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REPORT ON THE INTERNATIONAL CONFERENCE ON CITIES AND FEDERALISM:
INTERNATIONAL PERSPECTIVES – 6 AND 7 MAY 2002, RIO DE JANEIRO

REPORT ON
THE INTERNATIONAL CONFERENCE ON CITIES AND FEDERALISM: INTERNATIONAL
PERSPECTIVES – 6 AND 7 MAY 2002, RIO DE JANEIRO, BRAZIL

The international conference was held concurrently with the
2nd Conference on Cooperative Federalism: Local Power, Governance
and Citizenship, organized by the National Confederation of Municipalities (of
Brazil), the Konrad Adenauer Stiftung and the Forum of Federations.

At the conference a Background Paper on the Place and
Role of Local Government in Federations, prepared by Professor Nico
Steytler (Community Law Centre, University of the Western Cape, South Africa),
printed in Portuguese and English, was circulated to delegates.

The international conference was devoted to two key issues
that confront local government in Brazil – the difficulties surrounding common
competencies and the problem of vertical fiscal imbalance.

COMMON
COMPETENCIES

On the first day of the conference the focus was on the
difficulties associated with common competencies shared by local government and
other spheres of government.

Professor
Nico Steytler gave an overview of the theme of common competencies and
intergovernmental relations, setting out how responsibilities are allocated
between states and local governments. He noted that the problems that flowed
from common (or concurrent) competencies were common to those federations where
the powers of local government have been constitutionalized. Common
competencies are often explicitly allocated to two spheres of government but
implicit and even unintended overlaps also occur.

The problems created by common competencies are numerous
and impact negatively on the effective and efficient functioning of
federations. They include the following:

·
Duplication of services;

·
Inefficiency in the provision of joint services;

·
Failure to provide services at all;

·
Dumping responsibility for service delivery on local
government;

·
Lack of accountability by state and local governments to
their respective electorates; and

·
Domination of local government by states due to the
latter’s over-regulation and control.

Because concurrency is part and parcel of the fabric of
most modern federations, it is not viable to recapture a dual model of
federalism where all functions are neatly allocated and the spheres of
government need not interact cooperatively. Countries have therefore addressed
the problems of concurrency along a range of options. The first approach is to
reduce the level of concurrency and establish greater division of powers
between states and local government. Greater clarity is also sought on the
exclusive powers of local government. Where concurrency of competencies is the
intended result, the approach has been the effective management of the shared
authority in terms of the principles of cooperative government. A number of
good governance principles have been developed to minimize the negative
consequences of concurrency. The main thrust has been to define, within the
areas of concurrent functions, the roles and responsibilities of local
government with greater clarity and to engineer greater role differentiation.
The principle of subsidiarity has often been applied: functions should be
performed at the lowest possible level where those functions will be carried
out. However, a number of practical measures must be devised to give concrete
effect to this principle.

Glen
Murray, the mayor of Winnipeg, Manitoba, Canada, spoke on the Charter City Movement in Canada
the goal of which is the drafting of city charters that would reduce conflict,
clarify responsibilities and promote accountability.

He commenced by sketching the financial difficulties that
Canadian cities face because of their lack of revenue raising powers. As
cities’ taxing powers are usually limited to property tax, the revenue remains
static because there is little growth in building. Since local government is a
creature of provincial statutes, it faces increasingly the down loading of
responsibilities by provinces without accompanying funds for their execution.
The federal government has also withdrawn from housing and the building and
maintenance of the highway system, leaving these functional areas to local
government. Cities also face the challenges of globalization. They need to
attract capital and a mobile work force. The health of the urban economies is
also the health of the country. Cities have to compete against one another as
if there are no national borders.

As a result of these events a Charter City Movement has
been launched consisting of the seventeen largest municipalities in Canada. It
forms part of the Federation of Canadian Municipalities, which represents
almost all municipalities in the country. The aim of the movement is that
cities write their own charter in which they define which powers they should
have as well as their revenue raising capacity. These charters will be
presented by the mayors to provincial governments at the same time, setting out
a standardized position for cities.

The first basic claim of the charter is that permissive
local government legislation should be enacted, enabling cities to do anything
except that what is expressly excluded. This would include revenue-raising
powers. In providing a blue print on municipal finances, it also seeks to
establish a relationship between the tax base and expenditure. For example, tax
on gasoline should be linked to road building and maintenance. Conversely,
property tax should not be used for street maintenance and education; that
should be financed from income tax.

In two provinces
(British Columbia and Alberta) there is already charter-type
legislation. In Manitoba a two-year legislative process is underway towards a
charter that will build on the best practices in other provinces. There is also
evidence of a healthy competition among province to adopt progressive local
government legislation.

The cities movement also crosses international borders.
There are already linkages between cities in Canada, the US and Mexico; they
face similar problems that came in the wake of the North American Free Trade
Agreement (NAFTA) and the dropping of tariffs. A global movement of cities
could deal with important cross-border issues when national governments appear
unable to do so.

C. Neil
Giuliano, the mayor of Tempe, Arizona,
United States, and representatives
of the National League of Cities also noted that the trend in the US is for local
government to receive less money from the federal government while they are
under pressure to provide more services with fewer tax dollars. The challenges
faced by city leaders are how to grow city economies, protect the environment
and manage ethnic diversity. Because of these challenges, cities have been
discovering that it is imperative to work together across local boundaries.
Some cities have cooperated regionally to take better decision on water-use,
transportation, and land-use. Regional councils are made up of all local
governments, regional transportation associations, water-use management
agencies and other local government entities in the region. A number of states
have also created organizations that address homeland security preparedness on
a regional basis.

In land-use planning a recent Supreme Court decision has
strengthened local governments. Any delay caused by municipal planning
requirements, resulting in the temporary non-use of land, does not require
compensation of the landowner.

The National League of Cities (NCL) has tried to help
cities to find ways to be more active in successful land-use planning. The NCL
has identified three distinct roles for local governments. First, officials
must determine the local context of land-use decisions – how do new
developments fit in with existing patterns of settlement, transportation and
environmental needs? Second, local leaders should apply their communities’
vision and values to land use planning. Third, all available regulatory tools
for long-range planning should be used.

A number of cities have promoted smart developments through
various innovative policies and practices. For example, a city has offered a
municipal planning course for citizens to foster better understanding and
participation by them. Tax incentives have promoted developments that
rejuvenated inner city areas. A set of development criteria (“smart growth
matrix”) has been developed in terms of which new developments can be assessed.

Violeta
Ruiz Almendral from the Department
of Finance and Tax Law, University Carlos III de Madrid, Spain, explained the
use of covenants between the central government and municipalities to redefine
municipal responsibilities. The three levels of government in Spain – central
government, autonomous communities and municipalities – share a number of
competencies. While the Spanish Constitution recognizes local autonomy, it does
not grant municipalities specific competencies. The central government and the
Autonomous Communities must define such competencies. The central government
regulates the basic elements of local competencies and has done so in the Local
Government Act of 1985 and the regulation of local finances in 1988. The Autonomous
Communities regulate the competencies in further detail.

Both the central government and the Autonomous Communities
are responsible for the financing of local entities. There is no special law
for major cities; the only difference is that the large municipalities receive
more responsibilities. The provinces that date from Napoleonic times do not
have material competencies; their function is to coordinate municipalities in
their territory.

After the first round of decentralization, entrenching the
creation of Autonomous Communities in the Spanish Constitution, the second
round of decentralization resulted in the Pacto Local. The Pacto
Local is an agreement between the central state and the Federation of
Spanish Municipalities and Provinces (FEMP) for the development, clarification
and amplification of the competencies of municipalities. The object of the
agreement was to effect a second decentralization of competencies and, to avoid
confusion of roles, clarify the distributed competencies. The process of
negotiating and approving the Pacto Local took the best part of five
years, commencing in 1993 when the FEMP voiced the necessity of such a Pacto
Local.

The agreement is important as it serves as a significant
model of cooperative federalism; it strives to clarify the distribution of
competencies in a system where the major part of the competencies is shared.
The agreement has been criticized because of its democratic deficit, an
inevitable result of executive federalism. The answer to this criticism has
been that the agreement strengthens democracy because it favours transparency.
The Spanish Constitutional Court recognized the importance of the agreement;
although it is not binding, it is nevertheless important from a policy point of
view.

The agreement can work adequately depending whether there
is cooperation or conflict between the parties. The financing of local
government is a crucial element in making the Pacto Local effective.
What is further needed is for each Autonomous Community to have its own pact
with local authorities in its area.

A second Pacto Local is necessary and negotiations
are continuing. Municipalities want to increase and redefine the following
competencies: public transport, consumer affairs, sport, education, employment,
youth, the environment, women, safety, health services, social services and
tourism. The financial arrangement that must accompany the Pacto would
again be crucial to make it work.

VERTICAL
FISCAL IMBALANCE

On the second day of the conference the focus fell on the
question of fiscal imbalance – the allocation of functions to local government
without providing it with matching funding.

Violeta
Ruiz Almendral introduced the topic. The decentralization of fiscal
powers may give rise to two types of fiscal imbalances: vertical as well as a
horizontal. It is common in the literature on fiscal federalism to refer to
“vertical fiscal imbalance” as the situation that arises when one level of
government – usually the central or federal government – raises more revenue
than what it actually needs for the exercise of its responsibilities, while at
the other levels, the subnational governments raise less revenue than their
expenditure. This creates an imbalance that must be solved to guarantee the
required autonomy of the subnational governments; without funds they cannot
exercise their authority.

Broadly speaking, vertical fiscal imbalance can be solved
either through the transfers of funds from the central or federal government to
the subnational governments or through the reassignment of taxation powers.
There are advantages and disadvantages to both solutions. In practice a mix of
both of them is used; most subnational governments accumulate revenue in the
form of both transfers and the subnational government’s own taxes. However, it
must be taken into account that when subnational governments receive revenue
almost exclusively in the form of transfers, an incentive to overspend is
created. It may also create a lack of accountability that may not be in the
best interests of citizens; taxpayers would have difficulty to relate taxes to
expenditure, a necessary element in an accountable democratic state.

Horizontal fiscal imbalance arises as a consequence of the
different levels of income of subnational governments. These differences may
become greater when subnational governments are allowed to exercise taxation
powers. Although decentralization will always result in such an imbalance, it
is generally agreed that, for the sake of maintaining solidarity within the state,
it is necessary to correct these imbalances. This is usually done in the form
of transfers from the central state to subnational governments.

Vertical and horizontal fiscal imbalances affect all levels
of government. However, it is often said that it is the local authorities that
suffer most from these imbalances, as their powers to raise their own taxes are
usually very restricted. In seeking the “magic formula” for the financing of
subnational governments, the two imbalances, their causes and their consequences,
must be taken into account.

Gustav
Wabro,
former secretary of
state for Baden-Württemberg, Germany, spoke about
municipal financing in Germany. According to the Baden-Wűrttemberg
constitution, local autonomy is guaranteed, a provision that is also found in
the constitutions of the other Länder. The right to local
self-government includes financial autonomy; municipalities must have the
resources to fulfill their functions. The constitution of
Baden-Wűrttemberg provides that local government can collect its own
taxes. Municipalities also receive transfers from the Land. These
sources of revenue give municipalities a strong independent status.

Municipal finances are also provided for in the federal
constitution, the Basic Law. Fifteen per cent of income tax goes to
municipalities while a further 42,5% is allocated to the Länder.
Municipalities have taxing powers over services, such as water and sanitation
and may impose property taxes as well.

The German Constitutional Court has held that transfers to
municipalities could not be a top-down determination; a fair system is required
in which municipalities can participate in the process of allocation.

A new relationship between the municipalities and the
European Union (EU) is emerging. In terms of the Maastricht Treaty, there is a
common citizenship for all Europeans. At the same time people need to feel
linked to their regions. The Council of Regions has thus been created. The
Treaty also established the principle of subsidiarity; functions that can be
performed at local level should be the responsibility of municipalities because
they are the closest to the people.

Thabo
Mokwena,
chief executive officer
of the South African Local Government Association, outlined the legislative provisions in South
Africa that seek to counter unfunded mandates. Unfunded mandates are defined as
the allocation of responsibilities to municipalities by the national and
provincial governments without providing funds for their discharge.

Municipalities, as the third sphere of government, have
constitutionally enshrined powers and functions. However, additional functions
may be assigned to municipalities by national and provincial governments. In
order to guard against the practice of shifting responsibilities without
accompanying funding, the Municipal System Act of 2000 regulates the
assignments of functions to municipalities by both the national and provincial
governments. Where a provincial government, for example, intends to assign a
function to all municipalities in its area jurisdiction, the provincial
minister introducing the legislation effecting the assignment, must consult
with the provincial minister responsible for local government, the provincial
minister responsible for finance and organized local government in the
province. The minister must also request an assessment of the financial
implications from the Fiscal and Financial Commission, an advisory body dealing
with intergovernmental transfers.

In the light of the consultations and assessment by the Commission,
the provincial minister initiating the assignment must determine whether or not
the assignment imposes a duty on the municipalities and, if so, whether it has
financial implications. If there are financial implications, the provincial
minister must take “appropriate steps to ensure sufficient funding and capacity
building initiatives as may be needed” for the performance of the assigned
function.

Mokwena criticized the approach that the Fiscal and Finance
Commission has adopted in assessing the financial implications of assignments.
Its costing is for a short period of 2 to 3 years while the long terms
financial impact is not considered. SALGA, as the statutory body representing
organized local government in country, is seeking to play a more active role in
examining the costing of imposed mandates. Already two pieces of national
legislation – the Disaster Management Bill and the Immigration Bill – have been
identified as not complying with the Systems Act and they have been referred
back to the respective departments for amendments.

The system is still very new in South Africa and only time
can tell how it will work in the future.
While the legal framework is in place, the greatest challenge facing
local government is to change the mindset of national and provincial officials.
What is clear is that certain functions should not be shifted to municipalities
and SALGA will opposes such attempts. The problem of unfunded mandates is a key
issue in the debate around the viability of local authorities. With the
forthcoming UN conference on Sustainable Development in Johannesburg, local
government is saying that if sustainable government is going to happen, it will
happen through local government. Rendering municipalities unviable through
unfunded mandates, would, in turn, scupper this larger project as well.

John
Ross, the president of the Australian Local Government Association, noted that the
fundamental tension at the heart of a federal system, including in Australia,
is the clear delineation of roles and responsibilities between the different
spheres and the most appropriate allocation of resources. For an effective
federal system of government, he argued, every sphere of government, including
local government, must have political and financial autonomy.

Over the past thirty years an evolution of governance has
been underway that included the transfer of responsibilities and cost shifting
from the federal government and state / territory governments to local
government, blurring the roles and responsibilities of all three spheres of
government.

In the past local government’s role and responsibilities
have been strictly prescribed by state legislation. This has changed to a more
flexible arrangement stating only the general principle of local government
competencies. State legislative instruments now provide local authorities with
the authority to “do all that is necessary for good government in the interest
of the community.” Municipalities have thus a wide mandate to provide a range
of services to their communities. They are also service providers on an agency
basis for federal and state governments.

Intergovernmental fiscal relations are characterized by
significant differences between the relative revenue raising and expenditure
responsibilities of the three spheres of government. While the federal
government raises 79% of all taxes, it was responsible for only 59% of the
total government expenditure. States raised 19% of all taxes but were
responsible for 37% of the total expenditure, while local government was
responsible for raising revenue for 70% of its expenditure.

Increasingly local authorities are faced with unfunded
mandates that arise in the following situations:

·
Local government must now provide services that were
previously provided by the other spheres of government. For example, the
provision of aged and children’s services was the responsibility of the federal
and state governments; municipalities are now expected to provide these
services regardless of whether or not it is financially possible.

·
Services are formally referred to or assigned to local
government through legislative and other instruments. For example, most state
health legislation requires that municipalities conduct regular inspections of
premises where food is prepared and handled to ensure compliance with health
standards. This duty imposes a direct cost on municipalities. There are also
more than 200 pieces of federal legislation which imposes planning requirements
on local authorities. In meeting these requirements, municipalities incur a
range of costs that are met out of their own source revenue.

·
New and innovative services that are being provided to meet
emerging community needs have no history of funding with the result that the
responsibility for such funding is yet to be determined. For example,
municipalities have recognized that they must provide their citizens with
access to information technology by providing computers in public libraries for
general community use.

Financing the emerging gap between local government’s own
revenue and expenditure is problematic; the choices facing municipalities are:

·
Cutting back on the provision of unfunded mandates imposed
by the other spheres of government;

·
Increasing taxation, although some states have capped local
government’s powers to raise taxes; or

·
Increasing user charges for public goods, facilities and
services.

Recognizing this dilemma, the federal government has
announced that a Parliamentary Inquiry will be established to examine the roles
and responsibilities of local government and its financial relationship with
the state and territory governments.

M. K.
Stalin, the mayor of Chennai in Tamil Nadu, India, spoke about
municipal governance in India. The government of India favoured
decentralization and enacted in 1992 the 73rd and 74th
Amendments to the Constitution guaranteeing local self-government through the
pandachayat system. The 74th Amendment deals with urban
municipalities. To date 96 municipal corporations, 1494 municipalities and 2092
town panchayats have been established.
Generally, municipal administration is concerned with urban
infrastructure like water supply, sanitation, environmental hygiene, disposal
of solid waste, sewage and drainage facilities, slum development, education and
transport.

The city of Chennai (formerly Madras) has over 11 million
inhabitants and 4 million voters. Revenue generation is achieved through taxes,
fees, penalties and fines and transfers from the state government. Taxes
consist of property tax, general tax, elementary education tax, professional
tax, company tax, timber tax, advertisement tax, tax on carriages and animals,
surcharge on stamp duty and entertainment tax. Fees are charged either
seasonally, monthly or annually and include those for trade fairs, festivals,
tourist vehicles, fish sellers, parking and advertisement. Penalties are
collected for those who default on the taxes or fees.

Over the past few years the municipality has achieved
considerable success with its three-pronged strategy:

·
Providing primary education and primary health to the poor
(reporting a 30% increase in recipients).

·
Dealing with solid waste disposal, by using garbage as fuel
for power generation, resulting in the reduction of garbage heaps and greater
cleanliness.

·
Creating a world-class infrastructure by building roads and
fly-overs that have eased traffic congestion. This was done with the
municipalities’ own revenue.

Mayor Stalin made the following suggestions to increase
revenue generation:

·
In order to fund roads, part of the motor vehicle tax
levied by the states, should be passed on to the municipalities.

·
Public-private partnership should be encouraged.

·
Tollgate tax may be collected at one point of entry into
the municipal area.

·
Certain facilities may be offered for private participation
on a “build-operate-transfer” system, whereby the burden of capital expenditure
is reduced.

The conference was closed by Paulo Roberto Ziulkoski, president of the National Confederation of
Municipalities and David
Mac Donald from the Forum of Federations.

CONCLUDING COMMENTS

The conference highlighted two important issues relating to
international comparisons. First, while there was a remarkable congruence of
experiences on the topics of common competencies and vertical fiscal imbalance,
these matters were often expressed in different terms. The mismatch between
responsibilities of local government and the sufficiency of funds for their
execution is referred to in Brazil as “vertical fiscal imbalance”, while in
Canada the term is “downloading”. In South Africa it is called “unfunded
mandates” and in Australia “cost shifting”. The use of different terms alert us
to the danger that we could easily talk pass one another even when discussing
the very same problems.  Understanding
the commonality of problems can be facilitated by the proper appreciation of
the place and role of local government in each country under discussion, the
very purpose of the background paper.

Second, international comparisons between the status and
role of local government in different countries are increasingly been used in
the reform movement of local government. In the Charter City Movement in
Canada, the superior position of local government in comparable jurisdictions
has been used to advocate change in the status of cities that country.

On the focus areas of the conference, three key questions
emerged:

·
How should the appropriate functions and powers of local
government be determined;

·
How should the exercise of common competencies be managed;
and

·
How are local government functions to be financed?

Determining
the functions and powers of local government

In the past local government was simply the recipient of
functions that other levels of government bestowed on municipalities. A
fundamental shift is taken place where local government participates in the
process of defining their functions. Moreover, being closest to the people,
local government can be informed by residents about what services they should
provide. In Spain, organized local government was the negotiating party with
the national government in concluding the Pacto Local that defined
municipal powers. In Canada, the objective of the Charter City Movement is to
ensure that city officials and residents define what functions and powers will
be the most appropriate for their city. In South Africa, residents approached
councilors with their security concerns, which eventually led to the
establishment of municipal police forces. These three cases illustrate the
trend that local communities are increasingly taking their destiny in their own
hands and do so through organized local government.

Flowing from this general principle of local
self-government is the further realization that when granting powers to local
government, a one-size-fits-all approach is inappropriate. The necessary
distinctions should be drawn between types of municipalities and the powers
that are accorded to them; their capacity to assume the required
responsibilities is most often a function of their size and tax base.

Common
competencies

Whatever functions are given to local authorities, they are seldom
exercised in isolation from those of other levels of government. Functions
cannot be neatly allocated between levels in watertight compartment and common
competencies are inevitable. For the effective exercise of common competencies
a high level of cooperation between the levels of government is clearly
necessary. Because of the problems inherent in common competencies, the trend
is to seek greater clarity of responsibilities with local government an active
partner in such determinations.

Financing local government
responsibilities

Having participated in the definition of their responsibilities, it will
be of little comfort to local government to find that there are inadequate
funds to discharge those responsibilities. If duties are dumped on local
authorities without accompanying funds, they have had, in effect, no say in the
matter. At the heart of the question lies local autonomy. A local authority
must be able to decide whether or not to take on a new function or to take sole
responsibility for a particular task. The major consideration would be its
capacity to finance that responsibility. Unless there is a clear link between
the performance of a function and adequate funding for that responsibility,
local government may not be able to perform its primary function of serving its
citizens.

Professor Nico Steytler

Director

Community Law Centre

University of the Western Cape

South Africa

1 July 2002