The challenges facing municipalities on the infrastructure front have been exacerbated by inefficient use of their existing - albeit limited - tools and powers. Reforming property tax systems, pricing services more in line with the cost of service provision, better application of land-planning strategies to reduce sprawl, stronger coordination of services across municipalities in order to enjoy economies of scale, and improved management of the billions of dollars of public assets are all on the "to do" list. And, perhaps most importantly, many municipalities - particularly smaller ones - have not made optimal use of debt financing, with many opting to fund infrastructure almost exclusively from non-borrowed sources. Maintaining a very low debt-load may be a laudable goal, but if it comes at a cost of foregoing or delaying capital projects because non-debt sources of financing aren't available, then a low-debt strategy is counter-productive. Besides, a healthy level of borrowing passes the test of equity, since benefits, which are normally consumed over the life of several decades, are matched with the costs.
In any event, better use of debt and other funding vehicles currently at the disposal of municipalities will only go so far in providing them with adequate resources to effectively take on their challenges. As we argued in the April 2002 report A Choice Between Investing in Canada's Cities or Disinvesting in Canada's Future, municipalities require increased administrative flexibility and access to additional sources of taxation above and beyond the property tax. For example, a change in provincial legislation that would offer local governments the power to levy a gasoline tax over a commuter area on the same base as the province - and where the municipality would set the rate - passes the tests of administrative efficiency and accountability.
South of the border, municipalities not only have access to a larger number of tax sources, but a number of other types of innovative instruments that support debt-financing and the re-development of poverty-stricken and/ or contaminated areas. These vehicles - which include tax-exempt bonds, revenue bonds, tax-increment financing, infrastructure banks and enterprise zones - are reviewed in Part II of the report. In short, some of these arrangements deserve far more consideration than others do, while none represent a magic bullet. But, apart from tax-exempt bonds - which should be left on the shelf given their inherent flaws - these approaches to financing infrastructure may prove useful on a case by case basis. Thus, Canadian municipal governments should at least be given the authority to decide when their specific situations warrant them.