How the pandemic has hurt the finances of municipalities

The pandemic has significantly hurt the finances of cities and towns in Canada. Costs have risen to combat the virus and at the same time revenues have plummeted as they struggle to maintain services. User fees, in particular,  have plunged from sources like transit, parking and development. The diagram below shows two important indicators: public transport usage and traffic congestion. Both have been significantly affected and have yet to recover to pre-pandemic levels.

Real economy high frequency indicators

PUBLIC TRANSPORT USAGE AND TRAFFIC CONGESTION LEVELS

Usage of public transportation has been hit particularly hard, which of course has affected farebox revenues. Last September, the Toronto Transit Commission estimated a net financial impact of nearly a quarter billion dollars as a result of COVID-19. It is likely that public transportation ridership will take time to fully recover. This decline may force municipalities, which often operate transit systems, to make some difficult decisions about cuts to service. Doing so would disproportionately affect lower-income Canadians.

While the economy has improved significantly along with the vaccination rate, it is likely that some level of social distancing will prevail, which could continue to impair the fiscal position of municipalities. Indeed, a model we developed suggests that COVID-19 will decrease cities’ own source revenue (for example, nongovernment grant revenues) by about 15 per cent, from $112 billion in 2019 to $94 billion in 2020.

We do not anticipate that these source revenues will fully recover in 2021. Our model assumes an impact to both user fees and a small impact on property taxes. We have not fully taken into account the impact, however, of the booming real estate market in certain parts of Canada (namely Toronto) where municipalities earn significant revenues from land transfer taxes. On the flip side, the estimates do not take costs into consideration.

Municipal/local government own source revenues

PROPERTY TAXES, USER FEES AND OTHER NON-GRANT REVENUE SOURCES

So what are municipalities doing to address this gap apart from additional transfers from the federal government and provinces? During a presentation we gave to the Canadian Association of Municipal Administrators (CAMA), in which nearly a hundred or so senior municipal officials attended, we polled the audience to better understand the impact of COVID-19.

When asked about the impact of COVID-19 to municipal finances, the officials gave a variety of responses, which reflects the fact that every municipality is different. Still, the responses were broadly aligned to our estimates above.

Impact of COVID-19 on municipal own source revenues

As illustrated to the right, municipalities have used a range of strategies to address the fiscal gap, including cutting costs or service levels and accessing reserve funds that municipalities set aside for future expenditures like infrastructure maintenance or replacement costs. A number of municipalities also used increased government transfers to address gaps.

Few officials said they were willing to increase municipal taxes or user fees, but this may change, particularly if 2021’s own source revenues fall below expectations.

Strategies implemented by municipalities to address fiscal gap from COVID-19

It is also important to note that using reserves today may mean increased municipal taxes or a widening of Canada’s infrastructure deficit in the future. The federal government and provincial governments have instituted a number of programs to support municipalities, but more will be required to support government organizations that are on the front line of the battle against the virus.

Part of the policy prescription could be addressing some of the structural gaps in how municipalities in Canada are funded and providing for increased flexibility.

Doing so would not only help municipalities address adverse economic shocks, but also support municipal modernization efforts, which will be critical to driving efficiencies and improving service levels.