As Ontario rolls in tax dollars, why are its cities so cash-strapped?

The surge in revenues flowing into Ontario government coffers at a time when municipal budgets are stretched thin is reigniting debate over how cities fund their services.

Experts in municipal finance and public policy say there's a mismatch between the services cities are expected to provide and the revenues they have available to pay for them.

That mismatch becomes apparent in new figures outlined in the budget tabled last week by Premier Doug Ford's government, revealing just how flush with money the province is right now:

• Annual corporate tax revenues rose $12.5 billion between 2019 and 2022 a whopping 81 per cent increase in just three years.
• Annual revenue from personal income tax revenue rose $15 billion in that same three-year stretch, for a 40 per cent increase.

Contrast that with the far more sedate pace of municipal revenue growth: property tax revenue into all of the more than 400 cities and towns in Ontario rose by just $3.5 billion from 2017 to 2021, the latest year for which figures are available. That's a 17 per cent increase over four years.

The responsibilities that cities have in Ontario far outstrip their capacity to pay for them, says Sunil Johal, a professor in public policy and society at the University of Toronto.

"Municipalities' ability to raise revenue is frozen in time, while the costs that have been thrust upon them continue to escalate and get more complex," said Johal in an interview.

While the fiscal challenges facing cities predate COVID-19, the pandemic has made the situation more stark, says Johal.

"They're going to have to make really tough choices around cutting services, reducing services at a time when people need so many of those services," he said.

"We need to think about a long-term solution to a problem that is only getting more serious and more significant."

Municipalities in Ontario deliver not only local services including police and fire protection, transit, water, sewers and waste collection but also have roles in public health, social housing, and shelter for the homeless.

Cities have "huge expenditures, but very few sources of revenue," says Enid Slack, director of the Institute on Municipal Finance and Governance at the University of Toronto's School of Cities.

Slack says the time has come for a new conversation about the division of responsibilities between the province and municipal governments, and how to pay for those services.

"There are just so many challenges that cities are facing, in particular Toronto," Slack said, highlighting inflation, high interest rates, crumbling infrastructure, population growth and the lingering effects of the pandemic, affecting both transit ridership and demand for social services.

"We have to match up the revenue sources with the kinds of expenditures the cities are making," she said. "So if we decide that municipalities are best at providing social services, then we need to give them the revenues to be able to do that."

The last full-scale review of how municipalities are financed in Ontario took place 15 years ago.

It's far from clear that the Ford government is ready to launch such a conversation.

CBC News asked Finance Minister Peter Bethlenfalvy whether the cash-strapped status of cities suggests fundamental change is needed in how municipalities are financed.

Bethlenfalvy responded by touting the $1 billion in new funding he has budgeted to spend over the next three years on homelessness prevention, mental health and addictions. He also flagged the third-party audits of select large municipalities planned by the government.

"Municipalities have to do their part in that conversation about a financial framework," Bethlenflavy said.

"We're sitting down with them and going through their books collaboratively to say, 'Okay, what are the pressures? What are the challenges? And how can we work together municipally, provincially and federally to have a sustainable framework for the long term?'"

However, the audits in no way cover the full scope of municipal finances. The focus is on how municipalities spend their reserve funds and administer development charges, which are fees that cities levy on building projects to help cover the cost of new infrastructure.

The Association of Municipalities of Ontario (AMO) estimates the restrictions to development charges imposed by the government's Bill 23 will cost cities some $10 billion over the 10-year lifespan of the province's "More Homes Built Faster" housing supply action plan.

"Municipalities would very much like to have a conversation with this government about the fiscal framework," said Brian Rosborough, AMO's executive director.

"Whether increased investment goes toward really high-demand services like social housing and homelessness, or whether we take a look at modifying the fiscal arrangements to transfer some of the responsibility for those back to the province, we're open to either one," Rosborough said.

A fiscal arrangement with the province that is "stable, sustainable and affordable for property taxpayers" was AMO's number one request to Ontario's political parties during last year's election campaign.

One big question at play in all this: do cities need the power to levy some broader form of taxation, such as income tax or sales tax?

In a report published a year before the pandemic, researchers at the now-shuttered Mowat Institute, an Ontario public policy think-tank, said cities needed to modernize their revenue generation to rely less on property taxes.

Slack says property tax is less efficient at redistributing wealth than income tax.

"If the cities are involved in social services housing, the homeless providing those kinds of services property tax is not necessarily the best way to pay for that," she said. "An income tax is more appropriate."

At the City of Toronto, total property tax revenue has risen by an average of less than three per cent annually since 2016.

"Property taxes continue to be one of the slowest growing sources of revenue for us," said Toronto's annual financial report for 2020.