Municipal Finance and Governance: Tools to Affect Land

Use Decisions

Enid SlackInstitute on Municipal Finance and Governance

University of Toronto

Presentation to the Leading Edge 2006 Conference

Niagara Escarpment CommissionBurlington, Ontario

October 5, 2006

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Outline of Presentation Fiscal challenges facing large cities

How do municipal financing tools affect urban growth patterns: development charges, property taxes, user fees, tax increment financing?

What is the role played by local governance?

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Municipal Expenditures, 2004 Transportation (20%) Water, sewers, garbage (18%) Fire and police protection (17%) Health, social services, social housing

(16%) Recreation and culture (12%) General government (9%) Debt charges (4%) Planning and development (2%) Other (2%)

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Municipal Revenues, 2004

Property taxes (53%) User fees (23%) Provincial transfers (15%) Federal transfers (1%) Investment income (5%) Other revenues (3%)

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Fiscal Challenges Facing Cities Offloading of services

International competitiveness

Amalgamation

Urban sprawl

No diversification of revenue sources

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Fiscal Challenges – Success on Fiscal Measures Municipalities have done well on

fiscal measures:

Size of the operating deficit Amount of borrowing for capital Rate of property tax increases Reliance on provincial grants Extent of tax arrears

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Fiscal Challenges –Infrastructure and Services

Fiscal health may have been achieved at the expense of the overall health of Canadian municipalities:

The state of municipal infrastructure (water, sewers, roads, transit, etc.)

The quality of service delivery

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Finance and Governance and Urban Sprawl We know that many of the environmental

issues we face today (air and water pollution, loss of agricultural land, open space, environmentally-sensitive areas, greenhouse gas emissions) stem, in large part, from the way we have planned and built our cities in the past

We know, for example, that compact urban development is more environmentally sustainable than urban sprawl

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Finance and Governance and Urban Sprawl What is less well understood is how the decisions

we make around how to pay for services and infrastructure and how we govern our cities affect whether we will have sprawl or compact development

In many cities, financing tools subsidize sprawl because they charge an artificially low cost for infrastructure and services in sprawl developments

Few regional governance structures exist that allow us to coordinate land use planning and infrastructure investment on a region-wide basis

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Financing Tools and Urban Growth Patterns Where people choose to live, where

businesses choose to locate, and where municipalities choose to invest in infrastructure are all influenced by fiscal incentives

If it costs more to locate in outlying, low-density developments, need to charge more to pay for services and infrastructure in those developments

Financing tools need to create the right incentives

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Development Charges Also known as lot levies, impact fees Pay for growth-related capital costs Can be levied on a uniform basis or a

development by development basis Area-based charges reflect costs of

development in different locations – no incentive for sprawl

If uniform, they can promote sprawl

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Property Taxes Based on market value of properties Property tax differentials that do not

reflect service differentials will mean there are subsidies (positive and negative) that will worsen development patterns

Often apartments pay higher tax rates than single-family homes

Farm properties are favoured (value in current use) but does not necessarily stop development of farmland on the urban fringe

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User Fees

Need to be based on marginal cost (cost of additional user) rather than average cost

Average cost means that those in outlying areas pay less than the marginal cost and receive a subsidy

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User Fees: Road Tolls In the absence of tolls, decision to drive

depends on private costs (gas, depreciation etc.); with tolls, also consider social costs (congestion, pollution)

Discourage use of automobiles; reduce demand for commuting; increase demand for more compact development

Fuel taxes not as good because they don’t vary with time of day or location

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Tax Increment Financing

Way to raise money to revitalize blighted areas, downtowns, brownfield remediation

Uses increment in property tax to pay for redevelopment

Reduce need to develop greenfield sites

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Local Governance

Local governance determines how decisions are made with respect to land use and infrastructure investment – decisions that affect type of development

Growth management needs to be tackled on a region-wide basis; need regional governance structure

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Local Governance Need to coordinate regional planning,

infrastructure planning and investment, economic development and environmental protection on a regional basis

Models of regional governance: one-tier or two-tier government, inter-municipal cooperation, special purpose districts, provincial role

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Local Governance

Different models have worked in different places at different times

The precise model is less important than that there is some form of effective regional governance

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Concluding Comments Cities can improve their use of existing revenue

tools

Revenue tools need to reflect benefits received from local services

Revenue tools need to work with planning tools

Need to coordinate land use planning and infrastructure investment on a region-wide basis

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Concluding Comments User fees based on marginal cost (road tolls) Development charges should be area-based Property taxes should reflect benefits

received; eliminate over-taxation of apartments

Tax increment financing to revitalize downtowns and remediate brownfields

Some form of regional governance to manage growth