Douglas W. Judson
Municipal Budget 2021: An Explainer
Recently, there has been some buzz on social media in response to council’s decision to raise taxes by 2% in this year’s budget. Obviously, none of us ever want to pay more in taxes (or for anything else), but council does not pull these numbers out of thin air either, and it’s important that the community understands where they come from.
A municipal government’s budget is constrained by numerous factors – factors based on both legal requirements and local circumstances. As with my post about last year's budget, below I have outlined our budget constraints and requirements, and responded to some of the concerns and criticisms which have been made.
Municipal Budgets 101
To begin with, here are the fundamentals of the municipal budgeting rules, as required by law:
There is a difference between the operating budget and the capital budget. The operating budget refers to our budget for the town’s day-to-day operations, including staff salaries, snow removal, basic maintenance, and running the municipal water and sewage system. The capital budget refers to the budget for new capital spending, such as upgrading or replacing capital assets (vehicles, equipment, infrastructure, etc.).
Municipalities are required by provincial law to plan for balanced operating budgets each year. This means that we cannot budget for deficit spending like the provincial and federal government – our projected revenues must equal our projected expenses. Any shortfalls must be covered by tax increases or service cuts.
Municipalities can only issue long-term debt for capital projects. We cannot do so to cover operating costs, and we cannot commit more than 25% of own-source revenues to service long-term debt and long-term obligations. This means that we cannot take out a massive loan to cover operating costs in order to keep taxes lower. (Even if we were allowed to, that would be like getting a payday loan to cover your living expenses without having a plan to pay it back.)
Ontario municipalities are required to have an asset management plan in order to appropriately sequence re-investment into the assets (i.e., the capital assets) of the municipality. The purpose of this is to ensure that responsible decisions are made based on the useful life of assets – such as IT, sewers, zambonis, fire trucks, etc. As part of this process, we are required to contribute a portion of our revenues into reserves every year in order to have enough funds on hand to cover those future costs when they are expected to arise. If we didn’t do this, future tax years would require massive increases in taxes whenever it was time to replace capital or pay for a significant new asset. This would be very burdensome and unfair to future citizens, and would make a municipality unattractive for new property development or investment.
A huge portion of every municipal budget is uncontrollable – that is, council has absolutely no control or choice other than to budget to pay the number that is provided. For instance, our policing budget with the OPP has increased by hundreds of thousands of dollars in recent years. The levies we contribute to the Rainy River District Social Services Administration Board and the Northwestern Health Unit are also uncontrollable. In 2020, these 3 items alone totalled $4.9 million, which was an increase from the prior year.
Similarly, some of our operating costs are only controllable up to a certain point. Consider, for example, that we are legally required to meet provincially-mandated standards for the timely removal of snow after a storm. To do so requires a certain level of manpower and staffing to get the job done. We cannot control when or how many snowstorms, lawsuits, or other such events may arise.
Some of our budget decision-making is further constrained by good financial practices that we must abide by. For example:
It is bad practice to fund or subsidize operational costs from reserves because it is financially unsustainable to do so. If a municipality did do that, it would be shortchanging its own asset management plan, meaning future taxpayers would need to swallow larger costs. If this was done year-over-year, the municipality would eventually run out of money because it would not be bringing in enough tax revenue to meet its operational needs. Eventually, its reserves would be depleted. (This would be like if someone switched to a part-time job, and then tried to fill the gap in earnings from their savings account on an ongoing basis.)
The bare minimum amount that a municipality should increase taxes each year is the rate of inflation. Inflation is the rate at which the value of a currency is falling and, consequently, by which the general level of prices for goods and services is rising. Sometimes people refer to this as the “cost of living increase”. Inflation in Canada has been around 1.5 to 2% since the 2009 financial crisis. If we did not increase taxes by this amount, we would need to find consecutive cuts in service every year to do so. This is, frankly, not possible without cutting significant or essential services. This year, our baseline for inflation was lower than usual, at 0.7%.
The upshot of the above discussion is that in any given year, if every other variable remained the same, municipal taxes must be increased by a growth factor which is the sum of our asset management contribution plus inflation. If the increase in taxes is less than that sum, that means your actual tax increase is, for practical purposes, negative.
Local Budget Factors
In Fort Frances, these principles and rules need to be applied in the context of some unique local factors. Of importance:
We have lost significant tax revenue as a result of the reassessment of large industrial properties associated with the former Resolute mill. The tax ratio between residential and industrial rates is approximately 1 to 7. That means that the tax revenue resulting from an industrial property is much higher than that from a residential one of equivalent assessment. To give an example: the town would need to gain $49 million in new residential assessment to make up for the loss in revenue from $7 million in industrial assessment. Without absorbing major cuts to services, it is impossible to fill this revenue hole without raising taxes on other payers or bringing significant new development to the community (which cannot happen overnight).
While the town is in good financial health, we are playing catch-up due to some decisions of our predecessors. Over the 2 decades before this council's term of office, previous councils increased taxes by an average of 0.87% per year. In fact, there was not a single year over that time period when taxes were increased by at least the rate of inflation – including in the years after the mill closed and there was a real risk that our financial circumstances could change. While frugality can be a virtue, in excess it becomes short-termism. This has left today's and future taxpayers on the hook to make up the difference.
Our municipality works hard to prioritize its expenditures and its staff do an excellent job guiding council to make prudent financial choices. The town staff runs a comprehensive budgeting process where each department prepares and submits its operating and capital budget projection for internal scrutiny, where new capital spending projects are ranked by priority. These prioritized lists are presented to executive committees and then to council itself, which goes through all of the materials line-by-line to arrive at a final budget. There are, in effect, several stages of scrutiny to ensure that our budget is as cost-effective as possible.
Taking all of this together…
This year’s tax increase is, in my view, reasonable and responsible, as our citizens should expect from their municipal leadership.
I have personally supported the 2% increase because I do not want to see our municipality kick any more cost burdens to future generations of citizens, and because this rate is in line with the growth factors our citizens should expect year-over-year.
While some councillors disagreed about the exact percent of the increase, to my knowledge there is no member of council that would not have voted for an increase. The difference in magnitude would have likely been marginal. There is no question that taxes were going up.
Finally, while we are all aware that the pandemic has created some difficult economic circumstances, numerous financial supports are available from other levels of government with more fiscal firepower than the municipality. It's important to recognize that municipal taxes are paid by property owners, and not by residential tenants, who are often the individuals facing the greatest fiscal challenges and precarious employment.
If you don’t like what you see in this year’s budget…
Please participate constructively in the budget process. Each year, the Treasurer’s Department puts out a call for public comments, suggestions, and submissions. Usually, fewer than 4 are received. While we do not blame citizens for having concerns and questions about their municipality’s finances, it is important to bring forward your proposals and ideas if you think our municipality is missing a strategy to navigate the above challenges, laws, and requirements.
The views expressed are my own. Should you have any questions, please email me at email@example.com. Technical questions about the budget or the town's budgeting process should be directed to town administration at (807) 274-5323.