Fix the Municipal Funding System

Canadian cities cannot meet 21st century challenges with a 19th century legal framework.

By Ryan McGreal
Published April 30, 2007

Beneath the the high drama, the hijinks and the hide-covering of Hamilton's recent municipal budget deliberations lurks a crucial fact: the municipal funding system is broken.

Cities are expected to build and maintain roads and highways, run transportation systems, manage construction and renovation, regulate businesses, monitor food safety, provide affordable housing and social services, invest in promising business opportunities, provide emergency services, maintain public grounds, protect public health, and perform a myriad of other services both large and small.

However, city governments are severely constrained in how they can raise funds, limited mostly to collecting property taxes.

Property tax is a poor source of revenue for managing a city. Property taxes are regressive. They do not rise with a growing economy or vary based on ability to pay. They also tend to punish owners for improving their properties, resulting in too many decrepit buildings and too much surface parking.

The problem is that Canadian municipalities are not stand-alone governments. Legally, they are merely wards of the province. (This is why the Ontario Harris government was able to force the amalgamation of Hamilton and its surrounding towns over the opposition of residents.)

As a result of municipalities' dependent status, they are not allowed to introduce new taxes and are not guaranteed access to existing tax revenues from other levels of government.

The Buck Stops Here

The trend in Canada for more than a decade has been to download responsibilities from higher levels of government without providing adequate funding.

The notorious Canadian Health and Social Transfer (CHST), enacted by the Federal Chretien government in 1996, lumped health care, education and welfare funding in a single block sum delivered to provinces (they were split into the Canadian Health Transfer and the Canadian Social Transfer in 2004).

The CHST underfunded health care in violation of the Canada Health Act and insulated the federal government from cyclical variations in social costs.

Sidebar: Infrastructure Deficit

Squeezed between the inability to raise money or run deficits, cities have been forced to cut services and delay investments in infrastructure.

Almost everyone acknowledges a serious national infrastructure investment shortfall, but no one knows exactly how big the gap is. Estimates place it between $50 billion and $125 billion.

In 1997, the Ontario Harris government passed the equally notorious Omnibus Bill that uploaded education funding to the province and downloaded responsibility for welfare (with the province paying for half the cost), public housing, health programs, public transit, provincial roads, water and sewer systems, and ambulance services.

Again, the downloaded costs are more cyclical and are also more likely to be distributed unevenly among cities. That affects places like Toronto and Hamilton, with high poverty rates, a lot more than other municipalities.

The Ontario government claimed that the switch was revenue-neutral, but the practical result is that cities have the least ability to pay for social services costs precisely when and where those costs are the highest.

'New Deal for Cities'

Former Prime Minister Paul Martin campaigned in 2004 on a "new deal for cities" and his government addressed the funding crisis by exempting municipalities from the GST and establishing the transfer of gas tax revenues through bilateral arrangements with the provinces. (Read about the Ontario agreement here.)

This was a good first step, but it allocated money on a strictly per capita basis. This hurt cities like Hamilton and Toronto, which have both higher social services costs and greater opportunities to build fast, efficient transit systems for relatively dense populations.

Gas Tax Transfers to Ontario
Year Total Transfer Per Capita
2005-06 $9,559,914.65 $19.50
2006-07 $9,559,914.65 $19.50
2007-08 $12,745,129.62 $26.00
2008-09 $15,930,344.59 $32.49
2009-10 $31,860,689.17 $64.99

(Source: AMO Allocation of Federal New Deal Gas Tax Revenues For Environmentally Sustainable Municipal Infrastructure (5 cents/litre by 2009-10))

A second deal signed at the same time transfers provincial gas tax monies to cities as well. The plan started with one cent per litre in 2004, increased to 1.5 cents per litre in 2005 and finally to two cents per litre in 2006.

Because it's allocated based on ridership, Hamilton's poor record at attracting transit riders over the previous decade means again that the city gets less money.

New Planning Framework in Ontario

More recently, the Ontario McGuinty government has signaled with a variety of connected new laws and frameworks that they take cities' long term planning crisis seriously. With the Greenbelt, Places to Grow and the new Greater Toronto Transport Authority, this government has gone far in reversing the damage of the Harris government's eight years of neglect and abuse.

The City of Toronto Act and changes to the Planning and Conservation Land Statute Law Amendment Act have given Toronto new powers, including new powers to licence and regulate businesses, enforce transparency and accountability in proposed developments, establish urban design standards and minimum densities, and raise revenue through new powers of taxation in areas excluding income tax, wealth tax, gas tax or general sales tax.

The changes to the Planning and Conservation Act also apply to other cities, but as Ontario's biggest city and most important economic driver, Toronto was centred out for transformation into a de facto legitimate government with real taxing powers.

Funding is Still Too Politicized

Because the gas tax transfers are not enough to cover the infrastructure shortfall, Hamilton goes through an annual exercise of begging to the province for more.

Angry accusations and syrupy apologetics inevitably fly around, and politicians are evaluated based on how good they are at squeezing extra funds from higher levels.

With this year's provincial budget, city council found itself $5 million poorer than it expected, and the scramble was on to cut costs and find savings. After promising to hold the line on tax increases to three percent, council ended up coming in just under a 3.5 percent increase in the final approved budget.

This is no way to run a city. It's been said many times before, but Canadian cities have changed a lot since their political status was established in the mid-nineteenth century and their status has not kept up with the changes.

One Way Forward

I recently spoke with Mario LeFebvre, director of the Conference Board of Canada's Metropolitan Outlook Service and co-author of the 2006 report on Canada's Hub Cities: A Driving Force of the National Economy.

LeFebvre believes all three levels of government are collecting enough revenue in total, but it is not being allocated effectively to where it is most needed. He believes that the simplest solution is for the federal level to continue collecting the revenue but then transfer it to the provinces and municipalities.

He recommended that instead of reducing the GST by another point, the Federal government should instead transfer the revenue directly to cities. (Recently, Toronto Mayor David Miller echoed this call.)

"At the same time the feds talked about fixing the fiscal imbalance, they also promised a two point reduction in GST. If they gave a point to provinces and a point to cities, that would help to fix the imbalance."

LeFebvre stressed that the allocation should not be strictly per capita, since different cities have different spending requirements as well as varied capacity to drive economic growth.

He also recommended that cities become more comfortable with taking on debt instead of paying for investments up-front. As he explained, "Infrastructure is going to be in place for 40-50 years. Why pay for it all right now? Amortize it over its life."

Competing Globally

Even as cities in other countries gain the power and the money to plan effectively, invest in critical infrastructure and foster sustainable business development, Canadian cities are still trapped by 19th century rules that starve them of resources and infantilize their municipal governments.

Recent changes from the Federal and Provincial governments have started to address this problem, but we have much farther to go before Canadian cities can properly manage their affairs.

As Lefebvre concluded, "If we're going to succeed in this reality, we're going to have to give our cities the means to be successful. If not, it may turn out to be a pretty ugly scene."

Sidebar: City Rights Pioneers

It's not possible to write about this issue without making reference to the people who first recognized the constitutional crisis affecting modern Canadian cities.

John Sewell, a former Toronto Mayor and tireless urbanist, has long advocated granting official status to municipalities under the Constitution. He recommends the following:

The late Jane Jacobs lived in Toronto for much of her life and was active in municipal politics. The Death and Life of Great American Cities was merely the start of a lifelong study of how cities work and how they could work better.

In her last book, Dark Age Ahead, Jacobs dedicated a section to the legal status of cities, calling for a sensible, equitable, and localized approach to municipal government:

Central planning, whether by leftists or conservatives, draws too litle on local knowledge and creativity, stifles innovations, and is inefficient and costly because it is circuitous. It bypasses intimate and varied knowledge directly fed back into the system. [p. 117]

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan wrote a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. His articles have also been published in The Walrus, HuffPost and Behind the Numbers. He maintains a personal website, has been known to share passing thoughts on Twitter and Facebook, and posts the occasional cat photo on Instagram.


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