Municipalities have played a central role in Canada’s response to the COVID-19 pandemic. They have provided economic relief to residents and businesses, instituted public health measures, delivered vaccines and begun planning for a post-pandemic future.

The increased cost of this work, combined with decreased revenues – particularly from user fees such as transit fares – have resulted in significant, unanticipated operating deficits. Large cities with transit systems have been especially hard hit. Because municipalities are required by law to pass balanced operating budgets every year, they have not been able to resort to more borrowing. Instead, federal and provincial governments have stepped in to help them cover the shortfalls.

Alongside fiscal deficits, municipalities have also faced a governance deficit. While they have been on the front lines responding to the pandemic, they nevertheless have been excluded in many cases from key decisions made at the federal and provincial level. Instead, municipalities have relied on advocacy to get heard, although public health units have in some cases made use of their authority to enact certain restrictions.

All of this points to an underlying reality about Canadian federalism. Despite the important role that cities play in the federation, local governments are equipped with limited sources of revenue – largely property taxes, user fees, and transfers from the federal and provincial governments. They also do not have any real role or voice in Canada’s federal structure and are generally not included in federal-provincial discussions or negotiations.

Both of these problems need to be addressed. Municipalities should have access to the revenue necessary to fund the services they must provide. There should also be regular trilateral meetings among Ottawa, the provinces and senior municipal leaders to address issues of common concern, while recognizing the different needs of large and small municipalities.

Municipalities have too often been the forgotten partners or little siblings of Canadian federalism. Recent research has highlighted the challenges Canadian municipalities face in this respect. Municipalities have a semblance of authority in several policy areas, but often little actual power to make changes unilaterally, partly because provinces have shown little interest in ceding control. They have inadequate revenue sources and insufficient fiscal flexibility to meet their responsibilities. There is often unclear and overlapping jurisdiction between municipalities, provinces and the federal government. Finally, much of Canada lacks appropriate regional governance structures to encourage inter-municipal co-operation.

Coming out of the pandemic, there is an opportunity to put municipalities and Canada on firmer footing by addressing fiscal capacity and flexibility, embracing municipalities as partners and taking municipal differences into consideration.

Address fiscal capacity and flexibility

Provincial governments determine the revenue sources available to municipalities. They also hold municipalities to balanced budgets for operating purposes, and restrict how much they can borrow for capital expenditures.

This high degree of provincial control ensures that municipalities maintain good fiscal health, but it can obfuscate real fiscal problems. Balanced budgets, for instance, can hide the fact that a municipality is unable to pay the cost of maintaining and building new infrastructure, including public transit and affordable housing, using revenue sources at their disposal.

The limited number of revenue sources available to municipalities also means they lack fiscal flexibility. If transfers from government are adjusted downward, or property tax revenues decrease, they have few other places to turn for revenue. Without a mix of taxes, they are less able to respond to shifts in the economy, evolving demographics and changing expenditure needs. In this respect, big cities in Canada compare unfavourably to the rest of the world. In a study of eight international cities, only London was found to have access to fewer taxation options than Toronto.

In response, a reconsideration of “who does what” in Canada – particularly with respect to provincial-municipal relations – is needed. Such a process should ensure two things.

Saint John, N.B.

First, municipalities should have revenues that allow them to deliver effectively on their responsibilities. This may entail giving municipalities access to new revenue sources, or uploading responsibilities to the provincial level.

Second, municipalities should have appropriate revenue sources for the services they deliver. For instance, both in response to provincial “downloading” of responsibilities and to resident demands for action on issues like the opioid crisis and mental health, municipalities are increasingly being tasked with redistributive services such as social housing, public health and social assistance. These are best funded by progressive taxes, such as an income tax or a sales tax with mitigation for low-income individuals.

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Embrace municipalities as partners

A new vision for municipalities in Canada should also address intergovernmental relations.

In Canada, there is no formal mechanism for ongoing, formal federal-provincial-municipal relations. This is despite the fact that decisions taken by provincial and federal governments on immigration, infrastructure and public health, to name a few examples, have significant effects on municipalities. In cases where there is insufficient funding for programs, municipalities often bear the cost of filling gaps in services. Even in cases where municipalities have a semblance of authority – for instance, land-use planning and elections – provinces can often second-guess and/or overrule their decisions.

Many of Canada’s policy challenges require increased co-ordination and co-operation among all three orders of government. As Gabriel Eidelman has noted, “Urban governance is not simply municipal governance. Urban policy-making necessarily involves all levels of government.”

Municipalities should not need to wait to see what arrangements are made by the provinces and Ottawa in areas with municipal impact. Just as the provinces and the federal government meet regularly, without regard to whether there are particular issues that need to be discussed, so should cities, provinces and the federal government have formal avenues for regular meetings and collaborative governance.

Instituting more formal trilateral relations, however, runs up against the issue of fragmentation. Canada has approximately 3,750 local governments. It is unfeasible to involve them all in intergovernmental discussions. Ensuring that Canada’s major economic regions have robust metropolitan governance structures through which municipalities can co-ordinate on shared policy challenges and, when possible, speak as one voice, can help address this issue.

Take municipal differences into consideration

Canada is a largely urban and suburban country. Nevertheless, around a quarter of Canadians live in a municipality with a population of less than 20,000.

Small and large municipalities are distinct in many ways. Larger municipalities generally can draw more revenue from their tax base and also have a larger and more sophisticated public service.

As a result, policies and decisions tailored to large cities may not work for smaller municipalities. Instead, asymmetrical arrangements may be preferable. This might mean large cities and metropolitan regions take on more responsibility and gain access to new revenue sources, while smaller municipalities stay as they are and rely more on transfers.

In such a scenario, greater disparities may emerge among municipalities, so new or enhanced provincial-municipal equalization transfers may also be required to ensure that all municipalities can provide at least an average level of local public services by levying an average standard tax rate.

COVID-19 has shown us once more that municipalities play a fundamental role in the country’s policy-making. It is equally apparent that municipalities will be critical to address climate change and tackle the affordable housing crisis, among other challenges. Reforming our fiscal and governance structures would be the next step in reflecting the key role of municipalities in the federation.

This article is part of the Reshaping Canada’s Cities After the Pandemic Shockwave special feature. 

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Enid Slack
Enid Slack is the director of the Institute on Municipal Finance and Governance at the Munk School of Global Affairs and Public Policy at the University of Toronto.
Tomas Hachard
Tomas Hachard is manager of programs and research at the Institute on Municipal Finance and Governance.

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