How should we fund cities?

It’s time now for a discussion to reform municipal finance and grant municipalities the revenue tools they need.

Thestar.com
Dec. 1, 2022

“The status quo is outdated, ineffective and just plain wrong.”

That was Toronto Mayor John Tory, speaking just a few weeks ago about the way Canadian cities are funded. The news that unfolded at City Hall on

Wednesday provided the latest evidence of the unsustainable ad hockery of municipal finance.

Tory held a news conference to announce that Queen’s Park had agreed to pick up one-third of the city’s budget deficit. Toronto, you might recall, is facing a $703 million shortfall, largely blamed on higher spending and revenue loss, such as lower transit ridership, related to the pandemic.

The good news came via a letter from Steve Clark, Ontario’s minister of municipal affairs and housing, who declared that the contribution was in the spirit of “strengthening our long-standing partnership.”

The provincial move is welcome. And now Tory’s focus turns to Ottawa to persuade the federal government to kick in a share as well. Without financial assistance from senior governments, the city would be forced to defer vital infrastructure work.

Still, more budget woes loom. Bill 23, Ontario’s housing bill that was passed just this week, includes a provision to eliminate or discount development charges and parkland levies. These charges are paid by developers and are meant to cover the cost of infrastructure associated with new developments, such as sewer pipes, roads, sidewalks. That work will still need to be done.

This provincial move is a gift to developers. There’s no guarantee that it will result in lower home prices. But the impact on municipalities is clear.

Toronto pegs the lost revenue at $2 billion over 10 years. Mississauga Mayor Bonnie Crombie estimates it will cost her city $885 million over the next decade, equal to cutting the capital budget by 20 per cent. “The numbers are devastating,” she said Wednesday. “Property taxpayers will be funding developer profits.”

But Clark offered news here too, suggesting in his letter to Tory that the province would reimburse Toronto for any shortfalls that resulted from Bill 23, provided the city was meeting the province’s hyped-up targets for new housing. Oh, and it’s also subject to a provincial audit.

The financial reassurance on this front, while welcome too, is less certain. What’s sure to ensue is more discussion, more back-and-forth to settle this budget hole. That’s precisely the problem.

This cap-in-hand exercise, an annual rite, underscores that municipal finances and the limited revenue tools available to cities -- now largely based on property taxes -- are relics of the distant past.

Like Toronto mayors before him, Tory is seeking a lasting solution to the way cities are funded, one that adds other revenue sources to the rigid property tax base.

“We are dealing here with a regime established in 1867 . . . and the methods that were put in place way back then about how those cities are financed are way out of date,” Tory said Wednesday.

In his letter to Tory and a separate letter to the Association of Municipalities of Ontario, Clark opens the door to discussions around “exploring alternative tools” to fund urban growth. That seems specifically tied to the housing initiative. But Clark should go further and truly explore ways to put municipalities on a more stable financial footing, one that does not require the chief magistrate to beg and borrow his or her way out of the budget hole every year.

The city itself has some options, including a new tax on alcoholic drinks sold in the city, a tobacco tax or a motor vehicle registration tax. Tory tried to institute tolls on the Don Valley Parkway and Gardiner Expressway in 2016 to raise $200 million a year but was shot down by the provincial Liberal government of the day.

Another option is earmarking 1 percentage point of the HST for municipalities, as the Association of Municipalities of Ontario has advocated.

Queen’s Park has granted mayors new powers to encourage growth. It’s time now for a discussion on needed reforms to municipal finance to finally grant municipalities the revenue tools they need.