What are fiscal relations?
Why are fiscal relations important?
What is the tripartite Fiscal Relations
Working Group?
Which options were explored at the
FRWG?
Are these the only options that
First Nations can consider?
What is the Fiscal Arrangements
User Model?
Who would be interested
in using the Fiscal Arrangements User Model?
When
is a good time to use the Fiscal Arrangements User Model?
What are the risks of using the
Fiscal Arrangements User Model?
What type of analysis can
be conducted using the Fiscal Arrangements User Model?
What
are fiscal relations?
Fiscal relations are the financial arrangements
under which governments finance their activities. They can be
summed up with four basic questions:
1. Which government provides what services?
2. Which government pays for these services?
3. Who is eligible for what services?
4. Which government collects what revenues?
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Why
are fiscal relations important?
The fiscal relationship is the single most important factor in
determining the quality of future government services and infrastructure
for members. A fiscal relationship is one of three critical components
for self-government in a Treaty. Together with self-government
arrangements and the land and cash settlement, it determines how
much a First Nation can share the income earned off the land,
and to what extent it can independently exercise its authority.
The fiscal relationship is also the single most important factor
in determining the quality of future government services and infrastructure
for members.
| Success in negotiating land and
cash settlement through Treaty requires a supportive fiscal
relationship. |
 |
The value of the cash settlement
can be reduced if the fiscal relationship results in those
monies being needed to meet service obligations, or it allows
interest earned by the settlement to be used as a justification
for reducing transfers from other governments. |
|
The value of land received by a First Nation
will depend upon how much tax jurisdiction it holds over that
land and its control over the revenues generated by its businesses
and leases. All these issues are specified in a fiscal relationship.
|
| Success in negotiating autonomy
and expanded jurisdiction requires a supportive fiscal relationship. |
|
If the revenues that pay for the
exercising of a jurisdiction or the delivery of a service
are controlled by other governments, then that jurisdiction
can be subjected to conditions and reporting requirements
of other governments. This simply waters down the jurisdiction
and leaves the funding government in control. |
| Success in bringing services and
infrastructure up to the standards enjoyed elsewhere depends
upon the fiscal relationship. |
|
The fiscal relationship will determine
how much money a First Nation has to meet its expenditure
obligations and provide infrastructure. |
|
The fiscal relationship also determines the
extent to which other governments are obliged to provide services
and infrastructure. |
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What is the tripartite Fiscal Relations Working
Group?
The First Nations Summit participated with Canada and British
Columbia in a non-negotiating, without prejudice working group
called the Fiscal Relations Working Group or the FRWG. The objective
of the FRWG was to explore options for an improved fiscal relationship
in a treaty context. To accomplish this task an interest-based
approach was used, options were explored and then tested both
qualitatively and quantitatively (through the case studies –
the community profiling and modeling project).
The FRWG has now made its Report to the Principals (the Summit
Task Group, the Minister of Indian Affairs, and the Attorney General).
The FRWG Final Report including Annex A-F is included on this
CD-ROM. Unfortunately Canada and British Columbia were not able
to complete their quantitative analysis of the fiscal options.
At the Principals' meeting on June 21, 2003,
the BC Treaty Commission was requested to analyze the Fiscal Relations
Working Group Report to identify areas of agreement and areas
where further discussion of fiscal issues is required.
CLICK
HERE TO READ THE BC TREATY COMMISSION'S COMMENTS ON THE FRWG FINAL
REPORT (PDF)
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Which options were explored
at the FRWG?
Three options for a new fiscal relationship
were developed and explored at the FRWG. The three options were
called the Local Jurisdiction Option (LJO), the Flexible Fiscal
Option (FFO), and the Incremental Jurisdiction Option (IJO) and
they are compared and contrasted in the table below. The Flexible
Fiscal Option is essentially current federal policy.
Table 1 - Summary of Fiscal Options
| |
|
|
|
 |
|
|
|
| Own Source Revenue |
|
No streams excluded |
|
No streams excluded |
|
Some streams included. |
| (to be taken into account in a funding
transfer) |
|
Per capita OSR ceiling and floor |
|
Basic and per capita exemption |
|
Some streams excluded. |
| |
|
Credit for tax paid by First Nation corporation |
|
Phase-in period |
|
|
| |
|
OSR from resources on TSL are net of costs |
|
|
|
|
| |
|
Phase-in period |
|
|
|
|
| |
|
|
|
|
|
|
|
| Funding Responsibility |
|
After 5 years, the First Nation
assumes sole financial responsibility over “local”
programs and services. |
|
Shared funding responsibility
for Agreed-Upon Programs and Services. |
|
First Nation uses included revenues
to assume financial responsibility over selected Agreed-Upon
Programs and Services. |
| |
|
If above the per capita OSR ceiling,, the
First Nation also shares funding responsibility over all other
programs and services. |
|
|
|
Excluded revenues used to fund Not-Agreed-Upon
Programs and Services. |
| |
|
|
|
|
|
|
|
| Revenue Stabilization |
|
Per capita OSR floor maintained
through transfers from other levels of gov’t. |
|
OSR contribution determined annually
– transfer adjusts accordingly. |
|
Annual contributions to revenue
stabilization fund (contingency account) |
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Are these the only options that First Nations
can consider?
No. First Nations are free to pursue other
options at individual negotiation tables. In fact, the FRWG developed
an analytical tool called the Fiscal
Arrangements User Model,
which enables First Nations to examine the financial implications
of a wide variety of fiscal options.
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What
is the Fiscal Arrangements User Model?
The Fiscal Arrangements
User Model is a Microsoft Excel based
spreadsheet model that enables a First Nation to input its own
demographic, government, financial, economic, and treaty settlement
data, to examine the financial implications of proposed fiscal
arrangements over a 20-year timeframe.
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Who would be interested
in using the Fiscal Arrangements
User Model?
Any First Nation that needs to understand
the financial implications of proposed fiscal arrangements offered
during Treaty Negotiations will likely be interested in obtaining
the
Fiscal Arrangements User Model.
The model requires technical expertise (with Microsoft Excel)
and an investment of time and effort to be used effectively.
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When is a good time to use the
Fiscal Arrangements User Model?
The
Fiscal Arrangements User Model can be used in preparation
for and during Agreement-in-Principle negotiations to assist negotiators
in examining different fiscal relations options and economic development
scenarios. The model can also be used as a tool to discuss some
of the questions that membership may be asking during Agreement-in-Principle
community consultations.
The model will likely become even more useful during Final Agreement
Negotiations once some parameters of treaty settlement have been
negotiated. It will help negotiators in analyzing different scenarios
and options. It will also help treaty negotiators, chiefs and
councillors to respond to questions from membership during community
consultation.
The model can also be used once a Final Agreement has been negotiated
and implementation begins. At this point even more parameters
will be known and can be input into the model.
First Nations can also use the model without any consideration
for treaty settlement – they can simply use it as a strategic
financial planning tool.
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What are the risks of using the
Fiscal Arrangements User Model?
The model is not an economic forecasting tool but rather a comparative
policy analysis tool. It will be able to illustrate the difference
between different fiscal options but should not be relied upon
to provide accurate results over 20 years. The results provide
an indication of magnitude and direction only (trend) and will
not provide precise point forecasts. However, a user can develop
alternative scenarios in order to identify a range of possible
outcomes or vary specific variables in order to undertake risk
and sensitivity analysis.
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What type of analysis can be
conducted using the Fiscal Arrangements
User Model?
During the last 2 years, the Fiscal Relations
Secretariat has had an opportunity to listen to some of the questions
and concerns that membership, negotiators, and Chiefs and Councillors
have raised about tax and fiscal relations issues. There have
also been questions from representatives of Canada and British
Columbia. This analytical tool is intended to provide assistance
in answering some of these questions. Some examples of questions
and answers are listed below:
Example question 1:
How will a First Nation government
pay for programs and services to membership?
Example answer 1:
In short: through (1) own source revenue (often called OSR) and
(2) transfers from other governments. First Nation governments
can generate OSR through taxation, resource revenue, investment
income (from the capital transfer and investment of budgetary
surpluses), leasing their land, and First Nation owned businesses.
Own source revenue plus continued federal and provincial transfer
funding will support the provision of programs and services to
First Nation membership into the future.
The amount of revenue that a First Nation will have available
will depend on the nature of revenue sharing arrangements, own
source revenue provisions (offsets to transfers), transfer funding,
and other variables such as employment levels, interest rates,
tax rates, population growth, assessed values for land, number
and type of businesses located on First Nation land.
Figure 1 illustrates the total revenue
of a First Nation over a 20-year time frame. This example uses
the incremental jurisdiction option and the ‘resource’
representative community profile that was developed through the
Community Profiling and Modeling Project at the FRWG.
 |
Example question2:
How will First Nation government revenue
be affected in the future?
Example answer 2:
First Nation government revenue can be affected by both economic
growth and policy decisions. Some variables such as employment
rates, assessed values, and lease revenues are affected by economic
growth. Other variables such as growth in transfer funding, own
source revenue inclusion rates, and percentage of tax revenue
retained by the First Nation, are affected by policy decisions.
Figure 2 shows
the sensitivity of First Nation own source revenue (using the
resource representative community profile and the incremental
jurisdiction option) to different economic growth scenarios. The
main variables that were manipulated to generate different economic
growth scenarios were: assessed values, lease revenue, and employment
rates.
A policy-induced event, such as the increase in inclusion rates
could also increase the offset and reduce the transfer that a First
Nation would receive. Figure 3 illustrates
an increase in the inclusion rate from 50% to 60% using the flexible
fiscal option and the urban representative community profile.
Example question 3:
How does the contingency account (in the Incremental Jurisdiction
Option) protect a First Nation against the risk of an economic
downturn and revenue shortfall?
Example answer 3:
Distinguishing features of the IJO are that: (1) a First Nation
assumes full financial responsibility for a selected program and
service; and (2) annual contributions are made to a contingency
account that is used as a revenue stabilization fund in the event
of an economic downturn. Figure 4 illustrates an example where
a First Nation suffers a negative economic shock, namely a decrease
in taxation revenue in the middle of a Fiscal Financing Agreement.
The negative revenue shock decreases the amount of revenue a First
Nation would have available to fund agreed-upon programs and services.
Funds would be transferred out of the contingency account to make
up this shortfall and the balance in the contingency account would
drop.
Example question 4:
Based upon the flexible fiscal option
(FF0), which closely resembles current federal policy, which orders
of government will be collecting ‘new’ tax revenues?
Example answer 4:
If the current positions of the federal and provincial governments
were accepted, the benefits associated with section 87 of the
Indian Act would be phased out and ‘new’ tax revenue
would be created. Figure 5
shows which governments would be collecting which ‘new’
tax revenue under the flexible fiscal option for the resource
representative community profile. This scenario assumes that the
First Nation will be collecting 95% of the federal sales tax and
federal personal income tax revenue once the exemption is phased
out and tax collection agreements commence in years 2010 and 2014
respectively. This chart does not take into account the fact that
as a First Nation collects revenue, a portion of transfer funding
will be reduced.
 |
Example question 5:
How much tax revenue will a First Nation government generate if
the Section 87 tax exemption is maintained? How much tax revenue
will a First Nation government generate if the tax exemption is
phased out?
Example answer 5:
The benefits associated with the Section 87 tax exemption are
a significant issue in many communities.
Figure 6 illustrates the difference
in a First Nation governments tax revenues if it maintains the
benefits associated with the Section 87 exemption versus if it
phases out the exemption after 8 and 12 years (as per the current
positions of the federal and provincial governments). This scenario
uses data from the remote representative community profile and
the flexible fiscal option. It assumes that once the exemption
is phased out the First Nation will receive 95% of the revenue
associated with federal sales tax and 95% of the revenue associated
with federal personal income tax.
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