The Province of Ontario reduces its transfer payments to local governments: What does it mean for No

September 4, 2014 - In February 2014, the Ministry of Finance announced that the Ontario Municipal Partnership Fund (OMPF), the Province’s main unconditional transfer payment to municipalities, would be reduced from $575 million to $500 million by 2016.

The Association of Municipalities of Ontario (AMO) expressed its concerns regarding this provincial announcement, arguing that growing costs of policing and social services require a different approach to unconditional municipal funding. The province points to financial difficulties and reduced transfers from the federal government as reasons to proceed with the OMPF changes.

The growing tensions on this matter disguise the real problems in provincial-municipal relations. We explore these underlying problems to understand what is happening with Ontario municipalities.

Historically, municipalities were dependent on the Province, which would set up the legislative and responsibility guidelines for municipalities. This was a top-down regime in which the very existence of local governments, including their financial, policy, and service delivery frameworks, was mandated and regulated at the provincial level. The degree of dependence was even higher in the Ontario North because of harsh climate, limited tax base and sparse population. Recent economic, political, and societal trends are changing this paradigm in Ontario and in other jurisdictions.

In their research on Ontario municipal governance, André Côté and Michael Fenn from the Toronto-based Institute on Municipal Finance and Governance grouped these changes into three broad categories:

1. Emergence of big urban municipalities that are hubs of economic growth that demand more freedom and independence
2. Growing complexity of provincial-municipal relationships with a baffling array of responsibilities, arrangements, and roles that create governance and functioning inefficiencies and limit transparency
3. New challenges such as an aging population, skill shortages, infrastructure gaps, growing service delivery bills, and dwindling local revenue sources

Recognizing these challenges, observe Côté and Fenn, Ontario kept increasing the funding for municipalities, growing by 15 percent per year over the last decade. Ontario also devolved some responsibilities to the local level but retained control over key policy and funding decisions.

As a result of these developments, large actors and small powers characterize Ontario’s municipal world. The former are energetic urban centers, such as Toronto, that want more power to control their affairs. The latter are small and rural municipalities that have limited local revenue sources, receiving a large portion of their funding from the Province. The majority of Northern Ontario municipalities belong to this category.

The debates around OMPF exemplify all three recent tendencies described by Côté and Fenn. The Province created the OMPF in 2005 to support municipalities in meeting their portion of theestablished joint cost-sharing arrangements for social programs.

In 2008, the Province launched a new approach to the OMPF by paying for (or “uploading,” to use the government term) the Ontario Works (OW) benefits, court security and prisoner transportation costs. These phased uploads will be completed in 2018. The Province had previously uploaded the Ontario Drug Benefit (ODB) and the Ontario Disability Support Program (ODSP).

Subsequently, the Ministry of Finance reduced its transfers to municipalities because they were no longer financially responsible for these programs. In an attempt to provide better support to local governments, the ministry developed a new formula, the Northern and Rural Municipal Fiscal Circumstances Index (MFCI), which factors in median household income, employment rates, and other municipal characteristics to determine new allocation levels. At the same time, previous grant components dedicated to policing, farmlands, and managed forests have been eliminated.

These arrangements created new risks for Northern municipalities that have limited income sources to maintain appropriate levels of service. Among others, these risks include growing policing costs. According to the AMO, the cost of policing for provincial municipalities is $294 per capita, which is much higher than the Canadian average of $268. The AMO estimates that growing policing costs from the Ontario Provincial Police (OPP) wage-related increases will be approximately $25 million in 2014. In the absence of provincial support, this increase will burden municipal property taxpayers.

Other jurisdictions in the European Union, UK, U.S. and Australia recently encountered similar challenges related to municipal financial sustainability. As follows from Taxation Trends in the European Union, Australian Local Government Economics and other publications, these countries chose to expand local government taxation which improved municipal ability to fund services and growth.

In light of this international experience, we recommend that the Province work with municipalities to explore the possibility of new local taxes to respond to the new economic and governance challenges. We recommend this measure for a number of reasons:

1. Expansion of the local taxation base produced positive results in other jurisdictions
2. There is a significant body of research on new local revenue options that may be used by provincial and local authorities for evidence-based policy making
3. This process may generate positive spin-offs, such as more clarity in provincial-municipal roles and responsibilities. As a result, the Province and local governments may achieve greater efficiency and transparency in joint policy and program initiatives

To expand the municipal revenue base without placing excessive burden on businesses and households, a new taxation regime could consider a variety of factors, including municipality size, demography, economic structure, fiscal conditions, and tax administration capacity. Larger municipalities should be given broader taxing authority to support their robust economies. All provincial municipalities should receive powers to set tax rates and levy taxes.

Undoubtedly, the implementation of these objectives will require a lot of effort; but the extent of current economic, fiscal, demographic and infrastructure challenges faced by provincial municipalities clearly shows that the old model of provincial-municipal relations needs changes.

Authored by Leon Shafir