www.canadascities.ca  
 
 
CANADA'S CITIES - Unleash our Potential CANADA'S CITIES - Unleash our Potential

The time is right for new relationships with Ontario and Canada
Report prepared by the Chief Administrative Officer and Chief Financial Officer, City of Toronto - June, 2000 (updated October 2001)

Toronto's challenge
Financial demands are outpacing Toronto's ability to pay
"Puppets on a shoe string
The stakes are high
The right tools will make a difference
The right tools are making a difference elsewhere
How does Toronto compare?

Back to Canadian Cities home


Toronto's Challenge:

Research on Toronto's global competitiveness, in connection with the preparation of the City's Economic Development Strategy, points to the increasing metropolitan dominance of national economies. This dominance makes cities the building blocks of the global economy. The global economy is comprised more and more of competing city regions. Toronto is in competition with other city-regions in North America and around the world.

Toronto's ability to attract and retain businesses and investment, and the employment and income that they generate, is critical. The City's successes and failures in that endeavour hinge on whatever competitive advantages it can muster.

The state of the City's physical infrastructure is a fundamental determinant of attractiveness to investment and economic competitiveness. In addition, one of Toronto's key competitive advantages is quality of life. Particularly in the North American context, relative to cities of similar size and with similar overall business costs, Toronto is perceived to have a very good quality of life.

Toronto's challenge is to build and maintain necessary infrastructure and protect its quality of life by enhancing the City government's ability to:

  • manage its finances;

  • set policy directions; and

  • meet any new challenges that arise in a rapidly changing global environment.
There are many indications that the City's powers and revenue sources must be redefined to ensure that the City is equipped to deal with the challenge.

Financial Demands are Outpacing Toronto's Ability to Pay:

The City is in a financial squeeze that threatens its international position. It is caught between limited growth in its revenue base and high demands for unique services that are a consequence of its position as Canada's largest metropolis. This squeeze is worsened by the impact of ongoing transfer of responsibilities from the province.

The City's infrastructure is aging. It was largely built by the 1970's. Some of its basic components, including subway tunnels, the Gardiner Expressway and the major bridges are much older than that. Significant investments are necessary to keep the City's sewers, roads, bridges, subway system and other basic infrastructure in good repair. New infrastructure to keep the City competitive will also require huge investments.

As Canada's largest city, Toronto faces high demands for unique services. Unlike other municipalities in Ontario, Toronto operates and maintains a subway system and urban expressways. Toronto faces a disproportionately high demand for social services which it must subsidize from the property tax - an inappropriate source of revenue for income redistribution programs.

The City's financial pressures are compounded by new spending responsibilities that have not been accompanied by corresponding funding or additional financial tools. Increased responsibilities include capital and operating subsidies for TTC, roads, GO Transit and social housing. Until September 2001, when the Ontario government decided to restore a portion of its pre-1998 funding responsibility, Toronto was the only major city in North America where the total subsidy for transit fell solely on the property taxpayer.

When the federal and provincial governments funded housing or transit, they were able to draw on the broader base of income and consumption taxes. Toronto has three sources of revenue - property taxes, user fees and provincial grants. The decline in provincial grants in recent years has placed greater pressure on user fees and the property tax. However, the need to remain competitive with other cities constrains the City's ability to increase property taxes or user fees.

Because of the sensitivity of income and consumption taxes to economic cycles, federal and provincial revenues have risen by 35 percent and 48 percent respectively since 1992. In contrast, because the property tax is a relatively inelastic source of revenue in a mature, developed urban area the city's revenues (and expenditures) have remained relatively flat. The federal and provincial governments can cut taxes without necessarily cutting spending - in fact, they can cut taxes and increase spending at the same time. At the city level, tax cuts are difficult without service reductions.

The City's ability to gain access to alternative sources of revenue is curtailed by provincial legislation. Provincial legislation also does not permit City Council to develop policy responses to critical problems within the City's boundaries. There is a good example from the housing area.

With the withdrawal of the federal and provincial governments from the housing area, City Council has tried to take a lead role in addressing homelessness and the shortage of affordable housing in Toronto. In this regard Council enacted a by-law to control the conversion of rental housing to condominiums. A developer challenged the policy at the Ontario Municipal Board, which ruled that provincial laws do not give the elected city government the power to protect the city's rental housing stock. The City has obtained leave to appeal the OMB decision to the Divisional Court.

"Puppets on a Shoe String":

There are serious concerns about Toronto's ability to meet policy and financial challenges so long as the City has to rely on powers and revenue sources that have not changed in generations. This problem is not new, but it shows signs of worsening.

Almost twenty-five years ago, in "Puppets on a Shoe String: The Effects on Municipal Government of Canada's System of Public Finance", the Canadian Federation of Mayors and Municipalities warned that Canadian local governments were facing a growing financial crisis, which they could not survive without increases in property taxes, cutbacks in service or both.

Drawing on a comprehensive set of intergovernmental financial data contained in the "Report of the Tri-Level Task Force on Public Finance in Canada", "Puppets on a Shoe String" cited a growing gap between local revenues and expenditures. The report concluded that the fiscal imbalance and deficits of local governments were not the result of careless spending at the local level. Rather, they were due to the improper distribution of revenues in the Canadian finance system. While the federal and provincial governments had access to a variety of revenue sources, local governments were limited to the non-growth property tax. "Puppets on a Shoe String" argued for stronger, more autonomous municipal government in Canada with less reliance on conditional provincial grants and greater access to a wide range of tax revenues.

"Puppets on a Shoe String" was published in 1976. The warning about the potential unsustainability of municipal government has been repeated several times since then. The need for municipal governments in general, and Toronto in particular, to achieve greater autonomy in law-making, fiscal and institutional areas was recognized in reports and studies throughout the 1980's and 1990's.

The Stakes are High:

What has changed since 1976? In Toronto's case, the financial demands have grown but the law-making and financial tools have remained the same.

For the past few decades, the senior levels of government have steadily been withdrawing from or reducing their commitment to a number of policy fields that have a profound impact on Toronto. For example:

  • The federal government's changes to the Employment Insurance program had an impact on applications for welfare, which in Ontario is cost shared with the municipal government. A cutback to a federal program can increase the cost to the municipality.

  • The City's 2000 Report Card on Homelessness showed that the combination of lack of investment in social housing by the provincial and federal governments and cuts in welfare rates correlate statistically with observable increases in homelessness. There is a direct impact on the demand for municipal services from hostels and public health to policing.

  • The complete withdrawal of the federal and provincial governments from social housing provision has shifted responsibility to the municipal level.

  • The complete withdrawal of the Ontario government from transit and urban transportation (until the partial policy reversal in September 2001) has shifted responsibility to the municipal level.

Whatever forces are at play in the world - social, economic or environmental - their outcomes are concentrated, intensified and highly visible in large cities like Toronto and become challenges for communities and for governments. The policies and actions of all levels of government have an influence on these outcomes and their impact on the City's quality of life and competitiveness.

Whether as a result of an intentional transfer of responsibilities, as with Ontario's Local Services Realignment, or as a result of more ad hoc processes, a major shift of responsibilities to the city level of government is taking place.

The Right Tools Will Make a Difference:

The City's assets and quality of life must be protected. The federal and provincial governments cannot afford to turn their backs on the challenges facing the City. However, the challenges are becoming more and more difficult to meet with the legislative and financial tools at the City's disposal.

In addition to the Canadian studies already referred to in this report, the importance of sustainable cities has been recognized internationally.

  • The International Union of Local Authorities (IULA) 1993 "Toronto Declaration" called for greater local and fiscal autonomy. Toronto City Council endorsed this declaration and several governments around the world have used the declaration as a guideline in the preparation of new local government legislation.

  • In June 1996, during the Habitat II Conference in Istanbul, Canada joined other countries from around the world in signing the United Nations Declaration on Human Settlements. The Declaration recognized the need to change the legislative and financial capacity of municipal governments to enable them to meet growing responsibilities for human settlement issues.

The Right Tools are Making a Difference Elsewhere:

Like other large cities around the world, Toronto must be equipped with:

  • the powers to find solutions to its problems; and

  • access to sufficient, suitable and sustainable revenue sources to meet its responsibilities.

The powers and revenue sources of a number of cities in Canada, the United States and elsewhere were reviewed to understand how other jurisdictions have dealt with these needs. The findings are summarized in the Background Report entitled "Comparison of Powers and Revenue Sources of Selected Cities". Several key trends are evident.

  • Increasingly, city government is recognized as an order of government with entrenched rights. In some cases, for example, in Brazil and many European countries, municipalities are formally recognized constitutionally. Several U.S. states provide municipalities with the option to adopt Home Rule status, which allows them to draft, adopt and amend constitutional charters and govern their own affairs independent of the state government. Many Canadian provinces have amended their Municipal Acts to give municipalities broader powers and greater flexibility. The government of British Columbia and the Union of B.C. Municipalities have signed a protocol of recognition for local government that explicitly recognizes local government as an "independent, responsible and accountable order of government".

  • Because the powers of Canadian cities depend on the political will of the province concerned, municipal powers vary greatly across Canada. Like a parent, one province can allow municipalities little discretion while another allows extensive independence. In some cases, urban areas are recognized in various ways as being different from other municipalities. For example, Vancouver, Winnipeg, Montreal and Saint John are all Charter cities. Rather than being subject to a municipal act of general application to other municipalities in the province, each of these four cities is governed by its own "stand alone" legislation, its Charter. Each Charter codifies the laws applicable to the particular city and contains powers not given to other municipalities. This type of customized legal framework reflects the uniqueness of a city and is more easily amended to reflect changing urban realities than a municipal act of general application. Please see the Background Report entitled "Powers of Canadian Cities - the Legal Framework" for more details of Charter Cities.

  • Welfare and other income redistribution programs are not funded by the property tax. While responsibility for delivery varies, the programs are generally funded by state, provincial or national governments.

  • In most countries, there is recognition of the importance of vibrant cities to the national economy. National government funds are dedicated to the maintenance and expansion of urban infrastructure. The "Big Cities Policy" in the Netherlands channels funds from the central government to the Cities of Amsterdam, Rotterdam, Utrecht and The Hague for the construction of major infrastructure, house building, public transportation, improving quality of life in urban areas, economic development and job creation.

In recent years, the United States government has been investing heavily in infrastructure renewal in American Cities, using tools such as the $217 billion Transportation Equity Act for the 21st Century (TEA - 21). A study conducted by Urban Strategies Inc. showed that an American urban region comparable to the size of the City of Toronto would qualify for approximately $127 million annually under TEA - 21 and other U.S. federal government urban investment programs. An American urban area equivalent to the Greater Toronto Area would be eligible for a quarter of a billion dollars under these programs.

  • In Europe, the United States and some parts of Canada, a fixed share of senior government revenues is earmarked for municipalities. In Germany, local governments receive fifteen percent of national income and wage tax revenues. Manitoba allocates revenues from two percentage points of the personal income tax and one percentage point of the corporate income tax to municipalities in the form of a per capita grant. The Agence Metropolitaine de Transport (AMT) in Montreal and the Vancouver Regional Transit System (Translink) are partially funded by a dedicated share of revenues from the provincial gasoline tax in Quebec and British Columbia respectively.

How Does Toronto Compare?

Examples of these trends are found across Canada. Several Canadian provinces are redefining the role of their city governments and empowering them to suit the demands of the twenty-first century. This change is occurring from British Columbia to Newfoundland but, so far, not in Ontario. This means that Toronto, while the largest Canadian city, has less autonomy than many of its competitor cities and other Canadian municipalities.

  • Toronto has limited legislative powers. Toronto has twice the population of Manitoba. It has more people than all the Atlantic provinces combined. Yet, unlike Montreal, its Council does not even have the power to raise money by mortgaging an asset.

  • Toronto has fewer revenue options.

  • Toronto experiences little federal government involvement, primarily because of the inability to work through the federal-provincial relationship.

  • Toronto lacks a formal voice on critical issues. The City government is often not consulted on the development of federal and provincial policies and actions that have a profound impact on the City.

The time is right to commence a dialogue with the provincial and federal governments about the need for a new relationship between Toronto and the other orders of government.

Back to Canadian Cities home

 

Copyright © City of Toronto 2001-2006