Ottawa is Part of a Bigger PictureCities have always been centres of economic activity and growth. With the advent of free trade, cities have become key drivers of national economies, and investments in urban infrastructure provide significant benefits to communities beyond urban boundaries. Indeed, The Role of Metro Areas in the US Economy notes that the gross product of the five largest metropolitan areas in the United States ($1.68 trillion) outperformed every national economy in the world except for the United States ($10.21 trillion), Japan ($4.15 trillion) and Germany ($1.85 trillion). Within the United States, the gross product of the ten largest American metropolitan areas exceeded the output of the 31 smallest states. This renewed vitality of the world's cities is exciting for those who live there, and rewarding for all those who benefit from their productivity. A general consensus is emerging of which factors allow cities to compete successfully in the global marketplace while being desirable places in which to live and work. Seizing the initiative, national governments in the United States and Europe have made major investments to ensure their cities continue to thrive. Canada's federal and provincial governments have not yet recognized that they must make similar investments if Canadian cities are to compete and prosper. 4.1. 19th Century Solutions Can't Solve 21st Century ProblemsIn 1867, Canada was largely a rural country with a resource-based economy. Since Confederation, the Canadian economy has diversified significantly. Moreover, Canada is now an overwhelmingly urban nation. Indeed, nearly 80 per cent of Canadians live in urban areas, with 45 per cent of them living in the country's seven largest cities (Toronto, Montreal, Vancouver, Ottawa-Gatineau, Calgary, Edmonton and Winnipeg). Although Canada has undergone radical change over the course of the last 135 years, the statutory mechanisms regulating affairs between federal and provincial governments and their municipal counterparts have not. Indeed, in Canada's founding statute, the Constitution Act of 1867, provinces were given complete control over municipal institutions. In turn, the role, function and structure of these municipal institutions were set out some 20 years prior to Confederation. In 1867-135 years ago-this seemed an appropriate arrangement. Today, it is no longer viable. Municipalities in Canada have only three ways The current legal framework within which municipalities operate limits their ability to manage and regulate the programs and services they are responsible for delivering. Essentially, municipalities in Canada have only three ways to raise revenue: property taxes, development charges and user fees. Due to their limited flexibility, these ways are insufficient to meet the City's need for additional revenue. This is not the case in the United States and Europe, where considerable effort has been made to give cities the necessary supports to become and remain successful. In the United States, local governments are granted powers by their state. American cities can determine which services Home rule charters, however, also govern larger municipalities in the United States, and many of the smaller ones. These charters allow cities to determine themselves how they should be organized, what services they should deliver, and to what extent local matters should be regulated-all with no interference from the state. These charters also give cities authority to determine revenue sources, set tax rates, levy new taxes, borrow funds and use any number of other financial instruments at their disposal. As a result, American cities can determine which services they will provide, and raise the necessary revenues (see Table 1).
In Europe, services offered by local governments vary greatly, as does the authority of these governments. Throughout Europe, however, a strong understanding has developed of the important role cities play as centres of economic growth and employment. This understanding is expressed in the principle of subsidiarity, which is embedded in the European Union's Treaty of Maastricht. This principle formally recognizes that higher levels of government should exercise authority only when there are obvious and compelling reasons to do so. Subsidiarity also decrees that the level of government that has authority should have the resources needed to meet its responsibilities. The European Union, for instance, offers access to funding that allows local governments to leverage additional financing from their host countries for projects that support sustainable development in the broadest sense-environmental, social and economic. The practical effect of this difference in defining authority and access to revenue is noteworthy. The Federation of Canadian Municipalities estimates that, in 1997, Canadian municipalities spent $785US per capita, while American cities spent $1,652US and European cities averaged $2,100US. Some provincial governments in Canada have begun to demonstrate an understanding of the importance to municipal governments of having more flexible financial and legislative mechanisms within their reach. The governments of British Columbia, Newfoundland and Labrador, Alberta, Manitoba, Nova Scotia and Quebec have all either given municipalities authority to raise new revenues or transferred to municipalities portions of sales, income and fuel taxes. In some cases, provincial governments have done both. Further, Alberta has given cities natural person powers, which allows Alberta's cities greater flexibility to enter into legal agreements. Perhaps most promising is British Columbia's proposed Community Charter, which will, if enacted, give municipalities clear authority to make decisions and raise new revenues without having to secure provincial approval.
Although progress underway throughout the country is welcome, the fundamental constitutional framework governing municipalities has not changed. The provinces continue to retain control of the legislative and taxing powers of local governments, and provincial governments can restrict or change any previously granted powers at any time. Alberta, for instance, has unilaterally reduced Calgary and Edmonton's share of the fuel tax from 5 cents to 1.2 cents, effective March 2003. The future progress and stability of Canada's cities is threatened by an absence of authority over the services they are responsible for delivering, as well as a lack of stable funding mechanisms to support these services. 4.2 Infrastructure Investments Are Critical to Canada's Economic SuccessAccording to United Nations Secretary-General Kofi Annan, the world has entered the "urban millennium." In the urban millennium, a nation's cities must thrive globally if that nation is to compete economically. Cities are also expected to be centres of innovation and education, and they must provide the highest possible quality of life to residents. To that end, the United States and Europe have been making large-scale investments in municipal infrastructure. In Europe, infrastructure funding comes from the European Union, national and local governments, and public-private partnerships. At $175 billion US, the 2002-2006 European Regional Development Fund (ERDF) makes up one-third of the entire European Union budget. ERDF is available to any city or region that can demonstrate both a need and the availability of matching funds within the host country. In recognition of the importance of transportation infrastructure, over one-half of ERDF funds are targeted for these projects. Some one-third is targeted for environmental and water projects. ERDF is just one of a number of funds available to support the strengthening of municipal infrastructure. Other funds (listed in Appendix 2.1) provide funding for a wide variety of infrastructure and redevelopment projects. The United States federal government is also making impressive investments in urban infrastructure. The Transportation Equity Act for the 21st Century of 1999 has earmarked $217 billion US for transportation infrastructure over six years. Of this total, over $100 billion US has been made available for public transportation. Further, the act enshrines a transit benefit tax to help level the playing field between parking benefits and transit/carpooling benefits. The act also allows cities to leverage federal resources to encourage private-sector involvement, including direct credit assistance, such as loans, loan guarantees and lines of credit from the Department of Transport for up to one-third of project costs. Finally, the act permits toll revenue credits, where revenues from roads and public bridges count as matching funds for federal grants for other modes of transportation, such as transit. A number of other federal grant and loan programs (listed in Appendix 2.2) provide stable, long-term funding for wastewater, drinking water, housing, and community development projects in American cities. The approach undertaken in Europe and the United States is paying off. In January 2001, the 2nd Report on Economic and Social Cohesion to the European Commission concluded that reinvestment in cities was an effective means of mobilizing private capital and loans, and led to increased competitiveness and productivity of urban regions. The Role of Metro Areas in the US Economy notes that American cities' ability to compete in the global marketplace is largely due to the benefits of renewed infrastructure. Indeed, unlike other parts of the American economy, metropolitan areas continued to grow during the recent recession. In Europe, national contributions to public transportation are also substantial. European G8 member nations fund between 15 and 30 per cent of operating costs and between 30 and 100 per cent of capital expenditures. In the United States, the Transportation Equity Act for the 21st Century is the largest infrastructure investment program in that country. Under the act, combined state and federal funds cover 25 per cent of operating costs and 54 per cent of capital expenditures for public transit. Moreover, the United States and European countries employ a range of innovative financing strategies to fund transportation infrastructure. These strategies include direct credit, toll revenue credits, joint development of transit assets, transport contribution taxes and toll ring roads. American and European governments have recognized the critical role transportation infrastructure plays in serving as the backbone of every large city's economy. Transportation infrastructure is a considerable expense for government, but it pays off in both ease of commercial activity and development of a high quality of life that attracts businesses and residents. In contrast, investment in infrastructure by Canada's federal and provincial governments has been declining. Further, transfer payments and grants that remain tend to be conditional, shorter term and project-based. Moreover, the conditional nature of these programs directs funding to eligible projects, which are not necessarily the most urgent or important priorities of local governments. The Association of Municipalities of Ontario summarized the situation facing Ontario's municipalities in its 2000 Municipal Councillors' Guide:
In the case of transportation infrastructure, Canada is the only G8 country without a national urban transit investment fund. In fact, Alberta, British Columbia and Quebec are the only governments in Canada that provide ongoing support for public transit, although other provinces like Ontario have begun new grant programs. The Canadian Urban Transit Association estimates that a $9.2 billion capital investment over five years is required for public transportation. The Federation of Canadian Municipalities estimates the United States invests in urban transportation at more than 100 times the rate of the Canadian government. The United States invests in urban transportation The figures are equally revealing when transfers to municipal governments are examined. Combined transfers from both state and federal governments in the United States accounts for 27 per cent of all municipal revenues; in Europe, these transfers total 31 per cent; in Canada, combined transfers from federal and provincial governments accounts for 18.7 per cent of municipal revenues. In the case of Ontario, funding is almost exclusively related to income maintenance programs, which are cost-shared between the province and the property tax base. Some signs have appeared recently to indicate that governments in Canada are, at a minimum, contemplating the funding challenges faced by municipalities. The Prime Minister's Task Force on Urban Issues recognized in its April 2002 Interim Report that Canada's cities require, "a new approach that includes stable federal funding for urban infrastructure programs and funding for projects that clearly exceed the fiscal capabilities of municipal governments." Constructive action must now follow these words. For until municipalities are granted both the authority and the tools they need to secure stable, long-term funding, they will be unable to manage the demands of urban growth. 4.3 Shifting the Cost BurdenIn 1998, the Government of Ontario instituted Local Services Realignment (LSR), otherwise known as downloading. Originally projected to be revenue neutral, LSR saw municipalities assume greater responsibility for a number of key services, including public transit, police, property assessment services, septic system inspection, social housing, and land ambulances. In practice, LSR has not been revenue neutral. Instead, it has imposed a heavy financial burden on municipal governments throughout the province. For instance, as a result of LSR, the City now must spend an estimated $50 million more each and every year. This cost burden is increasing and is expected to continue to increase over the next ten years, as growing demands are made on services and as more services are downloaded. Ontario is the only Canadian province that requires In addition, Ontario is the only Canadian province that requires municipalities to fund significant health and social services programs on a property tax base. While Ontario controls and mandates a great number of social and health programs, it continues to require that costs of these programs be shared by municipalities and funded through property taxes. These programs include public health, employment and financial assistance, childcare and social housing. Meanwhile, other provinces have abandoned this requirement, allowing the property tax base to support those programs for which municipalities have direct responsibility. In 2002, $186.2 million was required from the Cost-shared health and social services add significant pressures to the property tax base. In 2002, $186.2 million was required from the City's property tax base to fund health and social services programs. These programs represent 23 per cent of the City's total tax requirement. If the province of Ontario treated health and social services funding the way other Canadian provinces do rather than funding them from the property tax base, the money freed up could be re-directed to reserves, and the capital funding gap in Ottawa nearly eliminated. Other than capital grants, operating transfers from the Government of Ontario have declined from $493 million in 1995 to $272 million in 2002 (see Chart 3). This decline has had a significant impact on municipal revenue. As well, some federal grants designed to help programs municipalities deliver end up being used by provincial governments on unrelated expenditures. When expressed as a percentage of the City's gross revenue, these transfers have fallen from 31 to 15 per cent. The rate of decline has been a precipitous 9.1 per cent per year.
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