Before any progress can be made with innovations and capital grants, three things need to happen. First, granting levels have to increase for a number of cities or the point is simply moot. This is particularly important for Regina and Saskatoon, which are the most reliant of all big western cities on own-source revenue for capital (Vander Ploeg 2003).
Second, federal and provincial governments need to ensure predictability and stability in the capital granting system, and this means a renewed recognition of the fundamental rationale behind grants. Grants should not be seen as "gifts" intended to display benevolence. Rather, there is a complex economic rationale behind them. When large cities are heavily reliant on property tax, grants are necessary for vertical equity - to close the fiscal gap between a slow growing revenue source and expenditures that might be growing faster. Grants are also necessary for horizontal equity - providing more resources for cities with an insufficient property tax base. But most important, grants are necessary to control for externalities and spillovers that naturally occur in large city-regions. Grants need to flow to large cities so they can provide services to a whole host of nonresidents who pay property taxes elsewhere. Otherwise, the burden rests disproportionately on local residents. A steady and predictable flow of grants is more than "greasing" a squeaky political wheel. Grants are part of the fundamental financing of cities, and are also important for long-term planning.
Third, there is only one order of government in Canada that has the fiscal wherewithal to consider any significant and ongoing increase in capital grants. Municipalities are financially stretched, but so are many provinces. Fiscal simulations based on certain assumptions and the current dynamics in play in 2002 indicate that the combined territorial and provincial fiscal deficit could rise to $12 billion annually by 2020 with debt swelling from $242 billion to $387 billion. The federal government is in a much stronger position - a similar simulation to 2020 indicates an annual surplus of $86 billion and debt falling to $53 billion (Conference Board of Canada 2002). If increased and more predictable levels of granting are to come forward, along with a renewed commitment of their importance, then Canadians also have to work through the reality that the federal government has to play a substantial role. Assuming these things come to pass, there are three broad innovations that might be of assistance.
■ Eliminate conditionality: Moving toward unconditional block capital grants could provide a source of new revenue without increasing taxes. With conditional grants, governments spend money to create programs, review projects, file applications, negotiate agreements, and evaluate the results. Reducing such administration costs would yield new revenue in the form of efficiency and savings. From the municipal perspective, it would heighten local autonomy and also reduce the deadweight loss that occurs when local priorities are shifted. When priority needs are redirected to projects that are less desired, it results in a misallocation of resources and reduced efficiency. From an innovation viewpoint, unconditional grants would allow cities to experiment and apply the funds where they have the most impact. For example, most grants now form part of the annual "pay-as-you-go" envelope, but a city might find it advantageous to use that grant to offset borrowing costs for a desperately needed project. Another city might choose to save part of the grant in reserve, collect interest on it for a number of years, and then employ a much larger amount to fund an infrastructure project that is part of a long-term strategic plan.
Conditional grants mitigate against experimentation, but are often defended on the grounds of accountability or maintaining the provincial interest in municipal affairs. Loosening the strings, however, does not mean accountability has to end - cities can still report on the various uses of the funds. Some have defended conditional grants if they are tied to rewarding "smart growth" as opposed to sprawl. But given the advantages of unconditionality, it might be better to directly address such questions through legislation rather than indirectly through capital grants.
| SHARING THE FEDERAL FUEL TAX Recent discussions on a potential federal proposal to share with municipalities up to half of the federal government's 10¢ per litre fuel tax for infrastructure represents an innovative initiative. In most western industrialized federations, direct federal-to-local tax-sharing is rare. The degree of uniqueness, however, depends on whether the transfer takes the form of a grant that is simply tied to a specific tax source, or if it becomes real tax-sharing that includes point-of-sale considerations. Nonetheless, the mere suggestion constitutes a significant step in a new direction for Canadian federal-urban affairs (Vander Ploeg 2002c). For municipalities, the value of such a proposal is clear. The federal government collected $4.8 billion in fuel tax in 2001, suggesting a $2.4 billion transfer if half of the tax is indeed shared. Its ultimate value, however, depends on certain details which remain unclear. Will the transfer be unconditional? Will the funds be available only on a cost-shared basis like many past federal initiatives? Will all urban and rural municipalities in Canada have access to the funds or will it be restricted to certain areas with the most need? Will funds be available only for transportation-related infrastructure or for other infrastructure as well? Most important, municipal affairs is an area of exclusive provincial jurisdiction. Will the provinces have to agree, and what might be necessary to win their approval? A sharing of half of the federal fuel tax would amount to about $80 per capita on an ongoing basis. For western Canada's big cities, that could mean up to $46.2 million annually for Vancouver, $54.0 million for Edmonton, $72.4 million for Calgary, $17.1 million for Saskatoon, $15.0 million for Regina, and $50.5 million for Winnipeg. If the amounts were not restricted to transportation but could be applied across a wider range of infrastructure projects, they would fund between 14% to 20% of capital spending in Edmonton, Calgary, and Saskatoon over the next five years and just under 30% in Regina and Winnipeg. It would fund over 40% of the planned capital spending in Vancouver over the next three years. When it comes to helping close big city infrastructure deficits, the value of half of the federal fuel tax on a strict per capita basis would solve about 17% of the problem in Edmonton and around 30% in Winnipeg and Calgary. It would clear out about 50% of the infrastructure deficit in both Regina and Saskatoon. A lot of Vancouver's problems would likely be solved, as the annual amount approaches 92% of that city's annual infrastructure deficit for the next three years. |
■ Eliminate cost-sharing: Requiring municipalities to come up with their own funds to access federal or provincial funds may not be the best way to proceed, particularly when municipalities have to struggle to come up with their portion. Putting an end to cost-sharing would allow cities wider access to financing and allow them to leverage those funds with other sources.
■ Link grants to specific tax revenues: To ensure a level of granting that is sufficient and predictable, governments could pursue a more formalized system of capital grants that reflects an actual sharing of revenues. This would provide cities with indirect access to a much wider range of tax revenue that would also grow over time. This innovation is clearly starting to gain currency in Canada. The federal government is contemplating a revenue-sharing deal with municipalities based on the federal fuel tax (see sidebar). In 1999, the Province of Alberta agreed to base a new set of capital grants on a portion of the provincial fuel tax to the Cities of Edmonton and Calgary. The regional transit system in Vancouver also receives a portion of the provincial fuel tax. Governments may be hesitant to earmark specific revenues fearing a loss of flexibility, but the rationale for such a system is not the "locking-in" of an expenditure - it is revenue-sharing. Clearly, issues of accountability would remain. But that may be the trade-off required to avoid the perils of less workable options.
The most significant barrier in all of this is federal and provincial agreement to some drastic changes. These governments first need to understand that they too receive a return on capital grants. Through their various taxation mechanisms (particularly income taxes, fuel taxes, and GST) at least a portion of the grant eventually comes back in the form of tax revenue. Cities and municipalities are not the sole beneficiaries. In fact, everyone stands to benefit from a new system that is more dynamic, predictable, and open to innovation - it ensures that funds have maximum impact.