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"Now comes the hard part for cities"

This article was published in Ottawa Citizen on August 24, 2009.
Written by Don Drummond and Derek Burleton.

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The Great Recession is nearing its end. But, for many of Ontario's municipal governments, the troubles may just be beginning.

The main sources of revenues for municipalities are transfers from the federal and provincial governments, property taxes and various user fees. These tend to be more stable than the personal and corporate income tax revenues that are so important for the other levels of government. Indeed, municipalities have benefited from rising grants for local infrastructure partly through a share of the provincial and federal gas tax. The provincial government has also relieved municipalities of some budget obligations such as a portion of social assistance.

Together, these moves have contributed to a more than tripling in ongoing combined federal-provincial support for local governments in recent years to more than $3 billion annually. In addition, governments have provided significant one-time support, including a share of year-end funds from the province of Ontario.

But soon the federal and Ontario governments will shift their focus to reining in their ballooning deficits. It is unlikely, and indeed would be inappropriate, for transfers to municipalities to be cut to the extent they were in the 1990s when the federal and Ontario governments faced fiscal crises. But municipalities certainly should not be counting on continuation of the recent pace of increases in funding they receive from other levels of government.

Further, the stability of property tax revenues is a double-edged sword, since improvements in real estate markets don 't automatically flow through to a higher overall take during periods of recovery as, say, they do for income taxes.

Meanwhile, some of the expenditure pressures on municipalities will intensify. In most cases the infrastructure monies that have flowed from the federal and Ontario governments have been for capital costs only. Municipalities will have to carve out the required operating funds to run the expanded facilities.

And if this economic cycle follows the patterns of others, social assistance costs borne by municipalities have yet to peak. Roughly 300,000 Ontarians are receiving Employment Insurance. As these benefits expire, they may need to turn to welfare later this year or into 2010. But they will first need to run down most of their assets. In Ontario, welfare benefits are denied to individuals with more than $580 in liquid assets and families with more than $1,600. So, again, there will likely be a lag before welfare caseloads peak. Further, we expect employment in the province to fall further over the next few months and not bounce back with any force in 2010. Ontario's unemployment rate is likely to hover in double-digit territory through next year.

Some cities will be better positioned to cope with these pressures than others. The city of Ottawa, for example, boasts a low debt burden and strong reserve position. The unemployment rate in the city currently resides at less than seven per cent. In contrast, Toronto is confronting an 11-per-cent unemployment rate and a more than doubling of welfare caseloads. Worse still, the City of Toronto has masked a structural deficit -- even during good times -- by running down its reserves while its debt load has been rising sharply. Regardless of these variations, few municipalities in Ontario will be immune to these broad challenges. Municipalities are at the epicentre of economic as well as budget matters.

Ontario's economy has been hit very hard by this recession. The forestry industry has been devastated by the impact on prices and volumes of the collapse of U.S. housing. The manufacturing sector in the province has lost 330,000 jobs in the past seven years, with much of the loss hitting communities built around the auto sector. The plunge in visits by Americans has been hard on communities with important tourism sectors.

In all these sectors, there are structural as well as cyclical pressures at play. No fast turnarounds are expected either for the individual workers or for the communities they live in. The great challenge before the Ontario economy will be how to replace these lost jobs and ensure a return to sustained, strong overall growth. For the most part, this will require an accelerated shift toward higher-valued-added goods and services. We can't and would not want to compete with China and other emerging economies on the basis of low wages. There is a clear role for the federal and Ontario governments to ensure sustained prosperity for Ontarians.

But, increasingly, municipalities will have to be leaders in the economic space. We are an urban society. Most of the jobs are in the major cities. Municipalities can no longer be considered the "junior" partners in economic or budget matters. Municipalities will need to use all their powers, and they still do not have enough, to leverage more and better jobs for their residents. And do that while carefully counting the beans.


Executive Headshot :  Don Drummond
Don Drummond
Former Senior Vice President and Chief Economist
TD Bank Financial Group

Executive Headshot :  Derek Burleton
Derek Burleton
Deputy Chief Economist
TD Economics

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