Mar 21, 2014

Infrastructure Funding - The Case for Legislative Reform

The four biggest challenges for city economies around the world are as follows:
  • Funding aging and new infrastructure
  • Health | Social Equity - we are where we live
  • Water  management
  • Connectivity

Over the next few months I will present some basic thoughts on all of these issues. For this posting I would like to begin to cover the first, funding aging and new infrastructure. For those interested in a preview of the second topic (Health | Social Equity), the TED talk I enjoyed giving last year in YYC can get the discussion going.

For the next few blogs I hope to spike your interest in infrastructure financing. I hope you stick with me through this rather non-exciting subject and hope you come to the conclusion that reform is needed.

The province is in the midst of  legislative reform discussion with citizens, towns, cities and business interests. They are hosting open houses around the province and all of us are invited to come and speak at the public session on April 10. One of the critical discussions should be the ability of local governments to fund much needed upgrades to the aging pipes, roads, water treatment facilities, community services, public transit, sidewalks, and the list goes on.  As Alberta’s towns and cities continue some of the fastest growth on the continent, we must have new ways to meet the physical and social demands of this growth. Municipalities are reviewing the current legislation (Municipal Government Act) and Mayor Nenshi is working with the Mayor of Edmonton and the Province to make reform happen. This could take place through a Charter tailored to the big cities.

Often forgotten in the mix is the social infrastructure necessary to meet the needs of a rapidly growing and aging population.  Whether Alberta was growing or not, the changing demographics of the province come with the need for new strategies to accommodate the changes. We’ll talk about this also in the next few weeks.

So what about the old pipes, the new public transit lines and schools?  There is no way to keep the politics out of the mix - and while you watch House of Cards on Netflix, remember that all politics are local. It is at our level of government where the decisions most affect everyday lives. How we get to work, where we recreate and if our electricity and drinking water meets our needs.

Canada is an amazing place for so many reasons.  Yet on the subject of the public finance of towns and cities, the ways of the past, where the feds, then the Province grant us at the local level the scraps in which to fund our daily needs, has not kept pace with the fast changing face of an aging and growing civic landscape.

There are many ways for cities to look to fund specific physical and social capacity.  The Community Reinvestment Levy (CRL) under the Municipal Government Act is a good example where the province has attempted to mimic the tax increment financing (TIF) strategies we used so frequently south of the border (both good and bad examples and when it comes to funding sports stadiums, there are not a lot of good examples).  The legislation could certainly benefit from a review.

I will revisit this subject another time in the context of benefits and challenges of tax “subsidies” like TIF’s and historic tax credits.  I will say, they can be critical to achieving success as well as creating challenges.  The key in any tax incentive though, is two-fold.  First, is the “but for” test.  This means, would an increase in revenue to the town or city have occurred without the tax incentive? For example, East Village has a Community Reinvestment Levy.  Clearly there is considerable building activity going on right now that will generate big increases in tax revenue to the City.  Would this have happened without the CRL?  Perhaps, but it would have taken much longer.

Construction in the East Village well under way. 
There are a lot of land development opportunities in YYC. It is also critical that the development occur in a logical manner. Our growth policy, recently adopted by Council, addresses this directly.  We need to consolidate our growth to achieve the highest efficiencies in using our existing infrastructure and minimizing the need for investment on new things that threaten our debt ceiling. East Village is arguably the most important development location in YYC for a number of reasons, not the least of which is that the type of development under construction and more on the way will generate huge physical, social and economic gains for YYC.

The benefits from the East Village growth will fund new infrastructure and services across the city, for a substantial net gain. So, that “but for” test has a very positive balance sheet through increased tax revenue that may not have happened, had the CRL not been created.

Now let us look at a different scenario where we focus on public investment and the wealth it creates.  The easiest and perhaps best example is investment in a road or public transit infrastructure.  I am going to highlight the later with two examples I worked on in Maryland as part of the Governor’s Sustainable Growth Commission.  We took on the task of looking at ways to fund the needed upgrade and expansion of local public transit infrastructure.

The simplest method in terms of logistics was raising the gas tax, which in Maryland had not happened in decades. The State legislature did vote this in. More challenging, and this brings me full circle back to the legislative review discussion happening in Alberta right now, was the sharing of provincial and municipal taxes.

The two examples I want to use are for a new light rail line (the Purple Line) and an ambitious bus rapid transit (BRT) system in Montgomery County Maryland, a suburb of Washington D.C.  The Purple Line had been on the books for over 20 years and land for the bulk of the right of way acquired almost as far back.  The BRT system was a new idea, ambitious given the right of way requirements on existing roads and the operating costs.
The Purple Line moved a step closer to a full federal funding 
match capping two decades of work leading to realizing this 
important public transit link to the Maryland suburbs of D.C.

The BRT system being considered in Montgomery County 
MD is ambitious. Yet “value capture”, meaning capturing 
value from the increased land value along the proposed 
routes, offers real potential to realizing the funding of the 
capital or operating costs.
The idea we were exploring, and the Maryland Department of Transport was a terrific partner in this effort, was value capture.  Simply put, by investing public money in infrastructure, the value of the land adjacent to that improvement goes up. When it does, there are increases in tax revenue for both the city and the state government. Value capture is about the new revenue, not the revenue the unimproved land is already creating. In our example of both the LRT and BRT, the analysis looked at capturing these increases as well as new development fees, within a set distance of either side of the new transit corridor or surrounding the potential LRT stations. I think the analysis used a quarter mile on both sides.

The purple line route crosses two counties and touches 4 stops on the D.C. subway. This linkage creates tremendous potential for land redevelopment that could help pay for part of the construction or operating costs of a major investment in public transit. The potential to “capture” the increases in revenue created by the public investment in the train, can go a long way to financing part of the construction but more importantly the operating costs.  The current discussions with the Province should explore this type of creative revenue sharing between the various levels of government

In YYC, we are in the midst of a building boom. Last year we issued permits for over $6.4 billion in construction well over the $4.1B of 2012.  The potential for value capture is enormous, but we must act quickly to capture the current boom. However, this potential can only be realized if the province acknowledges the need to dedicate some portion of their share of the increased revenue to help fund the capital and operating costs - of public transit for example. The recent announcement by the Province for a grant to help Edmonton, as well as, stating YYC can benefit from the same deal is a welcome step. However, it does not alter the fundamental structural funding deficit that exists in Alberta and elsewhere across the country.

We will break here and continue this blog in my next posting. 

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