Chapter 3: Revenue Sources for Local Government
In the first two chapters, we looked at the main sources of revenue for local governments in BC and the economic challenges that may impact revenues. Growing infrastructure deficits have combined with the offloading of responsibilities from senior levels of government to place more pressure on local governments. Yet, despite the increase in financial pressures, BC’s local governments have access to relatively narrow bases of own-source revenue.
In addition, many of BC’s communities are struggling to maintain a viable economic base in the midst of a very difficult economic transition marked by the erosion of high-value industries. If BC’s communities are to successfully adapt to a changing, globalized economy, our local governments will require access to a more diverse range of revenue sources.
In this chapter, we propose specific areas where local governments have the opportunity to diversify and grow their revenues. We focus on three main areas: new taxes and a share of existing taxes, opportunities to increase sales of services, and other revenue options.
BC’s local governments can make better use of taxation powers to increase funding for municipal needs. This section explores how BC municipalities can access new revenues by sharing – or negotiating a greater share of – existing taxes, or developing new taxation tools.
i. Taxes – Provincial Sales Tax
As of July 1, 2010, the British Columbia government combined the provincial sales tax with the federal goods and services tax using the federal collection and administrative process. The combined tax is called the harmonized sales tax (HST), and although the final rate remains at 12 per cent, the provincial portion will be collected on a broader base of goods and services.
In terms of sharing the new HST, local governments may want to look at the sales tax model in Saskatchewan. There, the provincial government agreed to transfer one percentage point – or 20 per cent – of its 5 per cent provincial sales tax to local governments. In its 2009 budget, the Saskatchewan government projected it would transfer $167-million in revenue to local governments. This is a 19 per cent increase over the previous funding transferred to local governments in that province.
If the British Columbia government transferred 20 per cent of its sales tax revenue to local governments, the result would be $627-million in unconditional transfers during the first full year of HST, rising to $667-million in year two.
This idea appears to have broad support among local governments in BC. Several resolutions were submitted to the 2009 and 2010 Union of BC Municipalities (UBCM) conventions calling upon the provincial government to share a portion of its sales tax revenue. In addition, when Think City surveyed local government leaders, 88.9 per cent agreed or strongly agreed that BC should use Saskatchewan’s policy as a model and transfer a share of the new HST to local governments in BC.
ii. Taxes – Local Sales Taxes
Another option local governments can pursue is collecting their own sales taxes. This would be more difficult and costly to implement and administer than a simple transfer of existing sales tax revenues, but remains an option that does not require sharing existing provincial revenues but would require changes to provincial legislation.
Municipal sales taxes are widely used to generate revenue in many European and Asian nations. Such taxes are also commonplace throughout the United States, where many states allow local government to charge a wide range of sales taxes. Municipal sales taxes are employed in at least 16 American states, such as California, Florida and Texas, and include some of the country’s biggest cities. Dallas, for example, has an 8.25 per cent sales tax, St. Louis has a 6.325 sales tax, New York City has an 8.875 per cent sales tax, and California’s sales taxes range from 8.25 per cent to 10.75 per cent.
US sales taxes are typically segmented and directed by legislation to very specific purposes. Missouri allows local governments to collect six sales taxes for general revenue (up to one per cent), capital improvement (up to 0.5 per cent), economic development (up to 0.5 per cent), transportation (up to 0.5 per cent), storm water and parks (up to 0.5 per cent), and fire protection (up to 0.25 per cent). New Mexico allows local government to collect several sales taxes for general revenue (up to 1.25 per cent), capital improvement (up to 0.25 per cent), environment (up to 0.0625 per cent), infrastructure (up to 0.25 per cent), and quality of life (up to 0.25 per cent).
iii. Taxes – Property Transfer Tax
A property transfer tax would allow local government to capture some of the increase in land value each time a property is sold. It is an efficient way of capturing a small percentage of the increase in land value.
The provincial property transfer tax is budgeted to bring in $900-million in revenue for the provincial government in the 2010 - 2011 fiscal year. The tax is applied to the sale of each property at a rate of one per cent on the first $200,000 in value, and two per cent of the value greater than $200,000. The revenue generated by this tax is very closely correlated with the fluctuations of the real estate market. As real estate values in British Columbia have climbed steadily in recent years, the property transfer tax has become a larger contributor to government revenues.
The City of Toronto has recently introduced a similar tax called the municipal land transfer tax (MLTT). As of February 2008, the Toronto began to collect the MLTT under the legislative authority given to it by its provincial government under the City of Toronto Act, 2006. The tax is calculated on detached houses at a rate of 0.5 per cent on the first $55,000 in value, rising to 1 per cent of the value between $55,001 and $400,000, and 2 per cent of the value over $400,000. For commercial property and multi-family residential properties, the rates are somewhat lower with the portion over $400,000 taxed at a rate of 1.5 per cent and any value over $40-million taxed at 1 per cent. In the 2009 fiscal year, the MLTT raised $184-million, over two per cent of Toronto’s $8.7-billion operating budget.
The property transfer tax allows local governments to capture a small return on its investment in infrastructure and services that sustain property values. It also ensures that localized increases in property value can be equalized and shared across the jurisdiction so that all taxpayers benefit. Assessed at the time of sale, this type of tax recognizes that – until a property is sold – an increase in land value does not translate into an increase in income for many homeowners.
Some critics claim property transfer taxes will deter investment. However, many jurisdictions in North America, including the British Columbia government, have a property transfer tax, and there is little empirical evidence to support claims that such a tax inhibits investment in real property.
iv. Taxes – Road Pricing
Road pricing is an economic concept that supports direct charges or user fees applied to the use of roads. Road pricing has two discrete objectives: revenue generation, usually for the financing and maintenance of road infrastructure, and road pricing for purposes of transportation demand management. The 1993 Greater Vancouver Regional District Transport 2021 study recommended the use of road pricing measures to reduce congestion, provide clearer price signals to users for the costs they incur and impose on others, and to raise revenues for transportation improvements.
Local governments throughout the province already benefit from one road-pricing tool, in the form of parking fees. However, other road-pricing tools, such as tolls, congestion charges and license fees are not currently available to BC’s municipalities. The provincial government itself has embraced tolls as a means of financing major road infrastructure projects. For municipalities, however, the implementation of such tools would require new legislative authority. Furthermore, there are other issues to address regarding tolls, as elaborated on in the Golden Ears Bridge case study.
Case Study: Golden Ears Bridge
The Golden Ears Bridge is a six-lane bridge in Metro Vancouver that spans the Fraser River and connects Langley on the south side with Pitt Meadows and Maple Ridge on the north side. Opened in mid-2009, traffic volumes have been lower than expected. This case illustrates that there can be problems of revenue leakage where alternate non-tolled routes exist. According to TransLink figures, the Golden Ears Bridge is not meeting its revenue targets. While daily traffic volumes have slowly increased in recent months, they remain significantly below TransLink’s original estimates. As a result, TransLink increased tolls on the new bridge on July 15, 2010 to capture additional revenue.
This raises questions about the approach to tolling for the Port Mann Bridge, the new Patullo Bridge, and other major projects. There seems to be no obvious reason why some of these bridges and highways should be tolled while others, like the Lions Gate, Pitt River, and Alex Fraser bridges are not.
A network or system toll would have the advantage of capturing toll revenues from all routes and not distorting traffic patterns as drivers attempt to avoid tolls. In fact, a system-wide toll would allow pricing to fluctuate in response to traffic volumes. High demand routes during peak periods could be priced higher than low demand routes during off peak periods. Portugal’s Via Verde, an electronic tolling system which covers all highways and bridges in the country, is a good example of system tolling applied at a macro level.
Aside from tolls, congestion charges are another road pricing option worth considering. Congestion charges are more likely to find political support within a major city because they extract revenue from non-residents, who, nevertheless, are using city streets and services but do not pay property taxes. The geography of Metro Vancouver, with its bridges and limited routes into the city, make it a good candidate for a congestion charge.
Singapore introduced the world’s first successful congestion pricing scheme in 1975. Now congestion charges are widespread, with well-known examples in Bergen, Stockholm, Shanghai and London. In North America, San Francisco is currently exploring this form of road pricing. In New York, Mayor Michael Bloomberg and a majority of his city council voted in favour of a congestion charge in 2007, only to see it stall in the state legislature.
Following the lead of Canada’s largest city, license fees are our final example of road pricing that BC’s local governments may want to consider pursuing. In 2008, Toronto was given the authority by its provincial government to introduce a personal vehicle tax (PVT) of $60 annually on each personal vehicle, and $30 annually on each personal motorcycle. Toronto collected revenues of $51.7-million from its personal vehicle tax in 2009. There was an attempt to introduce a fee for vehicles in Metro Vancouver in 2000, but that levy failed to receive support from the provincial government at the time.
v. Taxes – BC Carbon Tax
In 2008, British Columbia introduced a carbon tax at a rate of $10 per tonne, rising to $30 per tonne by 2012. The tax is applied to virtually all fossil fuels, including gasoline, diesel, natural gas, coal, propane, and home heating fuel. While the carbon tax is comprehensive, it is weakened by the many exemptions granted to the largest industrial emitters in the province, such as those for aluminum smelting, lead and zinc production, and the transportation sector.
There are also valid critiques about the disproportionate impact that the carbon tax has on lower-income households. The tax credits intended to cushion the impact on low-income households have not kept pace with increases to the rate of the carbon tax. The bottom 40 per cent of the income earners in BC will pay more in carbon taxes than they will receive in tax credits and income tax reductions. Furthermore, it is precisely these people who are least able to afford the capital investments required to reduce their energy consumption. In contrast, higher income families will find it easier to reduce their consumption and upgrade their homes for energy efficiency.
Although the carbon tax is projected to generate $1.85-billion in its first three years, it is designed to be revenue neutral because the government has reduced income taxes and business taxes by the same amount.
Instead of requiring that this money be used to cut other taxes for individuals and business, local governments could benefit from redirecting these funds toward programs and projects that will actually cut greenhouse gas emissions. Resolutions on this issue were submitted to both the 2009 and 2010 UBCM conventions.
When Think City surveyed local government leaders throughout BC, 77.9 per cent agreed or strongly agreed that the provincial government should direct carbon tax revenues toward initiatives to cut greenhouse gas emissions, which would also improve a local government’s bottom-line. Public transit, energy saving retrofits, district energy systems, upgraded sewage and waste management systems, renewable energy generation projects, more efficient vehicle fleets, and various other technology upgrades would not only reduce the greenhouse gas emissions of most local governments, they would also help local governments to save money through reduced energy costs.
vi. Taxes – Gas Taxes
Federal Gas Tax
One important new source of revenue for BC’s local governments has been the federal gas tax fund (GTF). In BC the GTF is administered under an agreement between the Union of BC Municipalities and the federal and provincial governments. The gas tax provides revenue to local government for municipal infrastructure and related projects. The stated goal of BC’s 2005 - 2015 gas tax agreement is that federal gas tax funding “… will provide local governments in British Columbia with a source of stable, predictable and long-term funding towards environmentally sustainable municipal infrastructure to help them address their infrastructure needs and meet sustainability objectives.”
The money from the GTF can be spent on a variety of eligible forms of capital infrastructure. These include public transit, community energy systems, water and wastewater projects, solid waste management, and capacity-building programs. All of these projects are intended to reduce greenhouse gases by allowing local governments to invest in cleaner technologies and municipal systems.
In many respects, this is good public policy because it channels the gas tax revenues into public transit and other projects that reduce emissions. However, the gas tax agreement does not allow these funds to be spent on operational needs, only on capital projects. Unfortunately, this is a serious oversight because operating funding is desperately needed to sustain many services, such as public transit, that are crucial to reducing greenhouse gas emissions.
Without operating funding, even the best capital investments will not function at peak efficiency, therefore depriving the public of their full benefit. For example, a clean fuel bus is of little use when it’s sitting idle because there isn’t money to pay drivers’ salaries. Similarly, funding staff training or capacity-building plans makes little sense at a time when layoffs have bumped recently trained civic employees into positions where they are unable to use their expertise. In order to realize the full benefit of these capital investments, municipalities need to be able to access operating funding to ensure that an adequate level of trained staff are in place when they are needed.
Provincial Gas Tax
When it comes to the provincial gas tax within the Metro Vancouver region, TransLink has legislative authority to collect an additional gas tax of 15 cents per litre to fund public transit. In the Victoria regional transit service area, BC Transit is authorized to collect an additional gas tax of 3.5 cents per litre for similar purposes.
The provincial government collects a gas tax of 14.5 cents per litre in communities outside of the Vancouver and Victoria metropolitan regions. Many of these communities also have public transit service operated by BC Transit, but lack similar legislative authority from the provincial government. There is no obvious reason to continue this inequity. Smaller communities also need reliable transit service and should be eligible for a gas tax similar to the tax collected in Metro Vancouver and Victoria.
Finally, local governments could be given the right to collect their own gas tax, in addition to gas taxes collected by the federal and provincial governments. Local gas taxes would help to recognize the current reality that all three levels of government have responsibilities connected to transportation and environmental policies. All three levels of government require the resources necessary to fulfill their respective responsibilities.
vii. Taxes – Hotel Room Tax
Since 1990, BC’s municipalities have been able to levy a two per cent additional hotel room tax on top of the province’s eight per cent hotel room tax. However, while local governments and school districts have successfully lobbied for exemptions from the HST, its introduction means the regular eight per cent hotel tax ceased to exist as of July 1, 2010. Those municipalities that levy the two per cent additional hotel room tax will still be able to collect this revenue for now (Chilliwack, North Vancouver, Oak Bay, Parksville, Prince Rupert, Qualicum Beach, Richmond, Rossland, Saanich, Smithers, Surrey, Vancouver, Victoria and Whistler). However, at present the status of the additional hotel room tax in future years remains unclear.
Across Canada, many municipalities collect hotel room taxes, sometimes called destination marketing fees. For example, in Alberta, Calgary and Edmonton charge one per cent in addition to the four per cent provincial tax. And in Ontario, the communities of Greater Toronto Area (GTA), Ottawa, Sault Ste. Marie, Kingston, Kenora, Hamilton, St. Catharine’s, Burlington, Stratford, Dryden, and the Village at Blue Mountain (Collingwood) charge three per cent. In the Maritimes, Halifax and Charlottetown charge two per cent and St. John’s charges three per cent. In Quebec, hotel room taxes go to the local tourism marketing associations.
viii. Taxes – Sin Taxes
Taxes are often used to discourage forms of behaviour that are deemed to be unhealthy or socially undesirable. These taxes are sometimes referred to as “sin taxes,” such as taxes on alcohol and cigarettes. They are also intended to recoup some of the social costs for additional care services or addictions treatment.
In 2006, the Ontario government gave Toronto the authority to impose a sales tax on alcohol, in addition to the provincial taxes already collected on alcohol sales. Although Toronto has not yet imposed an alcohol sales tax, it could do so at any time. If BC followed Ontario’s example, local governments in this provinces could then tax alcohol in view of the policing and social service costs associated with over-consumption.
The concept of sin taxes could also be extended to other harmful substances and activities, such as gambling and other behaviours that society wishes to discourage.
After property taxes, sales of services are the next largest category of own-source revenue for local governments. There are significant opportunities for local government to expand their sales of services and take advantage of their existing expertise and infrastructure. The principal areas where local governments could increase their revenues are sales of energy, garbage collection, water and sewer services.
i. Sales of Services – Energy Sales
British Columbia’s electrical system has historically been run by large utilities such as BC Electric, and its publicly-owned successor, BC Hydro. The government has exerted a high degree of control over the generation, transmission and sale of electrical power. As a result, British Columbians have enjoyed some of the lowest electricity rates in North America.
BC Hydro provides electricity to most of British Columbia, and FortisBC provides power to several communities in the Kootenays and southern interior of the province. Six communities in BC (Nelson, New Westminster, Kelowna, Summerland, Penticton and Grand Forks) have their own municipal electricity utilities because they were in operation prior to the creation of BC Hydro in the 1960s. Most of these municipal utilities purchase electricity from either BC Hydro or FortisBC – only Nelson Hydro owns and operates its own generation facilities at Bonnington Falls.
In other provinces, municipally-owned electrical utilities are much more common, despite a trend toward privatization in recent years. Edmonton’s EPCOR was recently partially privatized, and Princeton Light and Power was sold to FortisBC. These policy decisions reduce public control of a critical piece of economic infrastructure and close the door on potential sources of public revenue. Ironically, energy privatization is happening at precisely the time when energy prices are forecast to increase dramatically and when environmental and economic challenges demand a more aggressive and farsighted response than the private sector is usually able to provide.
In recent years, the provincial government has made dramatic changes to energy policy in British Columbia. The most significant policy change is the decision to restrict BC Hydro’s ability to build new generation facilities, requiring BC Hydro to meet its future energy needs by purchasing power from independent power producers (IPPs). This change has been controversial, and could erode one of BC’s competitive advantages – an integrated, publicly-operated electrical utility that provides low cost, low carbon emission power.
While it is questionable whether this policy direction is in the public’s interest, it does present certain opportunities for local governments to become involved in for-profit electrical generation. Local governments, First Nations and some community cooperatives are among the entities eligible to sell power to BC Hydro.
BC Hydro has three programs under which it purchases power: the calls for power program, the standing offer program, and the net metering program. BC Hydro issues calls for power (similar to a request for proposals) periodically and invites proposals for power projects. They then select successful proposals and negotiate energy purchase agreements.
In 2007, BC Hydro brought in the standing offer program to encourage small-scale renewable energy projects that generate between 50 kW and 10 MW. Proponents are required to sign a minimum 20-year energy purchase agreement with BC Hydro. It is possible for a local government to generate power for its own internal use and sell any surplus power under the standing offer program.
The net metering program is intended to encourage micro-scale projects, such as installing photovoltaic solar panels on the roofs of buildings or geothermal heating systems in new buildings. Under this program, hydro customers receive credit for any electricity they generate, and if at the end of the year they have generated more power than they have consumed, BC Hydro will pay the customer for the difference. Although participation in this program is unlikely to become a net-revenue source, it would reduce the electrical costs incurred by local governments for the daily operation of municipal buildings and facilities.
Local governments are well positioned to generate power for sale because of their existing infrastructure base and engineering capacity. By establishing a municipally-owned utility, local governments can take advantage of their existing land, buildings, infrastructure and expertise. An additional advantage for local government is that municipally-owned utilities are exempt from regulation by the BC Utilities Commission (BCUC). This has important implications, since the BCUC regulates prices and the capital structure of utilities (i.e., the debt versus equity ratio and other finance concerns). Local government utilities are therefore free to determine their own rates, priorities and tolerance for risk.
One of the most important advantages of public ownership is that local governments can make investments and undertake projects with longer time horizons and lower rates than most private sector companies. They also have the flexibility to look beyond immediate, bottom-line considerations and balance their return on investment with customer rates, long-term energy security and environmental considerations.
When Think City surveyed local government leaders throughout BC, 68.5 per cent agreed or strongly agreed that their government was looking for ways to create energy for internal use and/or external sales.
ii. Sales of Services – Drinking Water System Energy
Almost all local governments are involved in providing drinking water. In order to do this they maintain a vast infrastructure of pipes to bring water from fresh water sources to households. Some municipalities have fitted these pipes with turbines to harness the energy in drinking water flowing through their pipes. Cities such as Portland and Tacoma are generating electricity in this manner.
In 2004, the District of West Vancouver installed a system of this kind, the Eagle Lake hydroelectric project. Previously, West Vancouver used a system of pressure reducing valves to reduce the pressure of the water flowing down from the Eagle Lake Reservoir. They replaced the valves with a 200 kW turbine at a cost of $450,000. The project is expected to pay back the $450,000 capital investment over 10 to 12 years.
Another example of this type of project is the Lake Country hydroelectric generating station, a project that added to existing infrastructure with the installation of a
1.1 MW hydroelectric turbine as part of the Eldorado Reservoir system. This project generates approximately 4,000 MW hours annually that is sold to BC Hydro.
iii. Sales of Services – LandFill Biogas
Landfills give off significant amounts of methane, a greenhouse gas that is 25 times more potent than carbon dioxide in trapping heat in the atmosphere. Capturing and burning this gas cuts greenhouse gas emissions, and also produces energy. Capturing the gas can be an expensive process, and often requires major capital investment. In general, the larger landfill site, the better the economies of scale for such projects.
There are already several projects to capture landfill gas in British Columbia. These include the Hartland landfill in the Capital Regional District, the Vancouver landfill and the Glenmore landfill in Kelowna.
iv. Sales of Services – Municipal Solid Waste
Municipal solid waste can be burned in incinerators that convert waste-to-energy. Local government already collects the waste, and needs to dispose of it. Although there are important concerns about the toxicity of emissions, the latest high-efficiency furnaces are able to burn much cleaner than traditional incineration methods.
After implementing programs to maximize diversion rates through expanded recycling and composting programs, local government will still be left with solid waste that must be disposed of. High efficiency waste-to-energy systems are an option for local government in dealing with their municipal solid-waste problems. Although it is not a perfect solution, it must be balanced against the environmental cost of alternate methods of disposal, such as the creation of new landfill sites.
Metro Vancouver’s waste-to-energy facility in Burnaby processes about 20 per cent of the region’s garbage and generates about 135,000 MW per year that is sold to BC Hydro, earning $6-million annually for Metro Vancouver.
v. Sales of Services – Anaerobic Digestion
Anaerobic digestion of gases from sewage has long been a source of energy in sewage treatment plants, and biogas production is currently in place at sewage treatment plants in Vancouver, Prince George and Nanaimo. Energy from wastewater treatment digestion is likely only viable in communities of at least 50,000 people, and the economies of scale improve with larger populations and sewage volumes. Approximately one million litres of sewage per day is needed to produce nine kilowatts.
The Whistler wastewater treatment plant, owned and operated by the Resort Municipality of Whistler, extracts ambient heat from treated wastewater and provides 95 per cent of the heating and cooling needs for 2,200 homes, covering 85,000 square metres. It has been able to cut greenhouse gas emissions by 90 per cent compared to conventional systems. After its first year of operation, the system is already saving money for the municipality.
The plant is combined with a state-of-the-art compost system that transforms biosolids, residential food waste and wood chips into high-grade compost. The composting system has the potential to divert 5,000 tonnes annually, or 20 per cent of the municipality’s waste.
The Hyperion treatment plant in Los Angeles produces about eight million cubic feet of methane biogas, which is converted to electricity. The Deer Island sewage treatment plant treats 360 million gallons of wastewater each day from the Greater Boston area. It is able to supply 20 per cent of its own power needs through methane gas extraction and hydroelectricity produced as wastewater drops from the plant into the outfall tunnel. In total, the electricity the plant generates saves over $16-million in annual operating costs.
Montana’s Helena wastewater treatment facility treats 2.68 million gallons of wastewater per day. The treated wastewater is disinfected with ultra-violet light and methane gas from the digestion process is used to meet the plant’s heating and energy requirements.
There is also potential to use anaerobic digestion – the breaking down of waste in the absence of oxygen – on agricultural waste and green waste. Again, large volumes of organic matter are required in order to make enough gas to make the economics viable. In Canada, Toronto’s Dufferin facility is an example of anaerobic digestion of solid waste.
Toronto’s green bin program collects organic green waste from over 500,000 single-family households. Along with organic waste from city parks, this household green waste is processed at the Dufferin facility. The program generates revenues for the City of Toronto and has achieved a 44 per cent diversion rate, and aims to reach 70 per cent. A similar program in Metro Vancouver would extend the life of existing landfills, reduce methane gas emissions from landfills, and generate revenue for the regional district.
vi. Sales of Services – Biomass and Wood Waste
Biomass, in the form of agricultural waste or wood waste, can be a useful energy resource in many communities. For instance, Revelstoke undertook a community energy planning process in 1997. The process focused on a district heating system, a residential energy retrofit program, and, the creation of an energy services company to serve its institutional and commercial buildings.
Today, the people of Revelstoke are the proud owners of a biomass energy system that uses waste wood from the Downie Timber sawmill to produce energy for its district heating system. The waste is burned to provide steam for the sawmill, with the surplus steam used to heat municipal and commercial buildings in the downtown area.
The Revelstoke Community Energy Corporation is wholly-owned by the City of Revelstoke. Their programs reduce greenhouse gas emissions, produce electricity and generate revenues. The sawmill is their largest customer, and was a major partner in the deal. The project cost approximately $5-million, which was provided through a combination of loans, grants, and civic reserves.
vii. Sales of Services – Community Energy Cooperatives
Community energy cooperatives are companies owned by their members, not shareholders. There are two kinds of cooperatives: producer co-ops that allow producers to sell their power locally, and consumer co-ops that allow consumers to group together to buy power at lower rates than they could individually. Community energy cooperatives have been an important force in developing renewable energy in Denmark, Germany and the Netherlands.
For example, the City of Copenhagen initiated the Middelgrunden wind farm, and helped found an energy cooperative whose 8,500 members own 10 of the wind farm’s 20 turbines.
WindShare in Toronto is another example of a producer cooperative in the renewable energy sector. WindShare is in the process of developing Lakewind, a 20 MW wind farm in Kincardine, Ontario. When the wind farm opens in 2012, it will be the largest cooperatively-owned wind power project in Canada. It will consist of 10 two-megawatt turbines standing 108-metres high, and will generate enough electricity to power 13,000 homes.
Here in British Columbia, the City of Dawson Creek played an important role in helping to establish the Peace Energy Cooperative. This producer co-op helps small producers sell their power to larger distributors. As purchasing the technology for alternative energy – such as wind turbines and photovoltaic solar energy systems – is very expensive, producer cooperatives can help with bulk purchase orders and by negotiating better prices for energy producers.
viii. Sales of Services – District Heating Systems
District heating systems create an opportunity to provide steam heating and hot water to a network of buildings at lower costs than stand-alone systems are able to achieve. District systems also significantly cut the greenhouse gas emissions of participating buildings.
The Lonsdale Energy Corporation (LEC), owned by the City of North Vancouver, is an example of a successful district energy system. LEC provides heat and hot water to 1,390 residential consumers and 150,000 square feet of commercial space. LEC has grown rapidly and is now in a break-even position after only five years in operation. Investing in LEC has allowed the City of North Vancouver to provide a competitively priced and environmentally efficient service that also expands the range of services that the city is able to sell. As the number of buildings connected to LEC continues to grow, the city can expect to benefit from a new long-term revenue stream.
One other advantage of a district energy system is that under the province’s Community Charter, a city can mandate private property owners in the immediate area be connected to the district energy system. This type of system works best in compact, densely built areas, such as the Lower Lonsdale part of North Vancouver.
The City of Vancouver built a new district energy system as part of the Olympic Village project. It will provide heat for the entire development of over 557,418 square metres, using the city’s underground sewage pipes as a heat source to heat the water and generate steam. The system works by pumping sewage into the facility, where ambient heat is extracted and circulated through the buildings. The cold sewage is then pumped into the city’s sewer system.
The district heating system has the capacity to serve up to 16,000 residents and businesses and will reduce greenhouse gas emissions by 50 per cent compared to conventional heating methods. Half of the cost of the $29-million facility was covered by grants and low-interest loans from senior levels of government. The other half came from city bonds, which will be repaid through rates billed to future residents in the Olympic Village neighbourhood.
x. Sales of Services –District Electricity Utility
Similar to a district energy system, this type of utility or micro-grid distributes electricity rather than steam to customers in a compact, local area. Using renewable energy sources, and supplemented by power from BC Hydro when necessary, this type of small-scale utility could provide electricity to consumers in dense, urban areas. For example, the district energy centre in Toronto is part of the Exhibition Place complex and is owned by the City of Toronto. It provides heating, cooling and electricity for the entire complex.
The United Kingdom’s Borough of Woking provides a much larger example of how micro-grids can be used to provide power for neighbourhoods. The system in Woking provides public buildings and housing with both heating and electricity that is generated from nine natural gas co-generation plants and 11 photovoltaic solar power systems.
x. Sales of Services – Commercial Garbage Collection
In the last several decades, many local governments removed themselves from the business of commercial garbage collection, turning over city-run services to private operators. However, the trend in recent years is moving away from contracting out, as cities discover that commercial garbage collection makes sense for both businesses and taxpayers.
There are three reasons for contracting-in commercial garbage collection. Studies have shown it can be more cost-effective, contribute to greater waste diversion and deliver a profit to local government coffers. Even some advocates of private garbage collection, such as Ben Dachis, have even noted that “during the last decade, American cities have been contracting work back in at a faster rate than they have contracted out.”
In western Canada and the United States, there are several local governments that provide publicly-run commercial garbage collection, such as the City of Burnaby, the District of North Vancouver, the City of Calgary, the City of Medicine Hat and the City of Seattle. Publicly-run commercial garbage collection is often more cost-effective than private comparators because of larger public infrastructure and economies of scale. Diversion rates from landfill to recycling are typically higher in public systems than those achieved by private sector contractors. According to the City of Ottawa’s Diversion 2015 report, the reason for this difference is clear:
“When waste materials have limited commercial value, the private sector limits recycling services or prices them accordingly. Where there is insufficient demand for recycling due to the lack of regulatory requirements or the size of the local economy, the service will not be provided unless doing so can optimize use of other systems, such as the residential infrastructure, in an economic fashion.”
Ottawa is now in the process of phasing in an industrial, commercial and institutional waste strategy with the goal of increasing diversion rates from 17 per cent to 60 per cent by 2015, which will extend the life of municipal landfills and help protect the environment.
Increasing local government involvement in commercial garbage collection is also beneficial in reducing costs for businesses by providing competition – directly and indirectly. Directly, local governments can build on existing publicly-run residential garbage collection services to offer competitive programs that lower costs for businesses. Indirectly, the presence of a public sector commercial garbage competitor can help bolster fairness in the market.
An example of how business can benefit is the City of Toronto’s yellow bag program, an innovative pre-paid system of commercial garbage collection. The goals of the program are to reduce waste and increase recycling and organic collection, to create a harmonized, fair service for businesses across the city, and to dramatically lower the costs of garbage collection and disposal.
Recognizing that many small businesses do not generate large amounts of garbage, the program collects their garbage once per week, much like it does for residents. Businesses who register are entitled to free recycling and organics collection. Generally, commercial establishments of less than four floors and less than 500 square metres of ground floor space qualify for the program.
Competition in commercial garbage collection can also indirectly influence the behavior of private contractors to prevent collusion and keep costs in check. In 2009, the Federal Competition Bureau (FCB) investigated claims from central Vancouver Island that a small number of companies were manipulating the market for commercial garbage collection. The companies involved locked customers in using long-term contracts that included highly restrictive terms, such as automatic renewal clauses, significant penalties for early contract termination and rights of first refusal. The FCB ruled that the contracts resulted in substantially less competitive markets, leading to higher prices and reduced choice for businesses.
xi. Sales of Services – Franchise Fees
BC’s local governments have long charged franchise fees to utilities that use municipally-owned streets, alleys, poles, conduits and rights-of-way. These franchise fees are typically charged to electric utilities, pipelines, natural gas companies and telephone and cable companies.
Revenues that may be raised from natural gas providers are an example of the importance of franchise fees. For BC’s local governments, up to three per cent of the value of natural gas sales within municipal boundaries are payable as franchise fees. However, the provincial government has restricted, and sometimes prohibited, local governments from charging franchise fees without providing compensation to the affected municipalities to offset the loss of these franchise fee revenues. The UBCM has identified restrictions on franchise fees as an area where improvement is needed.
For example, the City of Nanaimo details the impact of the 1989 Vancouver Island Natural Gas Pipeline Act:
“The City’s inability to impose a three per cent franchise fee on Terasen (Centra Gas) means that the costs of Terasen (Centra Gas) doing business in Nanaimo must be borne by city taxpayers. It is important to note that the costs to municipal taxpayers from Terasen’s business have been substantial, especially in light of the major expansion of natural gas infrastructure that occurred in Nanaimo in the early 90s. Revenues from franchise fees, had they been allowed, would have kept pace with the expansion-driven costs.”
xii. Sales of Services – Water Pricing
Good water is a necessity of life for all species, including humans. Quality public water and sanitation are necessary for community development and the protection of community health.
Decisions about the management of water and sewer services should therefore not only be based on scientific data and best practices in public health, but must also take equity concerns into account. When it comes to water, revenue generation must never take precedence over public safety and public provision. Canadian communities moved away from private provision of water and sewage services in the late nineteenth and early twentieth centuries, after suffering a series of epidemics and public health crises related to water-borne diseases. Today, most Canadians are the beneficiaries of an extensive network of publicly operated and maintained water systems, though in many First Nations and rural communities, water quality continues to be poor.
Many local governments in British Columbia charge for water at a flat rate. Charges for water vary only by the assessed value of the property, rather than by the level of water usage. Some studies have shown that flat rates for utilities do not provide incentives for customers to limit their consumption. In areas where water conservation is a concern, flat rates fail to mitigate excess demand on the resource, especially during peak periods and times of scarcity.
As with other user fees, water pricing based on usage tends to have a disproportionately negative impact on those with lower incomes or with larger families. Those opposed to user fees for water believe them to be inherently regressive and argue that necessary services such as water should be provided through the general taxation system.
However, there are countervailing arguments about the need to conserve scarce water resources. One way to do that may be to price water in the same manner as other metered utilities such as electricity and natural gas. One possible solution to the impact of water metering on lower income families is a stepped rate structure. A stepped rate structure could provide each household with a reasonably inexpensive base rate, and rates would then increase with each incremental step. However, in countries such as South Africa, which instituted a stepped system of this sort via privatized “pre-paid water meters”, the result has been considerable social tension.
While most water conservation attention tends to focus on residential users, it is equally if not more important to focus on large commercial and industrial users because of their ability to achieve much greater conservation targets. A stepped rate structure could result in those large-volume users being charged rates commensurate with their much higher consumption of water.
Some BC local governments have brought in water metering. These municipalities include Vernon, Summerland, West Vancouver, Penticton, Peachland, Gibsons, and the Capital Regional District. Other municipalities, such as Richmond, Delta, Surrey and Maple Ridge, have brought in voluntary water metering. Voluntary water metering is a system that allows residential consumers to pay whichever is lower of either the metered rate or the flat rate.
Those who advocate metering believe it to be a useful tool in changing public behaviour. They believe local governments could benefit from increased water revenues and lower demand for expensive, new infrastructure such as dams and storage reservoirs. Cranbrook is one of several municipalities in the province now looking at water metering as a way to reduce demand and defer the need to build new storage reservoirs.
After citizen approval in a vote held in 2008, the Town of Gibsons invested $1.4-million to install one water meter for each commercial and residential property. The project was completed in 2009. Gibsons has done this in order to help educate residents about the amount of water they consume and to provide an incentive to use less.
Kamloops has also recently decided to proceed with water meters, with the hope that water metering will reduce consumption and aid conservation efforts in this very dry part of the province.
Others opposed to water metering are concerned that it is a first step toward privatization. Many people are worried about the commodification of water and believe that fees based on usage create a ready revenue stream that is very attractive for would-be water privatizers.
Whether or not water metering is implemented, it is important to recognize that metering alone will not do enough to achieve the conservation goals of a rapidly growing province. What’s needed is a comprehensive vision for better stewardship of water resources.
Regulation of water use is also a critical conservation tool. In order to address the problem of water conservation, we need to limit the amount soaked up by the largest water users such as golf courses and large industrial operations. Many local governments are taking steps to encourage re-use of grey water. As well, lawn-watering restrictions and public education about the need for water stewardship are important tools for all municipalities.
There are many other smaller revenue sources available to local governments, which are useful in diversifying the tax base and thereby reducing dependency on property taxes and sales of services. In this section we explore options that could generate new revenue or stop the leakage of existing revenue.
i. Other Revenues – Transfers
Local governments are creations of the provincial legislature. They are granted powers through provincial laws, such as the Community Charter and the Local Government Act. At the most basic level, local government powers to raise revenue are derived from provincial governments. In that sense, all local government revenues involve a sharing or transfer of provincial revenues.
Property tax is just one possible mechanism for transferring or sharing revenue. This tax has the advantage of being attachable to property that a local government serves, and therefore reflects the relationship between services provided and the revenue source. The idea that property owners should pay for services provided to their property appears fair. However, the extent to which local government services can be considered as services to property has become tenuous.
Communities that are similar, in terms of numbers and uses of properties, may have very different demands for services depending upon socio-economic characteristics and other factors. Many services provided by local governments are general government services to people. The demand for these services has a relatively insignificant relationship to the value of taxable properties in the community. For instance, certain kinds of policing may be needed to a greater degree in some communities for reasons only tenuously connected to the protection of property and residents located within the bounds of the community. The same may be true of certain kinds of social services that are provided to meet provincial objectives.
Furthermore, similar communities with similar needs and demands may have highly divergent abilities to pay for equivalent services due to different economic conditions. It is generally agreed that residents of all communities should enjoy a basic standard of local services to property, such as clean water, sewage disposal, waste collection and disposal, paved streets, and drains. However, communities vary widely in terms of the incomes of residents and businesses, the relative values of their properties, and thus the ability of property owners to pay taxes.
In British Columbia over the past few years, the forest sector has fallen into decline, decreasing the earnings of residents and businesses in rural areas. As a result, the property tax base in many rural communities has been eroded, as reflected in the declining relative property values and the loss of tax paying residents and businesses. Overall, the ability of residents and businesses to pay has come under severe pressure. Those communities experience a revenue squeeze on their local governments. The only way for local governments to address this squeeze is to cut services or collect relatively higher property taxes. Neither alternative is fair on the basis of horizontal equity, which holds that all residents should enjoy generally the same levels of services at comparable levels of taxation, regardless of the community they live in.
The revenue problem for local governments is fundamentally driven by differences in the per capita property tax base of their communities or regions. Similar rates of tax bring in much less revenue in less prosperous communities. In reality, adjusted revenue transfers from senior levels of governments are required to address this issue. Such transfers could equalize per capita revenue of the governments in question to ensure that comparable services can be provided at comparable tax rates.
Per capita grants provide a certain amount of relief, given that they assist poorer communities just as much as more prosperous ones. Equalization transfers are, however, are much more effective at ensuring equity among communities. Such transfers provide a ‘top-up’ to the revenues of less well-off municipalities, raising their per capita revenues to comparable levels with those municipalities that are better off.
Equalization transfers work to meet the objective of horizontal equity and of vertical equity, which states that better off communities should pay a greater share of the costs of services than those that are less well off. While British Columbia once had equalization revenue sharing for local governments, this is no longer the case. Unless and until there is a return to a system of equalization transfers to local governments, the financial problems of local governments in many parts of the province will become ever more onerous.
ii. Other Revenues – Gambling
In Think City’s survey of local government leaders in British Columbia, many local governments report gambling as an important new source of revenue. While there are many views about the appropriateness or morality of such expansion, there have been consistent trends toward increased opportunities for gambling and the liberalization of many restrictions on gambling.
Like other social vices, gambling produces associated social costs like organized crime, policing, emergency services, family violence, and addiction treatment. Local government often picks up the related expenses and, therefore, it is not unreasonable for local government to expect a share of gambling revenue.
In the case of new casino development, local government typically benefits from property taxes, development cost levies, amenity contributions, and an ongoing share of revenues. These revenues can be quite lucrative and therefore very attractive to local governments. However, there is a limit to the amount of gambling the economy can support. With several major casino projects opened or in the development process, BC may be nearing the point of market saturation. As such, it is unwise for local governments to count on growth in gambling revenues to continue at current rates.
From an economic development perspective, there is evidence to support the idea that gambling takes money out of the local economy that would otherwise be spent on other discretionary goods and services. In this sense, gambling expansion imposes an opportunity cost that is borne by other businesses in the economy.
iii. Other Revenues – Development Cost Levies
Development cost levies (DCLs) are fees charged to developers to compensate local government for the cost of providing new infrastructure and service to new developments. For example, development may require new streets, water and sewer lines, and other infrastructure. There is much debate about what could and should be included in the scope of DCLs. For example, how should local governments recoup longer term operating costs associated with new developments?
The province could assist local governments by providing them with more flexibility in determining DCLs that accurately reflect the true costs of development. However, there are several questions surrounding DCLs that need to be further explored. For example, some environmental and smart growth advocates express concern that the current system of municipal financing is motivating some local governments to approve development that would not otherwise be approved because of the DCL revenue that would flow to the city as a result.
In Think City’s survey of local government leaders, we asked what percentage of their total revenues came from DCLs. The median figure was one per cent. There are a small number of municipalities where DCLs do comprise an uncommonly large share of overall revenues.
Those municipalities brought up the average in our survey to 3.9 per cent. Notably, jurisdictions where DCLs are a large source of revenues can be left quite exposed to any downturn in the real estate and development industry.
iv. Other Revenues – Capturing Lift
Local governments often make land-use decisions that directly lead to an increase in the market value of one or more properties. For example, a property zoned for single-family residential use may be up-zoned to allow for a multi-family, residential high-rise. The value of the property can increase by millions of dollars as a result of this type of decision. The amount of this increase is called “the lift” and it accrues directly to the owners of the properties in question.
Most local governments try to capture some of the lift through various means, including requiring some amenity contributions from developers as a condition of development approval. For example, the developer may be required to contribute some land for a park or build a childcare facility. However, this process is not transparent. Negotiations happen behind closed doors between the city and the developer. The value of the amenity contribution varies from project to project and can lead to suspicion that some developers are treated differently than others and that political influence can result in a much more favorable deal.
Further research should be undertaken on mechanisms that would allow for a more uniform and transparent way of capturing the lift created by public policy and land-use decisions.
v. Other Revenues – Transportation-Related Land Development
Transit systems around the world, perhaps most notably the mass transit railway system in Hong Kong, are financed by revenues from property investment and development. As transportation is a key factor influencing land values, governments have captured revenue as land is developed for higher-density uses. At present, BC’s local governments realize little benefit from the increase in land value whenever a new bridge is opened or a rapid-transit line is built. However, one solution already underway in Metro Vancouver may usher in a new era in transportation-related land development.
TransLink is the regional transportation authority in Metro Vancouver, responsible for providing public transit and major road projects throughout the region. As a single agency responsible for transportation throughout the entire Metro Vancouver region, TransLink has the ability to shape development in the region through its investments in transportation infrastructure and its public transit service.
In 2008, TransLink established a wholly-owned real estate and property development company. This company is responsible for the acquisition and development of land for TransLink’s own use, and to generate extra revenues, which are forecast to be up to $1.5-billion over the next 10 years. Not only does this company allow TransLink to invest in land for future use at reasonable, fair market prices, it also allows TransLink to recover some of the costs associated with multi-billion dollar investments in transportation infrastructure.
vi. Other Revenues – Remove Public-Private Partnership Comparator Restrictions
In order to be eligible for project funding, the provincial government has burdened local government with restrictive rules that require all public infrastructure projects with a value in excess of $50-million to go through a complicated public-private partnership (P3) comparison process. This process is meant to prove that the local government can build the project at a lower cost than a hypothetical P3 comparator.
The P3 comparison process can be quite lengthy and expensive, relying heavily on outside expert consultants. It is also an unnecessary intrusion on the decision-making authority of local governments. Rather than allowing elected mayors and councillors to make decisions in the best interest of their communities, the provincial government is dictating a ‘one size fits all’ approach to municipal infrastructure funding.
Moreover, given the instability and dysfunction in world credit markets over the past few years, and the private sector partners’ difficulty in obtaining capital at reasonable rates, government financing and contracting is always more secure and often more cost-effective than P3 models. The difficulty of relying on P3 models was illustrated recently when the provincial government was unable to find a P3 bidder capable of financing the twinning of the Port Mann Bridge. Instead, they chose to develop the project using a traditional government-procurement model.
vii. Other Revenues – Collection of Tickets and Fines
Some local governments have lobbied the provincial government to make a legislative change that would allow local governments to collect unpaid tickets and fines by applying outstanding amounts to an individual’s property tax bill. Courtenay had a resolution to this effect at the 2009 UBCM convention. If implemented, this relatively simple legislative change would address the leakage of some revenue in unpaid fines and tickets.
viii. Other Revenues – Access to Proceeds of Crime
The provincial government’s Civil Forfeiture Act enables the government to seize assets purchased with the proceeds of crime. The production and sale of illegal drugs and other organized crime activity negatively impacts communities and causes economic harm to residents, businesses and local governments. Given the local impacts, many of BC’s local governments believe the province should enact legislation to share the proceeds of property seized with municipalities. The Cariboo regional district had a resolution to this effect at the 2009 UBCM convention.