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Bridging the Municipal Funding Gap series: Problems on the horizon

With the pressure increasing to provide more services and replace aging infrastructure with a shrinking pot of cash, Paul McLauchlin, president of the Rural Municipalities of Alberta, said there is every possibility rural communities will have to dissolve at a higher rate.
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Municipalities across Canada are struggling to continue to meet the needs of residents and replace aging infrastrucutre. Dr. Enid Slack of the Munk School of Global Affairs and Public Policy, who is an expert in municipal finance, said one of the challenges local governments face is raising property taxes, which is a very "visible tax." SUPPLIED/Photo

Every year, more small communities in the province are having to hand in the keys and close up shop, letting the neighbouring community take over running the town.

Right now two communities in the province are considering joining with their neighbours — the village of Halkirk and the village of Warner — due to such things as desperate financial situations and crumbing infrastructure.

Paul McLauchlin, who has spent 14 years as a municipal politician for the council of Ponoka County and is currently serving as the president of the Rural Municipalities of Alberta, has noticed the uptick in communities undergoing the viability process.

“I have every expectation that this will probably increase,” McLauchlin said.

With the pressure increasing to provide more services and replace aging infrastructure with a shrinking pot of cash, McLauchlin said there is every possibility rural municipalities will have to dissolve at a higher rate.

“We're not at that stage yet but that is the worst-case scenario for a rural municipality,” McLauchlin said.

Across Canada, infrastructure deficits are estimated to be high, with the cost to replace things such as roads, bridges, and water services sitting at more than $150 billion. The Federation of Canadian Municipalities estimates that municipally-controlled water and wastewater facilities alone will need more than $50 billion to renew infrastructure that is in poor shape.

Municipalities are responsible for 60 per cent of the infrastructure in Canada but collect fewer tax dollars than other orders of government, leaving them in a position to rely heavily on support and grant funding from their provincial and federal counterparts.

McLauchlin said it is a slippery slope to rely on grant-based funding for capital projects, such as building a community centre, bridge, or library, because the moment you complete the construction of the project, communities must immediately start saving to replace that infrastructure.

Some communities could save for 40 years and never come up with the funds to replace the aging infrastructure, because they didn’t have the tax base to come up with the money to build the project in the first place, which leaves them relying on unpredictable grant funding to repair, maintain, and replace the project.

“You're basically on a treadmill, and it's very difficult to get off that treadmill,” McLauchlin said.

“You get into a really tough position in that perspective because you'll never be able to build that reserve for capital replacement fast enough with other fiscal constraints that you're having as a municipality.”

Instead, communities are left to “spin the wheel of grants” McLauchlin said, and hope they get lucky enough to score funding from another level of government to replace the roof of the recreation centre.

If grants disappear or a population shrinks, communities can be left in a dire financial situation with no solution.

In recent years in Alberta, grants to municipalities have shrunk. The Municipal Sustainability Initiative program, which allocated grant money to communities for capital projects, was cut by an average of 25 per cent over the next three years during this year’s provincial budget. With that shrinking funding municipalities have to manage 75 per cent of all the roads and 66 per cent of the bridges in the province. 

This drastic cut to municipal cash flow left communities reprioritizing what projects can go forward, with the need to focus on funding core infrastructure, such as roads, bridges, and water services.

And while communities must constantly squirrel away money to replace projects they know they must save for, sometimes they receive the shock of having to pay a new bill or lose a funding source because of changes made by the federal and provincial governments.

This year, after five years of negotiations, the federal government and RCMP came to a deal which would see the salaries of the police force, which has one of the lowest pay scales across the country, be raised. The deal included retroactive pay increases for the staff.

But the cost of the RCMP, which is the force that polices the province outside of major urban communities, is split between the federal, provincial, and municipal governments, leaving municipal governments footing a large bill from a deal they didn’t make.

The Alberta Urban Municipalities Association is estimating municipalities will pay a cumulative $80 million in retroactive pay, while larger municipalities will pay a total of $60 million, as the maximum salary for a constable is going up from $86,000 to $106,000.

Barry Morishita, mayor of Brooks and former president of AUMA, said the retroactive pay would cost Brooks $700,000 in one-time back pay, which is the equivalent of a tax increase of five-and-a-half per cent.

“Now we've got plans to deal with that we should be we should be OK to deal with that, but it's still money that would be used elsewhere ... and I know obviously the more members you have, the more money, it is,” Morishita said.

Local governments regularly face the downloading of costs onto them or the removal of a funding source.

In recent years many have seen cuts to the grants they use in place of taxes the provincial government pays in lieu of property taxes on their buildings; a larger share of provincial fine revenue removed; increasing regulation costs for wastewater services; downloaded costs of forensic lab work; and most recently a cut to provincial support for disposing of hazardous waste in communities.

All of these costs layer on top of municipal increases to put financial pressures on local governments, who can’t run a deficit.

In rural Alberta, budgets are being delivered huge blows as oil and gas companies fold and don't pay their property taxes, leaving a hole of $245 million in taxes across the province. The latest RMR survey on RMR (cost to repair, maintain, and replace infrastructure) shows a 42-per-cent increase in unpaid tax amounts compared to 2020, and a 203-per-cent increase from 2019. 

How to pay for it all?

With all these costs piled on local governments, they are left with few options to come up with the cash to pay the bills.

Property taxes, the main way municipalities raise funds, are a very “visible” tax, said Dr. Enid Slack, an expert on municipal finance at the Munk School of Global Affairs and Public Policy at the University of Toronto.

Some people argue that municipalities could raise property taxes more than they do, Slack said, but those taxes are very visible to those paying for them.

Income taxes are withheld from employees and given straight to the government, and most people don’t know how much they spend on sales taxes every year, but property taxes are paid regularly, and residents know exactly how much cash they are handing over.

“It's a very visible tax, and that makes it very hard to raise and to increase. So a lot of municipalities have not increased their property taxes very much,” Slack said.

In Alberta, municipalities also collect an education tax on behalf of the province while they are collecting property taxes, which takes up a portion of the tax room municipalities have.

“If the province collected education tax as part of income tax, and didn’t tie it to property, that would give … municipalities tax room to actually fund them effectively for capital replacement,” McLauchlin said.

Collecting taxes to pay the bills is important for local government finances, but smaller rural communities may struggle to maintain the tax base they are pulling from.

Many rural communities struggle with a shrinking and aging population, which means there is less money to collect in property taxes, said Kevin McQuillan, a member of the University of Calgary’s School of Public Policy who is leading a project looking into municipal viability in Alberta.

According to Federation of Canadian Municipalities, rural populations across Canada are getting older and smaller, and McQuillan said this means there is less incentive for businesses to invest in rural communities who have a shrinking workforce.

“We're now in a situation where there’s really a relative shortage of sort of young and middle-aged people who really could both drive the economy and play a leadership role within the communities,” McQuillan said.

These problems have been widespread in municipalities across Canada but in Alberta, because of the boom-and-bust cycle and extended downturn in the economy, McQuillan said the province is now reckoning with a shortage of money to pay to maintain existing infrastructure.

With local governments unable to budget into the red, they are left with options to cut services, increase taxes, slow growth, or find alternative sources of revenue.

In St. Albert, the city is considering forming a municipal energy corporation as an alternative source of revenue to stave of a 1.5-per-cent property-tax increase to make up for the current $16-million annual cash shortfall to repair, maintain, and replace the existing infrastructure in the city.

The move wouldn’t take into consideration any new growth and the funding needed to replace it in the future.

In 2018 Edmonton started grappling with a $4-billion infrastructure shortfall needed over the next 10 years, which resulted in the city reducing recreation programs offered, a plan for increased landscaping naturalization, and the creation of a strategy to improve the financial situation for single-purpose recreation centres.

But for small towns, there is no financial wiggle room. If they can’t replace critical infrastructure, they must find a way to work with their neighbours. 

If the situation gets too dire, they must fold.

While many municipalities aren’t quite at the tipping point, McQuillian said communities are looking down the road and see they will face problems if they don’t tackle their finances.

“I think a lot of them are sensing there are problems on the horizon.”

In the next few weeks The Gazette will be digging into the issue of municipal funding in a series called Bridging the Municipal Funding Gap which will explore the financial challenges local governments are facing, how they got there, and what can be done to keep them viable. 

Jennifer Henderson, Local Journalism Initiative reporter

About the Author: Jennifer Henderson, Local Journalism Initiative reporter

Jennifer Henderson is the Local Journalism Initiative reporter for Great West Media based in St. Albert, Alta.
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