FINANCE & BUDGETING

Tampere, Finland Town Hall

Photo: Leo-setä

Restructuring Local Government in Finland BY THE ASSOCIATION OF FINNISH LOCAL AND REGIONAL AUTHORITIES & TYLER SUTTON, PUBLIC SECTOR DIGEST

Finland, a country of only 5.3 million people, is well known for its robust welfare state. But unlike in Canada where most education and social services are delivered by provincial governments, Finland’s generous suite of public programs and services are predominately delivered by local governments. The local authorities of Finland’s 342 municipalities are tasked with providing their residents with the following services: Public Sector Digest | April 2011 | www.publicsectordigest.com

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Health care, both primary and secondary Dental services Social services, including social welfare, child day care and services for the elderly and disabled Education , including pre-school, primary, secondary, vocational training, adult education, and library services Culture and sport programming Land use planning Construction and maintenance of local infrastructure and the municipal environment, including streets, energy management, water and wastewater, waste management, and harbours Public transportation Promotion of local businesses and employment1

This list of services provided by Finnish local governments reads like a consolidation of the responsibilities of both Canada’s municipalities and provinces. Health care and education alone are two of the most important and expensive services provided by Canada’s provinces. In Finland, these big ticket budget items have been entrusted to their municipalities. Although twenty regional authorities exist in Finland, their responsibilities are limited to regional economic development and planning. Local governments hold much more power and authority. How then can municipalities in Finland afford to deliver such expensive programs and services? What unique challenges do these local authorities face in public sector management and program delivery? And what lessons can be learned from the ongoing process of local government restructuring that is currently underway in Finland? This article will take a look at the structure of municipal governance in Finland in an effort to illustrate some of the strengths and weaknesses of Canada’s own local governments. I. FINANCING LOCAL GOVERNMENT

In order to finance the provision of such important and costly services as primary healthcare, local governments in Finland are granted with the authority to collect revenue through a combination of income tax, real estate tax, corporate tax, transfers from the central government, sales revenue and numerous other local charges. In Canada, municipalities are limited to financing expenditures through property tax revenue, local charges/fees, and federal and provincial transfers. Local governments in Canada are not able to collect corporate or income tax from residents, while federal/provincial transfers to municipalities are complicated by the fact that local governments in Canada are simply creatures of the provinces. With the exception of Toronto, due to its unique status emanating from the Toronto Act, all municipal governments in Canada are simply subsidiaries of provincial governments, limiting their financial autonomy. As a result, the Federal Gas Tax Fund is first transferred to each province in Canada and then subsequently distributed among local governments, instead of being directly transferred to municipalities. Each municipality is required to submit an Infrastructure Investment Plan to its respective provincial government in order to receive funding for an infrastructure program2. In Finland, however, local governments receive transfers directly from the central government, limiting restrictions on spending and improving the accuracy of annual revenue estimates for municipalities. Without a steady stream of transfers from one source, municipalities in Canada are forced to make budget projections without the certainty of knowing exactly how much funding they will receive from intergovernmental transfers. The recently released 2011 Federal Budget, voted against by the Liberal, NDP and BLOC Members of Parliament, proposed legislating the Gas Tax Fund as a permanent transfer to Canadian municipalities. Although this measure would provide more stability and certainty to Canadian municipal financing, the Gas Tax Fund alone is not enough to produce the same level of financial autonomy seen with Finnish municipal governments. As with municipal property taxation in Canada, each municipal authority in Finland can set its own local income tax rate, with the average income tax rate across Finnish cities in 2010 sitting at 18.5 percent3. Although local governments in Canada can set their own property tax rates, they are restricted by provincial regulations in setting both their tax base and rate structure. There is a debate over the effectiveness and efficiency of imposing a property tax versus an income tax at the local level. From an economist’s standpoint, property taxation is more efficient than income taxation as it is based on an immobile tax base (land), therefore limiting the potential for lost revenue. However, in the welfare state tradition, income taxation is more progressive than property taxation and yields greater funds for revenue-thirsty municipalities4. As of 2001, 95.4 percent of local revenue in Finland came from personal and corporate income taxes, compared to 91.3 percent of local revenue in Canada coming from property taxes (see Table 1 below)5. Evidently, Canada and Finland take a very different approach to funding municipal governments. Table 1 also indicates that while only 8.1 percent of all taxation in Canada consists of local taxation, in Finland 21.2 percent of all taxation occurs at the local level. Not only does Finland utilize a different funding source for municipal expenditures, but it also allows local governments to occupy a larger portion of the national tax space, thereby providing local governments with a more healthy revenue base. The differences between 1

Council of European Municipalities and Regions. Local and Regional Structures in Finland. http://www.ccre.org/finlande_en.htm. Gas Tax Agreement. Infrastructure Canada. 2005. 3 Structures are changing – in which direction? Social welfare and health services and the PARAS reform. Minna Kaarakainen, Vuokko Niiranen and Juha Kinnunen (eds.) 2010. 4 Harry Kitchen. Local Taxation in Selected Countries: A Comparative Examination, Queen’s Institute of Intergovernmental Relations, Working Paper 5, 2004. 5 Ibid. 2

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Finland and Canada, in terms of local government financing, suit the administrative dynamics of each political system with Finnish municipalities delivering more government services than Canadian municipalities and therefore needing a wider revenue base to finance those services. However, in recent years more services are being downloaded from provinces to local governments in Canada, placing greater pressure on Canadian municipalities to do more with less. Table 1 Source of local revenue (2001) Local taxation as % of national GDP (2001) Local taxation as % of all taxes (2001)

FINLAND 95.4% personal/corporate income tax 9.9%

CANADA 91.3% property tax 2.6%

21.2%

8.1%

II. RESTRUCTURING LOCAL GOVERNMENT

A process of local government restructuring is underway in Finland. However, instead of responsibilities being passed down to municipalities from higher authorities, as seen in Canada, responsibilities are being passed horizontally from small municipalities to major municipalities as Finland works to reduce the number of local authorities in the country. The process began in 2005 with the introduction of the Project to Restructure Local Government and Services (PARAS). The goal of this initiative has been to create a system of governance that will ensure that high-quality services continue to be delivered by local governments in the future. There are two main challenges that are threatening local service delivery in Finland and have therefore prompted the PARAS initiative; a rapidly aging workforce and an increasing propensity among Finnish citizens for internal migration6. Like in Canada, the bulging baby boomer generation in Finland is in the process of retiring, leaving local governments with looming crises in both healthcare delivery and succession planning. Local governments in Canada do not have to worry about the administrative holes that will be left in the healthcare and education sectors as a result of retiring baby boomers as these services fall under provincial jurisdiction. This allows local governments to focus more heavily on succession planning in the municipal government itself. In Finland, the increasing movement of citizens between cities is making service delivery planning more like guesswork at the local level, as planning is largely based on population size. A budget projection this year might not match the actual demand on local services next year as highly mobile Finnish citizens continue to relocate. For the most part, Canadian municipalities do not appear to be experiencing the same high levels of internal migration. However, international migration is of prime significance to the ongoing quality of service delivery in major Canadian cities. The article published in the Spring Issue of the Public Sector Digest entitled “Human Capital and Cities: Are University Degree Holders Home Grown or Imported?” looked specifically at the level and impact of internal migration in Canadian cities in reference to highly educated Canadians. The study indicates that while the majority of growth in the number of degree holders in Toronto and Vancouver between 1996 and 2001 came from international migration, growth in Ottawa and Calgary can largely be attributed to internal migration. Ottawa and Calgary, therefore, might stand to learn more from the outcomes of Finland’s PARAS project. In order to address the above concerns in Finland, a number of initiatives have been introduced through the PARAS project. The most dramatic change has been the gradual reduction of Finnish municipalities from 415 in 2007 to 342 in 20107 (See Figure 1 below). In order to streamline service delivery at the local level, smaller municipalities have been amalgamated and larger local authorities introduced. In 2007, the average population size of Finnish municipalities was approximately 13,000 residents, but as a result of municipal amalgamation, the average size of municipalities in 2009 was closer to 15,500 residents8. Fewer and larger local authorities allow Finnish communities to combine resources to address the challenges of an aging and mobile population. The best and brightest from each community are ideally retained or newly hired by the local government. The most experienced and capable candidates from all former municipalities can fill the void in the new local government left by retiring senior staff members. Service delivery duplication is also minimized at the local level through the centralization of administrative support for the entire area. A larger local authority benefits from economies of scale with the purchasing and delivery of goods and services made cheaper by the increased demand for public goods and services. A higher level of internal migration in Finland has become less of a concern with some of the migration now being contained within the larger geographic areas of Finland’s newly amalgamated municipalities. Local service delivery for the most part remains unaffected by this more localized form of migration.

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Structures are changing – in which direction? Social welfare and health services and the PARAS reform. Structures are changing – in which direction? Social welfare and health services and the PARAS reform. 8 Ari Kolehmainen, New Municipality 2017. Vision of the Future of Local Government. Association of Finnish Local and Regional Authorities, 2011. 7

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Figure 1 The Number of Municipalities in Finland (1917-2010)

Despite the benefits of local government restructuring, however, there are some concerns that follow local government centralization. With fewer municipal governments in Finland, it may become more challenging for smaller communities to be heard at the local level. Newly formed local governments must ensure that the unique opinions and circumstances of former communities are not ignored in favour of the more central, wealthy, and populous communities. The results of the recent municipal election in Toronto illustrate the complications that come with amalgamation at the local level. While the current Mayor of Toronto, Rob Ford, captured the vote in all of the wards in Toronto’s suburbs, the majority of wards in the City of Toronto proper showed their support for the runner-up George Smitherman. These outlying communities have been amalgamated with the City of Toronto over the years. With such geographically divergent election results, it has raised concerns that Mayor Rob Ford may not represent the interests of all Torontonians, but only of those who live in the amalgamated suburbs of the city. Finland has taken care to ensure that the PARAS project protects the interests of smaller communities. One key concern addressed through the Finnish initiative has been the quality of service delivery in smaller and isolated communities. With local governments delivering education and health services in Finland, it is vital that the newly created local authorities continue to provide adequate services for isolated communities no longer governed by their own local authority. Indeed, the PARAS project has been designed to incorporate changes not only at the structural level, but also at the community level. A lengthy process of community engagement was conducted to ensure that smaller communities would be provided with the services that they need, and with competent municipal staff available to deliver those services. The Association of Finnish Local and Regional Authorities states that, “The aims of PARAS can only be achieved if structural reforms, staff competence, decision-making mechanisms and clients’ opportunities to exert influence are in balance”9. III. OUTCOMES AND LESSONS

Unfortunately, the emergence of the global recession in 2008 disrupted the Finnish government’s ability to soundly evaluate the success of the PARAS project. The financial and managerial integrity of Finland’s newly formed local authorities have been greatly tested by the recession. With such a significant proportion of municipal revenue coming from local income tax, Finland’s high rate of unemployment during the recession has drastically reduced local government coffers. The financial stress on municipalities has translated into tension between the national and local governments. As of 2009, the central Finnish government’s share of local public expenditures was only one-fifth. Any recent increases in transfers from the central government to municipalities have been merely compensation for lost local revenue. While local governments look to increase local tax rates, the central government has been pushing to reduce the tax burden in Finland to support the recovery. The Association of Finnish Local and Regional Authorities has provided the central government with a number of recommendations to ensure that local governments in Finland continue to recover from the recession and are able to finally reap the benefits of the PARAS reforms. The following list of recommendations can be selectively applied to Canada’s own system of local-federal intergovernmental relations10: 1) Extend a portion of the revenue collected from the vehicle tax and the excise duty on fuels to local governments (similar to Canada’s Gas Tax Fund Transfer) 2) Raise the upper limits of the real estate tax and increase the proportion of corporate income tax transferred to local governments 3) Relax the central government’s control over local authorities, which impedes the efficiency and effectiveness of municipal operations 9

Structures are changing – in which direction? Social welfare and health services and the PARAS reform. The Impact of the International Economic and Financial Crises on the Local Economy. CEMR. January 2009.

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Local authorities should: 4) Reassess capital budgets and take the necessary steps to hasten progress toward balanced budgets 5) Strengthen the productivity and performance of government through further municipal mergers, increased cooperation between local and regional authorities, and a greater focus on best practices 6) Implement frequent evaluations of personnel policies to eliminate redundancies in public staffing

The membership of the ASSOCIATION OF FINNISH LOCAL AND REGIONAL AUTHORITIES consists of the towns and municipalities in Finland. The Association also provides services to hospital districts, regional councils and joint authorities. The Association has set as its priorities to develop municipal management and local democracy, to reinforce services and improve performance, to ensure stable municipal finances and to curb climate change. TYLER SUTTON is a Senior Research Analyst with the Public Sector Digest. He received his honours bachelor degree from the University of Western Ontario in 2009. He recently completed a Master’s Degree in Public Administration at Queen’s University in June 2010. Tyler can be reached at [email protected].

Public Sector Digest | April 2011 | www.publicsectordigest.com