As continual corporations, municipalities keep and manage community wealth, in the form of assets, for generations. They plan for population growth, asset maintenance, demographic changes, emergency preparedness and a host of other eventualities that affect residents' quality of life. As such, they need a longer-term focus than most companies or other organizations. Since amalgamation, Ottawa City Council has recognized the benefits of long-term planning and incorporated this approach into the decision-making process by creating the Long-Range Financial Plans (LRFP) I and II.
Experts agree structural funding issues impede financial sustainability
The first and second LRFPs focused exclusively on planning capital spending. This third edition of the City's Long-Range Financial Plan (LRFP III) is a comprehensive financial document, which also includes operating and capital expenditures and an overview of the City's assets and liabilities.
The first Long-Range Financial Plan, tabled in 2002, examined concerns regarding the financial sustainability of Canadian cities. It summarized findings of major studies on municipal funding, which emphasized the new importance of cities in the global economy, and examined funding differences between major Canadian, European and American cities. The United States government and national governments in Europe are making major investments in their cities and have made numerous funding tools available to municipalities. The Canadian federal and provincial governments' progress in these areas is well behind Europe and the United States.
Successful cities are essential to the success of the modern Canadian economy
Since 2002, a number of other studies have confirmed that serious concerns remain about the sustainability of the fiscal framework under which Canadian municipalities must operate. These studies note that, while the federal and provincial gas tax provides cities with some help in the area of public transit, very little real progress has been made since 2002.
The major conclusions reached by these studies are outlined below.
One of the major economic and cultural shifts that has occurred with the advent of globalization is the emergence of cities as key drivers of national economies. In short, "…cities matter… Indeed, in Canada, as in most other countries, as large cities go so, increasingly, goes the country."1
In Canada, the health of cities is of primary importance to the national economy. It is anticipated that:
as much as 80 per cent of economic and population growth will occur in only six broadly defined city regions: the Greater Toronto Area, Vancouver and the lower mainland, Montréal and its environs, Ottawa-Gatineau, and the Calgary and Edmonton regions."2
While there is no single definition for what makes a successful city, there are commonly agreed upon elements. These include high quality social and quality of life services, first-rate cultural infrastructure, good quality municipal infrastructure, an attractive natural environment, a diverse economy and the ability to attract and retain talented people.
Currently, Canadian cities are internationally recognized as successful. They are highly desirable places to live and work. When compared to American cities, they provide good social and cultural infrastructure and services while offering higher levels of personal security and safety. In 2005, Mercer International rated Ottawa 20th in the world for quality of life, ahead of Montréal and Calgary and most American cities. For cost of living, Ottawa ranked 122nd out of 144, making it less expensive to live in than Toronto, Vancouver, Calgary and Montréal.
However, the continued success of Canadian cities is at risk. The most significant reasons can be summarized as follows:
All of the studies conclude that, while Canadian cities are providing most of the services that lead to economic growth, they do not have adequate financial tools to fund those services. Economic growth increases federal and provincial revenues far more than those of municipalities. This creates a fiscal imbalance for municipalities.
A fiscal imbalance exists when:The fiscal capacity of one order of government is insufficient to sustain its spending responsibilities while the fiscal capacity of another order of government is greater than is needed to sustain its spending obligations, while both orders of government provide public services to the same taxpayer."4
There is a municipal fiscal imbalance that threatens Canada's prosperity
Cities in Canada are creatures of their province. This means that cities do not have control over many of the services they provide and are restricted in their abilities to raise revenues. Cities are subject to the whims of the province in terms of services, service levels and funding. While the current debate in Canada is the federal/provincial fiscal imbalance, most experts agree that the municipal fiscal imbalance is at least as important if not more so.
An analysis of the relative expenditures and revenues of the federal, provincial and municipal governments from 1988-20045 reveals the following:
The studies all agree on two key points regarding the municipal fiscal imbalance:
The existing funding framework means Canadian cities are not able to adequately maintain infrastructure
With more than 80% of Canada's population living in cities, and the vast majority of its businesses centred there, investments in high-quality infrastructure are vital to Canada's economic success. Specifically, the availability and quality of services provided by local infrastructure - water, sewers, solid waste facilities, public transit and transportation systems, cultural and recreational facilities - are critical factors in improving economic growth, productivity and international competitiveness.7
Ottawa's first Long-Range Financial Plan examined the importance of municipal infrastructure, and identified the significant differences between the large-scale investments made by Europe and the United States in municipal infrastructure as compared with Canada's investments.
There is agreement that there is a significant and growing infrastructure gap in Canada, and that it was largely created when federal and provincial infrastructure funding streams were replaced by ad-hoc infrastructure programming. American and European governments have recognized the critical role infrastructure plays as the backbone of every large city's economy; conversely, investment in infrastructure by Canada's federal and provincial governments has been declining. Canada remains the only G8 country without a national transportation infrastructure program. Moreover, given the limits to municipal funding tools, most municipalities have had little choice but to "systematically [under-invest] in infrastructure, both hard and soft infrastructure (e.g., transportation, roads, water, sewers, recreational facilities, community services, etc.)"8 to balance their budgets and limit their debt.
Statistics Canada estimates the value of Canada's existing public infrastructure at $157 billion.9 A number of recent studies have attempted to measure Canada's infrastructure gap, and estimates range from $60 billion to $125 billion, depending on the infrastructure included and the methodology used.10 Even when the lowest estimate is used, the infrastructure gap is significant and the studies agree that it must be addressed if Canada is to remain internationally competitive. Given that municipalities in Ontario have responsibility for most of the province's physical infrastructure assets (62%, compared to 23% for the province and 15% for the federal government), this gap is a particular challenge for Ontario's two largest cities, Toronto and Ottawa.
The conclusion reached by the studies is clear, and can be best summarized by the following:As municipalities grow and age, attention must be devoted to the expansion or replacement of their capital stock. Water plants and sewage treatment facilities must be enlarged or rehabilitated. Transportation and communications facilities must be updated and extended. Brownfield remediation must be addressed and 'blighted' areas of cities revitalized and redeveloped. The need for increased infrastructure funding in Canadian municipalities has been advocated by the Federation of Canadian Municipalities for some time and more recently, by the mayors of the large cities."11
Municipalities will not be financially sustainable without new funding tools and without authority over the services they provide.
1Slack, Enid and Bird, Richard M. "Cities in Canadian Federalism." Presentation. Conference on Fiscal Relations and Fiscal Conditions. Georgia State University, Atlanta. May 2006.
2Slack, Enid, Bourne, Larry S. and Priston, Heath. "Large Cities Under Stress: Challenges and Opportunities." Report. External Advisory Committee on Cities and Communities. March 3, 2006.
3Slack, Enid and Bird, Richard M. "Cities in Canadian Federalism." Presentation. Conference on Fiscal Relations and Fiscal Conditions. Georgia State University, Atlanta. May 2006.
4Kitchen, Harry M. and Slack, Enid. "Trends in Public Finance in Canada." May 24, 2006.
7Government of Canada. Fall 2002. Speech from the Throne.
8Slack, Enid, Bourne, Larry S. and Priston, Heath. "Large Cities Under Stress: Challenges and Opportunities." Report. External Advisory Committee on Cities and Communities. March 3, 2006.
9Research Analysis Division, Infrastructure Canada. "Productivity and Infrastructure: A Preliminary Review of the Literature." August 2006.
10The range varies because each study looks at different parts of the infrastructure and different data. Infrastructure Canada has very recently begun a comprehensive literature review in order to develop a work plan to address existing knowledge gaps about the specific nature of Canada's infrastructure gap.
11Kitchen, Harry M. "Physical Infrastructure and Financing." Research Paper. Panel on the Role of Government in Ontario. December 4, 2003.
- Federal and provincial governments are "in effect downloading some of their deficits to those at the bottom of the fiscal food chain - local governments."3 This has been done in a number of ways: by directly offloading services to municipalities (e.g., provincial highways, ambulance service, social services and social housing); by reducing transfer payments to municipalities (e.g., provincial transfers for public transit); by reducing direct government expenditures in areas that directly impact local areas (e.g., reductions to immigrant services and funding for health supports for low income and disabled people); and by imposing "unfunded mandates", where regulations have increased municipalities' expenditure requirements (e.g., water quality standards).
- To remain competitive in the national and international marketplace, cities must provide state-of-the-art transportation and communications infrastructure, high quality cultural and recreation facilities and programming, and reliable emergency and police services.
- Cities experiencing rapid growth are also experiencing higher costs, due to the high costs of building new infrastructure and of maintaining infrastructure that is under stress from a growing population.
- Increased pressures on the expenditure side have not been balanced by corresponding increases on the revenue side. Canadian cities can only raise revenues through property taxes, user fees and development charges. Unlike sales and income taxes, property taxes do not grow with the economy.
- While its revenues have been increasing, the federal government's expenditures, per capita, have been declining. Provincial/territorial government expenditures have been increasing at a lower rate than revenues. Municipal government expenditures have been increasing at a faster rate than their revenues.
- Provincial/territorial governments have seen the highest average annual growth rate in revenues.
- Federal and provincial tax revenues, per capita, increased over the 16-year period while municipal tax revenues remained fairly flat.
- Federal and provincial/territorial governments rely on personal and corporate income taxes and consumption taxes, along with other tax and non-tax revenues. Some provincial governments (including Ontario) also levy a property tax. Municipal governments rely mainly on one tax - the property tax.
- A greater increase in provincial property taxes for education and relatively smaller increases in municipal property taxes "suggest some crowding out of municipal tax room by the provincial property taxes…"6
- Municipalities do not have revenue-raising tools to allow them to adequately meet their responsibilities.
- Cities do not have sufficient control over their own destinies and are constrained from solving their own fiscal problems.