Giving Municipalities Financial Flexibility During COVID-19

By Michael Fenn

Municipalities need new financial tools to get through COVID-19.

Across the Canadian economy, governments are giving businesses – large and small – the lifeline of increased liquidity and credit, in order to avoid widespread business failures, large-scale layoffs, and discontinuation of contracts to small businesses and the self-employed. While some of this support might not meet the conventional cautious test of “bankability”, desperate times call for desperate measures. Public concerns about sticking with the fiscal plan and tracking towards balancing the budget have rightly been set aside until the crisis passes and the economic recovery takes hold.

Many municipalities may soon face challenges like those now facing tax-paying businesses and the ‘gig’ economy. While municipal tax revenues are largely secured by real property, history shows that severe economic reverses can erode the business tax base and drive-up arrears and write-offs on residential properties. In fact, much of our current municipal finance legislation grew out of the fiscal wreckage wrought by the Great Depression and the railway “bust” that preceded it. The Ontario government of the day resolved that municipalities would never again face defaults, with the associated damage to community well-being and to municipal and provincial credit ratings.

Fast forward to today, and the legislation governing municipalities ensures that municipalities cannot borrow more than a portion of their anticipated taxes in any year, that operating budgets would always be balanced, and that any in-year operating deficits must be fully paid-off as the first order of business in the next year’s municipal operating budget.  These strict rules, overseen for three generations by the Ontario Municipal Board (OMB), together with fully-funding pension obligations, paved the way for Ontario municipalities to avoid the financial problems and fiscal mismanagement seen elsewhere.

This prudence has meant municipalities are in a strong position to weather periodic economic downturns and natural disasters. However, the COVID-19 pandemic calls for extraordinary measures. Will municipalities without substantial reserves hit the statutory limit on current borrowing, as they try to care for those needing support and to fund recovery efforts while tax instalments, and utility and transit revenues, lag? Municipalities may also find that 2020 leaves them with a very large operating deficit. For some, without relief from the statutory restrictions on annual operating deficits, eliminating that 2020 deficit would likely require unwelcome 2021 budget reductions in services and staffing.

Two time-limited measures may allow municipalities to cushion and smooth the financial impact of the COVID-19 pandemic by preserving cash flow and by allowing a more protracted period to recover from the impact of 2020.

First, the statutory limits on the aggregate amount of short-term borrowing could be raised to a larger proportion of last year’s tax revenues, at any point during the year and perhaps to allow it to carry-over into the first quarter of the following year. Outstanding water rates could be added, too. Municipalities should still be obliged to pay back any amounts they borrow against projected tax and utility revenues in any year, but they could do it on a measured pace and timetable that reflects the local economic and fiscal circumstances – and cash flow – rather than arbitrary statutory thresholds. Likewise, municipalities that have patiently and prudently built-up reserves over many years may see them rapidly depleted: they should be encouraged to re-build those cushions against unforeseen circumstances and unnecessary borrowing.

Second, instead of requiring municipalities to cover the whole amount of any 2020 year-end operating deficit in the 2021 municipal budget, municipalities could be allowed to defray the 2020 operating deficit over more than one year. If the operating deficit is very large, there may be a role for the OMB’s successor, the Land Planning Approval Tribunal (LPAT), to sanction the repayment plans. Generally speaking, municipalities should be trusted to be fiscally prudent. If the LPAT is engaged, reviewing and approving these municipal fiscal plans should be a priority for the LPAT, ahead of other back-logged business. Alternatively, perhaps the Ministry could approve repayment plans beyond a specified threshold, in place of the LPAT, which would likely expedite the process.

No-one wants to see a very successful tradition of fiscal prudence undermined. Even if relief is afforded to municipalities, it should be clear that this is a temporary measure, not an invitation to permanently weaken fiscal safeguards. Rather than face an abrupt application of the municipal brakes mid-2020, or a wave service cuts and layoffs as part of the 2021 budget deliberations, municipalities should be accorded more discretion and responsibility to manage their way through this unique situation. Likewise, municipalities will rightly expect extraordinary financial assistance from other orders of government, as they incur costs well beyond what might have been imagined when they set their 2020 budgets. Cash-flow relief will not address those unforeseen expenditures.

Municipalities will need to be ready to play a key role in approving worthwhile development ventures, resuscitating local businesses, advancing infrastructure projects, and continuing to deliver key services, especially those municipalities responsible for public health, long-term care homes, land ambulance, and social services. They will need the same tools that businesses and families will need to get those jobs done, including money. Money to pay staff and contractors, and to keep municipal operations going in high gear, without immediately having to worry about the cheque coming due.