Municipal Finance and Governance: Tools to Affect Land Use Decisions Enid Slack Institute on Municipal Finance and Governance University of Toronto Presentation to the Leading Edge 2006 Conference Niagara Escarpment Commission Burlington, Ontario October 5, 2006

2 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?

3 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%)

4 Municipal Revenues, 2004 Property taxes (53%) User fees (23%) Provincial transfers (15%) Federal transfers (1%) Investment income (5%) Other revenues (3%)

5 Fiscal Challenges Facing Cities Offloading of services International competitiveness Amalgamation Urban sprawl No diversification of revenue sources

6 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

7 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

8 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

9 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

10 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

11 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

12 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

13 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

14 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

15 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

16 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

17 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

18 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

19 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

20 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