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What COVID-19 teaches us about municipal responsibilities and how to pay for them

by Enid Slack
in Economic Development, Finance
July, 2020

COVID-19 has highlighted just how much municipalities are on the front lines when it comes to delivering services. They have enforced physical distancing measures, made changes to public transit such as imposing passenger limits on vehicles, found additional spaces for the homeless population in part by re-purposing municipal facilities or leasing private hotels, undertaken more cleaning of facilities, provided personal protective equipment (PPE) for staff, and addressed IT issues so some employees could work from home. All of these activities have increased their expenditures.

Budget Hard Hits

Municipalities have been hardest hit on the revenue side of the budget, however. Many have allowed taxpayers to defer their property tax payments for 60 or 90 days without penalty or interest for late payments or non-payments. Some have also rolled back planned property tax increases. Municipalities that rely most heavily on property taxes will see the impact of these policies immediately, though in the case of deferrals the loss of revenue is temporary. In the longer run, there is the potential for defaults on property taxes, but municipalities have ways of eventually getting the property taxes through tax sales, for example. Perhaps more of a concern is a significantly reduced commercial tax base if businesses are forced to close. Municipalities that levy a municipal accommodation tax have also, in many cases, deferred or provided exemptions to the tax.

Transformative Incrementalism: A journey to sustainability

Municipalities have taken a more permanent hit on user fees. Many local governments have permitted the deferral of bills for water, wastewater, sewers, and waste collection and disposal and, in some cases, rate increases have been rolled back. Some have reduced or removed user fees from some services, for example, providing free transit and parking. User fee revenues from transit have declined significantly, especially in the larger cities, where transit ridership has fallen by 80 to 90 percent. Revenues from parking, recreational programs, and other municipal services have also declined.

Uphill Climb to Recovery

To meet revenues shortfalls, local governments are permitted to borrow within the fiscal year while waiting for revenues to come in, but provincial governments set limits on how much they can borrow. Some provinces have introduced loan programs or permitted municipalities to borrow for a longer time. Although these moves could help local governments with their immediate cash flow problems, many will not be able to carry this debt for a long period of time. More borrowing simply passes the problem off to the future, potentially at a time when local governments will face even more pressure on the property tax.

Local governments in Canada are not permitted to budget for an operating deficit. When they run a deficit, they are required to pay it off immediately in the next budget year. To address the deficits resulting from COVID-19, municipalities are delving into their emergency reserves, deferring capital projects to 2021, and cutting some expenditures, largely by letting go some employees.

When it comes to the economic recovery, municipalities will also face an uphill climb. Local government revenues will not increase automatically with the growth in the economy, as they will at the federal or provincial level. That is because property taxes are not an elastic source of revenue in the same way as income or sales taxes. Measures that they are taking to address the financial impact of COVID-19, such as dipping into their capital reserves and deferring capital projects, might see them through the short term depending on their individual circumstances, but these measures are not sustainable in the long run and will prevent them from contributing to the economic recovery.

Conversation on Fiscal Health and Public Services

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The federal and provincial governments have come to the rescue with funding to meet the revenue shortfalls in the short run. Although welcome news, it may be time to have a longer-term conversation about how to strengthen municipal fiscal health and public services going forward. Municipalities across Canada are confronting housing, public health, and climate crises with limited revenue sources to address them. This problem is particularly acute in Ontario, where municipalities are partially responsible for the cost of social services. Even before the COVID-19 crisis, a paper from the Institute on Municipal Finance and Governance (IMFG), the Urban Policy Lab, and Ontario 360  recommended that the province and municipalities work together to clarify responsibilities for public health and social services ( Coming out of this crisis would be a good time for provinces and municipalities to figure out who should do what and how to pay for it.  MW

Municipal World Insider and Executive Members: You might also be interested in Curtis O’Nyon and Natalia Lasakova’s article: Municipalities are key players in COVID-19 response and economic recovery. Note that you can now access the complete collection of past articles (and more) from your membership dashboard.

Enid Slack, PhD, is Director of the Institute on Municipal Finance & Governance and Adjunct Professor at the Munk School of Global Affairs and Public Policy, University of Toronto.

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