THE VERTICAL AND MUNICIPAL FISCAL BALANCES

Second Interim Report on the Committee’s Study of the Fiscal Balance between the Different Levels of Government in Canada

 Standing Senate Committee on National Finance 

SEVENTEENTH REPORT

Chair, The Honourable Joseph A. Day
Deputy Chair, The Honourable Nancy Ruth

 

June 2007


MEMBERSHIP 

The Honourable Joseph A. Day, Chair

The Honourable Nancy Ruth, Deputy Chair

 

and 

The Honourable Senators: 

Michel Biron

Grant Mitchell

Consiglio Di Nino

Lowell Murray, P.C.

Art Eggleton, P.C.

Pierrette Ringuette

*Céline Hervieux-Payette, P.C.(or Claudette Tardif)

William Rompkey, P.C.

*Marjory LeBreton, P.C.(or Gerald J. Comeau)

Terry Stratton

 

 

 

*Ex Officio members 

In addition, the Honourable Senators James Cowan and Francis Fox, P.C., were members of the committee at various times during this study or participated in its work on this matter. 

 

Research staff from the Library of Parliament:
Tara Gray
Lydia Scratch  

Catherine Piccinin
Lynn Gordon
Clerks of the Committee
 


ORDER OF REFERENCE

Extract from the Journals of the Senate of Wednesday, September 27, 2006:

The Honourable Senator Nancy Ruth, for the Honourable Senator Day, moved, seconded by the Honourable Senator Stratton:

That the Standing Senate Committee on National Finance be authorized to examine and report on issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada; and

That the Committee report no later than June 30, 2007.

After debate,

·         The question being put on the motion, it was adopted.

Paul Bélisle
Clerk of the Senate


TABLE OF CONTENTS 

Introduction 

Part I:  The Vertical Fiscal Balance

A.    Background

B.     The Major Issues

i.   Accountability and Transparency

ii.  Legislated increase in the CST

iii. Per Capita Funding

 

Part II:  The Municipal Fiscal Balance

A.    Introduction

i.   Evolving Local Government Roles and Responsibilities

ii.  Federal Involvement in Municipalities

            B.  The Major Issues

                        i.   Revenue Sources and Revenue Sharing

                        ii.  Cities and the Competitive Advantage

                        iii. Rural Municipalities

                        iv. The Federal Gas Tax Fund and Infrastructure Funding

                        v.  National Transit Strategy

                        vi. Federal Leadership

 

Conclusion  

Appendix A: Federal Government Direct Spending Measures

Appendix B: Witnesses

Appendix C: Fiscal Balance Written Submissions

Appendix D: Recommendations  


THE VERTICAL AND MUNICIPAL FISCAL BALANCES

On September 27, 2006, the Standing Senate Committee on National Finance was authorized to examine and report on issues relating to vertical and horizontal fiscal balances and to report back not later than June 30, 2007.

 

INTRODUCTION

The term fiscal balance refers to the balance between the expenditure responsibilities of the various orders of government and the ability to fund the services resulting from those responsibilities. A "fiscal imbalance" may exist, either among provinces (called a horizontal fiscal imbalance) or between orders of government (called a vertical fiscal imbalance). The current system of federal intergovernmental transfers includes both horizontal and vertical components designed to address these two aspects of the fiscal imbalance.  In addition, there are other transfers intended to support national programs.  The funding for these programs generally support targeted issues.

The Committee began its examination of the fiscal balance in the fall of 2006 when it focused on the horizontal fiscal imbalance and the Equalization and Territorial Formula Financing programs. These two programs are the federal government’s main policy tools for reducing the fiscal disparities among provinces and territories. On December 12, 2006, the Committee issued an interim report entitled The Horizontal Fiscal Balance: Toward a Principled Approach.

As the Committee noted in that report, fiscal arrangements in Canada between orders of government are complex and it is difficult to look at the federal programs that address the fiscal balance in isolation. At the time, the Committee made known its intention to study other aspects of federal-provincial/territorial fiscal arrangements, including municipal funding issues. The Committee also agreed to consider Canada’s international commitments and the effect they have on the expenditure responsibilities of governments.  

The current examination focuses on the vertical fiscal balance between 1) the federal government and the provinces/territories; and 2) between the federal and provincial/territories governments and municipalities. The Committee notes that the existence of a vertical fiscal imbalance at the federal and provincial/territorial level is still a matter of some debate. It has been argued that there can be no vertical fiscal imbalance since both levels of government have access to all major revenue sources and, beyond that, the provinces and territories have exclusive access to some tax bases.  On the other hand, many provinces and territories have maintained that they lack sufficient revenues to meet their constitutional spending responsibilities.   Conversely, the existence of a fiscal imbalance at the municipal level is less contentious: there would seem to be widespread agreement that municipalities do not have sufficient revenue sources to meet their growing expenditure responsibilities.

The Committee did not debate the existence of a vertical fiscal imbalance. Nor does this report comment at length on how roles, responsibilities and resources are allocated among the various orders of government or how they should be realigned. Rather, the Committee’s interest lay in reviewing the range of mechanisms currently used to address the vertical fiscal balance issue, and in examining the role of the federal government in addressing the municipal fiscal balance.

This review was complicated by several factors. First, the roles and responsibilities of federal, provincial, territorial and municipal governments often overlap. Funding arrangements and governance structures between orders of government differ widely across the country. In addition, the municipalities are constitutionally under provincial jurisdiction. For this reason, some witnesses suggested that if a fiscal imbalance exists at this level, it is between provincial and local governments.

The Committee believes that the federal government plays a vital role in this debate. The means that the federal government uses to address the vertical fiscal balance between the federal and provincial/territorial governments has a direct impact on the financial resources available to municipal governments.  In addition, the federal government carries out a key role in policy areas that directly affect municipalities such as immigration, the environment, aboriginals, public security and infrastructure, as well as through its social programs such as Employment Insurance, affordable housing and measures to address homelessness.

Over a seven‑week period in the spring of 2007, Committee members heard presentations by and received written submissions from various provincial and territorial governments; municipal associations, municipalities, and cities; and academics and social policy experts. Witnesses spoke about the vertical and municipal balances, their extent and growth, and shared with the Committee their thoughts about solutions to these issues. This report follows that examination and summarizes the range of views presented to the Committee. The Committee agrees with witnesses in their belief that healthy cities and communities are central to Canada's prosperity and quality of life.  Thus, this report focuses primarily on the fiscal challenges currently facing cities and communities across Canada. It starts by commenting briefly on several of the federal government’s proposed changes to the programs that are used the address the vertical fiscal balance.
 


Part 1: THE VERTICAL FISCAL BALANCE 

A. BACKGROUND

Fiscal arrangements at the federal/provincial/territorial level have evolved substantially over time.  Prior to the fiscal year 1996-1997, federal transfers for health care, post-secondary education and social assistance were made under two different programs: the Established Programs Financing (EPF) and the Canada Assistance Plan CAP. The EPF, which funded health care and post-secondary education from the fiscal years 1977-1978 to 1995-1996, was a block funding program under which each province received an equal per capita transfer. Under this program, funding was provided in equal parts through a tax transfer and a cash transfer[1]. The CAP was a shared-cost program under which, from the fiscal years 1966-1967 to 1995-1996, the federal government reimbursed approximately 50 per cent of eligible provincial social assistance and welfare program expenditures. The CAP imposed conditions on how provinces expended federal funds; for instance, the provinces were required to provide for those “in need”.

In the 1995 Budget, the federal government announced that it would be combining the CAP and the EPF to form a new block funding arrangement, the Canada Health and Social Transfer (CHST). When the CHST came into effect on April 1, 1996 provinces and territories received CHST cash and a tax transfer in lieu of entitlements under the CAP and EPF. However, the combined value of EPF and CAP cash was greater than the CHST cash amount provided to provinces and territories, reflecting the need for fiscal restraint at the time the CHST was introduced. The CAP portion of the transfer, previously distributed on a cost-sharing basis, was allocated on a per capita basis, like the EPF[2]

In April 2004 the CHST was divided into two separate transfers. Today, the primary vehicles currently used by the federal government to address the vertical fiscal balance are the payments under this split transfer: transfers for health under the Canada Health Transfer (CHT); and its transfers for post-secondary education, various social assistance and social services, and support for children under the Canada Social Transfer (CST). Both these transfers have included a per capita cash payment and the 1977 tax point transfer. Certain conditions are imposed on the cash transfer, and provinces that do not comply with these conditions may have their transfer payments reduced. More specifically, provincial health insurance plans must comply with the criteria of the Canada Health Act (universality, accessibility, comprehensiveness, portability and public administration) and must not require a contribution from users through extra-billing or user charges; nor may provinces impose minimum residency requirements on social assistance applicants. There are no special conditions for post-secondary education.

In the fiscal year 2007-2008, the federal government will provide $34.6 billion in transfers under the CHT, including $21.3 billion in cash and $13.3 billion in tax transfers.

$17.6 billion will be provided under the CST for the same period, including $9.5 billion in cash and $8.1 billion in tax transfers.

In addition to the transfers described above, there are a number of bilateral agreements between the federal government and provincial/territorial governments related to the delivery of public services.  These agreements cover such targeted areas as immigration settlement, infrastructure, agricultural spending, employee training and student loans, and economic development, among others. The federal government also provides direct funding and tax expenditures in numerous areas such as the Canada Child Tax Benefit, homelessness and affordable housing, and municipal infrastructure.  

The current funding provided under the CHT and CST, as well as other major direct federal support for provincial and territorial responsibilities, is summarised in Appendix A.

 

B. THE MAJOR ISSUES

i. Accountability and Transparency

Many witnesses appearing before the Committee raised concerns about the accountability and transparency of the CST, and its allocation to the areas that it currently supports.  They identified this as a weakness in the current system of intergovernmental transfers, in that taxpayers lack clarity about which order of government is responsible for any given public service; consequently, the taxpayer does not know which order of government to hold to account.

Nancy Peckford from the Canadian Feminist Alliance for International Action noted the difficulty in obtaining precise information on how CST funds are currently administered and spent, and whether or not these funds were being used to achieve national goals. The Cape Breton Regional Municipalities noted their frustration in obtaining information on federal transfers to the province of Nova Scotia to allow an analysis of the transfer of funding and to determine whether it is accomplishing its stated purposes. In their view, federal funding should not serve to exacerbate intra-regional disparities.

The Canadian Feminist Alliance for International Action supports reattaching designations to federal intergovernmental transfers to make the purpose of the transfers clear. Ms. Peckford also urged the federal government to re‑establish national standards for federal transfers. As she explained, when the United Nation reviewed Canada’s performance against the Convention on the Elimination of All Forms of Discrimination against Women in 2003, one of the concerns it raised was the variability in services across Canada.[3] She felt that the introduction of national standards governing  the CST would alleviate this issue. She noted that Canada tends to commit to implementing certain human rights under international conventions, as well as the Constitution and the Canadian Charter of Rights and Freedoms – such as the right to equality, liberty, security of the person and to an adequate standard of living— but does not come to terms with them in a meaningful way. In her organization’s view, these conventions require governments in Canada to ensure that social programs are adequate and consistent across jurisdictions, and meet established standards of equality. 

Other witnesses endorsed restructuring the CST along the various areas that it supports. Armine Yalnizyan of the Community Social Planning Council of Toronto suggested separating the CST into components in support of post‑secondary education, child care, social services, social assistance, child support,  and legal aid. She opined that these are discrete areas of intervention that require their own conditionality, national standards, and objectives.

While other witnesses stopped short of recommending more conditionality within the current system of federal intergovernmental transfers, many called on the federal government to focus less on jurisdictional issues and to take a greater leadership role in matters of national importance, such as housing, immigration, and the environment. This is discussed in more detail in Part II of this report (The Municipal Fiscal Balance).

As the Committee learned, the federal government has taken a different approach than what was heard from witnesses. As senior officials from the Department of Finance explained, in order to make the federal contribution to social policy areas more transparent, the federal government proposes to notionally “earmark” the CST according to provincial/territorial spending patterns. Under this approach, approximately 25 per cent of the CST will be earmarked as federal support for education, with the remainder earmarked for social programs. Officials clarified that the transfer will remain unconditional.

Senators also noted that proposed new CST funding will be subject to some as yet negotiated arrangements. Budget 2007 proposes to increase the base funding to the CST by $800 million for post-secondary education and to provide an additional $250 million through the CST to support the creation of child care spaces. According to the budget documents, these increases will take effect in the fiscal year 2008-2009, following discussions with the provinces and territories on how best to make use of those new investments and ensure appropriate reporting and accountability to Canadians.

Notwithstanding the above discussions surrounding new CST funding, witnesses and Committee members largely agreed that the federal government’s notional earmarking of the CST would fail to address their concerns.  Some Committee members do not support the imposition of greater conditionality for the CST. However, members urge the federal government to work more closely with provincial and territorial governments to provide a more complete accounting of where and how CST funds are spent, and to make this information more readily available to interested Canadians. It believes that this information will assist all levels of government in designing and implementing more effective programs. As a first step towards greater accountability and transparency, it supports restructuring the CST into two separate components. As some witnesses suggested, the federal government may wish to consider further restructuring of the CST.

 

Recommendation: That the Canada Social Transfer be restructured into two separate transfers: a transfer to support post-secondary education and a transfer to support social assistance and social services.

 

ii. Legislated Increase in the CST

As the federal government noted in the 2006 Budget Plan, when the value of transfer payments under the CHST was reduced in the 1990s, the reductions were notionally spread across the transfer’s three areas. However, when the funds were restored in subsequent years, most were specifically earmarked for health care spending. As a result federal cash transfers for education and social assistance has remained at lower levels than in the mid-1990s, even without accounting for the effects of inflation[4].  Currently, a large amount of federal support for post-secondary education takes place outside the CHT, through direct support for students and research in the form of loans, grants, scholarships and research funding and tax measures. Federal support to these areas has been growing over the past several years.

In 2004, cash payments under the CST were set to grow by nearly 3 per cent annually.  The current CST legislation, however, is set to expire at the end of the fiscal year 2007–2008. As Ms. Anderson explained, Budget 2007 proposes to legislate CST payments to the fiscal year 2013–2014, with an automatic 3 per cent annual escalator effective in the fiscal year 2009-2010[5]. This would place the CST on a similar long-term legislated track as the CHT, which has been legislated to grow 6 per cent annually to the fiscal year 2013-2014.

Many witnesses argued that the proposed 3 per cent growth rate in the CST is insufficient. Ms. Yalnizyan suggested that “the CST has been placed well behind the health transfer and these, in total, arguably are the social determinants of health, and should be equally funded”. Professor Gagné of the École des hautes etudes commerciales in Montréal was also concerned that this growth rate would prove inadequate. Professor Gagné, who served as the Co-Chair of the Council of the Federation’s Advisory Panel on Fiscal Imbalance, noted that the Panel recommended at a minimum a 4.5 per cent indexation rate for CST funds, based on very conservative assumptions. Compared to the Panel’s recommendations, the 3 per cent is not sufficient, nor are current levels of base funding, compared to what it should be to bring it back up to 1995 levels (taking into account the effects of inflation).[6]

            The Committee believes that, as the federal government has increased its funding for health care, so should it for social programs and post-secondary education. It supports  the Budget 2007 proposal to provide $800 million in additional base funding to the CST for post-secondary education in the fiscal year 2008-2009. However, it remains concerned that the federal government has not fully considered the considerable pressure its direct support for post-secondary education may place on provincial budgets (that is, support provided outside the CST). While providing direct support for students and research may relieve some of the financial pressure on the provinces, this form of spending can create new pressures by requiring considerable provincial investment in post-secondary institutions, for example on new infrastructure and ongoing operating costs. And, while the Committee supports the federal government’s decision to put the CST on a legislated long-term track, it is concerned that the 3 per cent escalator may prove to be inadequate compared to actual growth rates in provincial expenditures, particularly with respect to post-secondary education.

 

 Recommendation: That the federal government consult more closely with the provinces and territories regarding the indirect costs of federal support for post-secondary education provided outside the CST.

 

Recommendation: That the federal government consider increasing the annual escalator for the CST from 3 per cent to 4.5 per cent, effective in the fiscal year 2009-2010.

 

iii. Per Capita Funding

In 1977, the Government of Canada agreed to transfer 13.5 per cent of Personal Income Tax and 1 per cent of Corporate Income Tax to the provinces as part of the federal government’s contribution for health and post-secondary education. Since tax points are worth more in some provinces than others, it agreed to equalize the tax points on an on-going basis. According to the Department of Finance, the annual amount paid to equalize these tax points is called Associated Equalization because it is the Equalization amount ‘associated’ with the tax point transfer. The amounts are calculated and paid through the Equalization program; however, they are intended to support health and post-secondary education and as such have been included in the CHT and CST. Thus, the CHT/CST tax points have been supplemented by a cash payment of Associated Equalization to recipient provinces whose revenues from those tax points are below a certain provincial standard[7]. The Associated Equalization was also accounted for in the Equalization program, since these amounts are calculated and paid out through the Equalization system. In calculating total transfers, the total was adjusted to avoid double-counting since Associated Equalization was part of both Equalization and the CHT/CST.

One result of equalizing tax points is that per capita cash payments under the CHT/CST have differed across provinces. Some provinces have long argued that there should be one transparent Equalization program only and that, outside of that program, federal transfers should treat all provinces equally. And, as the Committee noted in its first interim report on the fiscal balance, it finds that the adjustments made to the Equalization program and the CST/CHT under Associated Equalization can be confusing and lack transparency.

As officials from the Department of Finance explained to the Committee, the federal government has responded to the concerns of some provinces. In Budget 2007 the federal government committed to moving the CST and CHT to an equal per capita basis on their renewal, effective in the fiscal year 2007-2008 for the CST. Under this proposal, all provinces and territories will receive the same per capita cash amount under the CST.  In addition to $300 million legislated increase in CST funding, the CST will be increased by $687 million year in order to provide for the move to per capita funding. In addition, certain provinces and territories will receive payments in order to protect the floor values of cash CST (and CHT) payments over a five-year transition period (see Table 1: Canada Social Transfer)[8].  

As a result of the new allocation method and the increase in the total amount of CST cash including the transitional funding, in the fiscal year 2007-2008 all provinces and territories will receive $289 per capita in cash support. This represents a $7 per capita increase in CST funding over 2006-2007 levels for all provinces, with the exception of Ontario and Alberta, which will see their per capita funding increase by $50 and $102 respectively. The reason for Ontario and Alberta’s greater increase is because under the old system, per capita payments in these two provinces were significantly lower than in other provinces due to the higher value of their tax points.  

 

Table 1: Canada Social Transfer: Cash Component

 

CST Payments (millions of dollars)

Floor Payment  Allocation

 

2007–08 status quo levels

2007–08 new levels

millions of dollars

dollars per capita

 

Newfoundland and Labrador

146

147

 

 

 

Prince Edward Island

40

40

 

 

 

Nova Scotia

270

270

 

 

 

New Brunswick

216

217

 

 

 

Quebec

2213

2220

 

 

 

Ontario

3254

3699

 

 

 

Manitoba

340

341

 

 

 

Saskatchewan.

335

284

51.3

52.2

 

Alberta

650

983

 

 

 

British Columbia

1311

1257

54.2

12.4

 

Yukon

10

9

0.6

17.9

 

Northwest Territories

6

12

 

 

 

Nunavut

10

9

1.6

50.2

 

Total

8800

9487

 

 

                     

Source: Budget 2007, Annex 4

 

Department of Finance officials also indicated that the government will introduce legislation implementing equal per capita cash support under the CHT, to take effect in the fiscal year 2014–2015 when the current legislation expires. As they explained, in the interim period, the CHT will continue to operate under the existing legislation, taking into account the value of the tax points. 

Some witnesses and Committee members expressed concern about the move to per capita transfers. As the Honourable Harry Van Mulligan, Minister of Intergovernmental Relations from Saskatchewan observed, the decision to distribute the CST on an equal per capita cash allocation, without accounting for the value of tax points, will penalize provinces like Saskatchewan with lower fiscal capacity, and shift resources from less wealthy provinces to more wealthy provinces like Ontario and Alberta. In his view, this will exacerbate the current differences in fiscal capacity between provinces. In a written submission to the Committee, the Government of Nova Scotia signalled similar concerns. In their opinion, the situation is made worse by the province’s above average costs in the area of health and the disproportionate number of out-of-province students attending post-secondary institutions in Nova Scotia.

As was demonstrated to the Committee, Saskatchewan would have received much higher CST cash than other provinces under the previous system. Under the proposed changes, Saskatchewan’s CST allocation will not increase until the fiscal year 2011-2012, despite the fact that the overall program will be growing. This can be attributed both to the province’s comparatively lower population growth rate, as well as its lower tax base: the move to per capita transfers means that the CST allocation will no longer take into consideration the lower value of the province’s corporate and personal income tax. Mr. Van Mulligan also signalled his concern with the proposed move to per capita funding for the CHT when the current legislation expires in the fiscal year 2014–2015.

Mr. Van Mulligan commented generally on the use of per capita funding outside of the CST and CHT. In his view, per capita funding in areas such as climate change and the national highway system is not justifiable as population is not the core cost driver in those programs. As an example, he noted that 9 per cent of the core national highway system lies with Saskatchewan’s borders; however, based on its population alone,  the province receives only  3 per cent of the total funding available to maintain it. In a written submission to the Committee, the government of the Northwest Territories stated that per capita funding is not appropriate for jurisdictions with small populations and for the North. They believe that fiscal transfers should be designed to recognize the different spending pressures that exist in smaller jurisdictions, where spending needs are proportionally greater than their share of population would suggest. They feel that this is of particular concern in the design of infrastructure programs, noting that in the North, infrastructure needs are driven more by the pace of development and the high costs of northern construction than by population.  Moreover, the existing infrastructure gap may be more pronounced in the North. They advocate for a more strategic approach to infrastructure investment.

 

Witnesses from the Cape Breton Regional Municipality also stated their concern about the move to per capita transfers. They noted:

 

Some principles must take priority over others if the objectives of the national programs and policies are to be truly realized. For example, while the equal per capita national health transfers may be viewed as fair to provinces and transparent for program administrators, they are inequitable for citizens in poor regions because they fail to recognize the very significant gaps that exist across Canada’s regions in socio-economic status and in health status.

 

Professor Gagné observed that while there are difficulties in per capita funding, as an allocation method, it offers certain advantages: in principle, it is fair and equitable. Further, he believes that there are greater difficulties with other allocation methods. For example, formulas which take into account needs and costs can become excessively complicated and can have undesirable public policy outcomes.  He noted that in practice, however, the federal government increased the disparities in the federal transfer system when it moved to per capita funding since it transferred proportionally more money to Alberta and Ontario.

Associated Equalization will continue to be paid under the new fiscal arrangements, but, as Professor Gagné noted, this will now take place within the Equalization program. He observed that by transferring the Associated Equalization program to the Equalization program, the federal government has also increased the disparities within the country. As explained, this is because in doing so, the government has implicitly moved from calculating Associated Equalization payments using the top-province standard to using the ten-province standard under which Equalization payments are now calculated[9].

The Committee appreciates that the government is taking steps to ensure that no province or territory is unduly affected by the move to per capita funding over the short-term.  It agrees that the Equalization program should be the primary vehicle for equalizing fiscal capacity among the provinces. However, the Committee is concerned that the move to per capita funding for the CST and CHT could have negative consequences for program and service delivery, particularly in rural areas and the less‑populated provinces/territories. In its view, transfers under the CHT and CST should continue to recognize the significant differences that exist between regions across Canada.  

 

Recommendation: That a federal/provincial study be undertaken to determine the impact of per capita cash transfers for the Canada Social Transfer and the Canada Health Transfer, and that the government report back before the end of this fiscal year.


Part II: THE MUNICIPAL FISCAL BALANCE 

A. INTRODUCTION
           
The fiscal imbalance debate plays out very differently at the municipal level. Municipal governments do not have the same taxing powers as the federal and provincial governments; they are constrained by provincial governments in terms of what revenues they can raise, how much they can borrow, and what expenditures they are required to make. 

As the Committee heard, while there would seem to be widespread agreement that a municipal fiscal imbalance exists, the extent of the imbalance is difficult to measure. For the most part, municipal budgets are balanced since most are prohibited by provincial statutes from running operating deficits. Municipalities may borrow for capital expenditures but debt charges relative to municipal expenditures have been declining.  That is because, in part, interest rates have fallen, but also because municipalities have reduced their debt loads to avoid servicing debt.  

According to Dr. Enid Slack of the University of Toronto, this apparent financial health has been achieved at the expense of municipalities’ overall health-- that is, at the expense of the services and the infrastructure provided at the municipal level[10]. Witnesses noted that the most visible example of the municipal fiscal imbalance is the growing infrastructure deficit[11]. Mr. Glen Hodgson of the Conference Board of Canada noted that estimates for the infrastructure deficit in Canada range from $50 billion to $120 billion, based only on current needs. Representatives from the Association of Municipalities of Ontario told the Committee the infrastructure deficit is continuing to grow by billions of dollars every year, which, in their opinion, is compromising  municipalities’ ability to provide safe, clean water, to protect the environment, and to provide reliable transit and efficient transportation networks.

After hearing from cities, municipalities, and municipal associations from across Canada, it is clear to the Committee that many local governments are struggling with current fiscal arrangements. Faced with limited resources and growing responsibilities, they question their financial sustainability. They told the Committee that to address their challenges, they require an expanded set of tools – including greater decision-making authority and access to a broader set of financial instruments. They also support greater federal involvement, including more stable, long-term federal commitments and policies in areas of national interest.

The City of Toronto offers a case in point. In a written submission to the Committee, the City told the Committee that it has been forced to use operating surpluses and one-time revenues such as surplus land sales to help fund infrastructure repair and maintenance, and to use reserve funds to alleviate annual budget pressures.  As its discretionary funds are almost depleted, without new funding arrangements with federal and provincial governments, the City believes that it will be forced to begin to cut municipal services.

As noted earlier in this report, the role of the federal government in this debate is complicated by the fact that under Section 92 of the Constitution Act, 1867, municipal or local governments are under the exclusive jurisdiction of the province.  In addition, there are other factors to consider. Across the country, the responsibilities of local governments vary greatly; and, within any given province, there is a distinct rural/urban divide. The political and administrative structures of local governments also differ greatly[12]. For this reason, the Committee believes that national solutions must be flexible in order to meet the distinct needs of individual local regions whatever form they may take, as well as to continue to respect provincial and territorial jurisdictions.  

 

i. Evolving Local Government Roles and Responsibilities

Historically, the purpose of a municipal or local government was to provide local services such as streets, water and sanitation, parks, garbage collection, emergency services, and some social services. These services benefited local residents and could be funded from locally-generated revenue. Over time, municipal roles evolved to include a much broader set of responsibilities, many of which have traditionally been the mandate of the provincial and federal governments (refer to Chart 1:  Local Government Expenditures by Category).

 

Chart 1:  Local Government Expenditures by Category, 2005

 

Source: Statistics Canada

Note: This chart refers to municipalities, municipal libraries and museums, municipal water and sewer services, and municipal boards, commissions and special funds. It excludes school boards. 

In many instances, the expansion of municipal responsibilities occurred in the 1990s when, in response to reduced transfers at the federal level, certain provinces downloaded responsibilities to local governments. This included transit, child care, education, social housing, airports, ports, and property tax assessment. In other cases, governments reduced transfers to local governments or withdrew their own financial support, in effect increasing municipal funding requirements. Other witnesses noted the negative affect that downloading has had on the more vulnerable segments of society. Downloading has had some positive aspects: witnesses noted municipalities may be able to deliver some services in a more effective and efficient manner than the provincial government simply because they know the demographic and geographic realities of their municipalities. As they observed, their challenge lies in paying for those services, not in their delivery.

Downloading has also taken the form of unfunded mandates. As witnesses explained, both the federal and provincial governments have often failed to provide appropriate cost-sharing arrangements with municipalities to facilitate the transition to mandated service provision standards, for example, improved water quality standards[13].  This can place a significant strain on already overburdened municipal finances. As a general comment, the Committee believes that when either the provincial or federal government introduces new measures that involve local governments, it should give due consideration to local government needs and provide appropriate compensation.

While they share in the same basic responsibilities, the precise functions of local governments vary significantly from one province to the next, and even between regions within a province. However, it was clear to the Committee that many municipalities are struggling to meet their individual expenditure needs with current revenue sources. As noted earlier, municipalities do not have the same taxation powers as other orders of government and continue to depend largely on a narrow set of revenue tools; namely, property taxes, user fees and intergovernmental transfers. These tools provide limited revenues and offer only modest capacity for growth. For example, the City of Vancouver told the Committee in a written submission that municipal local revenues grew by 14 per cent over the 1995-2001 period, compared with 30 per cent and 38 per cent at the provincial and federal levels respectively. The Federation of Canadian Municipalities observed that out of every tax dollar collected in Canada, 92 cents goes to the federal, provincial and territorial governments, while only eight cents goes to municipal governments.

Currently, the largest source of municipal revenues is property taxes, accounting for over half of all local revenues. As Dr. Slack explained, there are inherent difficulties in this reliance. The property tax is visible, making it more difficult to increase than income and sales taxes; and it is inelastic, meaning that the tax base does not increase automatically as the economy grows.  It is also regressive; low- and middle-income taxpayers pay a proportionally higher percentage of their income on property taxes than high income taxpayers; a difficulty experienced particularly in strong real-estate markets when property taxes are based on market value assessments. Other witnesses commented that an over-reliance on property taxes has contributed to the problem of urban sprawl, since cities have become dependent on expansion for new revenue.  In turn, this creates new financial pressures as lower‑density suburbs have proportionally fewer taxpayers supporting the same infrastructure requirements as core city areas. Moreover, witnesses noted that urban sprawl has other costs: it is a major contributor to greenhouse gas emissions.

Some witnesses, such as the Association of Municipalities of Ontario, suggested that the property tax is being used inappropriately to fund services that are arguably provincial responsibilities. As an example, in Ontario, approximately 50 cents of every dollar paid in property taxes is used to fund provincial health and social services programs such as disability benefits and long-term care for seniors.

Dr. Slack observed  that there may be potential for municipalities to raise additional revenues by allowing user fees to reflect more closely the actual cost of providing services such as transit and waste management. However, she believes that  municipalities’  ability to increase non-residential property taxes is limited because businesses are already overtaxed relative to residential properties and the services that they receive.

The Federation of Canadian Municipalities is of the belief that an increase in property taxes alone may not be sufficient to address municipal needs. To demonstrate this point, they noted that in a mid-size city of 500,000 residents, a 2 per cent property tax increase would raise an addition $5 million in revenue annually; in comparison, installing an underpass in that same city could cost over $60 million.

  

ii. Federal Involvement in Municipalities

The federal government is actively involved through both policy decisions and distribution of funding in several areas that directly interest municipalities. As many witnesses noted, cohabitation across all orders of government is now the norm for many policy spheres such as immigrant settlement, emergency preparedness, crime prevention and safety, and the environment. 

Funding arrangements with specific municipal involvement include several infrastructure funds (many of which have a dedicated municipal component); the federal Goods and Services Tax rebate for municipalities; the Gas Tax Fund; and public transit trusts and funds. Targeted programs include the Affordable Housing Initiative and the National Homelessness Initiative, among others, and immigration and refugee settlement and integration programs. Some of these initiatives are discussed below.

The administration of these initiatives varies. Until very recently, most federal funds have been channelled to municipalities through bilateral agreements with the provinces and territories. In recent years, the use of tripartite agreements has become more common, making local governments more equal partners to federal and provincial/territorial governments. For example, the Gas Tax Fund initiative is managed through agreements entered into by the Minister of Infrastructure Canada with each provincial/territorial government, the City of Toronto and in two cases, a municipal association (the Union of British Columbia Municipalities and the Association of Municipalities of Ontario). Witnesses also cited the Urban Development Agreements (UDAs) that are currently in place in Vancouver, Saskatoon, Regina, and Winnipeg. UDAs are a partnership of all three levels of government, working in collaboration on broad local issues such as inner city revitalization, strengthened innovation, or sustainable economic development[14]. The Committee also learned of bilateral federal/municipal agreements. The Green Municipal Enabling Fund and the Green Municipal Investment Fund were set up between the federal government and municipalities, without the provinces acting as intermediaries[15].

 

B. THE MAJOR ISSUES  

i. Revenue Sources and Revenue Sharing

Witnesses supported diversifying municipal revenue sources, but were divided as to what form that should take: some advocated more revenue-sharing arrangements with other orders of government, while others suggested giving the municipalities direct access to growth taxes. Others were less concerned about what form new revenues would take, as long as the arrangements were made permanent. 

Many witnesses advocated giving large cities and city-regions access to a broader mix of taxes, including income and sales taxes revenues. They noted that doing so would make municipalities less dependent upon transfers from senior levels of government; provide more accountability to the taxpayer; and respond to the municipalities’ growing responsibilities by offering a stable, predictable source of funding that grows with the economy. The Conference Board of Canada noted that most major cities in the United States and Europe have access to forms of growth taxes, and as such are more able to address their concerns directly.

The Committee was interested to learn of the unique revenue-sharing arrangements that exist in the province of Manitoba. As Mr. Bell of the Association of Manitoba Municipalities explained, the province recently announced a new Building Manitoba Fund that links municipal grant money to provincial gas tax revenues. In addition, the province shares a percentage of personal and corporate income tax with its municipalities, as well as a share of video lottery revenues. 

Giving cities direct access to growth taxes may be challenging. One issue raised by Dr.  Slack lies with the current governance structure of municipalities where large metropolitan areas are not governed as unique regions, for example Toronto within the Greater Toronto Area. Existing municipal boundaries could present problems should one municipality choose to levy a tax while a bordering municipality does not.   

Another solution proposed by witnesses would be to provide municipalities with their own tax room. In this case, accountability would also lie with the municipalities who could choose how much of the tax room they would occupy. Also called “transfer of tax points,” tax room is transferred when one level of government reduces the amount of tax it imposes, thereby allowing another order of government to increase their taxes by a corresponding amount.  The transfer of tax room has no net financial impact on the taxpayer per se; the only discernible effect is that a different order of government receives the revenues that another order could have collected. However, the value of the tax room changes along with the growth rate of the economy, and specifically the revenue potential of the tax base.

Many witnesses advocated transferring to the municipality all or part of the tax room made available by a lower GST rate. As they noted, 1 per cent of the GST currently raises about $5 billion of revenue in Canada, and would provide substantial funds to address the infrastructure deficit[16].

As the Committee heard, these proposals – either a reduction in the GST and/or allowing access to income and consumption taxes –  present other challenges due to the current constitutional status of municipalities. In Canada, provincial governments retain the exclusive authority to grant municipalities the power to levy taxes. Municipalities would be unable to take advantage of a transfer of tax points at the federal level unless provincial legislation was amended to allow them to do so. With respect to the GST, witnesses noted that this is complicated by the fact that Canada does not have a well‑integrated system of federal and provincial sales taxes, the exception being Atlantic Canada.  This would complicate any move to levy, for example, a municipal sales tax in place of the GST. There is also the unique situation of Alberta, which has no provincial sales tax and may not wish to establish one in order to assist municipalities in taking up the tax field vacated by the federal government.  Moreover, a transfer of tax points could lead to a more fragmented tax system favouring the more wealthy municipalities, and could worsen the problems of regional disparities in fiscal capability within provincial/territorial boundaries.

Other witnesses suggested a different approach, similar to how the current Gas Tax Fund is administered. In this case, the federal government would provide the municipalities with the equivalent of a one per cent reduction in the GST. Witnesses suggested that in this case, the federal government would be able to impose conditions on how those funds are spent, for example, specifically directing it towards infrastructure. The federal government, and not municipal governments, could remain accountable to the taxpayer, although other arrangements are possible.

For example, witnesses suggested that a GST fund be governed in the same way as the federal Gas Tax Fund, which is administered on the basis of negotiated agreements with each province, territory, and in some cases, municipal association or city. Witnesses appreciated the flexibility of the current arrangements, noting that they take into account the different relationships that exist between the municipalities and the provincial governments across the country, as well as the significant differences in priority areas of investment [17]. Witnesses also noted that there are fewer restrictions over the use of Gas Tax Funds than when the program was originally introduced. They also appreciated its predictability: since funds are distributed on a per capita basis based on recent Census data, municipalities know how much they will be receiving in advance (in this case, until the fiscal year 2013-2014), and as such, are able to plan capital expenditures over that period. They are also able to hold funds in reserve to facilitate major projects.

The Committee agrees with witnesses that municipalities need a wider range of revenue sources to meet their expenditure responsibilities, and in particular to address the growing infrastructure deficit, and social and environmental challenges.  It believes that any new revenue sources should be selected based on their potential to provide stable, predictable, and adequate income that is directly linked to economic activity.  It notes that the federal government would need to seek an agreement with the provinces in order to give the municipalities access to growth taxes, and that such a change might have implications for federal-provincial arrangements.  

Recommendation: That the federal government consider giving the municipalities access to growth taxes, including the GST.

 

ii. Cities and the Competitive Advantage

As was noted during the hearings, Canada has become one of the most urbanized countries in the world.  The recent 2006 Census indicates that over four-fifths of Canadians are living in urban areas; the vast majority of Canada’s population growth has been concentrated in metropolitan areas. Moreover, two-thirds of Canada's population growth was attributable to net international migration.  Three quarters of immigrants to Canada settle in the three largest cities:  Toronto, Vancouver, and Montreal.

The rapid growth in urban municipalities has put enormous pressure on service delivery and infrastructure.  The larger cities in particular have seen an expansion in their responsibilities and are facing greater demands in the level of services provided. Many witnesses commented that cities and city-regions are facing unique and complex challenges, such as poverty, housing, air quality, traffic congestion and crime, but lack the tools and authority to address them.

Ms. Yalnizyan discussed inequality in Canada, particularly in large cities. She opined that inequality is at a record level in Canada, despite 10 years of strong and sustained economic growth.  She offered the example of housing markets. The growth in housing values is far outpacing that of incomes, jeopardising access to affordable housing. She explained how rising real estate markets in Toronto have also affected community development: people who are on fixed, low, insecure or stagnating incomes can only afford to live in certain low-value neighbourhoods. They are low-valued because they lack access to basic services such as transportation, child care and recreation. As she noted, this trend is accelerating in larger cities, partly due to Canada’s reliance on immigration; immigrants tend to settle in poorer areas. For this reason, she explained, housing and transit are linked. She also noted that there is no national strategy for either, nor for labour-market training or child care, which she feels are all elements of a comprehensive anti-poverty strategy. 

Generally, witnesses were of the belief that the current governance structures do not reflect the modern realities of Canada.  They noted that despite their growing importance and the complexity of the issues that they face, constitutionally, cities and city-regions are governed by a century-old  model that makes them almost completely dependent on the provinces. As a result, they generally lack policy autonomy and are not systematically included in the decision-making process at either the federal or provincial level. As Ms. Yalnizyan observed, “a place at the table is needed.”

As they remarked in their recent report, Mission Possible: Successful Canadian Cities, the Council of the Federation believes cities and city-regions are the drivers of national prosperity. Along with increased access to new revenue sources, they encourage the federal government to make strategic, targeted investments in large cities, particularly in areas of national interest, namely, the environment and competitiveness.    Other witnesses disagreed. The Cape Breton Regional Municipality told the Committee that Halifax receives a greater share of government assistance than its population would suggest. For example, the majority of the federal government commitment to the transit system in Nova Scotia went to the Halifax Regional Municipality. In their opinion, this is exacerbating the regional disparities that already exist within the province.

 

iii. Rural Municipalities

The Committee heard that smaller, rural and remote communities are also dealing with unique challenges. Like urban areas, they are also faced with an erosion of services and a growing infrastructure deficit, but may have even more difficulty raising revenues on their existing tax bases.  Property tax revenues are tied to property values, which are generally lower in smaller communities. People and businesses are migrating to larger centres, eroding the existing tax base. In the absence of economics of scale, the cost of providing services and infrastructure in smaller, rural and remote communities may be higher compared to urban areas.  Imposing user fees that correspond to the actual cost of services in small communities and remote areas would be prohibitive. 

Some smaller municipalities note that their needs are not taken into consideration by other levels of government when developing policies. The Cape Breton Regional  Municipality noted that in their view, decisions are often made in, and for, large urban centres without due consideration to the effect on outlying regions.

Many witnesses observed that while some solutions may work for larger cities, such as giving municipalities access to growth taxes, for the reasons discussed above they would not generate sufficient revenue in small, rural, and remote communities. In their opinion, a more suitable option would be targeted grants and other programs from both the provincial and federal governments.  Some also suggested ensuring a significant portion of any new infrastructure programs is dedicated to the needs of smaller urban as well as rural, remote and northern communities. As an example, witnesses spoke of the $1 billion Municipal Rural Infrastructure Fund (MRIF) that was announced in Budget 2003, which was structured to respond to the specific needs of  municipalities in  rural and remote areas. At least 80 per cent of MRIF funding was earmarked for municipalities with populations of less than 250,000.

 

iv. The Federal Gas Tax Fund and Infrastructure Funding

As witnesses noted, the Government of Canada has taken steps to respond to the infrastructure deficit. The federal government began investing in municipal infrastructure in 1993 with the establishment of the Canada Infrastructure Works Program.  Since that time, the federal government has invested billions of dollars in various infrastructure programs, largely directed towards municipal governments. These include current programs which are now sunsetting, such as the Canada Strategic Infrastructure Fund, the Border Infrastructure Fund, and the Municipal Rural Infrastructure Fund noted above.  Recent budgets introduced new infrastructure funds, including the Building Canada Fund, the national fund for gateways and border crossings, the national fund for P3 (Public-Private Partnership) projects, and the Asian-Pacific Gateway and Corridor Initiative.

Federal funding for infrastructure also includes the rebate on GST and the federal portion of the Harmonized Sales Tax paid on purchases of goods and services by municipalities. In 2004, the federal government increased this rebate from 57.14 per cent to 100 per cent. According to the 2007 Budget, the GST rebate will provide municipalities with $715 million in the fiscal year 2007-2008. 

In 2005, the federal government announced the creation of the Gas Tax Fund.  The fund was originally a $5 billion transfer payment program equivalent to 5 cents per litre of gas tax revenues, to be delivered from the fiscal years 2005-2006 to 2009-2010. In Budget 2007, the federal government committed to extending the initiative to the fiscal year 2013-2014. Under this proposal, over the next seven years municipalities will be receiving a total of $11.8 billion in gas tax funding. The Gas Tax fund was designed to assist cities and communities to make long-term financial investments in urban planning and environmentally-sustainable infrastructure projects in such areas as public transit, water and wastewater projects and community energy systems.  Payments are conditional and are distributed largely on the basis of population.

 

Table 2: Planned Federal Investments in Infrastructure, 2007-2008 to 2013-2014

 

2007–

2008–

2009–

2010–

2011–

2012–

2013–

 

 

2008

2009

2010

2011

2012

2013

2014

Total

 

(millions of dollars)

 

 

 

 

 

 

 

 

 

Gas tax funding

800

1,000

2,000

2,000

2,000

2,000

2,000

11,800

GST rebate

715

750

790

830

875

915

960

5,835

Building Canada Fund

572

926

1,186

1,401

1,427

1,636

1,655

8,801

Fund for Gateways and Border crossings

137

221

283

335

341

391

396

2,105

Fund for P3 projects

82

132

169

200

204

234

236

1,257

Equal per capita jurisdiction funding (1)

325

325

325

325

325

325

325

2,275

Asia-Pacific Gateway and Corridor initiative

108

158

118

144

172

170

108

977

Total—Plan

2,738

3,512

4,871

5,235

5,343

5,671

5,680

33,050

Sunsetting Infrastructure Initiatives (2)

1,597

1,141

571

362

326

26

0

4,023

Grand Total

4,335

4,653

5,442

5,597

5,669

5,698

5,680

37,073

Source: The Budget Plan 2007.

1. Totals $1 billion, including $24 million in initial funding in the fiscal year 2006–2007.

2.  Includes the Infrastructure Canada Program, the Canada Strategic Infrastructure Fund, the Border Infrastructure Fund, the Municipal Rural Infrastructure Fund and the Public Transit Capital Trust. 

The cities, municipalities and municipal associations told the Committee that they were very appreciative of recent federal initiatives, in particular the Gas Tax Fund. However, they expressed regret that recent federal budgets have not delivered a long‑term, structural solution to eliminate the municipal infrastructure deficit. As many remarked, municipalities require dedicated, sustainable, predictable and long-term federal infrastructure funding for long-term capital planning purposes, without which they lack the confidence to proceed.

As witnesses remarked, sharing the revenue generated by the GST would be an excellent first step in addressing municipalities’ infrastructure deficit.  In conjunction with this, witnesses suggested that a long-term plan include making permanent the gas tax transfer. The Federation of Canadian Municipalities also recommended introducing an escalator to protect its value over time, both against the effects of inflation, and against the effects of population growth and economic expansion. In addition, the Federation recommended that the federal government expand the current project-eligibility criteria for the Gas Tax Fund such that municipal governments have greater discretion to allocate the funds toward local priorities.  Some witnesses were less concerned with this issue. They appreciated the current administrative and reporting arrangements, and that the funds were distributed as straight transfers and were not application-based.

With respect to the environment, witnesses noted that the responsibility for fighting air pollution and climate change is shared among federal, municipal and provincial/territorial governments. However, they told the Committee that these orders of government continue to operate independently and, in the absence of a national plan, their policies and programs tend to overlap, which is both costly and inefficient.

The Federation of Canadian Municipalities told the Committee that it would like the federal government to work with provincial, territorial and municipal governments to develop a national plan that would guide government investment in infrastructure. In their view, the plan must also take into account environmental and demographic issues, including accounting for the effects of climate change on critical infrastructure.

Witnesses also called on the federal government to ensure that a significant portion of new federal infrastructure programs are explicitly dedicated to municipal projects. As they observed, sunsetting infrastructure funds had significant municipal priority involvement, whereas it is not clear if the new Building Canada Fund does. The Association of Municipalities of Ontario is also concerned that, by combining funding for both provincial and municipal projects together under the Building Canada Fund, the interests of Canada’s municipalities may be overtaken by those of the provinces and territories. 

The Committee recognises the significant resources that the federal government has dedicated towards infrastructure. However, it agrees with municipalities that, for long-term capital planning purposes, a greater level of stability and permanence is necessary.  For this reason, it supports making permanent the gas tax transfer. As is currently the case, this funding should be in addition to existing targeted federal infrastructure programs. It also notes the municipalities’ concern over what they see as the lack of a federal national infrastructure plan, particularly as it relates to the effects of climate change on critical infrastructure. A national infrastructure plan should also include a comprehensive national transportation plan.  

Recommendation: That the federal government make permanent the Gas Tax Fund, and introduce an escalator to protect its value over time.

 

Recommendation: That the federal government develop, in collaboration with the provinces, territories and municipalities, a national plan that would guide long-term government investment in infrastructure. The plan should take into account transportation, environmental and demographic issues. It should also take into account the needs of smaller urban as well as rural, remote and northern communities.

 

v. National Transit Strategy

Current federal funding for transit includes the $900 million Public Transit Capital Trust, and the $400 million Public Transit Fund. These funds support capital investments in public transit infrastructure including rapid transit, transit buses, intelligent transportation systems and other investments such as high-occupancy vehicle and bicycle lanes.  In addition, several existing federal infrastructure funds and programs have public transit components. Other federal programs support increased transit use, such as the public transit tax credit.

Witnesses told the Committee that public transit is critical both to the quality of life and environmental health of urban communities, and to Canada’s economic competitiveness.  The Federation of Canadian Municipalities informed the Committee that a 2006 federal survey found that traffic congestion costs Canada's urban economies up to $3.7 billion annually.[18]  Despite this, Canada remains the only G‑8 country without a long term federal transit-investment policy.  In their view, greater federal and provincial involvement is necessary as the cost of building large-scale transit projects is prohibitive; as witnesses noted, the Canadian Urban Transportation Association estimates that Canada's public transit systems will need over $20 billion in new capital investment by the year 2010.

Witnesses were in agreement that an important component of an infrastructure plan would be a national transit strategy that would provide permanent, long‑term funding. The plan should provide greater continuity and predictability than do the current fiscal arrangements outlined above. The Federation of Canadian Municipalities suggested that any funding should be accompanied by a plan to integrate transit investments with other policies that support transit use and smart land use. They told the Committee there is a leadership role for the federal government in generating information and research on best practices on transit use and planning, and ensuring that that information is shared across the country.  

The Committee has since learned that the federal government intends to develop a National Urban Transit Policy, in consultation with the provinces, territories and other interested partners. However, the strategy is not expected to involve new funding beyond what is currently earmarked for infrastructure projects[19].

Recommendation: That a national urban transit strategy include permanent, long‑term funding dedicated to urban transit.

 

vi. Federal Leadership

Some witnesses commented that the federal government could assist municipalities by discharging its own responsibilities more effectively.  As Dr. Slack noted, “It is not just the money that the federal government gives to cities but how they deliver their own services that helps cities; that is, they deliver services to people in cities”.  The City of Vancouver agreed with this assessment. In a submission to the Committee, they ask for assurance that areas of federal/provincial responsibility will be adequately funded and serviced to avoid pressure on the city to allocate funds outside of their mandate. Examples they cite include regional transport, health care, non-market housing, social programs and daycare.

The City of Toronto also agreed with this view. Moreover, it told the Committee that it considers federal programs such as the Affordable Housing Initiative and the Residential Rehabilitation Program essential in addressing the affordable housing problem in Toronto. The City also welcomed the introduction of the Homelessness Partnership Strategy in December 2006, which replaced the National Homelessness Initiative. They note, however, that these programs are short term initiatives, most of which do not provide funding past the year 2009. Other witnesses noted the lack of a national housing strategy.

There was general agreement among witnesses that the federal government has a greater role to play in coordinating policies and programs across all three orders of government.  Many witnesses recommended clarifying roles and responsibilities, and working more collaboratively in areas of overlapping jurisdiction.  As the Federation of Canadian Municipalities told the Committee:

Over the past two decades, municipal governments had to assume many new responsibilities, for example, in areas like housing and immigration, without the funding to meet them.  At the same time, governments are not making the most of opportunities for cooperation in areas like the environment, security and emergency preparedness.  To ensure that resources match responsibilities and that tax dollars are spent most effectively in areas of overlapping jurisdiction, governments need to do a better job of working together.

 

Witnesses called for a greater municipal involvement and authority in areas of shared and overlapping jurisdiction. Other witnesses note that the federal and provincial governments have already started the process of working more collaboratively with municipalities, citing the Gas Tax Fund as an example.


CONCLUSION

While it respects the constitutional jurisdiction of the provinces, the Committee believes that there is a significant federal role in our communities. This starts with ensuring that the actions and policies of federal government do not exacerbate the social and economic disparities that may exist within provinces and territories. The Committee shares the concern of many witnesses about the rising inequality in Canada, in a time where Canada’s economic performance and fiscal capacity is strong.  For this reason, the Committee supports changes to the vertical fiscal arrangements which, in its opinion, are one element in a strategy to better enable provincial and territorial governments to respond to local needs, be it for post-secondary education, or for social services and social programs. 

As a first step, it recommends that the federal and provincial governments undertake a joint study of the impact of the move to equal per capita cash support under the CST and CHT. The Committee also supports restructuring the CST into two separate components. It believes that this change should lead to greater accountability and transparency in the use of federal funds at the provincial, and ultimately, municipal level. In its opinion, this may help to ensure that resources better correspond to responsibilities and that tax dollars are spent most effectively.

In addition, it believes that federal government should continue to pursue opportunities to work more collaboratively with other orders of  governments, particularly for issues that cut across jurisdictional boundaries like climate change and immigrant settlement. This points to the need for national policies on matter that are key to Canada’s economic and social development. Thus, it supports the development of national plans for both infrastructure and transit.  These plans would be incomplete without long-term, dedicated funding. Accordingly, the Committee is also recommending that the federal government consider making changes to its existing funding arrangements that benefit municipalities, with the objective of providing greater continuity and predictability than is currently the case. In particular, it supports making permanent the Gas Tax Fund. It also encourages the federal government to consider giving municipalities access to growth taxes such as the GST. It notes that in order to do so, the federal government would need to seek an agreement with the provinces.


Appendix A

Federal Government Direct Spending Measures

 

This appendix summarises the total federal support including direct spending measures in the areas of health, social programs, early learning and child care, post-secondary education, and labour market programming over the fiscal year 2007-2008.

 

i. Federal Support for Health

While provincial and territorial governments have the primary responsibility for the delivery of health care programs and services, the federal government will provide $44.5 billion in the fiscal year 2007-2008 in support of health care through the Canada Health Transfer (CHT), other targeted funds to provinces and territories, and direct spending initiatives in areas of federal responsibility. This includes:

·         $34.6 billion in transfers under the CHT, including $21.3 billion in cash and $13.3 billion in tax transfers;

·         $1.2 billion through the 2004 Wait Times Reduction Transfer; and

·         $7 billion in areas of federal responsibility, including First Nation’s and veteran’s health case, health protection, disease prevention, and health-related research, as well as $1 billion in medical and caregiver credits.

 

Under the September 2004 agreement on health care reform ( known as the 10-Year Plan to Strengthen Health Care),  the federal government agreed to increase the value of transfer payments under the CHT by 6 per cent annually,  starting in 2006-2007, to the fiscal year 2013-2014.

 

ii. Federal Support For Post Secondary Education

The federal government will provide over $8.4 billion in the fiscal year 2007-2008 in support of post-secondary education, through transfers, direct spending and tax measures:

  • $2.4 billion in transfers through the CST;
  • $1.7 billion via the tax system, through tuition, education and textbook tax credits;
  • $2 billion through grants, scholarships and loan programs;
  • $2.3 billion to fund research and related activities in post secondary institutions.

 

iii. Federal Support for Social Programs

The federal government will provide about $25 billion in support for social assistance, social services and income support. This includes:

·         $6.2 billion in cash transfers through the CST;

·         $9.5 billion in support of children primarily through the Canada Child Tax benefit and the Children’s Special Allowance;

·         $700 million to support persons with disabilities, including the Labour Market Framework Agreements for Persons with Disabilities, the disability tax credit and other measures;

·         $1.4 billion to provide basic social development programs for First Nations in areas of Federal responsibility;

·         $3.3. billion to support youth and housing, as well as programs for legal aid, and immigration and refugee settlement;

·         $3.7 billion to support low-and modest- income Canadians through the Goods and Services tax credit; and

·         $550 million in support for low-and modest- income Canadians through the Working Income Tax Benefits (as announced in Budget 2007).

 

iv. Federal Support for Early Learning and Child Care

The Government of Canada will provide nearly $5.6 billion in the fiscal year 2007-2008 in support of early learning and child care through transfers, direct spending and tax measures:

  • $1.1 billion in cash transfers to provinces and territories;
  • $2.4 billion though the Universal Child Care Benefit;
  • $695 in recognition of child care expenses through the child care expense deduction; and
  • $1.5 billion in tax support through a child tax credit (as proposed in Budget 2007)

 

v. Federal Support for Labour Market Programming

The Federal government will provide close to $3.5 billion in the fiscal year 2007-2008 in support for labour market programming through direct spending and tax measures:

·         $2.2 billion for Employment Insurance benefits and support measures;

·         $340 million for the Aboriginal Human Resource Development Strategy;

·         $26 million for the Aboriginal Skills and Employment Partnership initiative;

·         $310 million for the Youth Employment Strategy;

·         $220 million for the Labour Market Framework Agreement for persons with Disabilities and $30 million for the Opportunities Fund for Persons with Disabilities;

·         $100 million for the Apprenticeship Incentive Grant and $200 million for the Apprenticeship Job Creation Tax Credit; and

·         $45 million for the Targeted Initiative For Older Workers.

 

Source: Department of Finance.

Note: The Department of Finance notes that these numbers are based on multiple sources; some numbers used are estimates and are subject to change.

 


Appendix B

Witnesses 

Tuesday, April 17, 2007

            The Honourable Harry Van Mulligen, M.L.A., Minister of Government Relations,

            Government of Saskatchewan

Government of Saskatchewan:

Dylan Jones, Assistant Deputy Minister, Department of Government Relations

            Erin Brady, Analyst, Department of Finance

           

Tuesday, April 24, 2007

Department of Finance Canada:

            Barbara Anderson, Assistant Deputy Minister, Federal-Provincial Relations and

                        Social Policy Branch

            Frank Vermaeten, General Director, Federal-Provincial Relations and Social

                        Policy Branch

            Mark Haney, Chief, Transport and Corporate Analysis, Department of Finance

            Glenn Campbell, Senior Chief, Federal-Provincial Relations and Social Policy

                        Branch

            François Delorme, Director, Economic Development and Corporate Finance

 

Tuesday, May 1, 2007

The Conference Board of Canada:

            Glen Hodgson, Senior Vice-President and Chief Economist

            Matthew Stewart, Economist

 

Tuesday, May 8, 2007

Federation of Canadian Municipalities:

            Gord Steeves, President, Councillor of the City of Winnipeg

            Gabriel Miller, Senior Policy Analyst

            Christian Laverdure, Deputy Director, Policy

 

Tuesday, May 15, 2007

Community Social Planning Council of Toronto:

            Armine Yalnizyan, Director of Research

 

Canadian Feminist Alliance for International Action (FAFIA)

            Nancy Peckford, Program Director

 

Wednesday, May 16, 2007

Association of Manitoba Municipalities:

            Ron Bell, President

            Joe Masi, Executive Director

 

As an individual (by videoconference):

Enid Slack, Director, Institute of Municipal Finance and Governance, Munk Centre for International Studies, University of Toronto

 

Tuesday, May 29, 2007

Association of Municipalities of Ontario (by videoconference):

            Doug Reycraft, President

            Brian Rosborough, Director of Policy

As an individual:

Robert Gagné, Professor and Director, Institute of Applied Economics, École des haute études commerciales

 

Tuesday, June 5, 2007

Cape Breton Regional Municipality:

            John W. Morgan, Mayor

            Jerry Ryan, Chief Administrative Officer

            John A. Whalley, Economic Development Manager

 


Appendix C

Fiscal Balance Written Submissions

 

1.                  Nova Scotia Government: Mr. Michael G. Baker, Minister of Finance

2.                  Government of the Northwest Territories: Mr. Floyd K. Roland, Minister of
Finance.

3.                  Government of Yukon: Mr. Denis Fentie, Premier and Minister of Finance

4.                  City of Vancouver: Mr. Sam Sullivan, Mayor

5.                  City of Toronto: Mr. David Miller, Mayor


Appendix D

List of Recommendations 

The Committee recommends:

 

1.        That the Canada Social Transfer be restructured into two separate transfers: a transfer to support post-secondary education and a transfer to support social assistance and social services.

2.         That the federal government consult more closely with the provinces and territories regarding the indirect costs of federal support for post-secondary education provided outside the CST.

3.         That the federal government consider increasing the annual escalator for the CST from 3 per cent to 4.5 per cent, effective in the fiscal year 2009-2010.

4.         That a federal/provincial study be undertaken to determine the impact of per capita cash transfers for the Canada Social Transfer and the Canada Health Transfer, and that the government report back before the end of this fiscal year.

5.         That the federal government consider giving the municipalities access to growth taxes, including the GST.

6.         That the federal government make permanent the Gas Tax Fund, and introduce an escalator to protect its value over time.

7.         That the federal government develop, in collaboration with the provinces, territories and municipalities, a national plan that would guide long-term government investment in infrastructure. The plan should take into account transportation, environmental and demographic issues. It should also take into account the needs of smaller urban as well as rural, remote and northern communities.

8.         That a national urban transit strategy include permanent, long‑term funding dedicated to urban transit.


 

[1] Tax point transfers involve the Government of Canada reducing its tax room and making this room available to the provinces and territories. In 1977 the federal government agreed to give up 13.5% of personal income tax and 1% of corporate income tax to the provinces and territories. The federal government considers these tax points as ongoing contributions to provincial health and social programs.

[2] For a review, Refer to Budget 2006, “Restoring Fiscal Balance in Canada: Focusing on Priorities”.

[3] The Convention provides the basis for realizing equality between women and men through ensuring women's equal access to, and equal opportunities in, political and public life, as well as education, health and employment. States parties agree to take all appropriate measures, including legislation and temporary special measures, so that women can enjoy all their human rights and fundamental freedoms.  

A copy of the report can be found on the Canadian Heritage Web site at: http://www.pch.gc.ca/progs/pdp-hrp/docs/cedaw_e.cfm

 

[4] Department of Finance. Budget 2006. Restoring Fiscal Balance in Canada: Focusing on Priorities. May 2006.

[5] These changes were introduced with Bill C-52, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2007, tabled in the House of Commons on  March 29, 2007. At the time of writing, the Bill was before the Senate.   

[6] The Advisory Panel's report is entitled "Reconciling the Irreconcilable: Addressing Canada's Fiscal Imbalance" and was released in March 2006.

[7] While the standard has changed over time, a five-province standard was used (Ontario, Quebec, Manitoba, Saskatchewan and British Columbia) from 1982 to the implementation of the New Framework in 2004.

[8]According to the 2007 Budget, these transitional provisions will ensure that no province or territory experiences declines in either its CHT or CST cash relative to what its cash transfers would have been in the fiscal year 2007–2008  prior to the implementation of the new Equalization program and the move to equal per capita CST cash support. Declines in cash transfers could result from either the interaction between the CHT and the new Equalization program or the move to equal per capita CST cash. Approximately $282 million in funding has been provided for this purpose, including $226 million in 2007–2008.

 

[9] Using the example of CST payments in the fiscal year 2006-2007, Professor Gagné observed that the federal government claimed to be transferring $500 per capita to each province and territory through a combination of tax point transfers, Associated Equalization and cash transfers. Since the payments under Associated Equalization were not enough to equalize tax points across the country, the combined per capita payment of $500 was implicitly a top-province standard. 

[10] The term “infrastructure” refers to a broad range of structures, from roads, to water and sewage treatment plants, to buildings including recreational and cultural facilities.

[11] An infrastructure deficit generally refers to the gap between the amount that is needed to maintain and/or replace existing capital structures and the amount that is actually spent.

[12] Municipalities differ greatly in size and composition. The most common types of local government in Canada are municipalities, which include such entities as cities, towns, villages, and parishes. Another common type of local government is regional government. These are entities created by provinces in which several municipalities are grouped under a single regional administrative and political structure. Other examples of regional governments are the county systems found in Atlantic Canada, Ontario, Quebec, and Alberta. In this case, regional governments group several municipalities (often in rural areas) into a single regional structure for the purpose of providing certain region-wide services. For the purposes of this report, the term municipal government will be used when referring to local government, whatever form that local government structure takes.

[13] For example, the Committee heard that in Manitoba, a major municipal issue is the financial implications of the recently passed Water Protection Act.

[14]Refer to the Western Economic Diversification Canada Web site: http://www.wd.gc.ca/ced/urban/default_e.asp

[15] These funds offer  loans and grants in support of range of activities related to municipal environmental projects, from the early stages of project design unto and including the physical implementation of capital projects.

[16] For further information, refer to then proposal by the Federation of Canadian Municipalities Big City Mayors` Caucus. Sharing the Wealth for a Strong and Prosperous Canada: A Proposal to the Government of Canada for Sharing Revenues with Canada’s Big Cities. May 3, 2007.

[17] Accountability is achieved with the federal gas tax program through the contracts that Association of Municipalities of Ontario (AMO) and the City of Toronto have entered into with the federal government.  As the AMO explained, they have contracts with their 444 member municipalities to which they direct the funding. They must provide the AMO  with audited statements showing how those gas tax funds were used so that the Association can ensure that they are used in a manner that reflects the principles of the program. 

[18] The 2006 survey results, “The Costs of Urban Congestion in Canada” can be found on the Transport Canada Web site at: http://www.transportcanada.ca/programs/Environment/EconomicAnalysis/docs/summary.pdf

 

[19] On June 2, 2007, at the annual conference of the Federation of Canadian Municipalities, the  Honourable Lawrence Cannon, Minister of Transport, Infrastructure and Communities Lawrence Cannon announced that the federal government would develop new urban transit strategy for Canada. However, he stated that the  strategy is not expected to involve new funding beyond what is currently earmarked for infrastructure projects. Refer to the Infrastructure Canada Web site at: http://www.infrastructure.gc.ca/mc-cm/speeches-discours/20070602_e.shtml

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