One Size Fits All?
The purpose of this article is to show how external variables (A) and legislative design decisions (B) combust in municipal budget deliberations, giving Councils more credit for undesirable situations than they have control over them because the conflicts preceding budget approval are newsworthy and the final decision about how to respond happens in Council chambers (C). Though broadly discrediting to municipal institutions and actors, the sequence unfolds in ways that are more damaging to economically disadvantaged areas and more damning for their municipal leadership, with less organizational change capacity, starker decisions to make and fewer options than growing places with more households over which to defray tax costs and diverse economies.
(B) Among other things, municipal budgets reflect local responses to a few structural instabilities embedded in the financial design of municipalities:
Structural Mismatch: The natural rate of expense and revenue growth in municipalities is mismatched; ordinarily, (in lower inflationary environments) cost escalation far outpaces revenue growth.
Municipalities have a political and financial incentive to go to great lengths to attract new development, business activity, increase traffic and tourism flows. Where the base is buildings on private property, taxation generates stable revenue, likewise for user charges on immovable services and non-discretionary activities, i.e. water and wastewater.
Variable Revenues, Fixed Costs: Where the base is mobile and the activity is discretionary, revenue fluctuates with demand. Municipalities have a notoriously high proportion of fixed costs and spend on a number of non-discretionary services, so they can’t always answer less revenue with less expense.
Big cities, especially ones that operate a transit system, are much more exposed than small towns whose operating revenues never leveraged user volumes.
Similar Costs, Different Ability to Pay: The mechanism that gives rise to costs and scopes out revenue offsets is essentially the same for all municipalities. They take different forms, (various pieces of legislation, regulations, amendments, service agreements, program designs and heavy reporting burdens) and apply to very different economic circumstances but the rules are the rules. There isn’t one package for Cockburn Island and another for Ottawa, despite the former showing a 2021 population of 16 and a private household count of 89, and the latter registering over a million people and 427,113 private dwellings, (Statistics Canada, 2021 Census). The same own source revenue architecture creates very different revenue prospects and abilities to pay for the same core service package in different regions of the province.
(A) Add a trigger event that changes a municipality’s operating environment, something over which it has no control: Rapid cost escalation due to inflation, the current example, compounds number three, COVID lockdowns exacerbated number two, a climate event, etc..
(C) In communities with pre-existing economic vulnerabilities, what are the revenue options to manage inflationary cost pressures that don’t heighten community precarity?
Demographic data point us to two indicators of underlying community vitality: the rate of population growth and the growth in the total number of households in a municipality. Out of 444 municipalities, from 2016 to 2021, the population change was negative in 90, and the number of private dwellings contracted in 109.
Low-yielding tax bases need higher property tax levy increases to meet the spending mandate. They make for limited discretionary spending capacity, eroding the role of Council in community capacity building to begin with, and either negate or squeeze savings capacity needed to insulate a small assessment base and few properties from sharp year-over-year changes in tax triggered by an unlimited number of independent risk-posing variables (B) layered onto such fragile design (A).
Government decisions about how to respond to the change event render it a community-specific, newsworthy drama. Members of Council are in a position to own a lot of issues and the associated media coverage, since, to the public, members of Council look like they’re in the driver’s seat - Council and Budget meetings are reported across multi-media, members supply quotes and comment on the issues before their community, the final decision about tax increases and service cuts is theirs and the impacts show up in the tax bills sent on municipal letterhead or the quality of public services. There are no good options, but every unpopular decision is made by one community’s elected representatives, so Councils look like they are in control because the contours of a response belong to them, despite being passengers most of the ride.
66% of Ontario’s 414 single and lower-tier municipalities generate less than $100,000 with a 1% increase in their tax levy. In the 2023 budget season, not three months after members of Council were elected, the scene described two paragraphs above is set to play out in 275 municipalities across the province.
Are municipal revenues inflation-ready?
If property tax levy increases are the measure of local revenue capacity, the answer could depend on where you live.