By law, municipalities’ operating budgets must be balanced each year: they cannot run operating deficits, and debt-service payments have priority. As a result, municipalities often have better credit ratings than provincial governments and major Canadian corporations. Yet despite infrastructure’s long life, many municipalities are cautious about debt financing, even when offered attractive matching capital grants by other levels of government.
Like homeowners facing mortgage renewals, however, municipalities will soon find that rising interest rates mean both existing and new debt will cost more, eating into their tax-supported operating budgets and causing good projects to be paused, scaled back, or abandoned. The contrast between the Canadian and American municipal bond markets is striking. The US$3.8-trillion municipal bond market in the U.S. sees more than US$400-billion in municipal debt issued each year.
The first concern is that municipalities prefer new revenue sources or transfer payment programs. The argument is that “munis” have been called an inefficient way for federal and provincial governments to fund municipal activities because lower borrowing costs may help municipalities, but they produce theoretical tax losses for other levels of government.