The Context and Challenges for Canada’s Mid-Sized Cities

Abstract

All Canadian cities face fiscal and governance problems unique to their individual sizes, economies, housing situations and population demographics. This paper examines how mid-sized cities, with populations between 300,000 and two million, can strive to innovate, to act autonomously and to implement complex policies and programs within larger constraints — capabilities of which other levels of government need to be more cognizant. Yet, while provincial and federal regulations would seem to often block mid-sized cities’ capabilities for policy-making, they also offer a solid basis from which to operate. Property taxes provide stable revenue sources while constraints on borrowing mean protection for cities’ credit ratings along with access to capital markets. The challenge is forging a workable balance between constraint from without and a move toward autonomy from within.
Municipal governments in Canada typically maintain balanced budgets, but they are also subject to restraints on transfer payments imposed by their provincial governments. How the cities then allocate that money is determined by various factors. These include whether they have large populations of immigrants or the elderly to serve, the basis for the local economy — such as whether it is fuelled by resources, manufacturing or service industries — the degree of homelessness, relationships with public-sector unions, and the costs of compliance to federal standards for such things as wastewater. Unfunded liabilities may also put pressure on a city’s payroll and create an actuarial deficit for its pension plans, resulting in tighter provincial scrutiny.
A city’s fiscal health can be assessed by the ways in which it meets the basic criteria of sustainability, flexibility and vulnerability. Sustainability measures how

well a municipality maintains its financial obligations to creditors and the public via the services it provides. Flexibility entails how much it can increase its levels of debt and taxes, while vulnerability reflects the way the city is affected by provincial limits on transfer payments and outside factors beyond its control that influence its economy.
Cities do have room to innovate within their provincial and economic constraints, however. They can move away from their reliance on property tax revenue by shifting to alternatives such as a greater reliance on user fees or they can piggy-back on taxes imposed by other levels of government where these are permitted. Many of these options have yet to be explored.
Ironically, while the municipal level of government is viewed as being at the bottom of the hierarchy of governments, many city governments are larger, more innovative and more versatile than the provincial governments that oversee them. Municipal officials have as much expertise in policy-making as do their provincial counterparts. In fact, own-source revenues, such as user fees, licensing and investments in many large cities amount to 90 per cent of operating monies, making those cities less dependent upon which way the provincial wind is blowing when it comes to transfer payments. They thus have more room to innovate and to develop programs specific to their demographics and to the area’s economic health.
It falls upon provincial and federal governments to recognize what municipalities are capable of achieving, and to make appropriate legislative and regulatory changes that will permit more innovation and policy-making locally. Loosening the constraints under which cities operate will create the environment for further improvement and innovation in Canada’s municipal governments.