On March 22, 2017 the Saskatchewan government tabled their latest budget. In the face of falling revenues from both natural resources and tax, the province had to make some hard choices. Many of these made the news (e.g. the increase in the PST), but one choice they made is only recently becoming a hot topic. In that budget, the Saskatchewan government announced that it was eliminating the grants in lieu of taxes paid to municipalities by SaskEnergy and SaskPower (it later capped the reduction). It also announced it would no longer fund libraries in Saskatoon and Regina.
SaskEnergy and SaskPower are provincial crown corporations. Because they are government entities they are exempt from paying taxes, including property taxes. However, government entities often provide what are called payments in lieu of taxes (PILT) in the spirit of fairness. After all, these government entities are ensconced in buildings within municipal boundaries and place pressure on municipal infrastructure, so the payment endeavors to help offset these pressures.
PILTs are fairly common, at least historically, but have become increasingly disputed. PILTs are also often made “at the pleasure of the government” and not required. As a result, they can and have been reduced and eliminated. Some municipalities that are home to federal and provincial governments have, as a result, been increasingly moving charges from property tax bills (like those related to sewer and water) to user fees because while these government entities are exempt from paying taxes they are not exempt from paying user fees.
While the province does appear have the power to cancel these PILTs paid by these two crown corporations, the municipalities are indicating that they were not duly informed of this decision. The budget was March 22 and the cancelled payments were due April 1. There is some credence this notion that the municipalities were not duly informed given the two main impacted municipalities (Regina and Saskatoon) had already passed their budgets, which included the payments. The province disputes the lack of communication, but the province also did not make a call to the municipalities when their budgets were publicized. So while the move by the province appears to be legal, it certainly was not executed in a way to encourage positive intergovernmental relations. Indeed much of the discourse that has followed has been eerily similar to a parent scolding their child.
One item in clear dispute between these two levels of government is how these two municipalities should respond to a sudden ~$10-$11M annual reduction in revenues. In particular, the City of Regina, which appears harder hit that Saskatoon, has proposed severe cuts to services, including eliminating holiday transit service, closing libraries, a hiring freeze, user fee increases, and an increase in the property tax mill rate to cover the shortfall.
The province, however, has balked at this, instead saying the city should pay for the shortfall from its ‘rainy day fund,’ launching a new bun fight between the City and the Province. See, like many cities, the City of Regina has a reserve fund. Reserve funds are very important to municipalities as they allow it to borrow at preferred rates, they are used to support longer-term financial plans, and they help achieve community goals. That is, they ensure that municipalities don’t have to incur large debts when taking on capital projects thereby keeping tax rates stable over a longer period of time.
The City of Regina’s reserve fund and its rules are established by by-law and its purpose is to smooth out its budgets. The reserve fund is actually comprised of operating reserves, deferred revenue, and utility reserves. While the reserve has more than $200M in it most of these funds either can’t be used for general purposes (they are derived from regulatory charges and user fees which must be solely used for cost recovery from the good, service, or right charged. I worry that the premier is not aware of this since similar restrictions are placed on these revenues at the provincial level. Perhaps he should read my groovy new book?) or have been earmarked and contractually committed to capital projects, including those pesky infrastructure projects partially funded by Ottawa or the province. In fact, only about $25M in the reserve appears to be unrestricted, sitting in the general fund reserve account. And the current plan shows that fund being exhausted by 2020 (for what, that is not clear).
Ok, well it seems like there is perhaps some room to fund this year’s shortfall through a dip into the general fund reserve if there was a willingness to cancel whatever planned spending the general reserve fund was intended to support. But that only addresses 2017. There have been clear signals that the reduction in the PILT by SaskEnergy and SaskPower will continue and may be expanded. What then? There is not enough flexibility in the City’s general reserve fund to do much more than cover the 2017 shortfall, meaning that all that would do is postpone some very hard decisions. That is, the shortfall is now structural. Structural shortfalls should not be addressed through the use of one time funds because one time funds are not structural.
So if a lowly tax economist, with some knowledge of municipal finance I might add, can figure this out in an hour or two, why can’t the province? I imagine that politics is playing a role in the response. There is, after all, but one taxpayer. The province was able to reduce its tax increases by keeping the PILTs for its own purposes. To then just have the municipalities raise taxes, putting the blame at the feet of the province, raises attribution concerns. The province does not want to take responsibility for the municipal tax increases so pointing to the reserve fund attempts to redirect taxpayer ire back to the municipalities.
Overall, the position of either of these governments is not desirable and it does not help the situation when they don’t work together to address budgetary challenges. The City, I think, would be more amenable to using its general fund reserve this year if it knew what the provinces plan was for the future with respect to maintaining the PILT and to stick to that commitment. I also worry about some of the decisions that the City is making and worry some of the service reductions are being tabled solely for political reasons themselves. If I were there I would try to get much more clear details from the City and the province on these points.