Provincial Transfers and Financing Municipal Infrastructure in Alberta

Concern and uncertainty about municipal finances surround the government of Alberta’s plans to transition the Municipal Sustainability Initiative program to the Local Government Fiscal Framework. A close examination of provincial capital transfers and grants to municipalities shows that capital transfers are not allocated based on municipal capital purchases and grants seem to favour municipalities with higher-than-standard fiscal capacities. The allocation of funds is disproportionate and there is a definite need to restructure provincial transfers to municipalities. The current allocation formula is rather complicated and flawed. A major determinant of a municipality’s grant is its share of the provincial education property tax. This provision therefore provides higher grants to municipalities with often much larger tax bases. It also contains a clause for allocation based on how much road a municipality contains but does not account for road type — paved, gravel or dirt — which makes a big difference in infrastructure costs. The proposed new system includes providing matching grants for infrastructure spending, such as roads and water treatment. These types of grants not only benefit the municipality, but also non-resident users and the provincial government. As spending on roads increases, so does the movement of people and products, which increases economic activity and tax revenues. Another proposed change is providing grants to municipalities that have lower property tax bases. Non-residential property taxes are almost always much higher than residential property taxes. Municipalities with larger numbers of non-residential properties have a higher property tax base, which allows them to lower residential and farm property taxes and provide additional services. Those with mainly residential properties don’t have this same capacity, leaving them with higher residential property taxes and fewer services. These municipalities would benefit greatly from a top-up grant to help cover the costs of municipal services. To fund the provincial transfers, the province could stop calling the provincial property tax an education tax. In 2019, Alberta collected $2.484 billion in education taxes. The total provincial transfers were $2.143 billion. If Alberta reassigned this revenue to municipalities, it would have covered all provincial grants and still have left $341 million for property tax reductions or tax room for municipalities. Property taxes should be used for local services and infrastructure, which in turn are reflected in property values. Education spending should come from general revenues, which it already essentially does, so that property taxes can be used for municipal services, for which it is better suited. This also has the added benefit of making provincial transfers more predictable and stable. Provincial grants and transfers need to be restructured to more fairly and evenly distribute funds to the municipalities. This paper proposes several components to help resolve the problem, as well as a method for funding it.