POL 346

URBAN POLITICS
Week Nine
Municipal Finance
November 13, 2017
Today’s Readings

• Sancton, Andrew. 2015. “Budgets, Grants and User

Fees” In Canadian Local Government: An Urban
Perspective, pp. 289-313. Don Mills: Oxford
University Press.
• Sancton, Andrew. 2015. “The Property Tax” In
Canadian Local Government: An Urban Perspective,
pp. 314-329. Don Mills: Oxford University Press.
• Slack, Enid, and Andre Cote. 2014. “Is Toronto Fiscally
Healthy? A Check-up on the City’s Finances.”
Toronto: Institute on Municipal Finance and
Governance.
Statements of Assets and Liabilities

• Show how much an institution is worth

• Assets: value of everything that is owned
• Liabilities: debts and financial obligations
• Assets – Liabilities = Net worth
• If Liabilities > Assets = Net indebtedness
• These statements provide important information
about the potential capacity of a municipality to
repay its debt.
Statements of Revenues and
Expenditures
• Report on the sources of revenue and the purposes
of expenditures for a given period of time (e.g. year)

• Annual municipal budgets are very similar to these

statements except that the statements looks to the
past and budgets look to the future.
Municipal Expenditures

• The expenditure data on page 294 (Sancton)

• Municipal expenditures are dominated by roads and

public transit, water supply and sewage, and public
protection (police and fire services).

• Only in Ontario are there significant expenditures for

“health, social services, and housing.”
Municipal Revenues

There are two main kinds of own-source municipal

revenues:
1. Property taxes
2. User fees
Municipal Budgets

There are two kinds of budgets:

1. Operating Budget
2. Capital Budget

• Provincial legislation prevents municipalities from

budgeting for operating deficits.
• Municipalities are allowed to borrow to finance capital
costs, but it is regulated by provincial governments.
• Municipal budgets are usually a reflection of the status
quo.
Budgetary Process

• The political acceptability of the budget will be

determined ultimately by the extent to which it results in
changes to property tax levels that are acceptable to the
voters who elect the councilors.

• Many aspects of the operating budget are determined by

prior commitments.

• Most municipalities are financially cautious. Compared to

their federal and provincial counterparts, Canadian local
governments are in good financial shape.
Municipal Credit-Rating

• Like all governments and corporations, the credit-

worthiness of municipalities is evaluated by credit-
rating agencies.
• Municipalities with high credit ratings can borrow
money at lower rates than municipalities with low
credit ratings.
• High municipal credit ratings are also achieved by
having diverse and stable local economies.
User Fees

• It is not possible to finance all of services by user

fees.
• Services that cannot possibly be financed under user
fees are public goods (e.g. street lighting, protection)
• Some goods cannot be provided efficiently by
competing private suppliers such as water, electricity,
natural gas. Governments either take over these
services themselves or tightly regulate the private
monopoly suppliers (Tool goods).
Setting the price
• The level of the toll in roads and public transit is a big
issue.
• Higher tolls to fully self-finance a service vs. government
subsidies?
• Average cost pricing: the municipality simply takes the
total cost of providing the service, divides it by the
number of anticipated number of users, and the quotient
is the price. (good for full cost recovery)
• Marginal cost pricing: if the service is produced on an
already built plant but it requires additions or enhanced
capacity to the plant, then the marginal cost of additional
infrastructure will be less than the average cost. (better
for both municipality and the customers)
The Property Tax

• The most important municipal revenue source

• Decisions regarding how much property tax revenue

is needed in a given year is difficult.

• The factor of growing municipality on the property

tax revenue
Determining Taxes:
Assessment and Rate
• The amount of tax payable for each individual property
owner is determined by the assessed value of the
property and by the property tax rate set by the council.
• Unlike income taxes or sales taxes, property taxes are not
levied as the direct result of any transaction.
• In Canadian municipalities, the assessment of property is
done on the basis of its market value.
• The rate is the total amount of money a municipality
needs to raise from the property tax divided by the total
assessed value of all the properties within its boundaries.
Determining Taxes:
Assessment and Rate (cont.)
• Many provinces allow municipalities to vary the rate
among different classes of property:
- single-family residential
- multi-family residential
- commercial
- industrial
• In Canada, owners of single-family residences have
received the best deal from municipalities.
Alternatives to the Property Tax

• Sales tax
• Income tax
• 2007 ruling for Toronto: the authority to tax personal
vehicle registrations, land transfers, public
entertainment, tobacco products, and alcohol served
in bars and restaurants
• Taxed only vehicles and land transfers
• Currently taxing only land transfers
Disadvantage of the Property Tax

• It is inelastic source of revenue: it does not respond

to changes in the economy unlike sales and income
taxes.
• It is unfair to the low income homeowners (bigger
percentage of household income goes to paying this
tax). Also, the senior citizens.
• It does not tax non-residents (commuters and
tourists)
• Yet, it is the financial bedrock of Canadian
Municipalities.
 Thank you.
Questions and Comments?