HomeMy WebLinkAboutFIN-09-120 - Development Charges Credit Refund Agreement PolicyREPORT
REPORT TO:
Councillor B. Vrbanovic, Chair, and Members of
the Finance and Corporate Services Committee
DATE OF MEETING:
October 26, 2009
SUBMITTED BY:
Dan Chapman, General Manager of Financial Services
PREPARED BY:
Dan Chapman (2347)
WARD(S) INVOLVED:
All
DATE OF REPORT: August 27, 2009
REPORT NO.: FIN-09-120
SUBJECT:
DEVELOPMENT CHARGES CREDIT/REFUND
AGREEMENT POLICY
RECOMMENDATION:
THAT the City of Kitchener Development Charges Credit/Refund Agreement Policy (I-XXX) be
approved, as attached to staff report FIN-09-120.
BACKGROUND:
City Council passed Development Charges By-Law 2009-091 on June 22, 2009. The by-law
imposes development charges on new development in the City to pay for the growth-related net
capital costs of servicing new development. The development charges are based on a growth
forecast and growth-related capital program set out in the City’s Development Charges
Background Study, June 1, 2009 (the Background Study).
Related to the development of the new By-Law and Background Study, Council directed staff to
develop a policy with respect to the use of DC credit/refund agreements. These agreements are
used by the City to facilitate construction of growth-related capital projects. The aim of the policy
is to standardize the use of such agreements so that growth-related infrastructure can be
emplaced in a fair, transparent and fiscally responsible manner. The policy will provide an
alternative financing mechanism to facilitate higher priority development throughout the City. It
will also help the City manage its development charge reserve funds by ensuring that
development charge funds are available to service higher priority projects.
REPORT:
The City will continue to rely mainly on two processes to plan for and manage growth over the
five year term of the development charges by-law:
The recently adopted Kitchener Growth Management Plan (KGMP) which prioritizes
development and identifies infrastructure needs. The KGMP is anticipated to be updated
bi-annually.
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The 10-year capital forecast which identifies the cost and timing of capital works required
to service the growth anticipated by the KGMP. The capital forecast is reviewed and
updated annually.
Over the five-year term of the new DC By-Law, conditions may arise that may cause the City to
consider alternative methods of financing the growth-related capital program set out in the
Background Study. This is because growth and resulting development charge receipts over the
term of the by-law may not proceed as anticipated under the Background Study. Should growth
be slower than anticipated and development charge revenue decline, the City will have to
balance its development charge reserve fund position with its commitment to proceed with its
Growth Management Plan and capital forecast.
Conversely, in times of more rapid growth than anticipated, or growth that occurs out of
sequence with development plans, the City may receive requests from developers to advance
the timing of capital works so that development can proceed quicker, or in different locations,
than anticipated by the development charge growth forecast or the City’s capital forecast. In
such cases the City has the option to enter into an agreement with a developer to facilitate the
request. The City is, however, under no obligation to enter into such an agreement.
The City has entered into these kinds of agreements with developers in the past from time to
time. Under these agreements developers have either constructed, or paid to have constructed,
infrastructure that the City is unwilling or unable to fund itself. Reimbursement to the developer
has taken two forms:
A credit, which is provided to the developer against future development charges equal to
the cost of the growth-related component of the works paid for by the developer. The
developer uses the credit to offset all or part of the applicable development charge when
it becomes due.
A refund of any outstanding cost that exceeds the value of the credit. The refund portion
of the cost incurred by the developer has been reimbursed in a variety of different ways in
the past.
The absence of a policy has resulted in an inconsistent approach to the consideration of
requests for credit/refund agreements. While it is reasonable to expect that agreements will be
tailored to the unique circumstances of each project, it would be beneficial to have a standard
policy framework governing the use of credit/refund agreements. A standard approach provides
transparency, fairness and allows the City to continue with its capital infrastructure plans in a
fiscally responsible manner.
Previous Credit/Refund Agreements
The following are three examples of credit/refund agreements have been utilized in the past.
Each example highlights the pros and cons of past agreements and outlines where the
proposed policy would be consistent with past practice and where it would differ from that
practice.
Community Trails
Current development charge credit agreements related to community trails generally provide
only for a credit against development charges payable in respect of each lot within the
developer’s plan of subdivision for which the works are being completed and/or funded by a
developer. The subdivision agreement with that developer provides the authority for a
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development charge credit agreement for the construction of specified community trails. The
credit is equal to the soft services portion of the development charge and, as the cost of such
works is generally small, full reimbursement is available through credits.
The agreements include an estimate of the total cost to construct the trails with the proviso that
it may be adjusted once the works are tendered and completed such that the developer would
provide any additional funds needed and their development charge credits would be increased
to reimburse any such additional amount. In the event the developer is constructing the
community trails the agreement provides that all such construction shall be completed to the
City’s specifications and to the City’s satisfaction.
The community trails credit agreements described above have worked reasonably well for the
City. They generally relate to minor capital works and consequently bring with them little
financial risk. Moreover, they support Council’s desire to promote “green” infrastructure (i.e.
parks and trails). The proposed policy would accordingly support the City participating in such
agreements in the future, although the credit would be limited to the outdoor recreation service
and any shortfall in credits would be refunded to the developer in accordance with the
provisions of the policy.
Lyndale
The Zeller Drive pumping station and associated forcemain were included in the City’s 1999
Development Charges Background Study as a 100% growth-related expenditure. In order to
allow its development to proceed ahead of the schedule laid out in the 1999 Background Study,
Lyndale Estates paid $5.6 million to the City so that the timing of construction of the pumping
station and forcemain could be advanced to 2004. The City agreed to repay the money to
Lyndale on the following terms:
Lyndale received a credit equal to 100% of the development charges owing from
development on its lands; and
Any outstanding monies (i.e. over and above the value of the credit) were paid out to
Lyndale semi-annually from development charges collected from development adjoining
the Lyndale estates and a $200,000 annual payment from the development charges
reserve fund up to the limit of the eligible costs of the capital works.
Under the agreement the City was not required to pay any interest charges on the total cost
owing to Lyndale. The agreement was signed in April 2004 and was registered on Lyndale’s title
to its lands.
An agreement of the type entered into with Lyndale brings with it financial risk for two reasons.
First, by committing to a fixed repayment schedule, the City has to make payments out of its
development charge reserve funds even during periods of slow growth (when development
charge revenues decline). Second, by giving a credit equal to the full development charge owed
by the developer the City’s ability to pay for other capital works unrelated to the pumping station
(e.g. libraries, recreation facilities, roads) could be undermined. In order to minimize such risks,
the proposed policy restricts a development charge credit to the service to which the subject
works relate and makes the timing of refund repayments contingent on growth. Under the policy,
the risk of slower growth, and corresponding slower repayments, would be borne by the
developer rather than by the City.
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Activa
The City’s 2004 Development Charges Background Study included the Strasburg Creek
Sanitary Sewer in its growth-related capital program. The sewer was required in order for lands
owned by Activa Holdings Inc. and Werner Brummond to develop. In 2004, through its
subdivision agreement with the City, Activa agreed to pay for the cost of the sewer should it
wish to proceed with its development before the City had allocated sufficient development
charge revenue to fund the project.
Accordingly, in 2008 Activa paid $1.6 million to the City for the cost of the sewer (now called the
Middle Strasburg Trunk Sanitary Sewer) and received a development charge credit equivalent
to its payment. Provision was made for Activa to make an additional payment should the project
cost exceed $1.6 million.
The value of development charge credit was set to be equal to the engineering services portion
of the total development charges due on the Activa’s lands (i.e. not just the sanitary sewer
service). As the total project cost of $1.6 million exceeded the value of the credit by about
$431,000 the City agreed to grant an additional development charge credit for that amount to
other landowners who were benefitting from the sewer. These landowners, Eastforest and
Decora, also separately agreed to reimburse Activa for the $431,000.
The value of the development charge credit to which Activa was entitled was indexed at the
same rate and the same time that the development charge rates were indexed. The City agreed
to provide Activa with an annual financial statement providing details on the status of the credit.
The credit agreement between Activa and the City was registered on Activa’s title to its lands.
As in the Activa agreement, the proposed policy would allow for reimbursement of the actual
cost of the up-fronted capital works to the developer and would allow for other developers to
participate in the agreement. However, the proposed policy would have restricted Activa’s credit
to the sanitary sewer service component of its development charge rather than the entire
engineering service component of the charge.
Proposed Policy
The policy that follows is intended to guide the City when making decisions about whether to
enter into a credit/refund agreement. The policy is more restrictive than has been past practice,
although is still somewhat less restrictive than the policies in place in other local municipalities.
Given the City’s desire to manage growth through the KGMP and 10-year capital forecast the
expectation is that credit/refund agreements will be used on a limited basis. In addition, the City
is in the midst of an economic downturn which has resulted in decreased inflows to the
development charges reserve fund. It is in the City’s interest to carefully manage cash flows
within the reserve fund to ensure that funding is available for the City’s highest development
priorities. The proposed policy will allow the City to plan for growth in a way that will meet its
planning objectives in a fiscally responsible manner as evidenced by the following provisions:
Agreements will be limited in their application and will generally only be considered for
projects that support higher priority developments as outlined in the KGMP;
Agreements will generally only be considered for “hard” service projects which are
required to open up lands for development. That said, the policy will support Council’s
desire to promote “green” infrastructure by allowing developers to pay for parks and
trails up front;
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Prior to approving a Development Charge Credit/Refund Agreement, Council will be
provided with a staff report outlining the provisions of the proposed agreement along
with the anticipated impacts arising from the construction of the capital works including,
but not limited to, the anticipated operating and maintenance costs of the capital works,
staff resources and other infrastructure necessitated by the proposed development;
Credits and/or refunds will be limited to a specific service of a development charge,
meaning that the City’s ability to construct works in other services will not be impacted
by a commitment made under this policy; and
The payment of a refund will be subject to two conditions – 1) that funds be advanced
when the project is scheduled to be constructed in the approved capital forecast; and 2)
that repayment only occur should the City have sufficient development charge funds on
hand within the service to which the capital work relates (i.e., a balance beyond what
was projected in the specific reserve fund for the year in which the project was originally
scheduled to proceed). The policy does provide for repayment over an extended period
of time in the event development proceeds at a rate slower than anticipated at the time
of entering into the agreement. It also provides flexibility to consider the use of a fixed
repayment schedule for projects identified as high priorities in the KGMP.
Local Comparisons
The proposed policy is somewhat less restrictive (i.e. more favourable to developers) than the
practices in place in other local municipalities as outlined below:
City of Cambridge – does not provide DC credit at building permit issuance; provides a
refund of the costs of the capital works at the time the works were identified for
construction in the City’s capital budget forecast;
City of Waterloo – does not provide DC credit at building permit issuance; provides a
refund of the costs of the capital works at the time the works were identified for
construction in the City’s capital budget forecast;
Region of Waterloo – does not provide DC credit at building permit issuance; provides a
refund of the costs of the capital works at the time the works were identified for
construction in the Region’s capital budget forecast; use of these agreements are strictly
limited.
Other Considerations
Use of Debt with Development Charges Reserve Funds
The current economic downturn and its negative effects on growth, coupled with the City’s debt
per capita, which is anticipated to approach a “high” level as defined by the Province of Ontario
around 2013 when the final debenture is issued within the City’s $110 million Economic
Development Investment Fund (EDIF), mean that the financing of growth-related capital
infrastructure through debt should be avoided in the near future. Accruing further debt may limit
the City’s ability to respond to other capital spending priorities and objectives, unanticipated
spending needs, or a further slowdown in growth and the economy.
The City should therefore only consider debt financing growth-related capital infrastructure for
high priority projects identified by the KGMP and only when no developer is willing to pay for the
works up front.
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Front-Ending Agreements
Section 44 of the Development Charges Act allows a municipality to enter into a cost sharing
agreement (called a ‘front-ending agreement') for growth related capital works that benefit a
specific area. Under a front-ending agreement a landowner ‘up-fronts’ some or all of the cost of
servicing an area and is later reimbursed through development charges paid by other
landowners when they develop in the area.
The City has never entered into a formal front-ending agreement because the stringent public
notice requirements and the potential that objections and appeals can create a great deal of
legal and administrative work and because defining a specific benefitting area in the context of
the City’s development charges by-law, which imposes uniform charges on broad areas of the
City, can be difficult for certain types of infrastructure.
That said, given concerns expressed by stakeholders, it should be stressed that the policy does
not preclude the City from entering into a formal front-ending agreement as set out in the
Development Charges Act.
Developer Group Agreements
Under some credit/refund agreements, like the Activa agreement described above, repayments
to the landowner who originally pays for advancing the infrastructure can be redistributed to
other benefitting landowners. This process is sometimes referred to as ‘tiering’. Under a tiering
agreement landowners who reimburse part of the cost of the work borne by the original ‘front-
ender’ are then in turn reimbursed by subsequent landowners who develop in the area.
Development industry stakeholders have expressed a desire that the policy not prohibit the
practise of tiering. The proposed policy would accordingly allow for tiering agreements.
FINANCIAL IMPLICATIONS:
None
COMMUNICATIONS:
A meeting of stakeholders was held on Wednesday, September 23, 2009, to present the draft
policy (meeting minutes attached). Staff and representatives from Hemson Consulting met with
representatives of the Waterloo Region Homebuilders Association on October 8 to further clarify
the proposed policy and respond to stakeholder concerns. Changes in policy wording were
made as agreed to during the meeting. The City subsequently received two written submissions
from stakeholders:
From Mr. Peter Armbruster of the Waterloo Region Home Builders’ Association, dated
October 21, 2009
From Mr. Paul Britton of MHBC, dated October 20, 2009
Both submissions are attached to this report. There are two substantial issues raised in the
submissions. First, both submissions recommend that the policy be amended so that refund
payments be calculated based on revenue projections between the date of the DC Background
Study and the date scheduled for the capital works rather than between the date of the signing
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of the agreement and the date scheduled for the works. Second, Mr. Britton suggests that the
policy allow for DC credits to be issued against more than one service in exceptional
circumstances.
With respect to the first issue, it would be inappropriate to base a refund payment on the
proportion of actual revenue received relative to the revenue projections for the development
charge reserve funds contained in the DC Background Study, as the growth-related capital
forecast is updated during the annual budget process (to respond to changing capital priorities
and actual revenue received). The annual capital forecast will set out the most up to date
timeline to complete growth related capital works taking into consideration the anticipated
revenue over the term of the forecast. For consistency, it is recommended that this approved
forecast be used to establish the timing of repayment as well as the threshold to be achieved
prior to providing full repayment. Given that it is in the City’s (and developers’) interest to base
refund payments on the most up to date revenue projections available it is proposed that the
refund payments remain based on projections between the date of the signing of the agreement
and the date scheduled for the works. It should be noted that the City has typically maintained
the population growth projection consistent with the most recently approved DC background
study over the term of the related by-law.
The second issue has been addressed earlier in this report. Issuing a development charge
credit against more than one service can undermine the City’s ability to pay for other capital
works unrelated to the infrastructure that is being advanced. In order to minimize this risk, the
proposed policy restricts a development charge credit to the service to which the subject works
relate in all cases. This practice would still be less restrictive than similar practices in the Region
of Waterloo.
In addition to the above, both submissions contain suggestions for changing the language of the
policy to better reflect its intent. In this regard, staff is of the opinion that the language used in
the policy adequately reflects its intent and that no changes are warranted.
ACKNOWLEDGED BY:
Dan Chapman, General Manager of Financial Services & City Treasurer
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POLICY NUMBER: X-XX DATE: OCTOBER 26, 2009
POLICY TYPE: FINANCIAL
SUBJECT: DEVELOPMENT CHARGE CREDIT/REFUND AGREEMENTS
PURPOSE:
This policy provides a framework to identify the limited circumstances under
which it may be desirable to enter into agreements with developers wishing to
construct, or pay to have constructed, growth-related infrastructure that the City
is unwilling or unable to fund itself. This policy also sets out the major terms and
conditions applicable to Development Charge Credit/Refund Agreements.
DEFINITIONS:
Credit/Refund Agreement
–An agreement entered into at the City’s option with
a developer to facilitate the advancement of the timing of capital works so that
development can proceed quicker, or in different locations, than anticipated by
the development charge growth forecast or the City’s capital forecast. Under
these agreements developers either construct, or pay to have constructed,
infrastructure that the City is unwilling or unable to fund itself. Reimbursement to
the developer is provided by way of development charge credit and/or refund.
Credit
–A credit, which is provided to the developer against future development
charges equal to the cost of the growth-related component of the works paid for
by the developer. The developer uses the credit to offset all or part of the
applicable development charge when it becomes due.
Refund
–A refund of any outstanding balance that exceeds the value of the
credit.
SCOPE:
This policy relates to agreements between the City and land developers with an
interest in adjusting the timing of construction of growth-related infrastructure as
identified in the City’s Development Charges Background Study and capital
budget forecast. Financial Services staff are responsible for the implementation
and administration of this policy, supported by staff from multiple City divisions
including Building, Engineering, Legal, Operations and Planning.
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THE POLICY:
1. Development Charge Credit/Refund Agreements will take the form of a legal
contract and will set out all terms and conditions in detail.
2. Development Charge Credit/Refund Agreements will be applied on a limited
basis and only be considered for capital works that are required in order to
achieve higher priority development set out in the City’s Growth Management
Plan. Higher priority developments will generally, though not necessarily, be
viewed as those identified as A or B in the Plan.
3. Agreements will generally only be considered for capital works relating to
“hard” service projects (i.e. sanitary sewer, watermain, stormwater, or roads
and related works). Exceptions to this practice may be made for park and trail
development projects where the City has an interest in a developer paying for
the works up front.
4. Prior to approving a Development Charge Credit/Refund Agreement, Council
will be provided with a staff report outlining the provisions of the proposed
agreement along with the anticipated impacts arising from the construction of
the capital works including, but not limited to, the anticipated operating and
maintenance costs of the capital works, staff resources and other
infrastructure necessitated by the proposed development.
5. Development charge credits and/or refunds paid to a developer by the City for
capital costs incurred will be based on the actual cost, without interest, of the
capital works.
6. Credits and/or refunds will only be issued against the service of a
development charge to which the capital works relate (i.e. sanitary sewer,
watermain, stormwater, or roads and related works) so as to avoid
compromising the City’s ability to execute the balance of the capital program.
7. The timing of refund payments (i.e. that portion of the reimbursement that
exceeds the value of the development charge credit) by the City will be set
out according to the following principles:
7.1. Repayment will occur on a date prior to June 30 in the year the capital
work that is being advanced is scheduled to be constructed in the City’s
approved 10-year capital forecast at the time of signing the Development
Charge Credit/Refund Agreement;
7.2. Full repayment will occur as above only if the City has received all the
development charge revenue anticipated at the time of signing the
agreement between the time of the agreement to the year prior to the
above date in the reserve fund for the service to which the work relates;
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COUNCIL POLICY RESOLUTION
7.3. That until all the anticipated revenue has been received only a partial
repayment will be made annually. The amount of the partial repayment
will be determined by the ratio of cumulative actual revenue received
versus the revenue anticipated from the time of signing the agreement to
the year prior to the year the work was scheduled to be constructed;
7.4. For growth-related projects that also have a non-growth funding source
(e.g., partial funding from capital out of current) the refund of the non-
growth amount will generally occur on a date prior to June 30 in the year
the capital work that is being advanced is scheduled to be constructed in
the City’s approved 10-year capital forecast at the time of signing the
Development Charge Credit/Refund Agreement without adjustment (as
outlined in Sections 7.2 and 7.3 above) as the availability of these funds
is not normally dependent upon the realization of forecast growth; and
7.5. The City may consider fixed repayment schedules for projects defined as
high priority in the Kitchener Growth Management Plan.
KITCHENER 3 OCTOBER 2009
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City of Kitchener Development Charges Stakeholder
Meeting
MINUTES
SEPTEMBER 23, 2009 3:00 P.M. – 4:00 P.M. CONESTOGA ROOM
Dan Chapman
MEETING CALLED BY
Development Charges Stakeholder Group
TYPE OF MEETING
Stefan Krzeczunowicz (Hemson Consulting)
FACILITATOR
Michele
NOTE TAKER
TIMEKEEPER
Dan Chapman, Mike Seiling, Grant Murphy, Karen Eskens, Stefan Krzeczunowicz, Alain Pinard,
Ruth-Anne Goetz, John McBride, Brandon Sloan, Craig Binning, Pete Graham, Jennifer Passy, Paul
ATTENDEES
Britton, Craig Robson, etc.
Agenda topics
WELCOME AND INTRODUCTIONS
ITEM 1
n/a
DISCUSSION
Karen Eskens welcomed the group to the meeting and asked that everyone introduce themselves
ACTION ITEMS PERSON RESPONSIBLE DUE DEADLINE
n/a
REVIEW OF DREAFT CREDIT/REFUND
ITEM 2
AGREEMENT POLICY
DISCUSSION A) Credit/Refund Policy
Stefan thanked the group for their participation in both the drafting of the Background Study and By-law which
passed on July 1 and for attending today’s discussion regarding the new policy
A handout of Stefan’s presentation was given to all in attendance – attach the presentation when sending this
out
A review of what has transpired to this point was given (i.e. meetings, council direction, etc.)
The background and context for the proposed Credit/Refund Policy and the principles and provisions of the policy
were provided
ACTION ITEMS PERSON RESPONSIBLE DUE STATUS
n/a
ITEM 3 DISCUSSION ALL
DISCUSSION Feedback, Issues and Suggestions from Stakeholders
Stefan then opened the floor up to discussion on the policy
STAKEHOLDER COMMENTS
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Stakeholders noted some areas of concern with policy:
Do not understand what is driving the need/desire of the policy
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Policy was viewed as negative and punitive, in tone and content
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Policy is viewed as out of step with Council’s wishes with respect to green infrastructure
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Credits should not be limited to the service component of the development charge
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Formal front ending agreements under the should still be considered by the
o
City
that the practice of tiered agreements should still be available
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Uncomfortable with refunds only being issued when a project is dated in the approved capital forecast -
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uncertainty as to
A question was raised around carrying costs
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RESPONSES
Stefan and Craig Binning provided responses to above comments:
Intention of policy is not to discourage growth but to facilitate development identified as high priority in
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Growth Management Plan in a fiscally responsible manner
Important for City not to overextend its infrastructure commitments in too many locations during period
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of uncertain growth
Policy not intended to prevent front-ending agreements. This should be made clear in staff report.
o
Policy not intended to discourage tiered agreements. This should be made clear in staff report.
o
Carrying costs are not part of the repayment
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ACTION ITEMS
PERSON RESPONSIBLE DUE STATUS
Minutes of meeting will be sent to stakeholders Stefan/Michele/Karen Sept 30 Open
Written submissions from stakeholders should be sent to City Stakeholders Sept 30 Open
ITEM 3 NEXT STEPS
DISCUSSION n/a
Stefan explained the process on how issues raised at this meeting will be considered
Staff report and draft policy will be reviewed to reflect stakeholder comments
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Issues raised will be set out in staff report to Council on October 26
Stakeholder can send City a written submission which will be attached to the report as an addendum, providing it
is received by City no later than September 30
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Stakeholders may also make representation at the Council meeting on October 26; notice to the clerk’s office of
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intent to present must be done no later than noon on Wednesday October 21.
ACTION ITEMS PERSON RESPONSIBLE DUE STATUS
n/a
ITEM 4 NEXT STEPS
DISCUSSION
N/A
ITEM 5 OTHER BUSINESS
DISCUSSION
N/A
ACTION ITEMS PERSON RESPONSIBLE DUE STATUS
n/a
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