Intergovernmental Transfers

Intergovernmental transfers can be a useful source of funds for planning and construction. However, a disadvantage of this dependence is that the amount and timing of transfers can be unpredictable. Market cycles, demographic shifts, policy changes by other levels of government, and natural disasters are a few examples of events that can affect government revenues and transfers to lower levels of government. Transfer programs can also distort local decision making. Conditional transfers, for example, generally require municipalities to spend the funds they receive according to state or national guidelines and often require municipal matching funds.

There are generally two types of intergovernmental transfers: unconditional (general) and conditional (project-specific). Many examples exist of cities accessing conditional transfers and grants—sometimes via competitive processes and sometimes requiring matching funds—to advance local urban regeneration plans. One example of a national government providing conditional grants to support large-scale urban regeneration is the U.S. Department of Housing and Urban Development (HUD)’s HOPE VI program. It has provided more than US$6 billion in grants to communities across the country for a specific purpose: namely, to deconcentrate very low-income public housing households and to transform their existing, underinvested neighborhoods into more socially and economically sustainable mixed-use, mixed-income communities. HOPE VI revitalization grants have been used to fund acquisition of sites for land assembly and off-site construction; demolition of severely distressed public housing; capital costs of major rehabilitation of public housing units; and new construction and other physical improvements, such as new public spaces. A successor to the now defunct HOPE VI program is HUD’s Choice Neighborhoods Program. It provides implementation grants to cities that have undergone a comprehensive local planning process and are ready to implement their transformation plans to redevelop urban neighborhoods.

Another example of how municipalities access intergovernmental funds for urban regeneration can be found in South Africa, where the National Treasury transfers funds to municipalities to support both operating and capital infrastructure needs. South African municipalities are largely dependent on the central government for capital funds. Indeed, grants represent an average of 80 percent of revenue for capital budgets in rural municipalities and 70 percent of revenue in urban municipalities. According to the National Treasury, since 1999, transfers to local government have grown faster than total government expenditures, consistent with a national policy of fiscal devolution.

However, with few exceptions, South African municipalities have generally struggled to meet the need for public services and reinvest strategically in urban infrastructure. With flat national economic growth projections into the near future, the treasury is offering performance-based incentives in which metropolitan municipalities must meet various metrics. Examples include submission of a “Built Environment Performance Plan,” identification of priority urban regeneration projects, and submission of a proposed implementation strategy. These may be required for municipalities to be eligible to access national grants, such as the relatively new Integrated City Development Grant that can be used to finance urban revitalization.

In Chile, there are three sources of revenue for every municipality. These include (a) autonomous income (property taxes, vehicle circulation licenses, building permits, commercial and alcohol licenses); (b) transfer of funds from the Common Municipal Fund (CMF), which is a municipal income distribution transfer system; and (c) transfers from central government agencies’ funds. In many cases, the CMF is the main source of funds for municipalities. However, Santiago is among the municipalities that have less economic dependency on the CMF.

Municipalities in Chile have a very restrictive law in relation to budget administration. They do not have borrowing power, which limits their financial management possibilities and reduces the opportunity to embark on larger investments. Municipalities are forbidden to enter into contracts with the private sector and are required to use a bid system.8 When the amount and length of the contract exceeds both the mayor’s electoral period and a certain amount (US$38,000), the allocation of funds would need approval from the mayor and the municipal council (Valenzuela 1997).

Another model of accessing transfers can be found in Mexico, where the federal government provides most of the financial support to states and municipalities on an ongoing basis. It provides support through a mix of unconditional transfers, as well as through transfers that support specific policy areas. Cities that want to invest in major upgrades to their center city core or to their municipal public transit system, for example, petition Banobras, the Mexican Development Bank responsible for promoting and financing infrastructure projects and public services. As the trustee of Mexico’s National Infrastructure Fund, created to increase national and international private investment in this sector, Banobras is the de facto gatekeeper for cities to access grants, as well as low-cost debt financing needed for local capital investments.