In this article, Peter Nichols discusses the municipal infrastructure gap and reviews some of the available mechanisms for funding new capital requirements.

This seems to be the "Year of the Infrastructure". The Alberta Growth Summit identified public infrastructure needs as a major area of concern. The Premier's Infrastructure Task Force -- with active AUMA participation -- has been formed to examine ways to support infrastructure development. And a number of municipalities have raised concerns regarding deteriorating infrastructure and accelerating capital spending needs. There are indeed a number of signs that public infrastructure spending in Alberta has lagged: for example, during the decade ending in 1985, capital spending in Alberta by all governments averaged 3.5% of provincial GDP; in the five years to 1991, 3%; and in the period 1992-1996, 2.2%. By 1996, public capital spending had declined to 1.9% of GDP.

While a need for increased capital spending seems to be recognized, the thorny problem that remains is how to finance those expenditures. A "checklist" of major financing avenues that are open to municipalities is summarized below:

• Provincial grant programs. The province administers a number of capital grant programs in support of municipal infrastructure, the most significant of those designated toward road, water and sanitary facilities.
  
• General municipal revenues. A municipality can of course rely on property taxes and other general revenues to fund new capital. There are effective limits on how much new capital can be financed on a pay-as-you-go basis but municipalities can pay for new infrastructure over time by taking on additional debt, and passing the debt service charges through the municipal operating budget. Municipal debt levels in the province have declined in recent years, signalling both a reduction in capital spending and a move toward pay-as-you-go financing. One of the AUMA's key policy objectives is the removal of education funding from property taxes: this would provide more tax room for municipalities to finance capital by way of general revenues.
  
• User fees. A sound way to obtain revenues for infrastructure -- particularly in the utilities area -- is through user charges. However, user fees are often set at a level that covers only operating and maintenance costs and, at best, a portion of historical facility costs, but they are often at a level insufficient to generate reserves for replacing facilities or funding new infrastructure.
  
• Development fees and levies. It has become increasingly common practice to pass on some part of the infrastructure costs associated with growth and development to those new developments. This can take the form of off-site levies, connection fees, various development fees and charges, and other recoveries as part of a development agreement. Traditionally, developers have been responsible for most "on-site costs", but they now are called on often to contribute toward water, sanitary, arterial road, recreation and other municipal facilities that serve a wider development area or the community at large. In some instances, developers are required as well to "front-end" the costs of extra capacity to serve future developments and various mechanisms have been implemented to help repay them for those front-end investments.
  
• Local improvement taxes. Local improvement taxes are often used to fund new or improved facilities that will benefit a particular area rather than the whole municipality. Examples include local road paving, the provision of sidewalks, curbs, and gutters, and street lighting. The debt servicing costs for those improvements are borne by the benefiting properties but the municipality carries the debt on its books and assumes some risk of non-payment.
  
• Special taxes. Under Section 382 of the MGA, municipalities may pass special tax bylaws to pay for a specific service or project. An advantage of these special tax provisions is that they allow the municipality to target a particular benefiting area and recover taxes only from properties in that area.
  
• Privatization. An increasing number of municipalities across North America are pursuing the privatization of some municipal functions. This can provide immediate revenues through the sale of assets to fund high-priority infrastructure needs and can reduce a municipality's future infrastructure financing requirements.

These are the main capital financing avenues available to municipalities. They are often used, of course, in various combinations and the challenge for municipalities is to determine an appropriate financing "package" that is fair and equitable. With growing infrastructure demands facing many communities, it can be expected that capital financing issues will become an increasing preoccupation with municipal managers and councils.