Transfers from provincial and federal governments to municipalities to cover a portion of operating and capital costs.
(Enid Slack lecture, Fall 2008)
The vast majority of intergovernmental transfers to municipalities come from the provinces. In 2005, 17.1% of municipal revenues came in the form of transfers, with provincial governments responsible for all but about 1% of that amount. The overall level of transfers to municipalities has also declined in recent years, as they made up 23.1% of municipal revenues in 1990.
There are a range of different types of transfers. While some grants are unconditional – meaning they can be spent as the municipality sees fit – most are conditional, tied to a specific purpose such as transit, infrastructure or education. Conditional grants can also be matching, meaning that the municipality must match the funds put up by the province in order to receive them. These conditional matching grants can either be open-ended or they can be capped, where the province will match only up to a maximum level. Finally, transfers can be allocated for both operating and capital expenses.
There are a number of economic rationales for transfers. They can promote efficiency by subsidizing spillover benefits, such as road networks that connect municipalities. They can promote equity by ensuring that municipalities with smaller tax bases or higher need have the capacity to offer comparable service levels. They can address claims of municipal fiscal imbalance by providing funds to fill gaps in municipal operating budgets (though other options include uploading costs, or granting more revenue generating capacity). Lastly, they can also allow the province to exert control over municipalities by tying conditional transfers to provincial priorities.
At the same time, transfers can also be problematic. They can distort local decision-making and remove the incentive for proper pricing, particularly when a matching grant is the impetus for shifting spending away from one priority to another. In some cases, matching grants can also further disadvantage poor municipalities who cannot afford to spend to receive them. Provincial and federal grants often are not stable or predictable, sometimes forcing municipalities to cover unforeseen shortfalls on little notice.