Municipalities can’t generate massive revenues through income tax, but are losing billions providing essential services
The spread of the novel coronavirus is continuing to create more questions than answers. The uncertainty around the future impact of COVID-19 has sweeping financial ramifications for municipalities that are in a precarious position.
They lack the broad revenue generating ability the two higher levels of government enjoy through income taxes paid to both of them by millions of working Canadians, but municipalities have to provide some of the key essential services needed to keep society running in the ongoing emergency.
Cities have made clear they need help and have collectively asked the federal government for financial assistance to keep their essential services running, while preparing to restart many other programs once public safety measures begin to be lifted.
Cities across Canada are losing tens of millions of dollars in lost transit revenue each week
The unified message was voiced recently by the Federation of Canadian Municipalities (FCM). Its ask is simple: cities and towns need $10 to $15 billion to help with the financial hit they have taken. The need was supported by early financial projections released by municipalities, including Brampton, Mississauga and the Region of Peel. The projections focus on operating costs, expenses for things like fire services, policing, public health departments and transit, that are needed on a daily basis (police and public health are covered by the Region of Peel).
Numbers presented by each city show a financial impact that might change over time. It’s a factor both cities have acknowledged, as neither of them know how long the pandemic will last and what the ultimate financial impact will be.
The City of Brampton has calculated its projected losses at the end of the second, third and fourth quarter, Natalie Stogdill, a spokesperson for the City, told The Pointer.
At the end of the second quarter, Brampton is projected to lose $77.5 million in revenue and $106.5 million by the third. By the end of the fourth quarter, revenue loss will rise to $125.6 million. Reductions in transit revenue (all transit rides are currently free to ensure essential workers have a way to get around, while also helping others who need access to groceries and other items) and from recreational services are the two main reasons for the losses, which are adding up by the day.
Projected deficits for Brampton are much lower than revenue losses, thanks to a reduction in certain services and layoffs of 2,000 non-essential staff that have led to savings. With these applied, the City projects a deficit of $44.7 million by July 1, $51.5 million by October 1 and $54.7 million by the start of the new year.
But officials have made clear that these were very preliminary figures and there are likely revenue losses that have not yet been factored. Brampton is allowing property owners to defer tax payments for five months, which will result in further losses.
The City of Mississauga used an approach that projects losses over a series of months. By April 30, estimated losses for the city will sit at $43.4 million. This will increase to $49.9 million by May 31 and $59.2 million by June 30. If physical distancing measures continue until December, the deficit could sit at $100 million, according to a report put together earlier this month by City staff. The leading losses of revenue for Mississauga come from reduced recreation services ($16.7 million by April 30) and MiWay ($14.6 million by April 30), which is also offering free fares during the pandemic.
The City of Mississauga has postponed $360 million in tax receivables through its move to defer property bill payments for three months. This will cost the city $2 million in penalties associated with the delay of tax payments. “Any loss in taxes in response to the COVID-19 crisis will require a reduction in services or a disproportionate increase in taxes in the future,” the staff report states.
The estimations are admittedly based on some hard to determine calculations while cities have no way of knowing when the impacts will end and how deep they will be felt. It raises the question of what will happen if a city projects numbers far lower than what the final losses might be.
One answer is to raise taxes. For Mississauga, the FCM report projects a required tax increase of 17 percent, if aid from Ottawa is not provided, but according to a rough per capita calculation based on FCM’s $10 billion to $15 billion need, its numbers are much higher than what the City projected.
The City of Brampton has released very preliminary projections for its losses
For Brampton, Mayor Patrick Brown said during a Wednesday press conference, the number could be between four and seven percent. Christine Sharma, a spokesperson for the City of Brampton, explained this number is based on the projected deficits the city put out.
However, if the eventual reality is closer to the FCM numbers, Brampton would also be looking at a tax hike in the 16 to 17 percent range, without any aid from the federal government.
FCM’s model for the federal government to provide emergency assistance focuses on two funding approaches: base allocation (for all municipalities) and supplementary allocation (for municipalities with their own transit system). The former funding need would require $7.6 billion distributed on a per capita basis. The latter is asking for $2.4 billion, with funds distributed based on 2019 ridership numbers.
Rough calculations based on per capita numbers show Brampton and Mississauga would get about $400 million to $600 million, or about $200 to $300 million dollars each (Mississauga would get slightly more because it has approximately 100,000 more residents).
These figures are far higher than the numbers currently projected by either city. Representatives from both cities shared similar reasonings with The Pointer, stating it’s too early to speculate the amount of funding that will be needed, while allocations of such funds would also be based on the two-tier system the Region of Peel uses, with numerous cost-sharing arrangements in place. For example, excessive costs for public health departments and paramedic services that might be piling up, if overtime hours are mounting, are the responsibility of the Region, while the cities cover services such as transit and fire.
Mississauga faces a possible 17 percent property tax hike, according to FCM, to cover losses if Ottawa doesn't help
The Pointer reached out to the federal government to learn about a potential financial response for municipalities. Katherine Cuplinskas, the press secretary for Deputy Prime Minister Chrystia Freeland, was not able to provide specifics, instead referencing Freeland’s recent acknowledgment of the hardships faced by municipalities during this time. There was no mention by the minister of any funding for municipalities in her acknowledgement of the problem late last week.
Brown has stated on multiple occasions he has spoken with Freeland and with Rod Phillips, Ontario’s Finance Minister, about funding, even suggesting last week he was given a “reason for optimism” after talking with the two senior officials. Gary Collins, the Director of Communications for the mayor, clarified that discussions with Freeland are not one on one, but happen as part of calls with the Big City Mayors caucus (which is supported by FCM), where Brown occasionally gets an opportunity to talk.
One of the conversations he was a part of focused on transit operations. “We depend on transit operations as a national service,” he said at his press conference this week, responding to a question by The Pointer about funding help.
Brown is also part of the Large Urban Mayors Caucus of Ontario (LUMCO) where calls almost always include Steve Clark, the Minister of Municipal Affairs and Housing, and occasionally Phillips, Collins explained.
The current plans for both of Peel’s cities involve using reserve funds if the higher level governments can’t help or don’t provide all the needed aid.
The FCM report states cities may turn to cost cutting or further reducing services in order to ensure they do not go into deficits. Municipalities face strict restrictions against running operating deficits, and have no legal ability to do so. While short term-deficits are allowed, budgets must be balanced before the year ends.
While Brown previously told The Pointer no plans to cut services are being considered, given the unpredictable nature of the pandemic, it’s possible this could change. The cancellation or postponement of capital projects may also take place in Brampton, according to the report presented by City staff, if funds from higher levels of government are not secured. If this happens, the $84 million in property tax funding allocated for these projects in the 2020 budget will shift to cover operating costs.
The City of Mississauga will also be looking into using its reserve funds to help mitigate operational costs. Specifics are not available as it’s a situation that hangs on the outcome of the ongoing pandemic. City staff in Mississauga plan to provide an update on the projected numbers at a June budget committee meeting.
For municipalities across the country providing crucial essential services during the global pandemic, the financial crunch is the latest reminder that their responsibilities are not matched by the limited revenue generating tools they have at their disposal.
In the end, if the higher levels of government don’t spread income tax revenues to cities, property owners will end up subsidizing many of the costs of this national emergency.
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