estate agent for the non-profit group in the purchase of the site and received a 5% commission; was a director of a construction company building the project; held 50% of the voting shares, and finally, was the property manager for the building as well as for several other projects completed by that non-profit group."
I'd like you to comment on this whole issue of allegations of conflict of interest and the allegations of not getting the best for the buck that is paid because of these inter-relationships of real estate agents, consultants and gosh knows who all.
Mr Burns: You have a wonderful way of asking many questions at once. Let me take a minute to go through the pieces.
Conflicts of interest: As a matter of practice, for a long time the ministry has wanted them declared and that the practices of the parties reflect the declaration; that in so far as people are dealing with the ministry, that all be very clear.
Mr Tilson: But that hasn't been done to date.
Mr Burns: No, that has been the practice. What we had not done and what we have done since is to make that absolutely crystal clear by way of, first, a directive to our own staff as to how they're to deal with questions like this when they arise. But I think much more importantly, right in the proposal call that we just issued in December, there's a section called Conflict of Interest. If, as part of the proposal, there are any conflicts, they are to be declared comprehensively at the beginning so that everyone is perfectly clear on where they stand.
As you well know, there isn't necessarily a problem with the conflict of interest. Conflicts of interest arise in the doing of business whether you're in the private sector or the public sector. But what is required for good business practice is their full declaration and an absolute understanding by all the parties of the business consequences of the particular conflicts that have been identified.
I went to the Ontario Association of Architects' general discussion in the fall and was asked by a couple of architects why, in their cases, our ministry staff wouldn't deal with them and would only deal with a non-profit sponsor. The reason they wouldn't deal with them is that in that particular case, they had more than a client service relationship with the non-profit doing design; they were in some way, as you just said, part of the proposal to build a building.
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Our practice is, where that's the case, we will not deal with the consortium on the business side. They're not acting simply as the agent of a non-profit or co-op. It's more complicated, as you've just said. That has been the practice, but we have confirmed it with a directive and made it a mandatory requirement of participation in the next program.
Mr Tilson: I guess the difficulty is that so many consultants end up managing these places. It's a strange coincidence.
Mr Burns: There are some in this particular business -- I've no idea how many but there are certainly some -- whose business includes not just development work but property management, and that condition has been true of the private sector for a long time. In and of itself I think that's just a feature of the business landscape we're operating within. That's just a touch on the conflict-of-interest question a little bit.
Fees: I think I said at the beginning, when we were talking about the history and the evolution of the programs, that in 1986 there was a sort of general agreement among the provinces and with the feds to delegate down the responsibility for dealing with program delivery.
One of the things that was inherited, in addition to that staging process, was a set of norms used to deal with proponents and fee structures were among those. Certainly, for a period of time those general norms on fees were used in the provincial programs.
What we have done more recently as part of our response to changing market conditions is push harder and harder and harder on every element of the fee structure as we're looking at applications and insist that they not be argued to us on the basis of norms, but rather on the basis of actual work plans and, at the end of the day, actual performance. So the fee element of the capital cost has -- and I think the auditor --
Mr Tilson: But that policy still continues, doesn't it, Mr Burns? The policy of the architects and the consultants receiving a percentage of the capital costs which include the cost of the land -- that policy still continues.
Mr Burns: The fee schedule for architects -- the architectural association relates them to the capital cost of the construction. That's the way they do it. We don't tend to pay their fee structure, but in the way they do their work, they attach it to fees per unit or fees per square foot. That is the way business is done by architects.
Engineers are a little different. It depends on the complexity of the engineering work and it's an actual thing. You've got an electrical-mechanical system, you've got a structural system, you're dealing with a particular thing.
The development consultant guideline, which was up to 2%, was a guideline. What we've done in practice, like I just said to you, is switch to "We're from Missouri. You've got to show us. Where's the work plan? What are you actually doing?" It's not just "If it's $1 million, you get $20,000." We are trying to move the business practice from an expectation that people can push for norms or guidelines towards real costs and real business practices.
Mr Tilson: I was listening to your words of delegating down by governments and in fact that's what you're doing with the non-profit housing projects. You're delegating down to non-profit housing corporations, which leads to a question.
These are churches, these are people interested in helping solve the housing question and a lot of these people -- some of them have expertise and some of them don't in particular areas -- rely on the provincial government to assist them in pursuing these very complicated projects. Do you have lists of consultants, lawyers, architects, engineers, other professional groups to assist these people in choosing, because they won't know who to go to?
Mr Burns: I will address that. I don't want to lose your question about incentives because I think it's a very important one and I would like to comment on it.
The Chair: Go ahead.
Mr Tilson: You're not saved by the bell, in other words.
Mr Burns: Well, we're here for the rest of the week. I think the bell is irrelevant.
The program requirement as was indicated in the chart, right up to and including the proposal call we issued in the fall, says you can't get past first base if you don't demonstrate as an organization that you've got the resources to deal with the thing you're proposing to do. A capable board is one ingredient to that; the right professional services is another.
In some cases people will come with development consultants, as you've mentioned, sometimes they'll come with other groups of professionals or associated people, sometimes they'll come with the municipality, and they'll say, "The city of Ottawa's going to build this thing for me." They've got the capacity, so you can respond to that.
A church-based group in a smaller community comes to us and says: "You're saying we have to prove we're competent, and we need some professional resources. Where the hell do we find them?" We will give lists of people who practise this business in a region, but we do not license, we do not regulate this industry, we don't blacklist. What's given out by our office is our best understanding of who's providing this service, and the group itself makes a search and a business decision, whatever that group happens to be.
We don't provide comprehensive lists, as far as I know, for other professions related to the building industry -- appraisers, architects, lawyers, engineers and all the other professions that are involved in real estate-property management. We don't do that. We do provide what might be called master lists of people who are in this particular business in a region. That's all. They're not evaluated, they're not licensed.
Mr Marchese: Another member has raised a question about the high cost of non-profit housing and why not pursue the alternative of buying existing housing stock. My sense of that is that what's probably available is one-bedroom or two-bedroom condos, and that in itself is quite costly if not more costly than what it takes to build. In building, we're creating jobs and affordable housing for many, so that would be a positive thing.
I want to pursue that line of thinking and ask you some questions. A number of people ask, "Why not let the private sector build non-profit housing instead of having governments do that?" because they could probably do it better. Given your experience, is that an option that somehow we are not allowing? Why is the private sector not building non-profit housing or affordable housing, for example, if that's what it wants to do or if that's a cheaper option? Do you have a sense of the answer?
Mr Tilson: You can't beat city hall.
Mr Burns: The private sector builds most of the new housing in any particular year, including from the point of view of construction, at least all of the non-profit housing. We do get private rental housing built in Ontario every year, 2,000, 3,000, 4,000, 5,000 units, but most of it in smaller communities.
The question that was raised over here originally about the relative merits of buying existing and building new is a broad policy judgement that governments make based not just on program objectives but on market conditions from time to time, and it has changed over the last 25 years just by observation. At the moment, the last number of programs have had some component of purchase in them, but mostly have been about new supply. That's essentially been the general approach taken by the province of Ontario since 1964. I don't want to judge that, but just to describe it; that's what's happened.
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Mr Marchese: I was going to pursue it in different ways but I'd rather ask another question, given that I have another question to ask. Do you get the sense that we're building non-profit housing or cooperative housing in areas where there are already plenty of such units? Are we attempting to mix housing in a number of other areas where there's probably a need and we're not doing so, and do you see it as a problem?
Mr Burns: This is a question that vexes local governments and communities in thinking about non-profit and co-op housing.
Just to step aside for a minute, in 1987 and 1988 the government put together and finally promulgated a housing policy statement under the Planning Act that required municipalities to rethink their housing strategies. In fact it identified a number of priority ones -- they were in all of the high-growth areas -- and it explicitly said: "You have to deal with the question of increments to your housing stock and who are they for and how do you deal with that. You should have some goals for that. You can't have a situation where you only allow million-dollar houses to be built in your community; you have to have some diversity to your housing strategy."
That's caused a number of municipalities to think about the issue you just raised, which is, in increments to their housing stock in new subdivisions or in redevelopment areas, what proportion of that might appropriately be moderate-cost ownership or non-profit rental? Some progress has been made towards thinking about those issues in terms of goals instead of reacting just to local conflicts.
The second thing I'd say about that is that the professional literature that's looked at the consequences of non-profit and cooperative housing in a community, mixed tenure, and the scale we produce here, suggests that you can't find impacts, for example, on market prices and parking and traffic conditions. They're the sorts of things that often worry people when you first start talking about non-profit and co-op. We don't have a lot of professional evidence that there are negative consequences to introducing non-profits and cooperatives in particular places.
In a few places, a number of non-profits and cooperatives have been funded in a short period of time, and sometimes in local community contexts you get a worry about the pace of change, that it's just a whole lot of change all at once and has that been thought through and does that have consequences for the schools and the social service structure and all that sort of thing. I think there have been times in the development of social housing in this country where that has not been fully and properly dealt with.
When the city of Toronto did the St Lawrence neighbourhood, they chased it for 10 years and the provision of social infrastructure -- day cares, schools and all that kind of stuff -- is still in some ways not fully dealt with. You can get to a point where you're doing something at a scale where you're not dealing with all the consequences when you do it. But by and large, in recent years, the program's been funding relatively smaller projects in a relatively large geography.
Just to acknowledge it, there are still a few places in the province where this "It's all too much at once" is an issue, and I think in some respects it is an issue. When you introduce a whole lot of people all at once, there are second-round impacts that need to be looked at.
Ms Harrington: I'd like to go back to the costs that the auditor was concerned about. He looked at the maximum unit price. I believe from 1987 to 1989 the maximum unit price did not increase. Is that correct? I'll go ahead while you're looking it up. I think the question from the auditor's point of view --
Mr Burns: From 1987 to 1989, I think there were increases. What we didn't do is change it from 1990 to 1991, even though that's when the market went over its hump and backed down, and one of the questions, rightly, asked in the auditor's report is, why didn't we?
Ms Harrington: You're going to ask the question for me here.
Mr Burns: It wasn't done for two principal reasons. The impact of the GST on our cost structure, which was introduced January 1 of that year, was not perfectly clear. In fact to be honest, it still isn't today. We still have arguments going on between all the parties in this process and the feds about who pays how much GST, when and all that stuff. That was going to goose prices to some degree automatically, even though other parts of the cost structure were declining. We wanted to see how it was going to fit in and shake up.
The second thing is that some time in 1991 the market adjustments to the turn in the general economy were uneven. We're still seeing transactions in the land market up there, and then over there you'd see one down here. The process that the marketplace went through to adjust took a while, and we had trouble tracking what the real underlying trend in all this was and what evidence should we rely on.
What was done was that the MUP was left in place but pressure was exerted at the level of individual projects over the course of the year. In fact over that year we ended up committing the universal projects in that year at 94% of MUP, and over the course of the year that average dropped. As we were dealing with real projects, we were experiencing cost reductions, but we got at it differently than using the general MUP; we got at it specifically through the projects. We have of course since reduced the MUP, because the shape of the change is stabilized and we understand it better.
Having said that, the MUP itself, and I've said this before, is a pretty blunt instrument, and we have to unpack it a little bit to deal with the real cost elements within it a bit more effectively, in part because I think we should do something more creative about addressing incentives in the cost structure on the capital side than maybe we have.
Ms Harrington: Very briefly, would you say the development charges in that area of 1991 were also a factor?
Mr Burns: Yes. In some communities, they were introduced in 1991.
Ms Harrington: Was that significant?
Mr Burns: In some communities, it's quite significant. The MUP applies to big geography. So you get one municipality with a $3,000-a-unit development charge and an exemption for non-profit and next door you've got somebody with an $8,000-a-unit development charge and no exemption for non-profit. What do you do with the MUP? What we're going to do is unpack it so that we can deal with these things. But at the day the two-tier MUP in Toronto covered municipalities with incredibly diverse practices and development charges.
Ms Harrington: One last question: Was the MUP reduced in 1992?
Mr Burns: Yes.
Ms Harrington: By how much?
Mr Burns: I don't know what percentage that is. It varies by region and size of unit, but somewhere between 5% and 10%, depending on where it went. Even with that, in that year we committed at 91% of MUP across the whole system. So even though the big cost control dropped to there, the actual trend line for project commitments continued down and was below the reduced MUP.
The Chair: Thank you. The committee is adjourned, and we will reconvene at 3 pm this afternoon.
The committee recessed at 1309.
AFTERNOON SITTING
The committee resumed at 1511.
The Vice-Chair: The public accounts committee will now come to order for our afternoon session. I understand the deputy minister will be somewhat late. I think, however, we should continue, and I believe we have the clerk to bring you up to date where we left off. The Liberals will be starting this round.
I understand you want to answer some of the questions that were asked this morning. Why don't we do that first, and may I ask that you not direct the answers to any specific member, and then we'll continue with our rounds. Any follow-up questions could be made that way. Thank you.
Mrs Suzanne Herbert: All right. What we'd like to start to do is go back to the question of the two-bedroom equivalent and the costing. So if I can direct the members to the letter that was sent to them on March 5, we're going to start, using that as a focus for responding to some of the questions that occurred around this subject this morning. I'm going to ask Toni Farley to lead us through that.
Ms Farley: Do you all have a copy of the letter dated March 5?
The Vice-Chair: The March 5 documents, yes.
Ms Farley: Okay, great. I first noticed that there was a potential problem with the methodology when you look at the finding that the auditors came up with, which was that the average two-bedroom cost in Metropolitan Toronto was $158,000 for 1990-91, and when you look at what our MUP was for that same time period for Metropolitan Toronto, it was $152,000. Then, later on, the auditors went on to say that we were committing projects on average at 94% of that $152,000. Therefore, how could the average two-bedroom equivalent be $158,000? There was therefore a logistics problem.
The auditors very kindly lent me their notes, and I looked at the methodology they used to calculate the figure of $158,000. What they basically did is that they took a sample of 12 projects, all of which were located in Metropolitan Toronto. They had the total square footage for each of those projects, and they had the actual number of units. They then assumed that the average two-bedroom size was typically 800 square feet. They divided the 800 square feet into the actual square footage to get the two-bedroom equivalent.
In the letter there is an example of how that worked. There is a project that had a total capital cost of just over $36 million that was all of one-bedroom units -- 297 -- 4and it had a total square footage of 179,091. That translated into 225 two-bedroom equivalents, and then, looking at the average cost of those 225 units, it came out to an average cost of $161,000. But when you look at what it actually cost us to produce that, it was $121,000 a suite. So there is obviously a problem there in the methodology.
I then thought, okay, maybe I'm doing something wrong here. And I thought, well, if the conversion model works, I will then simply convert everything into one-bedroom equivalents, since most of the sample was in fact one-bedroom. Converting everything to one-bedroom equivalent in fact yields a much more accurate response, simply because of the sample that was used. You're getting an average of $121,000, so that to me meant that that $158,000 per unit is really misleading.
The Vice-Chair: I think on this subject, before I turn to the -- I believe you have other questions that you have answers for in other areas.
Ms Farley: Yes.
The Vice-Chair: Okay. The auditor has asked me if he could ask some questions with respect to this particular area, so I'm going to turn to him and allow him to ask some questions.
Mr Peters: Thanks very much. I just wanted you to relate the comments you just made in which you pointed out that the flaws in this methodology that we used, which I've explained to the members already, we used in the absence of any other available methodology at that point, and the ministry itself had explained, I think when we discussed the matter, as you indicated to us, Dan, that there were absences of information.
I wonder, in order to put this back on the controversy, rather, in measuring between yourselves and ourselves, if you might not also want to relate for the members how this relates to the total cost per unit in the slide that you presented this morning, where you said that in a sample project for families in Metro Toronto in 1991 the total cost per unit was $144,000, which seems to be very much closer to the numbers that we developed. That is the number one question, if you could relate it.
The second rather interesting point, and you might want to check this out, is that we did a very rapid calculation based on the slides presented this morning and tried to apply our methodology to the information that was presented on the slides. We determined a unit cost of about $111,000 only, using the available cost versus the $144,000 which you say you paid; in other words a differential of something like $32,000 per unit or 29%. If you are really quite definite about it and apply this to the $5-billion cost that we have, we're talking about a $1.5-billion cost differential. You might want to help the members out a little bit in explaining that, if you will. I'll gladly give you this sheet.
Mr Kormos: On a point of order, so that we can follow: There are two total-cost-per-unit pages. One is page 144 and one is page 115. Which one is the auditor referring to?
The Vice-Chair: Which page is this?
Mr Peters: I'm referring to a pie chart that says, "Sample Project for Families in Metro Toronto."
Mr Kormos: Okay, not the seniors.
Mr Peters: When somebody asked the question of the committee -- I think just to explain why they're related -- what the mix of these units was, the point was made that they were largely two-bedroom and others so that we could relate the two together.
Mr Burns: I think the important thing about both slides -- I touched on it briefly this morning -- is that they represent the cost breakdown for one project each. They're not the averages, and we didn't present them in order to advance any conclusion about general cost structure, but to show you the typical breakdown of capital costs in a couple of projects. Obviously, if these were our average costs, then all the things you said afterwards would have validity. They are not our average costs; they were presented to give you a sense of -- not you, because you know, but members of the committee -- what the basic cost elements are in a typical non-profit project.
Interjection.
Mr Burns: One was family and one was seniors.
Mr Peters: They were both samples.
Mr Burns: In a sense, they are samples, but it's not even a sample. It is just one project.
Mr Peters: It says on the slide, though, "Sample Project." Oh, it's one sample project.
Mr Burns: A sample. I did say that this morning, but I appreciate that I was just zooming along. Let me just emphasize it again: Each one of these is the cost breakdown for one project, but we gave it to give you a sense, in a project, of what the elements of the capital cost are, not because they represent, in any way, any sort of average. I'm very sorry if we left any misunderstanding about that on the table with anyone this morning.
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Mr Peters: The important point is, though, that that was a sample project, that is an actual sample and it came very close to the calculations we have made for the same time period for two-bedroom apartments. That part I'm very pleased to note --
Mr Burns: That's valid and, as you know from looking at our material, the capital costs are in array. They don't fall all in a band of a couple of hundred dollars' difference; there's actually a distribution.
Mr Peters: Right, that's very good, thanks.
Ms Farley: How accurate the methodology is in terms of coming up with something based on actual really does depend on the mix of the unit sample you're dealing with. In this instance, it didn't work simply because they were all one-bedroom units. In subsequent calculations that you do, where the sample is predominantly two- and three-bedroom units, then in fact you tend to get something a little more representative of actual. What we then did is for -- if I can carry on?
The Vice-Chair: Yes, please carry on.
Ms Farley: Looking at the actual average cost of all units in Metropolitan Toronto for 1990 and 1991, we have a figure of just over $134,000 per unit. That's based on a sample of just over 6,000 units in 67 projects.
The Vice-Chair: Do you want to carry on?
Ms Farley: The other aspect that was touched on in the --
Mr Tilson: The auditor said $158,000.
Ms Farley: That's correct.
Mr Tilson: I'm just clarifying that, Mr Chairman, because that's quite a major discrepancy between what the auditor said and what is now being said.
The Vice-Chair: Yes, that would seem to be the case. Could you carry on, unless you have something else.
Mr Peters: I'm just wondering -- the point being made, though, is that they're non-comparable units. In other words, in our unit we have developed for the demonstration a hypothetical two-bedroom unit of 800 square feet. The $134,000, if I understand the number correctly, can be a mix: It can be a unit as small as a hostel bed and as big as a three-bedroom apartment, so it's the average of those. If the majority of these were hostel beds, I would say that would be terribly expensive. I must confess to some trouble comparing the numbers because of the mix question as to what a unit represents.
Mr Tilson: What are we to believe? What is the average cost of construction units?
The Vice-Chair: Mr Tilson, may I just interject at this moment? Can we have an agreement to carry on? I understand you want points of clarification, but I think if we have the presentation and the responses to questions that were asked, then we'll get into a round of questioning.
Mr Tilson: The difficulty is, Mr Chairman, I think we're still not certain as to what the average cost of construction is.
The Vice-Chair: I'll be happy to entertain a round of questioning at this time if that's what the committee so desires.
Mr Tilson: I'm just hearing a set of figures here and a set of figures here; that's all I'm asking.
The Vice-Chair: Mr Kormos, on that point?
Mr Kormos: Please speak to Mr Tilson's point. I think it's incredibly important that we clarify this. The auditor and the ministry are in a position now to explain -- well, he's already explained what it is the auditor relied on. But more specifically, I think it's important that these people be given a chance to explain -- the ministry people -- how it is that the approach used by the auditor resulted in this inaccurate impression. Exactly what is it? Again, I suspect it's the matter of bathrooms, kitchens being factored in, or whatever. I agree with Mr Tilson. Let's have this dialogue now --
The Vice-Chair: May I suggest, as the Chair, that we have a five-minute round on this particular subject matter? We'll start with the Liberals and go around. Five minutes. Have you finished with that part of your presentation?
Ms Farley: Yes, I have.
The Vice-Chair: Okay. Why don't we have questions now, starting with Ms Poole.
Ms Poole: This morning when I raised this issue, I asked you if you had an analysis of how many two-bedroom units you had in the non-profit housing program, how many one-bedroom units and how many other types. I wondered if you had that information for us now.
Ms Farley: Yes, we have it for central region, which is the largest area, for new construction projects for 1990 and 1991. There were a total of 8,566 units, of which 2,846 were two-bedrooms.
Ms Poole: I'm having a little difficulty understanding why it appears to be so impossible to calculate the cost of a two-bedroom apartment. When I contacted several people in the private sector and said, "What did it cost you in 1991 to build a two-bedroom apartment?" they went to several of their projects which had mixed bedrooms in them and came back and gave me a very definitive number.
There are certain factors that are common if you're looking at the cost of a two-bedroom and one-bedroom. The foundation is an enormous cost, the exterior walls, the heating, ventilating and air-conditioning system, the central plumbing system, the elevators; all this type of thing are all common costs. When you get into a one-bedroom or two-bedroom, then you'd have to calculate the difference that having a kitchen, for instance, or a bathroom would make in converting. But can you not calculate in one of your projects what you estimate to be the average cost of a two-bedroom unit in that building?
Ms Farley: If I may answer this, we went back during our break and attempted to do that. This is obviously a very rough estimate and not based on an extremely comprehensive sample, but we did come up with a cost of about $143,000 for a two-bedroom.
Ms Poole: So $143,000. And how would the methodology you used, whatever it is, differ from the methodology the auditor used, which was basically to go on a square-footage basis? Did you factor out the cost of things such as the kitchen and bathroom, or did you go back to actual figures in a building which had both two-bedroom and one-bedroom apartments?
Ms Farley: We went back to actuals.
Ms Poole: And it is your feeling that the project you chose would have been representative of your average housing project, where you didn't have a lot of special needs, you didn't have a lot of hostel-type units --
Mr Burns: When Toni says it was rough, unless we go back and look at the actual projects, ones that are specially fitted for disabled people and extra elevator costs and all those kinds of things, they're very difficult to speculate on. So when Toni said it's rough and it's preliminary but it gives you a ballpark, that's all we can do, without something more extensive.
Ms Farley: I did a very rough check on that. I looked at what our two-bedroom high-rise MUP is. For Metro in 1991 it was $152,000. If we're committing on average at 94% of that, then you are looking at $143,000 and change, $144,000.
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Ms Poole: For the sake of discussion, let's use the $143,000 figure for a two-bedroom non-profit unit, and also for the sake of discussion, let's use the $106,000 figure for a private sector unit built at the same time. How would you attribute that significant difference between $106,000 and $143,000 for delivering the same thing? Where is the bulk of it? Is it in administration? Is it in the two-year time lag? How would you divide that up? How would you explain it, I guess is the question.
Ms Farley: It was primarily in the land. I didn't have a great deal of opportunity to look in detail, but the study that was referred to in the audit, which was the LePage study, indicated that prices declined from $156,000 to $106,000; that was a drop of some 32%. Where that was reflected was in the cost of land. Where the model originally assumed a land cost of I believe $78,000 a unit, that then declined to about $30,000 a unit, and the question begged of the auditors of us was that we didn't take advantage of that drop in land prices.
That was where the difference lay, so I went back and said, again based on actuals, "Okay, what did we pay for land, and what are we currently paying for land?" What I determined was that in fact the most we have ever paid for land was in 1988. At the peak, we paid just over $42,000 a suite for land; in 1991, our average declined to just over $28,568. So we had a drop of about 33% in land, so again we are consistent with the findings of the ministry study in terms of acquiring land at about $30,000 a suite.
The Vice-Chair: I'll interject to say that there's one minute left, and Mr Callahan wants to ask a brief question.
Mr Callahan: Why haven't you got these figures? I get the impression that you're putting them together after the fact. I would have thought it would be most important to have a process in place whereby these could be determined on a project-by-project basis, particularly the consultant's fee, which I understand is most unusual. The consultant receives a percentage on the price of the whole thing: the land, the buildings, the whole works. That must also drive the whole thing up. Why did you not have it, and do you now have it? Are you now in a position where we could find out the individual price?
Ms Farley: We do have the data on computer. Each project is broken down.
Mr Callahan: Why wasn't it given to the auditor, then? Why did the auditor have to simulate this if you had it?
Ms Farley: The audit took place in the late fall of 1991 and the first part of 1992, correct? Our year-end was then, and the bulk of our projects tend to get committed during that period, so we didn't have the comprehensive data available at that point in time. Projects simply weren't committed then.
Mr Callahan: When did it become available?
Ms Farley: Actually, they're becoming available now, towards mid- to late 1992.
Mr Callahan: Bizarre. That's all I'd say.
The Vice-Chair: I'm sorry, the five minutes have elapsed. Mr Tilson, you have five minutes.
Mr Tilson: That's a long time.
Mr Derek Fletcher (Guelph): That seemed like 10 minutes so far.
Mr Tilson: No, I'm not referring to Mr Callahan. It's a long time to not be able to make that information available. Don't you have computers, or are you doing it by hand over there?
Ms Farley: We have computers. The programs aren't designed to generate this type of information, so you have to go back. In terms of what we use the information for, it's not the use that the auditors were seeking. At that point in time, we simply didn't have the volume of projects to indicate what in fact we actually did commit at what price levels.
Mr Tilson: So you got your first report from the auditor in April, and then another one came out in June. You'd think you would have been alerted. These figures on page 130 were made available to you in April of last year.
Mr Burns: That's true, and of course when that happens, there's a discussion between the audit staff and the ministry staff, as there was in both those cases. Acknowledging the narrow base of data, we put forward the view that we thought the methodology was going to give numbers that would divert from actuals that we write in terms of methodology. The ministry letter to the auditor said that. We had a sense that there was an understanding of that discussion, which I think there is. The audit report stuck with the work that had been done, which is not totally unexpected, but we did discuss these things, and our reflections on them were embedded in our letter of July.
Mr Tilson: I'd like to ask the auditor to comment. Your office seems quite specific on page 130: "We calculated the average cost of a sample of 12 projects approved in 1990 and 1991 in Metropolitan Toronto to be $158,000 per two-bedroom equivalent unit, even higher than the prices at the peak of the housing boom." I assume those are the figures we're speaking of, and that's the specific paragraph. You seem quite specific. The ministry is saying that you simply didn't have the right information, but you're quite specific when you say you had 12 projects. I'm just confused when I see figures -- this is my initial question of clarification; I guess I was the one who started this round. The ministry says $135,000, $134,000, and you say $158,000. I'm still not clear, in other words.
Mr Peters: I would turn this over immediately to Gary and Anne Beaumont, who worked with this. I confess to you that I'm not clear either. The one fact of course remains that the $134,000 figure was provided to us on March 3 and to the committee on March 5, 1993. It did not arise in any discussions we had.
Mr Tilson: You had 12 real projects that you got your figures from. As simple as that.
Mr Peters: Yes, I'm not denying that. It's just that you also put in the $134,000 figure.
Mr Tilson: Well, that was a response to the comments made by the delegation.
Mr Peters: That's right. And I'm pointing out to you that our figure was developed and made available way back in April, and you're quite right on that. Then the $134,000 figure was only made available to us on March 3, 1993.
Mr Tilson: What's the real story, Mr Auditor? What's the real story here?
Mr Peters: Well, let's hear.
Mr Gary Peall: I think the real story is just how they tried to explain the difference in the way the methodology is presented. If you have a very heavy weighting towards single bedrooms, then those fixed costs associated with the single bedroom, going to a two-bedroom, get inflated in the model we apply. The 12 projects we picked were all the projects we could readily identify as being in Metro Toronto, and as we only had comparative data from Metro Toronto, that's what we used to compare. So we took the complete list of committed projects the ministry had as of the date of our audit and said, "For the projects we can identify as being in Metro Toronto by their description, we will calculate this two-bedroom equivalent unit, and that's how we'll try to make the comparison to what's going on vis-à-vis the private sector to put some overall perspective on this thing."
In those 12 projects, we weren't sure of the mix of units, and as Ms Poole has tried to point out, the mix of units does make a very big difference to this calculation. That's where the difference arises.
Mr Tilson: I trust that the auditor's office, now that you will have all the information that wasn't available to you, will be coming back to this committee in due course with further comments, because this figure is most important for us to appreciate the pros and cons of the financing of non-profit housing. It's now been left up in the air, depending on what type of unit you're talking about. I believe one can be more specific about that.
I'm not being critical of you or the ministry. I'm just saying that surely there's a way of being more specific so that we can come up to appreciating the variance of units, that we can be a little bit more precise in determining what the average cost would be.
The Vice-Chair: I'm sorry. We've run out of time, Mr Tilson. Mr Kormos.
Mr Kormos: You know, I don't think there's anybody here who wouldn't feel a little bit of concern about the fact that you don't have a handle on your per-unit costs. I say that, but that having been said, the issue is the comments made by the auditor. You heard just now an explanation as to how that calculation -- taking a gross square footage and then turning it into two-bedroom units -- creates in this instance an artificially high price. And that's because of what factors? Why is the number arrived at $156,000? Why is that number arrived at inaccurate, especially when applied to that project?
Mr Burns: Our comparison to actuals demonstrates that it was out of line. It actually produces a number higher than the MUP, and we knew then that we were committing below MUP.
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Mr Kormos: MUP is maximum unit price.
Mr Burns: Maximum unit price, the capital cost control system. We knew then that we were committing under MUP, so there was an understanding last summer that it wasn't quite working among all the parties to the discussion. Why it doesn't work arithmetically is a question that I'm interested in too. Frankly, I don't have a full answer for you right now. I believe its roots are in the issues that were raised by Ms Poole earlier, that hostel beds and one-bedrooms have a different ratio of support space in the building in any unit than two-bedrooms and, in turn, three-bedrooms. Arithmetically, when you try and bridge from a sample that's tilted a lot one way to another part of the stock, you can't arithmetically guarantee that you're going to produce equivalent costs. We believe the actuals demonstrate that.
As I said this morning, I believe -- and in fact Mr Tilson just said it -- we should have a methodology we're confident in. I'd like to have one and I'd be more than happy to have a further conversation about how we can do all that kind of thing. We do collect program information. We are not absolutely ignorant at 777 Bay of what's going on in the regions, but with projects in motion it's not a simple thing to pull out of them the kind of material that was needed for this particular kind of assessment. There is something in that arithmetical process that does this, and I'm not sure, sitting here today, what it is that does it.
Mr Kormos: I'm not really good at that kind of stuff, but I get the impression that if, for instance, they had taken three-bedroom units and applied the same formula, why then it would have been, in the converse, an artificially low figure, because there's a fixed cost of bathrooms and washrooms and foundations and kitchens.
Mr Burns: I think actually the arithmetical tilt was running the other way. If you tried to do a hostel unit conversion, you'd end up below our real program costs, and if you did a three, you'd end up even higher above. That's the way the arithmetic tilts from the actuals.
Mr Kormos: Because you point out that what they ended up with was 225 two-bedroom units when there were actually 279 one-bedroom units.
Mr Burns: Right. That's a measure of why the arithmetic is a bit of a problem.
Mr Kormos: So the numbers that the auditor came up with using that formula were higher than the actual numbers.
Mr Burns: Yes.
Ms Farley: No, no. Excuse me; I'm sorry.
Mr Burns: Higher than the actuals for the whole sample, not for the actual projects we're looking at.
Ms Farley: Exactly.
Mr Burns: Obviously, they didn't miss those numbers. They were real numbers from real files.
Mr Kormos: So they were inappropriate numbers, they were unfair numbers to compare against the real scenario.
Mr Burns: I think I said this morning that it's not a conventional calculation in the real estate business that I know of, so an effort was made to try and construct one. I think they should go back and construct one that works consistently.
Mr Kormos: The auditor also made reference -- and Ms Poole has made reference to a similar figure -- in his report, page 7, about how a two-bedroom unit that cost $156,089 could be built for less than $106,000 in 1991, including a 20% profit for the developer. That's this Royal LePage report that was commissioned. I guess the first report was done back in 1989. These people seem to have some problems as well, starting back in 1989, mind you, before you were deputy minister.
The Vice-Chair: That may be an interesting point, but we've run out of time.
Mr Kormos: Give him a chance to respond.
The Vice-Chair: Maybe we can get a brief response on that.
Mr Burns: The ministry did commission Royal LePage to look at some market conditions and give some advice on trends, and some of the numbers in the discussion today arose from looking at that material, including the $106,000. I think at some point, if we finish this cycle, it might be worth a few minutes looking at that report and that material and talking about what it is and what it isn't. But I won't do it right now. We'll leave it for an appropriate time.
The Vice-Chair: Perhaps I could ask members if there are any further questions in this area. I'd be happy to indulge you in another round. Remember, I'm at the disposal of the members. Would you like me to do that and we'll have another five-minute round? Ms Poole, you can start that next round.
Mr Burns: Mr Chair, if I could just interrupt for one second, there were a couple of other questions asked this morning beyond the ones we've just been addressing.
The Vice-Chair: Yes, I understand that, but I think --
Mr Burns: One was the one you asked and one was another of Ms Poole's. We do have answers to other questions, but we'll leave that in your hands to deal with when you want.
Mr Tilson: A point of order.
The Vice-Chair: A point of order, Mr Tilson.
Mr Tilson: Both the ministry and the auditor said they're going to have to look at these figures again. It seems to me we can keep asking these questions for ever, and at this stage there doesn't seem to be an answer, because the information isn't available.
The Vice-Chair: I'm at your disposal. If you'd like me to go around to this side for questioning, we'll do that.
Mr Tilson: If you want to go around again, but I don't know how many times they can say it. They don't know. Nobody knows.
The Vice-Chair: The auditor has a point to make here.
Mr Peters: Hopefully, I can put this into some sort of perspective that's helpful to the members. We did a hypothetical calculation in order to determine whether prices should have dropped because the market prices dropped in that particular period of time. We came up with a calculation of a hypothetical amount using your hypothetical two-bedroom apartment. We brought this out as one of the problems of the price not having dropped with the market as it went along.
Indeed, I think we can spend an awful lot of time being precise as to what the actual number would have been. Where we stand right now is that we have opted for the top of the range based on our discussion, which was around a $200-million differential on the sample, and the ministry has acknowledged that it is at least $20 million. So any precision we have now is in merely being precise whether it is $200 million or $20 million. It's still a lot of money. I think the point has been made that the rates did not drop with the market. We can spend a lot of time now calculating it, but I think the point for the committee's benefit may have been made, although the precision is being questioned, if that helps.
The Vice-Chair: Ms Poole, on the same point of order.
Ms Poole: No. I wanted to say, the question I have isn't so much on the method.
The Vice-Chair: On a different point of order.
Ms Poole: It's not so much on the methodology, which Mr Tilson and the auditor have just responded to; I'm trying to get at why there is a difference in the private sector price and the non-profit price. I'm willing, for argument's sake, to take the ministry's figure and just say that's a $37,000 difference. Even if you have land as a major component, that cannot explain the whole thing, because the land price per unit only went down $14,000 from 1988 to 1991. So I accept your argument that land's a major part of it, and I'm sure it is, but I'm trying to get at why non-profit housing is more expensive to deliver.
The Vice-Chair: Mr Duignan, on the same point of order, because we're not asking questions at this point.
Ms Poole: Hold that question.
The Vice-Chair: Just let me follow some semblance of procedure here.
Mr Duignan: I'm not actually too sure which point of order we're really on.
The Vice-Chair: Mr Tilson's original point of order.
Mr Duignan: You will not be able to determine the minister's figures until you do another audit of the figures, is that correct?
Mr Peters: That is right. I'm asking the committee whether we should actually make that effort, because all we are talking about is a range of numbers. The ministry and I agree on the direction but not the amount.
Mr Duignan: So that in fact could be a recommendation of this committee on Thursday afternoon.
Mr Peters: It could be a recommendation if you wish to have a more precise number on this, but it is past history. I don't know how much benefit there would be.
Mr Duignan: Thank you.
The Vice-Chair: I need some direction from members of the committee. Shall we continue this line of questioning or is there not a consensus and we can move on to another area?
Ms Poole: You could go back to 20-minute caucusings and we can all decide what we want to talk about, if you like.
The Vice-Chair: I think I will proceed in this fashion: I will allow the ministry to continue with its answers to questions that were specifically asked this morning, and once we complete that, then we'll move on to 20-minute rounds. So would you like to carry on with your presentation or answers to questions?
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Mr Burns: Mr Chair, you yourself asked a question this morning about the level of acquisition activity during the program delivery period we were discussing this morning. I have a chart here that covers that: 1986 to 1991 inclusive, $5,989, or in general terms, $6,000. That's, I think, a little under 10% of the total program activity in that period of time.
Actually, I have it broken down here by region and year and could copy that and make it available to you if you want, but that's the level of acquisition activity. Most of it took place in the last three years -- that is, 1989, 1990 and 1991, in that period.
The Vice-Chair: Perhaps you could make that available by photocopying it for all members of the committee. I think the clerk will assist in making some photocopies.
Mr Burns: Next, Ms Poole asked a question about the pattern of change in overall starts, non-profit starts and private rental starts over a period of time, and we have a summary chart that answers -- not answers but --
The Vice-Chair: Do you have copies available?
Mr Burns: This one, we have copies, and it's even a nice chart. This is the wonders of modern technology, if you have the right person sitting at a computer.
The Vice-Chair: Perhaps we could distribute that as well for members of the committee. As that's being distributed, would you like to give us some comments on that?
Mr Burns: Yes. There was one other proposition made this morning that I think I should respond to, several questions about the federal-provincial planning model or allocation model, often referred to in the vernacular as the fair-share model, and the work that we're now doing to try to make the assessment of local need a bit more sophisticated than what's turned out by that model. We're prepared at any time you think is appropriate in the proceedings of this committee to make a separate, say, 10-minute presentation on the history of that, how it works historically and how we're looking at changing it.
I need a little bit of notice because the expert is over there in College Park, but if you wanted, for example, to start tomorrow or Thursday with a little presentation on that, to kick off some discussion, that would be fine with us.
The Vice-Chair: I might ask the members when that might be possible. Could we say tomorrow afternoon in the afternoon session, to make that expert available for the committee?
Mr Burns: Okay, that's fine. Thank you. I think those were the questions put to us this morning that needed a response right now.
The Vice-Chair: We'll commence the next round, 20 minutes to each party, starting with the Liberals. Ms Poole.
Ms Poole: Are we going to have a 20-minute round?
The Vice-Chair: Twenty minutes.
Ms Poole: Mr Chair, would you let me know when 10 minutes are up so that we can share our time?
The Vice-Chair: That's fine. Ms Poole or Mr Callahan, who's going first?
Mr Callahan: Age before beauty. That's not a sexist comment. I'm older than you are. That's a fact.
The Vice-Chair: Before we have other comments which might be troubling in nature, please carry on, Ms Poole.
Ms Poole: I'd like to go back to the point we were on before because, quite frankly, one of the biggest criticisms of non-profit housing over the years has been that the private sector could deliver it more cost-effectively, and I think if we're going to deal with this issue we have to address that particular criticism. If we take the ministry's figure of $143,000 for a two-bedroom unit and $106,000 as the private sector cost for producing that two-bedroom unit, there's a $37,000 difference.
I understand the dilemma you're in with the land, that because of the close-to-two-year time lag, land that you bought in 1989 doesn't come on stream, the building isn't up and occupied until 1991, so that you do have that time lag to deal with. But even giving the benefit of the doubt, saying that we use 1988 prices, which is the peak of the boom, when it was $42,000 per unit for land for a non-profit unit, even if we use that figure and deduct what was being spent for a non-profit unit in 1991, which you say is an average of $28,000, that's 14,000 additional dollars you might have had to pay for land because it was purchased two years previously. So let's take that out of the equation. You're then down to $23,000 difference on a unit.
I'd like you to turn to page 135 of the auditor's report. The auditor has looked at monthly controllable operating costs per unit and has taken out items like utilities which are beyond the control of the non-profit group and the project, and the auditor has listed I believe six different items where he compared what the Toronto private rental sector and the Toronto sample projects were paying per unit for these things.
I'm looking at, for instance, labour and related costs. The auditor has said that his calculation is that in the Toronto private rental market you'd be paying $23 per unit for labour and related costs but the Toronto sample non-profit project would be $72, which is triple in non-profit as in the private rental. I wonder if you could give us an explanation of why there would be such a large differential there.
Mr Burns: You've asked two questions in two general areas and a further one on some capital cost issues and then a question on operating costs.
Ms Poole: Right.
Mr Burns: To handle them in reverse, the social housing sector generally, not just non-profits and cooperatives but public housing, experiences higher operating costs than the private sector. Partly that's because we impose on them a very difficult set of administrative practices that they have to follow. They have to vet people on intake. They have to recheck people every year if they've got more than one project. The city of Toronto is administering about 90 budgets and seven different sets of program rules. So there are requirements that we lay on operators of non-profit and public housing, social housing, that mean by definition that there will be higher administration costs. That's the first point.
Second, social housing, and again this applies to public housing as well and not just to non-profit and cooperative housing, runs at a higher level of staffing and a higher level of annual expenditures on maintenance and repairs. I think that's probably got several different root causes, but it is a fact. There's a higher level of public expectation about service and response and maintenance levels, I believe, in public services than there is in private ones.
In addition, and particularly in the public housing stock, because our access is tilted to families with young children, you get a lot of wear and tear that you have to respond to. It's just rooted in the nature of the community and dealing with the real conditions that are there. I think at base, and this has been for the last 50 years, there are higher operating costs in the social housing sector than the private sector. So that's one point.
But having said that, the auditor points out, and we agree and reach the same conclusion in our program review, that the distribution of costs is a little wider than you'd really expect if you were just coming at it fresh, so we included in our program review follow-up work plan a process of looking at norms for broad categories of expenditure across the sector, looking at variances from that and beginning a program of tackling them.
We've done that to some degree in local regions, that is, some of our local offices have a reasonable grip on typical costs and that has been part of the annual budget discussion. In the larger regions, and particularly in the larger operators, who are dealing with a very large volume of budgets and complex market conditions, we have not been as thorough and as norm-based in looking at operating costs.
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The second point I'd make is that there are things here that need addressing and in this year's work plan for the program review in fact I think we've retained some outside help to look at some of those issues. I believe there are things we should be tackling in operating costs in the way you've raised it.
At the beginning of your question, you asked again about trying to compare our capital costs to what happened in the private market. When Toni Farley was talking earlier, she used a graphic image trying to compare curves. The private sector costs went up higher and crashed more dramatically in the land component, but they also did in other respects as well.
The market conditions are extremely hot and so people -- there was a time in Toronto when condos were $300 a square foot, more in some places, to buy, which is way beyond any cost structure we ever reached. So the private sector curve in looking at condos did this; ours went more like that -- a different shape to it. It's difficult to directly compare the nominal value of points on the line. There should be some resemblance to that; ours should turn when theirs turned, and this is the question Mr Peters was alluding to before.
The question of the $106,000: The $106,000 in Royal LePage is not a market-based number; it's a theoretical construct called an estimated replacement cost. It's a number often used in real estate to make assessments and judgements about investment in one thing or another.
I think in comparing $106,000 to $134,000, you're comparing an apple to an orange. What you should compare, what the auditor tried to get at, what we tried to get at and what we need still to fully get at, is a way of tracking the components, not just the general. I said this morning that the MUP capital cost control's a very blunt instrument. We need to be able to track its major components: land, construction costs per square foot, carrying cost in the interim, which comes to the length of the planning process, and to be able to track those in relation to market conditions.
We do some of that now. In some regions I think we do it very well, in some places we don't do it quite so well, but that's what we're trying to do. The period of time we're talking about, our land prices were either comparable to or below condo land prices; our construction prices were comparable to private sector construction prices; our soft costs showed a lot of variation -- a significant number of them were above private sector experience for the reasons we've just touched on. But that's the comparison that has to be made; that's the comparison that makes sense. The $106,000 was not an actual market-based condition; there were no condos in Toronto for sale for $106,000 in 1990.
The Vice-Chair: I just wish to advise that 10 minutes are up. Ms Poole.
Ms Poole: I just want to make one last comment and then Mr Callahan has some questions. I didn't trust that study either, because if it's the one I'm thinking of that was released -- I believe it was April 1991, the ministry study?
Mr Burns: The ministry staff are nodding, so I think that's the date.
Ms Poole: Yes. I remember it well, because we were in the middle of rent control hearings at that particular time. Anne Beaumont is nodding her head yes. Yes, we all remember that too well --
Mr Burns: We've talked about this one before.
Ms Poole: -- including Mr Tilson. When we looked at that report we found out that the original report in fact had not been commissioned for the purpose the update was used for; that it was an update; that Royal LePage had been given six days to complete the update, and they basically had a letter that disclaimed any responsibility for the accuracy of it.
That's why I went to a couple of developers and said, "Tell me what it would have cost for an 800-square-foot, two-bedroom apartment in 1991." The first thing they said was: "Well, quite frankly, we didn't build 800-square-foot apartments, we built 1,000-square-foot apartments and we paid $115,000 to $120,000." They said $106,000 was definitely in the ballpark of what they would have paid, and they looked at a number of different projects.
While I would not like to rely on that particular ministry's study for much else, it did appear to give a reflection of --
Mr Burns: And you're talking about all costs, land, construction, soft costs, marketing, developer profit, the whole package?
Ms Poole: Yes. That's what I asked them for. I said I wanted everything --
Mr Burns: In the Toronto market?
Ms Poole: -- including the profit margin-land in the Toronto market.
The Vice-Chair: Ms Poole --
Ms Poole: Yes, we're eating up his valuable --
The Vice-Chair: We're cutting into the next 10 minutes. Unless there's agreement, I have to move to Mr Callahan. I apologize for that.
Ms Poole: I'd like Mr Callahan to --
Mr Callahan: I want to go back, if I could, to what I think is a very important question, particularly since I understand it's still policy of the government. I'm reading from the explanation of "highest and best use," which I understand becomes the basis of valuation of a property. It says, "This basis is the acknowledged concept of valuation of land, either vacant or improved, and the Ontario government official policy for selling or purchasing property."
Now when I look at that statement -- I don't know whether you have it before you -- but on page 2 it gives certain criteria or conditions for exercising that policy, and it says, "A property's highest and best use must be physically possible, legally permissible, financially feasible and maximally productive."
I look at the auditor's report and I see in one instance a rental apartment building which was rejected for conversion to condominiums by the municipality and was subsequently offered for sale as a non-profit project. The highest and best use appraisal assumed that the building could be converted to a condominium, which resulted in the ministry paying $1.5 million more than the appraised market value.
I suggest to you that this flies right in the face of the whole conditions that have to be fulfilled in terms of using the highest and best use, namely, that in that case it was not legally possible for it to be a condominium because it had been rejected. Yet $1.5 million more was paid for that than the appraised market value. That's the first one. These are all in the auditor's report.
The second one I looked at was another building with an appraised market value of $5.7 million, acquired for $7.9 million. The highest and best use price was based on a municipal zoning provision which allowed for intensification of social housing projects. Here's the real hooker: "To intensify the site, two additional storeys would need to be added, but this would have been neither structurally sound nor economically viable." Again you've contravened the question that one of the conditions of using a property's highest and best uses was that it was physically impossible to have accomplished this so-called, mythical highest use of that land.
If nothing more comes out of this committee hearing than the fact that the government of the day should say that policy is bogus, if it's not rejected by the government, then I'm certainly going to start dealing in land deals with the government. You're going to get a great deal. You could tell them they could build Wonderland on that property and they'll buy it at its highest possible value. That's in addition to the one we talked about this morning, where you paid $250,000 per acre and a non-profit group paid $2.85 million for less than two acres of land and made itself a quick profit of $2.3 million of taxpayers' money.
For God's sake, if the minister's listening -- I'm not sure if it's she or he any more -- she will realize that the use of this policy is great in what is called "expropriations," where some government body comes in and says, "Mr Callahan, we need your house for a highway widening. We're going to take it from you," and I say, "Hey, look, I've been living here 20 years and I like my house." That's where the Expropriations Act says that you get the highest possible value for that house because it's being taken without your consent.
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But surely to heaven, when you're doing the non-profit thing, particularly in a soft market -- in a hot market I can buy it -- you should throw that right out the window, because there are so many buildings out there and there are so many pieces of land, I'm sure, that have been zoned for this type of thing that you can cut your own deal. I suggest the Ministry of Housing start cutting its own deals instead of cutting the deals at my expense and that of the taxpayers of this province. I really find that objectionable.
Finally, I'm told by the auditor's report that consultants' fees are based on the whole ball of wax. I have to look at that deal where you paid $2.85 million for less than two acres. If the consultant's fee on that was on the whole ball of wax, you've added a great deal more money to the -- or I guess it's included. That's a significant amount of money. Architects do that, but I don't think consultants do it and I would want to check into that. Maybe the auditor can tell us whether consultants normally apply a percentage to the entire thing -- land, buildings, the whole thing. Is that the normal practice?
Mr Peall: I don't know if it's normal practice for development consultants. Maybe the ministry can answer that better. For architects, though, I understand it's a percentage of construction costs only, so it's irrespective of land value, which shouldn't obviously affect their fees. It doesn't affect their work.
Mr Callahan: So the architect makes out worse than the consultant. Maybe I can ask you: Is that the policy of the ministry, that the consultant gets a percentage on the whole ball of wax?
Mr Burns: Mr Callahan, you've asked a number of questions. Can I address them all, or how would you like me to respond?
The Vice-Chair: I think I have something to say about that. There's probably about a minute and a half remaining in Mr Callahan's time.
Mr Callahan: Fine. I have no further questions, but I think maybe he --
The Vice-Chair: Summarize your response on that.
Mr Burns: Yes, I will sail through this. The first two examples mentioned involve a public agency and not development consultants, for starters. In the first case, the site was fully approved for condominium development. It predated the Rental Housing Protection Act; there was no issue of preventing conversion. The assessment was done on real market conditions.
Mr Callahan: Excuse me. Are you saying the auditor's report is not correct and that they are misleading us in that regard? Is that what you're saying?
Mr Burns: I'm not saying anything one way or the other about the auditor's report. I'm answering a question that you asked me.
Mr Callahan: No, but that's what the auditor's report says. He says, "...had been rejected by the municipality for conversion to condominium."
Mr Burns: That's true, it had. But in that era, you could take it to the Ontario Municipal Board, which had happened, and there was a fully approved condominium development for that site. I know this site extremely well. The owner of the site in effect forced the city building official to issue all the necessary permits.
On the second site -- and that was also a reasonably hot market, as the second site was purchased in a reasonably hot market -- in that particular case, the development on the site did not take full advantage of the development rights on the site and so the appraisal simply acknowledged that, as it should have.
The third case we discussed briefly this morning. I won't repeat it.
On the question of fees, we did touch on them this morning. The fee guideline, which is up to 2%, is something that derives from assessments done in the context of the federal program some years ago. As I told you this morning, we have moved away from accepting guideline-based submissions towards real work plans and real costs. The reality is that for that budget line we are committing at 1.4%, I think, not the 2% guideline, significantly below it, because we are, as we are in all costs, pressing down. Is that my minute and a half?
The Vice-Chair: We've run out of time. Thank you very much. Mr Tilson, you have 20 minutes.
Mr Tilson: I'd like to talk about the issue of reserves. Obviously, as I understand it from ministry policy, reserves are set aside each year for purposes of future maintenance.
Mr Burns: Yes. The reserves are to be set aside to help fund a major maintenance or renewal project that may be needed in the future.
Mr Tilson: Could you explain that, like what moneys are set aside each year? I understand the moneys for this year were cancelled.
Mr Burns: Yes, we've put a two-year moratorium on general funding of replacement reserves as part of our cost containment program. The guideline has been 0.65% of capital costs for essentially the three programs we're discussing here; it's an annual set-aside.
Mr Tilson: I guess the question is quite obvious. If we set up non-profit housing, assuming that there are going to be maintenance costs probably the year after the darned things are built if they're like any other buildings, you'll need to spend major moneys in due course. Can you explain what's going to happen if you've cancelled these reserves?
Mr Burns: Let me just make three broad points in relation to the question you raise. While we suspended contributions to replacement reserves for two years as a part of our cost containment exercise, we did retain some program funding for those people who had an urgent need for some financing for major renewal in that period of time. So for those people who may have had that need in the short run, we did set aside some money.
Secondly, most of what we're dealing with here, of course, is relatively new stock. I'm certainly not suggesting that there shouldn't be contingency funding set aside for renewal in the long term, but given our need to contain costs in the short term, we made a decision to suspend these contributions for two years. In the interim, we're looking at a number of measures for that budget line that may lead to a somewhat different set of practices in the future.
The first question is, why 0.65% of the capital costs? Does that make any sense? Should it be higher or lower? Should there be a variation? Should one kind of building, one with an elevator or one that's older, perhaps have a larger reserve than another?
Second, we're looking at some of the issues surrounding the management of replacement reserves. At the moment we place very strict and conservative rules around how those funds can be invested and what kind of return you get on them. It may well be that we can make a significant increase in the amount of cash available in the general system for reserve funding by a more market-based approach to the management of the funds. All those issues are things we're discussing with the major associations of people who manage social housing.
Mr Tilson: Mr Burns, the reason I raised this is that I find it ironic that some of us got to know the Ministry of Housing officials during the rent control hearings, and we all remember how it was suggested by the current government that perhaps landlords should be forced to put aside reserves for capital expenditures such as roofs, appliances and other items that would deteriorate.
Of course the landlords said: "There's no way we can afford that. We haven't got the money for that. We're in a recession." It's just a passing comment that it's rather ironic that the government itself has now put a moratorium on the very thing that it was recommending that the owners of the private stock in this province do.
I guess one of the concerns I have is that if you don't allow for these sorts of things -- and they are government buildings, notwithstanding the fact that they're owned by non-profit housing corporations. I've heard it suggested that the principle of non-profit housing is wonderful: You have this initial financing, but they're going to be paid for in X number of years. They're going to be clear, and the non-profit housing corporations will have these buildings that are completely paid for.
The difficulty is that it's going to be like any other stock in this province. I think 70% or 75% of the private stock in this province is 20 years old or more and it's falling apart. That's why we've got into all this mess with housing. How are we going to get them fixed up? Yet the government itself is getting into non-profit housing. Are they going down the same road that the landlords have already been down?
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People in private enterprise are very expert in this thing; they're very qualified to deal with all of these subjects. Are we going into a non-profit housing philosophy knowing full well that there's going to have to be substantial maintenance? I don't know what the life of a roof is or the life of a parking garage. I'm trying to think of things that non-profit housing may have, depending on the structure. They're all going to have major capital expenditures. Where is the money going to come from? The answer is that it's going to come from the taxpayers. My question to you is, knowing what private enterprise has achieved or has learned, perhaps the hard way, can you recommend that the government continue in this philosophy?
Mr Burns: Can I recommend that the government continue in which?
Mr Tilson: The philosophy of non-profit housing, knowing that the issue of maintenance is going to get completely out of hand. The private enterprise people have learned that, and they've learned it the hard way, particularly when they now have rent controls which limit them specifically from getting into major capital improvements.
Mr Burns: The philosophical question of what's an appropriate government supply program I think is a question to be addressed by the cabinet and in the Legislature. I don't want to comment on that.
Mr Tilson: I appreciate that, but you must be able to advise the government on the whole subject of capital expenditures. That's why I started off on the subject of reserves. We have reserves to make capital expenditures, and yet there's a moratorium on them. Presumably if you're advising any government -- it doesn't matter what philosophical faith you are -- the question is that the money's got to come from somewhere. I don't know whether anyone has done any studies on this, but private enterprise sure can talk about it. We sat through, I don't know, two different sets of hearings on this whole subject.
Mr Burns: I think I indicated in my response to your first question that in the period of the moratorium one of the things we are looking at is what is an appropriate guideline for the buildup of a reserve. The 6.5% was not rooted in private sector models or in engineering assessments; it was a pretty rough-and-ready guideline. We do need to reassess that and come to a point.
The government of the day, when the moratorium is over, will deal with its options in terms of whether it starts funding replacement reserves in the former format, in a new format, at all or whatever happens to be. The question of access to capital to do major overhauls when buildings need them is a significant issue in the non-profit sector. It's a significant issue in public housing. You may well know that in public housing there are no replacement reserves; that's not the way it was set up. The Ontario Housing Corp has no replacement reserve, so in fact has to deal with its major renewal issues on a debt basis or restructure the way it spends its cash.
Mr Tilson: Mr Burns, I would submit that we're going to have problems in the non-profit housing, the maintenance of these buildings, many of which are fairly new. They're going to age and deteriorate very rapidly. Someone's got to pay for these things.
Mr Burns: Let me say one more thing about that. It touches on a question that Ms Poole was asking earlier. We consistently spend more money on annual maintenance and on preventive maintenance systems in the social housing sector than they do in the private sector. Will that fully answer every issue downstream? I don't know.
Mr Tilson: I found an interesting comment that you made this morning, that the policy of non-profit housing can create vacancies -- I forget who was phrasing that -- in certain areas if you don't have proper assessments done as to the need in specific areas. Your response, if I can quote you properly -- I made notes; I think this is what you said -- was that this was healthy, that the issue of vacancies is healthy.
The difficulty is, healthy for whom? It's certainly not healthy for the private individual who's trying to put up housing and make a living and keep these places going if they are vacant. We're getting into the issue of capital costs, capital expenditures. They don't know where their next dollar's coming from. If you have the government coming along in competition with them, there's no -- I asked that question of you specifically about your chart this morning. I'll bet you there are hardly any private enterprise apartments being built in the province of Ontario today. Every individual, whether it's conversion from condominiums or whether it's whatever, is going into non-profit housing, because the government is the only one that can afford this stuff. And why? Because it has a big bankroll behind it.
Hence, Ms Poole is quite right, when we start looking at the operating costs comparing the Toronto private rental to the non-profit. You're going to drive these people out of business. I'm not asking you to make philosophical comments, I'm asking you perhaps the same line of questioning that Ms Poole has. If you look at these figures, anyone with common sense will realize that the private enterprise person simply won't survive with that competition. Hence, you're going to have a greater problem.
Mr Burns: Just to touch on history again, every government housing policy that I'm acquainted with in this country and in others has taken it as one of their objectives to create a competitive market, by which they mean choice, and in the rental sector a level of vacancy that's adequate to produce competitive conditions. I've never seen a policy statement by anybody that said the object of the policy is to bankrupt a whole lot of people, but I think some level of vacancy is a healthy thing in a marketplace. It does give choice and it does discipline all the participants in that marketplace to deal with their costs and provide good service.
Mr Tilson: Mr Burns, I can assure you, and you know perfectly well, that there certainly are no vacancies in non-profit housing. The vacancies are all in the private enterprise. There's an article from the Hamilton Spectator in December which talked about this very problem. It came from Dundas, and it talked about the rental restrictions imposed by provincial regulations.
"Although waiting lists for apartments and town houses continue to grow, organizations such as the Dundas Valley Non-Profit Housing Corporation are unable to accommodate the more needy when vacancies arise. The corporation's Motherwell Mills family town houses on Hatt Street, for example, must maintain a mix of low-income and higher-income families, which means that many of the vacancies are not available to the poor. It could be 1994 before a vacancy is offered to low-income families."
So in non-profit housing they're not having any vacancies; they can't lose. But the private enterprise is having all kinds of vacancies. Yet you look at these figures and it's inequitable. I guess that leads to another area of questions, specifically with the Dundas area, that I would like to canvass with you.
The requirement of the ministry to have a mix of tenants with different income levels: I understand the principle of that; it's to ensure that low-income families are not isolated from the community. I understand that principle. The difficulty with that, of course, is that the whole principle of this type of non-profit housing is to help the needy, to help the single-family mothers, to help the seniors, yet we've got a whole slew of these people on waiting lists. In this particular example, it's going to be at least 1994 until it's offered to low-income families. Some of the seniors will be dead by that time. I'd like you to talk about that principle of non-profit housing. Is it equitable to be giving a certain percentage of housing, paid for by the taxpayers of this province, to individuals who don't need it?
Mr Burns: You've touched on a whole variety of subjects. Let me perhaps touch on three aspects of it. I said this morning in my review of the history of housing programs and their delivery that 1972 to 1974 was a watershed and that the country as a whole abandoned 100% households in poverty approaches to publicly supported housing and replaced them with a mixed approach. The mixed approach was entrenched in the 1973-74 amendments to the National Housing Act and have been followed in all the national programs and provincial programs since. Their object is to create healthier community conditions than the former model has. Their object also was to switch the key responsibility for providing publicly assisted housing away from large government agencies and towards organizations based in the community, which almost universally advocate the mixed model to community building and healthy communities.
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Third, all the non-profit programs from that point on are not just intended to address poverty; they are intended to address questions of general supply of housing -- broader spectrum -- and questions of community building, healthy communities.
When you put that many goals in one mix, you can get tensions. I accept that. There are tensions between those different goals. But this program we're talking about today was designed on those same broad policy principles and was delivered on the basis of those principles.
The Vice-Chair: Mr Tilson, if I may, you have a couple of minutes remaining.
Mr Tilson: The Provincial Auditor has certainly not been very kind to the Ministry of Housing with respect to how it is operating the non-profit housing programs: It's being wasteful and, I would submit, in many cases negligent. I can tell you that as a member of this Legislature who hears concerns from my constituents on a weekly basis, the poor, the single mothers, the abused women, the seniors are on waiting lists. They can't get into these places. You're not building enough of them. Yet can we afford to build them? Can we afford to keep building them and maintaining them? Is the system appropriate to proceed on that basis, particularly when you look at the unbelievable costs?
From the moment someone has the idea to put a non-profit housing unit in a particular area, when you go through consultants and go through incorporating of non-profit housing corporations, go through zoning applications and possibly going to the Ontario Municipal Board for appeals, and go through all the other business that's required with municipal people and the costs of hiring other people, planners, the costs of working out partnership arrangements with developers and the non-profit housing corporation and the legal aspects of that, or just hiring someone -- that's even before you put a shovel in the ground -- the cost is unbelievable, all of that money. People are coming into my office wondering why the heck they can't get into these places and why they're having to live in substandard housing. Then they look at all these costs and they look at these reports from the Provincial Auditor and they shake their head.
I agree that there's an issue of policy, but I believe that you as an administrator have an obligation to tell this government that it's going in the wrong direction, that we can't afford it.
The Vice-Chair: Thank you, Mr Tilson. Your time has expired. I will move on to Mr Hayes, who is first on my list.
Mr Pat Hayes (Essex-Kent): I can't help but address the comments Mr Tilson was making. He asks whether we can afford it. I don't think we have any choice. We have a lot of vulnerable people, a lot of handicapped people and a lot of senior people, and we can't afford not to take care of those people.
Mr Tilson: On a point of order, Mr Chair: That isn't what I said.
Mr Hayes: I'm just making my comment, that's all.
Mr Tilson: You can make your comment, but don't start putting words in my mouth saying that I'm uninterested in those people. I'm simply saying that the process you're using is wrong. We have suggested another policy of shelter allowances, and you know that.
The Vice-Chair: Mr Tilson, Mr Hayes, First of all, that's not a point of order.
Interjections.
The Vice-Chair: Order.
Mr Tilson: Don't start putting words in my mouth.
Mr Duignan: That's your leader's solution.
Mr Tilson: That isn't what my leader said either.
Mr Hayes: We can't afford not to afford.
The Vice-Chair: Can I call order, please.
Mr Tilson: No, you haven't even tried. You won't even --
Interjections.
The Vice-Chair: If I can't bring the committee to order, we're going to recess. Mr Hayes, would you keep your comments to the point at hand? Let's try not to incense other members.
Mr Hayes: No, I didn't mean to do that, Mr Chair. I think I would be remiss in not responding to some comment.
Mr Tilson: And I would be remiss in not responding to your nonsense.
The Vice-Chair: Order, please.
Mr Tilson: It's absolute garbage what you're putting forward.
Mr Hayes: Mr Chair, I'd like to ask Mr Burns a question dealing with --
The Vice-Chair: Please stick to the issue at hand, Mr Hayes.
Mr Hayes: Thank you, Mr Chair. The auditor's report alluded to the paying of the consultants, that the fee is based on the cost of the project rather than services provided, and what I heard yesterday and again today is that they do get a percentage of the total cost, including the cost of the property. They get a percentage of the total project.
How long has this been going on? Is it still going on? If it is, what is the ministry doing to correct that situation? What steps are they taking to stop this? I don't feel it is really proper that the consultants should get paid for the costs of the land and everything else.
Mr Burns: I think I touched on parts of this earlier. Perhaps to bring the pieces together, the federal government put together a series of basic guidelines for delivering non-profit housing in 1979. Based on their assessment of fundamental cost components and ways of doing business, they established a guideline of up to 2% for this function, a function that has to be played in the development of any housing project, private sector or public sector, and for some years that 2% was treated by a lot of people as a kind of norm. I know this because in an earlier life we used to derive some income from that at the municipality level to pay for our costs. That design was based on the total cost of a project, so that guideline did relate to the total cost, all in: construction, land and all the rest. Obviously in the boom conditions, the 2% rose. The question that comes to mind is to assess whether it still makes sense in those circumstances.
I think I've touched on this a number of times, but we moved away from the practice of accepting it as a general norm to the practice of accepting real proposals for work to be done, work plans, not a guideline but a fee based on proposed services, which are costed 18 months ago, the fall of 1991, as we were closing out these programs; partly in acknowledgement of the change in market conditions that took place in 1991 and part of what we've been talking about here more generally. Since then, that has been our practice. The result is, as I've said a number of times, that that development consultant fee line is not running at 2% of our program costs but is running at 1.4%; therefore, for a number of projects, considerably lower than that.
But I've also said it's an area of practice that deserves some further discussion and consideration. So even though we've taken the steps away from using a guideline towards using real service proposals and real costs, we're going to look hard at those service components.
Perhaps I should just say one last thing about this, because there are some circumstances in which the real costs of organizing a non-profit project can be higher than 2%, and I'm sure you'll find if you look at our documents that there are ones that are over 2%. If you're doing a project which is intended to house people with severe difficulties and you have to do a lot of organizing with service providers and you have a difficult community consultation process, and if for good program delivery you want a small project, because you don't want people who have collateral difficulties beyond need for shelter to live in large numbers but in small numbers in a community context, you may well need more than 2% of the capital cost for a project to do that job right. We've taken all those steps and we're going to take some more, but it will result, I think, in an array of costs; total costs down, but in some cases up.
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Mr Hayes: In fact, you have taken steps, you said, 18 months ago to change that practice. I'm very glad to see that happen. Thank you very much.
Ms Harrington: I'd like to touch on three items I think are real problems and that have no quick answers, I don't believe. But it's something we have to really keep working on. I need to know where you're going with it.
The first item is problems with our regional offices. I think the problems may be varied and sundry in different parts of the province. I need to know what is being done and what you hope to do in staffing and other directions you are giving to your people.
The second problem is operating agreements. When this government came into place -- I know because my colleague right here, Noel Duignan, soon brought to my attention the problem of there not being operating agreements with the co-ops and non-profits across this province. This is a problem going back, I believe, to 1986 and 1987. The previous government left us with this major problem. I need to know, are you setting dates to make sure this is in place soon?
The third item is what the auditor addressed as "tenant placement." It's the issue of access, the relationship with the local housing authorities. If a person needs affordable housing, does he have one place to go where he can access the system? My understanding, as it is now, is that it's very diverse in different communities. To quote the auditor, he says it's inconsistent at best. I would hope that over the next while that would be addressed.
I'll leave you all three.
The Vice-Chair: Do you want to respond to that?
Ms Harrington: I certainly hope he will.
Mr Burns: To tackle them in the reverse order: On access, the question of how people who may wish to live in social housing find their way to the entry point, get on the right waiting list, get proper information, was one of the major questions put to the public and discussed in the consultation round on the non-profit and co-op programs which took place in 1990-91 and led, after government consideration, to the document Consultation Counts, which itself provides some foundation stones for the new program.
As a result of that discussion, what the document says is that in the future new non-profits and co-operatives will be required to bind themselves to common access practices. That's a condition of funding. At the moment people are to bind themselves to the local housing authority for a referral process for some part of their units. We're now going to make people bind themselves to common access. If you do go to one place in your community you will know where they all are, what kind of housing they offer, how to make contact with them and how they run their access systems.
Beyond that, we are strongly encouraging social housing providers in communities to get together and look at the issue of common waiting lists beyond common door of entry to where people are. We have a couple of communities, and I think Hamilton is probably the furthest along of the large communities, where a lot of the social housing providers have banded together to create universal access. In Metropolitan Toronto we've had for some years a common access arrangement for seniors' housing that's run by the Metropolitan Toronto Seniors' Housing Registry.
Ms Harrington: May I just ask a brief question? Have you found that this is prohibitively expensive in your Hamilton project? It has to be done smoothly and well.
Mr Burns: So far the Hamilton one looks as though it can get mainly dealt with by restructuring the existing effort that's made by people to deal with access. The seniors' housing registry, on the other hand, was quite expensive to get up and running. I think the costs have now been tackled and pruned significantly. So just looking at those two models, one, at least at the opening, looks to be relatively inexpensive; one was expensive. I don't know what the final answer to the whole panoply is, but the --
Ms Harrington: I really believe that if you could get a system that works, we've got to get it in place as quickly as possible everywhere.
Mr Burns: To echo a point you made, the auditor pointed to this part of our system, as did Consultation Counts, the public discussion of the programs. It is a priority to build on that towards a much simpler and more accessible system from what we have now.
Operating agreements: Yes, this is quite a significant problem -- program administration. An awful lot of people are running on memorandums of understanding between ourselves and the operating cooperative and non-profit. We have completed the negotiation of a master operating agreement between ourselves and cooperatives, and that agreement is now in the process of execution throughout the province.
We've also laid down the framework of issues and timing to do the same thing with the non-profit providers and to complete a structure of an agreement and get it executed in the next round of work. We didn't totally expose ourselves, because most people have some level of agreement with us, but I agree with the comments you made, this is not a proper long-term way of doing business and it was a criticism made in the auditor's report, quite rightly, that we should get on with it, finish this process and replace the memorandums with full operating agreements.
In terms of regional offices, there are some important things we would like them to do in the future that haven't been so much part of the past. One is to be a bit more active in looking at local market conditions. It comes, in part, to the question we touched on before, of whether using this grand federal model is really getting at local market conditions effectively and whether we should be building a more bottom-up model, to use Mr Tilson's phrase from earlier. I think we should. That means the regional offices have to be more active in that area than they have been. Rather than just assessing submissions, they should be organizing a program of looking at those kinds of things.
Secondly, because of the tremendous growth in the number of operating cooperatives and non-profits, we've had to add staff on the operating end and I think there's quite a big need in parallel to the introduction of new operating agreements and the new program to do an intensive training program with our regional staff about those new principles and the operations of the new structures of agreements.
In addition to being more active, if you like, at the community level looking at housing market conditions and strategies, we also are going to undertake a major training program for our own staff to make sure that, as the new program comes and as the operating agreements move into place, we are completely lined up to administer them effectively.
The Vice-Chair: Might I just point out that there's approximately five minutes left and we still have two more people on the list.
Ms Harrington: Thank you very much for your replies. I should maybe mention that I was at the northern office in Sudbury and at the one in Thunder Bay and I found your staff to be excellent. In case I set the wrong tone there, I didn't mean to blanket and say everything was wrong.
Mr Tilson: You haven't done that at all, Margaret.
Ms Harrington: I want to maybe go to one further question. Mr Tilson was talking about the upkeep of the buildings and the need for renovations in the future and I wanted to ask you: After the 35-year mortgage, obviously that mortgage payment then will drop off and the rents will still be being collected. Do you see that as an appropriate time in the history of the building for major renovations? Does that look like it would be helpful and a workable solution?
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Mr Burns: In some cases that is a good way of dealing with the need to do a major overhaul. I know when I was at Cityhome that some buildings had needs for significant overhaul while we were still dealing with the first mortgage. Others, well built and maintained, were probably going to last 40 years. But we certainly did our long-term business planning on the assumption that some proportion of our buildings, when mortgage number one was over, would be remortgaged and that money reinvested in the building. It's at least a partial response to the question of how you get the capital to reinvest in buildings at the right time, but I don't think it's a total one, because 35 years is not necessarily the exact time when a building will need a major reinvestment.
Mr Duignan: I can't help but respond to some of the remarks by the member for Dufferin-Peel, especially around the whole question of rent supplement. A committee of this Legislature looked at a small rent supplement program that was in place in the early 1980s; I think the committee looked at it in 1981. I was wondering if the report of that committee was made available to this committee, because it came to some quite -- the reason they got rid of it was, for example, that rent supplement housing is more costly than non-profit and government-owned housing. In tight rental market conditions private landlords do not renew their rent supplements. Tenants do not have the same security of tenure as in public, non-profit or cooperative housing, because the landlord can terminate rent supplement agreements.
It's very difficult for the government to project subsidy costs of rent supplement housing, so I was wondering if we could get a copy, or is this copy going to be made available to this committee so we can actually take a look at the findings of that committee? I think it was in 1981. I'm not too sure what committee looked at that.
The Vice-Chair: Can you be specific, Mr Duignan, about what report that was, what committee that was? I didn't quite catch what you had said.
Mr Duignan: I'm not too sure what that particular committee was. It reviewed the existing rent-supplement program and I understand it was somewhere in 1981.
The Vice-Chair: Perhaps our researcher could make that information available at a later date. I'll undertake to look into that.
Mr Duignan: Because it seems to me, Mr Chairman, that politics, not experience, evidence or rational debate, drives this lobby for rent supplements. It has been around; this government, in fact, has a rent-supplement program, something like $2.2 billion administered to social assistance, and to say that we haven't tried -- in fact, we are trying it and it has been tried by previous governments in the past.
I have one quick question that deals with the cost. I know we've been hearing that you will be putting in place measures to reduce the cost of non-profit housing as part of the program review. I understand you expect these measures to save some substantial amount of money over the next few years. Could you give us some idea of what type of cost saving you're anticipating?
Mr Burns: In the case of this program, the non-profit review is a three-year program. It tackles to some degree every major cost element, capital and operating side. Our goal is to have saved $100 million in the three-year program, and at the end of it to produce ongoing operating costs that are at least 5% lower -- perhaps more -- than they were actually at the beginning of the process. So in addition to the $100 million in the three-year program, there would be an ongoing permanent saving from the restructuring in the way business is done.
In addition to that, frankly, at the moment we're looking at a number of other elements and I'm confident we're going to produce some fairly substantial savings from looking at some other major pieces of the business; for example, the way refinancing is going on and whether we can be aggressive in the current low-interest market and save ourselves some money there. But the program review itself is a $100-million saving.
The Vice-Chair: I'm sorry. We've run out of time. I think, Ms Poole, you had a point of information that you wanted to request of the ministry.
Ms Poole: That's right. It was actually a request for information. Members were given yesterday a single sheet called Chez News, which is a Ministry of Housing newsletter. It was just the front page, I believe, from June 1992, and it talked about the non-profit housing program review. In this one page it says, "We identified more than 30 aspects of the non-profit program where we believe cost savings can be achieved." Could we perhaps have that list, and you could maybe also update us tomorrow verbally -- we don't want to have you working all night -- on some of the areas where you've achieved progress.
Mr Burns: Yes.
The Vice-Chair: Thank you very much. That concludes our hearings for today. We are adjourned until tomorrow, Wednesday, 10 am.
The committee adjourned at 1656.