Ballad Group

Alberta’s Municipalities to Feel the Fiscal Strain

Recently, Alberta’s provincial government released its budget and economic projections for the coming fiscal year and beyond. As was widely anticipated, it was acknowledged for the first time that the pace of deficit reduction would be much slower than previous forecasts, reflecting the marked shift in economic realities posed by the COVID-19 pandemic: economic output in Alberta contracted by a record -7.8% in 2020, placing enormous pressures on households, businesses and public services across the province. The provincial government’s focus on ‘protecting lives and livelihoods’ provides continued funding for essential services while attempting to mitigate the effects of an already-severe downturn.

Even with the provincial government pushing out its target timelines for returning provincial finances to balance – originally set for FY 2022-23 – fiscal consolidation is expected to proceed over the coming years: the deficit is forecast to peak at over $20 bn (6.6% of GDP) in FY 2020-21 before falling gradually to reach $8 bn (2.1% of GDP) by FY 2023-24, with this relying on expenditure restraint, the reversal of pandemic-related recovery and stimulus measures, and improving tax receipts as the broader economy picks up (Figure 1). Correspondingly, elevated deficits in the near term will add to the province’s debt levels, with taxpayer supported debt rising from $98 bn in FY 2020-21 to $133 bn in FY 2023-24.

While pandemic-related supports and stimulus measures will recede going forward, the province’s ‘ordinary’ expenditure is expected to grow at an average rate of 1.5% annually in the coming three-year period: operating expenditures to meet day-to-day needs comprise over 80% of total government spending and are set to grow by 0.8% annually, while capital spending is set to grow by 5.9% annually, albeit with an overwhelming proportion of this dedicated to the expansion of Calgary and Edmonton LRT systems. Growth in ‘ordinary’ expenditure is relatively modest given that nominal GDP is forecast to rise sharply throughout the same period, with this pointing to expenditure restraint and steps the government is taking to reduce the size of Alberta’s public sector relative to the economy.[1]

Overall, Alberta government spending is projected to fall in relative terms from 18% of GDP to 15% of GDP during the period. Thus, while the province’s overarching fiscal targets have been scaled back, the broader thrust of September 2019’s MacKinnon Report and its push towards achieving greater efficiencies in government spending remains firmly in place. Indeed, once this most acute phase of the COVID-19 pandemic has passed it is expected that further plans to achieve a balanced budget will be released. Given this government’s stated aversion to tax increases, additional pressure on the spending side can be anticipated.

Within these shifts at the aggregate level lie significant implications for Alberta’s municipalities which face growing demands on infrastructure and locally delivered services. Municipal budget challenges will increase further in the near term as the province seeks additional costs savings, with municipal funding envelopes set to fall sharply (Figure 2).[2] The combined provincial and federal support to municipal infrastructure projects is expected to average $1.9 bn annually, with this including over $0.7 bn in investment earmarked for Edmonton and Calgary LRT service expansions.[3]

After separating out LRT investment, support for municipal infrastructure is actually set to decline by over one-half (55%) in the coming period. The decline is largely attributable to the Municipal Sustainability Initiative (MSI) which accounts for over half of municipal capital funding (excluding LRT projects) and provides for building and maintaining local infrastructure projects (roads, bridges, wastewater treatment, etc.). After increasing to $1.2 bn in FY 2021-22, MSI funding is set to fall to just $485 m annually, with the province setting aside $375 m for a separate Economic Recovery Capital Envelope.[4] Overall, these reductions in capital funding for municipalities – particularly for municipalities in rural Alberta – place significant pressure on their capacity to meet infrastructure demands.[5]

Municipalities of course have other means of raising finances in order to bridge this gap, including through raising property taxes or charges and levies. Indeed, part of the rationale for reducing the provincial government’s contribution was that municipalities were estimated to have additional headroom for raising taxes rather than relying on grant funding (MacKinnon Report, 2019). However, any such capacity for tax increases has been significantly eroded by the economic challenges that have pushed the province’s unemployment rate above 10%, while over 20% of businesses were still in danger of closing permanently as recently as January (CFIB, 2021). In fact, many municipalities have offered deferrals for households and businesses in paying their property taxes, reduced or eliminated fees, and launched microgrants to support their business community. Furthermore, the provincial government has encouraged municipalities to match its own commitment to maintaining stable tax rates (Budget 2021).

Average residential (5.6%) and non-residential (11.9%) tax rates have remained broadly stable in 2020, even as assessment values have likely come under pressure, especially on the non-residential side (Figure 3). As a result, the capacity of municipalities to source these funds from their local tax base is shrinking, with many organizations already looking to municipalities for funding supports rather than new increases to fees or taxes. In view of these mounting pressures on the revenue side, it is likely that municipalities will once again have to look to expenditure efficiencies and service reductions to maintain longer-term viability.

In some cases, these challenges are compounded by non-payment of commercial property taxes as almost all economic sectors have come under pressure and companies seek out relief. This has been especially pronounced in Alberta’s oil and gas sector (more on this in our next issue) due to headwinds facing the sector in recent years. Rural Municipalities of Alberta (RMA) estimates that among its members there was some $245 m outstanding in 2020 (up from $173 m in 2019) relating to non-payment of property taxes from oil and gas companies, with around $100 m of this related to companies that continue to operate. This equates to around $3.5 m per member municipality and is continuing to grow, leaving municipalities with limited means to recoup these debts within the current legislative framework.

Taking all of these factors together, the economic and fiscal realities facing Alberta’s municipalities – much like for the provincial government – have changed markedly from pre-pandemic expectations. While growth is returning and there are undoubtedly efficiencies that can be found, municipalities will face significant hurdles in bridging the funding gap left by reduced provincial support while still ensuring that Alberta’s infrastructure remains a source of competitive advantage. Thus, the provincial government’s request for no tax hikes in order to support economic recovery is challenging in an environment in which municipalities may be left with little alternative. While we remain steadfast in our belief that Albertans enjoy a bright future in the post-pandemic period, there is a risk that the intended cuts to municipal infrastructure supports may produce the very outcome that the provincial government has sought to avoid: tax increases at the local level during a period in which residents and businesses are already experiencing significant financial hardships.

The Ballad Auger is written by Research Analyst, Alan Gilligan.

[1] As an illustration of this point, 1.5% annual growth in ‘ordinary’ expenditure for the coming period compares with 4.1% annually between 2010 and 2019 (Statistics Canada, Table: 36-10-0450-01, General Government Expenditure).

[2] Capital funding envelopes for Alberta’s municipalities appear particularly vulnerable to provincial spending cuts given that the municipal capital stock in Alberta is over 80% higher than the national average, while per capita spending on municipal infrastructure is 20% higher (MacKinnon Report, 2019).

[3] This figure is the combined total of: the Clean Water and Wastewater Fund (CWWF), Edmonton and Calgary LRT, Federal Gas Tax Fund, First Nations Water Tie-in Program, Green Transit Incentives Program (GreenTRIP), Investing in Canada Infrastructure Program (ICIP Projects), Municipal Sustainability Initiative (MSI), Municipal Water/Wastewater Partnership, New Building Canada – Small Communities Fund, Public Transit Infrastructure Fund (PTIF), Regional Water/Wastewater Projects – Water for Life, and Strategic Transportation Infrastructure Program.

[4] The Municipal Sustainability Initiative (MSI) will be replaced by the Local Government Fiscal Framework (LGFF) from FY 2024-25 onwards. The annual funding base level under the LGFF has also been reduced from $860 m to $722 m once it begins.

[5] Beyond capital spending, budget documents largely show the province maintaining funding at current levels across other programs for municipal finance (e.g., the Grants in Place of Taxes program).