In this article, Peter Nichols discusses the need for municipalities to re-examine and redefine their approaches for financing local facilities and infrastructure.

A primary role of municipal government is to provide and maintain local facilities and infrastructure including roads, water and sewer systems, parks and recreation facilities, and fire and police equipment and facilities. The key challenge confronting municipalities is to ensure that adequate facilities are in place when required and that appropriate funding can be secured to meet new requirements and replace obsolete facilities. A deterioration in local infrastructure can impede local growth and development and signal a municipality's inability to maintain essential public facilities.

A feature inherent to the development of community infrastructure and facilities is that these involve the need for large, infrequent expenditures which place particular pressures on local government. Those pressures have been intensified in recent years by: the reduction in conditional capital grants and the local assumption of new infrastructure responsibilities from the province; the need to replace facilities at new, higher standards (and at higher cost); the increased resistance by property owners to higher governmental taxes and debt; and, among many jurisdictions, a lower growth in financial capacity.

Over the years, municipalities have developed various methods for dealing with their capital financing. These range from simple pay-as-you-go to more sophisticated debt and reserve policy systems, with the simpler approaches being more prevalent among smaller municipalities. The pay-as-you-go systems often are modified by:

• phasing capital projects to spread the financial burden over several years;
  
• allocating capital budget funds to a specific project in the two or three years prior to the project's commencement; and
  
• changing the timing of projects to minimize overlapping capital demands.

Within the context of debt financing, there has been a tendency toward shortening debt amortization periods to minimize interest payments and there appears to be a clear reluctance on the part of some municipal councils to assume additional debt.

Notwithstanding the significance and importance of infrastructure development to municipalities and, as well, the new challenges that surround the financing of facilities, many jurisdictions continue to rely on capital planning and capital financing practices that are no longer appropriate in the new environment. Those practices, often developed over time on an ad hoc, patchwork basis, should be re-examined, modified as necessary, and formalized.

The process by which municipalities evaluate proposed capital projects and set municipal capital priorities is an obvious starting-point for review. Objective criteria should be developed to assess the relative merits of different projects, to ensure that long-term benefits to the community from capital spending are maximized. In this context it may be useful to distinguish between different types of capital expenditures by recognizing that some projects have a built-in repayment mechanism (for example, the development or upgrading of a water utility), while others (for example, pools and other recreational facilities) may imply ongoing operational demands on the municipality's general revenue base.

Beyond that, it is important that municipalities ensure that their capital financing policies are effective, equitable, and efficient. For certain projects, municipalities may choose (and be able) to finance capital on a pay-as-you-go current basis and will need to define a preferred mix of user fees, off-site levies, and property taxes. Long-term debt financing may be relevant for large-scale projects that have an extended economic life and which will convey benefits over the longer-term. The need to adopt reserve provisions is becoming increasingly important now as a greater share of the capital burden of local facilities passes to the municipalities and as the facilities financed heavily in the past with grants begin to wear out.

Because many municipal capital expenditures convey long-term benefits, the question of who pays and who benefits -- both now and over time -- will need to be addressed. That question may be answered differently from community to community but it will affect the choice of financing methods.

And, finally, some municipalities are looking as well at the sale or privatization of some types of infrastructure in order to "free-up" capital and to pass the obligation for new capital financing to the private sector. This can imply that the capital expenditure is "transformed" into an operational one, if for example the municipality begins to rely on leases or service contracts to provide some municipal functions. Examples include municipal leases for public works equipment, vehicles, and administrative space.

Improvements to infrastructure planning and financing approaches can have dramatic implications to municipal financial condition and performance and local jurisdictions are encouraged to re-examine these critical areas as an integral part of their search for innovation and performance enhancement.