Provinces consider controversial idea of allowing municipalities to run deficits

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Provinces across Canada are pondering whether cities should be allowed to have more leeway in how they handle cash-flow deficits this year, as mayors and councils struggle with collapsing revenues from transit, parking, building fees and possibly property taxes because of the COVID-19 pandemic.

But, while a few current and former city politicians have floated the idea, many more say it’s a bad solution.

The latest province to make a move on the idea is Alberta, after B.C. loosened some restrictions on city borrowing last week.

“Our government is continuing to work with our municipal partners through this pandemic. With respect to maintaining deficits, we have heard this request, and given the circumstances, we are carefully and seriously considering it as a temporary measure,” said a statement issued this week from the office of Kaycee Madu, Alberta’s Minister of Municipal Affairs.

Ontario has said it is considering many possible steps to support cities, in response to a question from The Globe and Mail about the possibility of leeway with short-term deficits.

A suggestion about allowing cities to run a new type of deficit during the current emergency was raised in the Quebec legislature two weeks ago.

But Edmonton’s Mayor Don Iveson, like many city politicians across the country, is vehemently opposed to the idea.

“Edmonton city council strongly feels deficits are the wrong course for our city in this crisis,” said the mayor in an e-mail to The Globe. “Encouraging municipalities to run deficits could make it really difficult for communities to rebound from this crisis, and doesn’t recognize the stark financial limitations local governments already face.”

Federal and provincial governments should be supporting cities with direct aid, not pushing them into any kind of deficit financing to meet budgets that have been turned upside down by the pandemic, said Jacques Demers, the president of Quebec’s association of municipalities and the mayor of Sainte-Catherine-de-Hatley.

“Instead of deficits, government should help them so COVID is not on their shoulders,” Mr. Demers said.

And the head of the Association of Municipalities of Ontario says having cities take on debt at a time like this is the worst choice.

“We are not looking for the opportunity to have accumulated debt,” said executive director Brian Rosborough, whose organization works closely with the province on joint issues. “That’s really just about transferring the costs down the road. The aftermath is going to be changing enough already without adding debt.”

He said the province has so far been very responsive to what cities really need, which is direct aid. Early on, Ontario provided $200-million to cities, many of which have transit, public health, housing, shelters and even some long-term care homes on their budgets, to help with extra costs and revenue drops.

Mr. Rosborough said what cities really need is direct cash support as well as, in some places, economic stimulus through construction projects.

“That is the combination that works.”

B.C. was the first province to have announced some first-time measures for city finances as a result of the pandemic.

Last week, Municipal Affairs Minister Selina Robinson said cities would be allowed to borrow from their capital reserves with zero interest for five years.

As well, they will be allowed to carry debt from short-term “revenue-anticipation” loans, which typically several get in a regular year to tide them over until property taxes get paid in July, into 2021. That would result in a “cash-flow deficit,” as opposed to a planned budget deficit, which B.C. cities are still not allowed to do.

But the minister didn’t have any announcement at that time about direct aid, something that Vancouver Mayor Kennedy Stewart criticized, saying the province’s new borrowing rules would not solve the city’s more fundamental and long-term problems caused by the pandemic.

Besides city politicians not liking deficits, investment managers who buy municipal bonds also don’t like them. All the talk of deficits, potential bankruptcies and multibillion-dollar budget holes has some of them feeling anxious.

But a representative from a major bond-rating agency said he has seen nothing yet to indicate cities are getting into serious trouble, because the measures taken so far are not about allowing cities to plan for budget deficits or stretch any debt indefinitely into the future.

“If [the deficits] are temporary, if there is a sunset clause, I don’t think that would be a significant factor,” said Michael Yake, the vice-president and senior credit officer for Moody’s Investor Services in Toronto. He understands that some politicians are using “extreme language” to talk about their cities’ finances, as a way of getting political support, but it doesn’t undermine the fundamentals of city credit.

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