Provincial Election Primer

On October 10, 2007, all Ottawa residents should carefully consider what each provincial party will do for our cities today and in the future. Fair funding for Ontario's cities is a decisive issue in this provincial election. Residents should ask 10 important questions of their local candidates for Queen’s Park, to assess their commitment to your city.

Ottawa and the Municipal Fiscal Imbalance
Ottawa taxes similar to other large Ontario cities
Property assessment process not fair
Spending
Canadian cities need adequate funding for infrastructure projects
The One Cent NOW! Campaign
Provincially Cost-Shared Programs
What can you do?

Ottawa and the Municipal Fiscal Imbalance

Cities are the engines of Canada’s economy and contribute billions of tax revenues to the federal and provincial governments annually. And yet, economic and policy experts agree that Canada’s cities lack the legislative and financial tools needed to adequately fund the services and programs they are obliged to deliver. If this municipal fiscal imbalance is not addressed soon, the ability for Canadian cities to continue to fund existing services and public infrastructure will be compromised. Correcting this situation is essential for Canada’s economic prosperity.

Of all the taxes Ottawa residents pay, including provincial and federal income taxes and property taxes, only 9 cents of every tax dollar remains with the City. Funding municipal services, infrastructure, and paying the cost of social services once paid for by the provincial government, has become an increasingly large burden for property taxpayers in Ottawa.

Comparison of provincially mandated programs, per household – Ottawa, Toronto, 7-city average

Municipalities fund operations mostly through property taxes and user fees (including water and sewer rates). However, none of these sources of revenue are growing sufficiently to fund the annual growth in City expenditures. Simply put, costs are far and away outstripping revenues. Therefore the City must look beyond taxation and user fees to other sources of revenue to bridge this widening gap.

Ottawa taxes similar to other large Ontario cities

Ottawa’s property taxes have increased on average by 1.6 percent annually over the last seven years – less than any other major municipality in Ontario. Yet despite these low annual increases, Ottawa’s property taxes are among the highest in Canada largely because Ottawa ratepayers pay a portion of provincially mandated social programs through their local property tax bill.

Property assessment process not fair

The Province provides annual property assessments through the Municipal Property Assessment Corporation (MPAC). Over the last few years, Ottawa has seen property values rise substantially in several neighbourhoods, based on rising market values.

Taxpayers have been frustrated by changes in their property assessment and resulting tax increases. Some residents feel that the property assessment system is not transparent, not accountable and difficult to predict. Many have misinterpreted these tax shifts as budgetary tax increases that could be controlled by City Council. However, these provincial property assessments are outside the jurisdiction of Council – the property assessment system is the responsibility of the Ontario Provincial Government.

The result of the province’s property assessment system is that some neighbourhoods pay more, some pay less, or businesses pay less and homeowners pay more, depending on market values of the properties being assessed.

In some cases, the phase-in of tax increases between these classes over the past number of years has resulted in taxation inequities. In 1998, the Province made a decision to try to improve the tax predictability of the business class by setting an annual tax cap for these properties. This policy limited property tax increases for some businesses but at a cost to other businesses expecting a property tax decrease due to lower assessments, creating a new set of inequities.

Similarly, the way the education property tax rate is calculated has also led to inequalities in the municipal tax system. The Province calculates the education tax rate using residential property assessment values for all of Ontario. Ottawa’s residential property assessment increases have been above the provincial average for several years. Due to these increases, Ottawa residents are paying a larger share of provincial education taxes than other municipalities that have not seen comparable increases in property assessments. Ottawa will continue to lobby the Province to remove education taxes from the property tax bill or to collect a set education fee rather than a rate based on property values.

In 2006, the Province announced a two-year freeze to deal with problems with MPAC assessments. Since then some administrative reforms have been announced, but the fundamental principles behind Ontario’s broken property assessment system – market valuation of property – remains. And in 2009 a new round of property assessment will begin (based on property values as of January 1, 2008).

Recently, the Provincial Government announced a number of changes to the property tax system, however; concerns remain about the volatility of the province’s property assessment system.

Spending

Ottawa’s budget includes numerous programs and services that are provincially controlled, but paid through property taxes. Of the approximately $2.2 billion dollar budget, just 58% of the City’s expenses fall under the decision-making authority of City Council.

City operating expenses have increased 25 percent over the past 5 years, however, when population growth and inflation are included, this actually represents a 5.1 percent decrease in total spending.

City Spending on Operations

Canadian cities need adequate funding for infrastructure projects

The infrastructure that cities provide – roads, water, sewers, etc. – are fundamental to both economic activity and quality of life. However, there is a significant and growing infrastructure-funding deficit in Canada, which has grown considerably since regular federal and provincial infrastructure funding was replaced by one-time infrastructure programs. For example, Canada remains the only G8 country without a national transportation infrastructure program. Municipalities also have very limited ways to raise revenue like taxes and user fees. Municipalities in Ontario must also balance their budgets, with no deficits. As a result, most municipalities have had little choice but to under-invest in infrastructure to balance their budgets, limit tax increases and limit their debt.

The City of Ottawa is responsible for maintaining a variety of major types of infrastructure, with an approximate replacement value of $26.4 billion. These assets include roads, water and sewer networks, public transit, buildings, buses and paramedic vehicles. The City budget classifies infrastructure projects into three categories: renewal of City assets, growth, and strategic initiatives.

Historically, cities have opted to defer capital rehabilitation and renewal to meet the pressure for balanced municipal budgets to avoid large tax increases. The 2006 Research Report on Municipal Finances prepared by Standard & Poor’s, reported that municipal infrastructure deficiencies are typically related to water, sewer, road and transit networks, and are estimated to range from $60 billion to $120 billion nationally.

Some infrastructure currently in use in Ottawa is more than 100 years old. Limited revenue for capital projects means making tough choices between competing priorities such as providing maintenance to older infrastructure, adding new infrastructure to growth areas, and developing projects that respond to changing demographics and Council’s new infrastructure priorities.

Funding rules surrounding new revenue sources such as the provincial and federal gas tax rebate limit what municipalities can pay for with this funding. For example, federal gas tax monies can only be used for water and wastewater infrastructure, transit or community energy projects. The City does not have sufficient revenue for capital projects necessary to meet the needs of citizens in Ottawa over the next ten years. Based on current funding sources, a funding gap of approximately $2.1 billion is projected for Ottawa. This is simply not sustainable.

Projects in new developments are primarily funded through development charges (fees charged to developers). This guaranteed revenue ensures there is sufficient funding to build the required infrastructure in new communities like roads, parks and sewers. However, once built, this new infrastructure must be maintained and repaired, and staff to operate. This puts pressure on the City’s operating budget, which in turn puts pressure to delay maintenance in order to avoid large tax increase.

As Ottawa continues to grow and age, it must replace and expand its infrastructure. Water plants and sewage treatment facilities have to keep up with the demands of our residents and businesses. Sustainable investments in good quality infrastructure are vital to Ottawa’s economic success. Ottawa, in partnership with other “big city” municipalities, is advocating for increased infrastructure funding and better funding tools to ensure our long-term financial sustainability.

The One Cent NOW! Campaign

The City of Ottawa has joined together with over thirty major municipalities and the Federation of Canadian Municipalities to support the City of Toronto’s One Cent Now! Campaign to lobby the federal government to return the equivalent of one cent of the existing GST back to Canadian municipalities.

The One Cent NOW! Campaign requests the Federal Government share the equivalent of one cent of the existing GST with cities to ensure that infrastructure and important services are maintained and that future infrastructure can be built in a sustainable manner. The Federal Government has indicated that there is room to cut the GST and we believe there is room to share the equivalent of one cent to support the critical needs of Canadian municipalities.

Right now, municipalities get none of the revenue created when the economy grows, even though municipalities pay the cost of growth through maintaining and building the infrastructure required to support healthy economies and cities. This needs to change.

Provincially Cost-Shared Programs

Ontario is the only province in Canada that funds social programs like social assistance, public housing and public health from property taxes. The Province controls the standards and overall costs of these programs and these are funded from a combination of property taxes and provincial subsidy. Council has limited authority to alter costs and must fund its share of these costs from property taxes.

Since the Ontario Government downloaded social programs to municipalities in 1998, municipalities have assumed greater funding responsibilities for social programs like childcare, public health, housing, and ambulance service. The Province offset this downloading by creating more tax room by reducing education property taxes. The service realignment or downloaded changes made by the Ontario Government provided new transfers and tax room but were not revenue neutral for municipalities. The matter of funding these programs has remained contentious, as many agree that property taxes should not be used to fund these types of income-transfer programs. As well, the City of Ottawa (and other municipalities) argues that there are significant funding gaps in many of these provincially mandated cost-shared programs. This means that the level of funding Ottawa receives from the Province does not accurately reflect the cost-sharing arrangement. This year, the difference between what the Province has agreed to pay for mandated, cost-shared programs and the anticipated amount received from the Province, will result in a $13 million shortfall or funding gap for the City of Ottawa. Currently, City taxpayers make up this gap to maintain the service at the provincially mandated levels.

In Ottawa, the projected increases in costs to deliver these social programs over the next four years could result in a property tax increase of approximately 0.7 percent annually, or an additional $6 to $8 million more per year.

If the Province were to fund all of its mandated cost-shared programs the average urban residential household in Ottawa would pay $670 less in property taxes per year. Ontario cities have argued that these social programs should not be on the property tax bill and are clearly within provincial jurisdiction as is the case across Canada.

What can you do?

All Ottawa residents should carefully consider what each provincial candidate would do for their city today and in the future. Residents should ask all provincial candidates the following questions to assess their commitment to resolving issues in Ottawa.

• Will you help lobby the Federal Government to give the equivalent of one cent of the existing GST to municipalities?
• Do you believe that the provincial and federal governments need to adequately and permanently fund infrastructure? Should they properly fund cities to do their jobs?
• Do you believe that municipal governments require revenues that grow with the economy?
• Do you believe the province’s property assessment system should be reformed to make it more stable, predictable, and accountable?
• Do you believe that funding arrangements with municipalities need to be modernized to better reflect the fiscal realities of the 21st century? For example, would you support the City of Ottawa receiving the power to levy a wide range of taxes similar to those received by Toronto?
• Would you support giving a permanent share of provincial taxes to the City of Ottawa?
• Would you support giving cities more legislative autonomy and adequate resources to meet their service responsibilities and to attract investment and growth?
• What do you think about the proposals for electoral reform brought forward by the Citizen’s Assembly on Electoral Reform?
• Would you support the removal of education taxes from the property tax bill or collect a set education fee rather than a rate based on property values?
• Would you support giving the City of Ottawa more money to deal with the services the Province downloaded to municipalities? Or would you rather have the Province reclaim responsibility for funding these provincially mandated programs?

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