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May 2019 | May Issue

Building a Field of Dreams: The Risk to Municipal Fiscal Sustainability in Ontario
In Conversation with Stephen VanOfwegen, Commissioner of Finance, CFO, Region of Peel
Municipal revenue generation has been a consistent topic of frustration for municipalities across Canada. Communities are becoming progressively more dependent on property taxes and development charges for municipal revenue generation, creating a heightened risk to municipal revenue sustainability. The Region of Peel and The Mowat Centre partnered to research this risk and to analyze new trends emerging in the field of revenue generation, with a specific lens on revenue tools in a digital age. The report, “Rethinking Municipal Finance for the New Economy,” was released in April of this year. PSD’s Sloane Sweazey spoke with Stephen VanOfwegen, Commission of Finance and CFO of Peel Region, to discuss the findings of the Report and to speak to the current state of municipal finance in Ontario.
 
Can you provide a brief summary of municipal government revenues in Ontario right now and why there is a need to modernize municipal revenue generation?
 
Under the Municipal Act, we have two core sources of revenue – four if you include user fees and senior levels of government subsidies and grants. However, the two primary revenue sources are property taxes and development charges, both of which are fees related to how land is consumed and used. That’s all we have and so, as municipalities, we are quite limited in the tools available to us to generate revenue. The legislative framework for municipal revenue generation in the Province of Ontario is one of the most restrictive. 
 
There are a handful of various tools proposed in The Mowat Centre Report, as well in literature in general, for some time now. These include the municipal sales tax, municipal income tax, and dedicated fuel tax. How viable do you believe these options really are?
 
As I am sure many are aware, AMO (Association of Municipalities of Ontario) has proposed a one percent increase to the Provincial sales tax. Last election, no provincial party was willing to go down that path – both senior levels of government are experiencing their own fiscal challenges. In response, our recommendation to council is to educate senior levels of government on the challenges faced by municipalities in Ontario due to 19th century revenue tools.  We will be working with AMO and FCM (Federation of Canadian Municipalities) to bring awareness to the risk of municipal fiscal sustainability as a result of being overly reliant on fees related to how land is consumed and used.  
 
The socio-economic study that we undertook with The Mowat Centre revealed that municipalities will not be sustainable in the existing framework and taxes will not be affordable in the long-term. If we look south of the border, we see municipalities that fail. I do not think that either senior levels of government want to see municipalities fail. There are options that are out there, but I don’t think any senior level of government are open to those options when they’re dealing with their own fiscal house. This is a long-term issue and the key is truly educating them. Municipalities need a new relationship with the Provincial and Federal governments and the ability to share in Canada’s prosperity and growth more equitably.
 
“The reality is, as we’re moving to a digital economy, to intelligent manufacturing, to artificial intelligence, how and when infrastructure is being consumed for employment looks vastly different than when we put the infrastructure in place 20 years ago.”
 
What exactly would you be educating the senior levels of government on? 
 
The first step is helping them understand that municipal fiscal sustainability is at risk if we do nothing. We cannot put our head in the sand and hope for the world to change. Over the period of 2002 to 2017, municipalities were required to plan and service infrastructure for growth, based on provincial forecasts. And Peel, like most municipalities, put the investments in – as I like to call it: “Building a Field of Dreams,” in the hope that employers will come in the same form that the Province and thinkers from 20 years ago thought would happen. The reality is, as we’re moving to a digital economy, to intelligent manufacturing, to artificial intelligence, how and when infrastructure is being consumed for employment looks vastly different than when we put the infrastructure in place 20 years ago. 
 
In Peel, we borrowed $1.4 billion to fund the “Field of Dreams,” and today we are $838 million short on non-residential development charges. We expected to be short a small amount, but we are not getting the same number of jobs outside the City of Toronto. Most significant is how land is consumed by new jobs is incredibly different. For example, people do not shop in shopping malls anymore; you go online and a truck shows up at the front door and leaves packages. Shopping malls pay a lot of property taxes - the Amazon warehouses pay a lot less and they do not need as much space. So we’re not building a lot of new shopping malls anymore – those are development charges that we could have expected to materialize based on planning 20 or 30 years ago.
 
Do you find as revenue tools change and evolve, your team of municipal finance personnel and their expertise are needing to change as well?  
 
It is becoming increasingly important that the role of a CFO be more of a strategist and a catalyst, and it doesn’t matter whether it is in municipalities, the Province, or even the private sector. We must help to drive change or support change that the organization has to make and improve the ability to see long-term trends.
 
We have a role to manage the books, but increasingly we also have to support council decision-making and provide long-term perspective insofar that we can anticipate what might be happening in the future. In this way, and through council, we can bring forward policy and advocacy options to senior levels of government. I think that the role of municipal finance practitioners has grown in its importance over time.
 
In your view, what is the biggest difference in terms of revenue generation between single tier municipalities and regional governments?
 
Regardless of municipal structure and regardless of location, the change is happening, although impacts will be a little different in growth and non-growth municipalities. In rural Ontario, you are seeing bank branches leave. Online banking is now present reality and you are not seeing that footprint of bank branches expanding the way we saw 30 years ago. That’s the reality that affects all municipalities regardless of municipal structure. 
 
What global revenue tools have you come across that you are envious of as a CFO of an Ontario municipality?
 
Taxes are emerging surrounding the digital economy. Airbnb is an example: a hotel pays a commercial, non-residential tax rate. But Airbnb’s are located in residential buildings and there are a lot of people using them as a business, not just a one-off bedroom they are renting out in their house. That is, a lot of people are using it like a hotel, but they are paying lower tax rates. 
 
Toronto and Ottawa, and soon Mississauga, are all moving forward with applying a hotel tax, and Airbnb is open to working with them. That’s an emerging area. For the municipal sector, what you want is for revenue to grow with the economy to the same extent that the Provincial and Federal governments’ revenues do. Right now, because of the tools available to us – namely the taxes being dependent on how land is consumed and used – our revenues do not grow with the economy. 
 
 
STEPHEN VANOFWEGEN has worked in the public sector for over 30 years. In his present role as the Commissioner of Finance and Chief Financial Officer for the Region of Peel, Stephen is responsible for ensuring that Peel’s resources are optimized to achieve a positive return on impact for the residents,  businesses and taxpayers. As of March 2017, Steve also took on the role of Acting Commissioner of Digital and Information Services. In this role, Stephen enabled the team to establish a new digital strategy that will lead the Region’s shift towards “modern government” and continue to act as the foundation of Peel’s innovation focus going forward. Stephen is a Chartered Professional Accountant (CPA), Certified Management Accountant (CMA) and a member of the Municipal Finance Officers Association (MFOA) and the Association of Municipal Clerks and Treasurers (AMCTO).