Good afternoon, my name is Charlene Smylie and I am the AUMA Board Director for Villages West and I am also the Mayor of the Village of Wabamun. I am pleased to introduce this working session on the Municipal Sustainability Initiative. As you are aware, MSI funding is a critical component for municipalities to offer the infrastructure that Albertans rely on for transportation, the delivery of safe water and other important services such as recreation. Each municipality s MSI agreement was set to expire in 2017 but the province extended those agreements for an additional two years to end in March of next year. The province has indicated that funding will continue into the future but we still don t know what that will look like. For the last year and half we have reviewed the MSI program to understand its shortfalls and have been advocating for the province 1
to come to the table to discuss the future of provincial funding for local infrastructure. Today, we will present AUMA s vision and principles for a new funding model, discuss some of the options for how it could be structured and then we will get your input. For those of you that attended last year s spring Mayors Caucus, you may have seen some of this information but we also know there are some new faces in this room following the fall election. This issue is too important to be left to chance so we want to ensure that everyone has a good understanding of the issues at hand. I would now like to introduce Darren Reedy, who will walk us through the details of AUMA s review and recommendations for the replacement of MSI. Darren has been supporting AUMA in our review of MSI and he also manages AUMA s Welcoming and Inclusive Communities initiative. Please welcome Darren. 1
[DARREN SPEAKS.] To go back in time, the MSI program was created in 2007 as a 10 year funding commitment of $11.3 billion dollars. It was largely in response to the advocacy that AUMA was doing at that time where we were calling on the province to end education property taxes so that municipalities could apply all of the property owner s tax bill to municipal infrastructure and services. The Premier at the time, Ed Stelmach, advised that the province wouldn t end education property taxes but he offered the MSI as an alternative where he said it would be equivalent to the education property taxes. MSI was heralded by municipalities as being the key to their sustainability as it would provide both operating and capital funding in a predictable manner and allow for a 10 year planning horizon. 2
Unfortunately, the provincial government did not live up to its promise. The program was underfunded in 9 out of 10 years and the average annual funding was $890 million per year instead of the promised $1.4 billion. In Budget 2017, the province indicated it was committed to continuing MSI but at the forecasted rate of funding, that $11.3 billion promise will not be met until 2021. This extends what was supposed to be a ten year program into 15 years. This is a concern because the province encouraged municipalities to borrow against the MSI commitment so many of our larger municipalities in particular took this course of action and are now left wondering how this shortfall will be addressed. 3
This slide demonstrates the real weakness of how MSI is structured. There is a lack of stability and predictability of future funding. Municipalities have to await the provincial budget each year to learn what amount they will receive. It seemed that every year, the budget message would be sorry we can t fix MSI this year but don t worry we will do so next year and the province would forecast an increase. Then next year would roll around and it would be the same story all over again with no increase and sometimes even a decrease. The gray bars in this chart represent the original MSI promise, which involved a three year phase in period and then $1.4 billion each year thereafter. The black line represents the province s two year budget estimate for MSI. The blue line is the one year budget estimate and the yellow line is the actual MSI delivered. 4
You can see some big examples of unexpected changes for example in 2009 the funding was unexpectedly cut by 33 per cent. On average, MSI funding was 9% lower than the estimated amount in the previous year s budget. And 14% lower than the estimated amount that was promised in the province s budget two years before. How can municipalities be expected to plan and prepare long term plans with this kind of uncertainty? This not only causes difficulty in planning, it also creates inefficiency due to project delays and the time and effort municipalities have to take to change their budgets each spring. 4
In terms of being equivalent to the education property tax, that was another gap in delivery of funds promised. When MSI was created in 2007, the education tax requisition was $1.4 billion. Therefore, when the province committed that MSI would be $1.4 billion by 2010, it was making a commitment to provide almost 100% of the education property tax requisition back to municipalities. Instead, MSI funding did not reach the $1.4 billion promise and education taxes rose by an average of 7.3% per year between 2010 and 2016 while MSI remained relatively static. This is important because property tax is the primary source of revenue for municipalities. The increases in education property tax has meant there is little room left in taxpayer s tolerance for the municipality to increase taxes for its own purposes. 5
In 2016, we began to work on what a replacement for MSI should look like to overcome the past program shortfalls and deficiencies. We consulted a working group of administrators as well as our standing policy committees. During that process, we considered how the changes to the MGA were going to impact municipal financial planning. Since the province is going to hold municipalities accountable to providing three year operating and five year capital plans, then there should be an onus on the province to deliver funding to municipalities in a predictable manner. As well, the mandated Intermunicipal Collaboration Frameworks will require stability of funding so municipalities can enter into agreements for joint services and joint capital projects. 6
Through that initial work, we developed a vision, objective and principles for a new funding model. The vision is that Alberta municipalities should have an enduring partnership with the Government of Alberta that recognizes our shared responsibility to fund the infrastructure that Albertans rely on to maintain economically and socially resilient communities. I want to emphasize the word enduring in this vision. Ten year agreements such as MSI are good, but they will still come to an end, which creates a challenge for municipalities to develop an accurate 5 year capital budget when the future of funding from the province is unknown. 7
The recommended objective is that the province provides sufficient and predictable funding to eliminate the municipal infrastructure deficit and enable municipalities to prepare financial plans with certainty of funding. I want to make a comment about the word certainty. Certainty does not mean knowing the exact amount municipalities will receive each year for the next 5 10 years. That would be an unfair expectation since no government or business has certainty in knowing what their future revenue will be. We are looking for certainty that the funding program is stable, and that the annual funding amount will not be cut or terminated based on short term political decisions. 8
We have proposed four key principles for a new funding model. Possibly most important is that funding should be adequate to maintain local infrastructure without resorting to unduly high property tax rates. The principle of predictability is also essential for a new funding model to allow municipalities to develop realistic and accurate fiveyear capital budgets. 9
The principle of responsiveness should also be incorporated to consider the province s own financial realities. As the province s funding grows, so should their contribution to municipal infrastructure. And when their funding declines, municipalities should be willing to accept lower levels of funding. The fourth principle is that the province should honour the remainder of the MSI funding commitment because some municipalities have borrowed against those future funding amounts. Another principle that was considered is that of autonomy but as I will explain in a moment, that principle would be considered at a later phase of this work. 10
Through this visioning process, we saw that the development of a new funding model can be separated into three phases. First, we need to determine the source of the funding and the total amount in the funding pool. Second, we need a formula to distribute the funding to municipalities, whether that be the existing MSI formula or an alternative. And third, we need to determine what the funding can be used for and the requirements for reporting. Today, we are still in phase 1. 11
To achieve predictability of funding while also being responsive to the province s own financial realities, the Board is considering a couple of options. First is that a new funding model should be legislated and indexed as a statutory expenditure, which means it would not be subject to an annual vote. This would reduce the likelihood of the funding program being changed based on politics of the day. The legislation would then state that the annual funding is determined based on a fixed percentage of the province s revenue, expenditures or a combination of both. The are several benefits to this approach: o A link to provincial revenue or spending offers the greatest potential for funding adequacy as municipal funding will increase over time as the provincial economy grows. o It also creates a framework where municipalities will have 12
o information and a system to be able to predict future funding levels for the development of an accurate five year capital budget. Furthermore, there is no pre determined end date to the funding so municipalities can continue to forecast future funding amounts on rolling five year periods. Finally, a link to revenue would demonstrate that municipalities are willing to share in the risk and reward that when the provincial economy declines, municipal funding will decline and when there is economic growth, municipal funding will increase. A link to spending would also be beneficial as the municipal funding could not be targeted for cuts without the province reducing spending in other programs. 12
This slide shows how a link to provincial revenues or spending would compare to the MSI program between 2010 and 2017. The yellow line is actual MSI. The blue line represents a fixed percentage of provincial taxes and resource revenues. It shows how when provincial revenues increased between 2011 and 2014, this model would have delivered an additional $865 million in funding to municipalities. The black line represents a fixed percentage of provincial expenditures on programs. If that model had been in place, it would have delivered an additional $1.2 billion to municipalities as provincial spending grew on a fairly consistent pace. Both of these examples demonstrate how municipal funding that is linked to the province s economy or government spending is more likely to ensure adequate levels of funding for municipalities 13
compared to relying on provincial decision makers to decide what an appropriate amount is each year. You can also see how a link to revenue would be more volatile for municipalities to predict their future funding. Note that we have excluded the Basic Municipal Transportation Grant from these figures. That program was merged with MSI in 2014 but we have excluded it to maintain a consistent historical outlook. 13
In terms of how the funding is calculated, AUMA is proposing that the calculation be based on the province s revenue or expenditures from two years prior. For example, the 2018 funding would be based on the province s 2016 financials. The key advantage of this approach is more predictability and increased efficiency. Let s use an example to demonstrate. 14
If a linked model was currently in place, the province would release their 2017 financial statements in June. In July, Municipal Affairs would use the 2017 financial statements to calculate how much funding would be provided to municipalities in 2019. Later in the summer, Municipal Affairs could notify each municipality of the exact amount they will receive in 2019. Municipalities would then have that information as they deliberate their budgets in the fall. At the same time, you would be halfway through 2018 and will have a reasonable understanding of the province s financial state to predict whether your 2020 funding will go up or down. For the remaining three year outlook up to 2023, it would depend on your assessment of the provincial economy and your risk tolerance in budgeting. Under this approach, municipalities would be more efficient as you 15
could finalize your capital budget before the start of the year, which allows you to proceed with construction tendering earlier in the year and spend less time on budget changes in the spring after the provincial budget is released. 15
Other provinces are using similar funding models. Saskatchewan s Municipal Revenue Sharing program delivers one full point of the PST revenue to municipalities. It is predictable as it is linked to the economy and is calculated based on the province s PST revenue from two years prior. 16
Until recently, Manitoba had a funding model that calculated an annual pool of funding for municipalities based on one seventh of provincial sales tax revenue or 4.15 per cent of estimated personal and corporate income tax revenues, two cents per litre of estimated provincial gasoline tax revenue and one cent per litre of estimated provincial diesel tax revenue. This program was legislated but even with that additional assurance, the province repealed the sections of that Act in their 2017 budget. 17
The last example is Ontario where two cents of every litre of gasoline that is sold is pooled and distributed to municipalities with public transit systems. At this point, I would like to pass the mic over to President Morishita, who will talk where we stand today and what the next steps may look like. [BARRY ASSUMES THE MIC.] 18
[BARRY SPEAKS.] At our fall Convention, Premier Notley and Minister Anderson communicated that the province would be looking at some cautious restraint in its spending for 2018. Those comments suggest that MSI could be reduced when the province announces its budget next week. We don t have the ability to influence how much MSI will be in 2018 but there is an opportunity for municipalities to influence the future funding amount in a new funding model, especially as the province heads into an election in 2019. Last week, we sent a survey to CAO s and Mayors seeking stories on how MSI has delivered value in terms of job creation, economic development, ensuring the safety of water and wastewater systems and providing the social and recreation facilities that make Alberta desirable for current and future residents. 19
We will use that information in our discussions with the province to demonstrate the importance of this funding. Thank you to those of you that have completed the survey and for those that haven t, there still is time as it closes on March 17. 19
In terms of where we stand today, you passed a resolution at the fall convention that asks the Minister to consult municipalities on the future of provincial revenue sharing. The Board has met with Minister Anderson to communicate AUMA s vision, objective and principles for a new funding model to replace MSI. As usual, the government is pretty limited in what it will share in the months leading up to a new budget. We are waiting to see what will be announced in next week s budget and then assess how to move forward. We are entering interesting times as we are just over a year away from a provincial election and future infrastructure funding is top of mind for all of us. All of you have a significant voice in your community and with local media. If needed, we can unite our efforts to apply pressure to ensure that 20
municipalities get the funding that is needed to keep our communities safe and attractive for Albertans. You can expect more communication from us in the coming months on how this issue moves forward. 20
With that covered, we are now ready to move into the part of the session where we ask for your input. In the past, discussions on MSI sometimes turn to concerns with the MSI allocation formula. I want to clarify that our current focus is on how big the total pie of funding should be and how it should be structured so that municipalities have predictability and adequacy of funding. You can certainly share your comments on the MSI allocation formula but please keep in mind that those discussions will come at a later date. 21
To summarize, AUMA is proposing that the model used to replace the MSI program should represent an enduring partnership with the province where the funding model is legislated as a statutory expenditure. To achieve the principles of providing predictability for financial planning, offering assurance that revenues will be adequate in the future and that it is responsive to the province s own financial reality, we are proposing that annual funding should be determined based on a fixed percentage of provincial revenues, expenditures or a combination of both. Lastly, the provision that this model be based in legislation would minimize the potential for political influence and offer the stability that municipalities need to plan for their future. I m going to turn things back over to Charlene, to facilitate some group discussions on MSI. 22
[HAND THE MIC BACK TO CHARLENE.] 22
[CHARLENE SPEAKS.] Thanks, Barry. Here are the questions you will be asked to answer. AUMA representatives are at each table and they are responsible for taking notes and making sure your group gets through all the questions. You can appoint a spokesperson in the event that your table is selected for the report back. Our first question is: Do you support AUMA s vision, objectives and principles for a new funding model? The second is: Do you have suggestions on how the funding model should be structured? For instance, do you prefer a link to revenue, a link to expenditures, or another alternative? And the third question is: Over the last eight years, MSI has averaged $890 million per year, not including the Basic Municipal 23
Transportation Grant component. Has this provided an adequate level of funding for your community? If not, how much does your current allocation need to increase by? We know that is a tough question but a general estimate as a percentage would be helpful. You have until about 1:50 to answer these three questions. If you have questions, please raise your hand and someone will come to your table. [AT ABOUT 1:50 P.M., CHARLENE STOPS THE DISCUSSION AND CALLS ON ONE TABLE TO ANSWER QUESTION 1; CALLS ON A DIFFERENT TABLE TO ANSWER QUESTION 2; AND CALLS ON A DIFFERENT TABLE TO ANSWER QUESTION 3.] Thanks everyone, for sharing your feedback. This is a very important topic for AUMA moving forwards, so we appreciate your input. I d now like to call on my colleague Trina Jones to introduce the next session. 23