The Municipal Infrastructure Funding Money-go-round

Commentary, Larry Mitchell, Local Government

The present complex and convoluted channels of Canadian tax-supported funding for municipal infrastructure produces some undesirable, economically inefficient results. Federal and provincial subsidies for municipalities’ upkeep and the capital development of their vital infrastructure are often allocated on a haphazard and/or a politically-driven basis.

In the first item of this Frontier series on local government entitled Good Local Government the issue of funding of infrastructure was singled out for further study. It is an essential ingredient of good local government. At present, best practice in this area within Canada can and should be improved.

Given the ten provincial jurisdictions across Canada it is unsurprising that municipal asset funding practices would be patchy. Some are better than others but all require better structure, process and rationale.

Federal funding mechanisms share some of these deficiencies although recent initiatives at the federal level suggest that positive improvements are well on their way. Witness the creation of Infrastructure Canada, an agency set up in 2002 among other reasons, to sort out a more economically efficient and apolitical way of rationing funding to municipalities, i.e., their Build Canada Plan. These improvements are works in progress but essentially they involve a move to ensure that funding is fully justified on a consistent and rational basis as a pre-condition before funding is authorized.

From a practical point of view some criteria (i.e., best practice) that all funding agencies (federal and provincial) should use for municipal asset funding are worth highlighting.

In many cases the existing processes can produce perverse and often unfair allocation of funding for infrastructural asset maintenance and capital works.

The game at the moment (call it the funding-money-go-round) is effectively a race to the bottom in process and policy terms. Municipalities, often those with very poor asset management practices shout loudest for aid. These pleas, often backed up by political intrigue appear to be warranted because municipalities with poor asset management practice operate and own assets that are allowed to decay over time. Their needs appear to be greatest so they often receive the lion’s share of available monies. But it’s all based on a flawed funding process.

The end result is a poor allocation of resources. Funding is granted that is not founded upon acceptable capital project and other ranking methodology. It is therefore unsupported with proper justification and priorities when compared to other municipalities.

So what is to be done to put Canadian municipal asset-funding on a best-practice footing? Here are some suggestions, a number of which are borrowed from New Zealand local government experience.

Funding agencies must demand better information from municipalities about their proposed asset expenditures before funding is even considered. This information must be derived from a governance (legislative) framework and from municipal management systems that include best practice asset-facility and financial management plans.

A considerable body of knowledge and best practice has been assembled that integrates such plans into New Zealand local government legislation. There, comprehensive asset funding process is mandated within provisions of the 2002 Local Government Act. For example, a balanced budget provision requiring that projected municipal funding is sufficient to maintain the service capacity and integrity of assets throughout their useful lives.

This represents a far cry from merely reacting to those cities and towns that shouted the loudest. It took a major effort over at least five to seven years in New Zealand to establish the required level of justification for funding from information contained within acceptable best practice asset, financial and community outcome-based plans. All components within the process are enforced for compliance because they are the law. Add to this an audit involvement that ensures compliance and a very public reporting which accompanies any default.

Given all of the exposure by the media and elsewhere to municipal affairs, their stadiums, the running of major local public events, regulatory operations, parks and reserves, the cultural and social activities, these aspects of local government rarely take up more than 20% of total municipal assets or finances. The balance—an 80:20 rule—is that 80% of municipal resources are tied up in roads, water, wastewater and storm water infrastructure assets—in other words, where local governments ought to be focused as opposed to on concerns more properly the responsibility of senior levels of governments.

Because of their literal physical size and budget implications, much more attention must be paid to municipal asset care and replacement. Another pressing reason for placing more emphasis upon municipal assets is because, if existing reporting of infrastructural asset maintenance backlog totals are believable, then the total is likely to grow even larger under present conditions.

The mess that Canada has got itself into in this area may well have a great deal to do with historical and dysfunctional funding decisions made on inappropriate terms, many of which still prevail today.

The best way to fix the infrastructure deficit and also to bring fairness and economic efficiency to the asset funding dilemma, are captured within suggested improvements to best asset management practice, firmly coupled to better municipal legislation. A New Zealand legislative and best practice model plus the asset management guidelines set out in the international NAMS initiative (National Asset Management Steering group) would be two good places to start.

Given the amount of money involved, senior levels of government and other funding agencies are entitled to insist upon better management practices in support of funding proposals. The goal, now worked towards by some but one useful for all Canadian municipalities, is a process that is based on uniformly better financial and asset management information and practice.