The next is harder than the last

February 14, 2015

There is a bit of a myth about municipal budgeting in Ontario.

Unlike the federal or provincial governments, local governments cannot carry an operating deficit.  They can use debt to pay for capital projects like roads and water pipes but not to pay to plow those roads or pump water.  If they overspend their operating budget, they must address that deficit in the next year’s budget.

However, there are ways that this financial discipline is eroded.

The first is to use cash reserves to meet revenue needs.  This is not without merit – it depends on the circumstances – but it does push off the problem to the next year – a type of “deficit”.

Another is to send less money to the capital budget to cover infrastructure renewal.  This only serves to increase the infrastructure gap which is a shortfall – a deficit – in funding.

And another way is what we are seeing proposed in Toronto (Toronto to balance books by borrowing from own capital budget) to address an $86-million hole in the proposed 2015 operating budget.  This accomplishes the same thing – it pushes off the problem to the future while hoping for better days.

These tactics are used to meet election promises.  They are risky because most municipal operating budgets have been scraped so close to the bone that they hover in the realm of “penny-wise but pound-foolish” decision making which can come back to bite you.  Sustained savings will require long-term (i.e. multi-year) and transformative changes in the way local governments do business.

The one thing I know about municipal budgets – the next one is always harder than the last.