Briefing Note On First Nations-Fiscal Relations Bill 2002

BRIEFING NOTE Institutional Fiscal Relations Package
April 21, 2002

Prepared by Michael Sherry
PENNER REPORT 1. The Penner Report of 1983 was issued by the parliamentary standing committee on Indian Affairs. The chairperson was Keith Penner, an MP from northern Ontario. The committee had been originally tasked to produce a report on the issue on the equalization of womens status rights in the Indian Act, vis-a-vis s.15 of the Charter of Rights. There was a process in place to deal with this issue, which eventually resulted in Bill C-31 of 1985. However, the committee led by Penner seemed to be more interested in the issue of First Nation self-government. The committee produced a brief report on the status issue, in order to fulfill its formal mandate, and quickly moved on to its real area of interest, i.e. self-government. The committee probably wanted to influence the multilateral constitutional process on self-government, which was then in full swing, based on the provisions (in particular s. 37.1) of the Constitution Act, 1982. The Penner Report made many recommendations that foreshadowed the work of the Royal Commission on Aboriginal Peoples in the 1990's. In particular, the Penner Report recommended a new bilateral fiscal relationship. Increased annual transfers from Canada would be based on all relevant factors and would be determined through nation-to-nation negotiations. Echoing this approach, the principal fiscal recommendation of the RCAP Report was a massive transfer of new funds to First Nations over a period of 20 years. The four institutions (Tax Commission, Finance Authority, Management Board, and Statistical Institute) recommended by INAC, ITAB, and the AFN fiscal relations unit completely by-pass the principal fiscal recommendations of the Penner Report and the RCAP. Instead, the four institutions focus on the imposition of expensive accountability guidelines and the generation of revenue through on-reserve property tax.
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MULTILATERAL CONSTITUTIONAL PROCESS (1982-1992) 4. This process featured four multilateral constitutional conferences in the 1980's, the Meech Lake Accord of 1989 (?) and the Charlottetown Accord of 1992. The conferences of the 1980's were specific to First Nation concerns and ended up focussing on the issue of the inherent right of self-government. Three of the four conferences were required by a process provision in the Constitution Act, 1982. The Meech Lake Accord and the Charlottetown Accord were driven by the political mandate of the federal government of Brian Mulroney. First Nations were excluded from the Meech Lake process, but played a large part in the Charlottetown process, mostly because of the political support of Ontario Premier Bob Rae. All of the conferences and processes (except Meech) focussed on the inherent right of selfgovernment. The most elaborate expression of the right was contained in the Charlottetown
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Fiscal Institutions Briefing Note - April 21, 2002
Accord of 1992. Oddly enough, none of the processes paid much attention to the financing of the inherent right, assuming its entrenchment by constitutional amendment. If any of the processes had been successful, the financing of self-government would have to have been worked out on a going-forward basis. 6. The constitutional processes were aimed at entrenching the inherent right, subject to various conditions suggested by Canada and the provinces. My recollection is that the kinds of institutions in the current fiscal relations package were not a feature of any of the selfgovernment proposals.
KAMLOOPS AMENDMENTS TO THE INDIAN ACT 7. Since the political process attached to the 1969 White Paper, there had been a kind of political and psychological understanding between First Nations and Canada that the Indian Act should not be tinkered with before the fundamental issues (eg. self-government) had been dealt with. This understanding was breached with Bill C-31 in 1985. There was an extensive consultation attached to this Bill, but in the end Canada felt obliged to act in order to avoid massive liability under the equality guarantee contained in s. 15 of the Charter of Rights. The effect of s. 15 was suspended between 1982 and 1985 to allow governments to bring their legislation up to scratch. Canada believed that the status rules of the Indian Act, particularly as they affected women, were certain to be struck down by s. 15. The breaking of the political barrier with regard to amendments to the Indian Act was quickly exploited. A group of First Nations in BC spearheaded a drive to amend the Act to clarify the reserve status of conditionally surrendered land and to confirm the capacity of First Nations to impose property taxes on all reserve land, including conditionally surrendered land. My recollection is that the BC First Nations were motivated by a difficult situation peculiar to BC. Some municipalities there were imposing property taxes on conditionally surrendered land. The eventual Kamloops Amendments put an end to this practice. It seems there was an expectation that the affected First Nations would step into the breach and replace municipal property taxes with First Nation property taxes. The Kamloops amendment package was successful because of the way it was packaged. It was sold as a First Nations driven package, making it difficult for other First Nations to resist. And, as noted, the barrier to change to the Indian Act was broken with Bill C-31 in 1985. The revised s. 83 of the Indian Act still left the Minister of Indian Affairs in charge of approving property taxation bylaws. However, on an administrative basis the Minister created a new advisory body called the Indian Taxation Advisory Board (ITAB). The ITAB advised the Minister on the adoption of s. 83 bylaws and related matters. It seems that over the years the ITAB developed a close working relationship with INAC. An objective of ITAB was to promote the use of property tax bylaws across the country. However, in spite of over a decade of effort (1989 to 2001), the ITAB was largely unsuccessful. The bulk of s. 83 bylaws come from BC First Nations; only a handful of communities east of Alberta have passed such bylaws. The ITAB operated largely apart from the AFN until 1997 or 1998. In that period, a closer
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working relationship between the AFN and ITAB developed. In particular, ITAB assumed a special role in the elaboration of the AFN position on fiscal relations. There is no doubt that the AFN benefited from the expertise of ITAB in some fiscal matters. However, in retrospect the wisdom of this relationship on a key policy matter like fiscal relations may be questioned. The ITAB seems to have a profound philosophical inclination toward local taxation and accountability measures. This agenda is similar to the INAC agenda. This agenda is not supported by most First Nations in Canada. Not surprisingly, the current institutional proposals of the AFN fiscal relations unit seem to reflect (at least in part) the view of ITAB. The proposed institutions lean heavily on local taxation and accountability. The proposals have almost nothing to say about Canadas responsibilities, including the option of increased fiscal transfers. 13. The ITAB Kamloops agenda of increased local taxation, borrowing, and accountability may make sense for the handful of First Nations in BC and elsewhere that benefit from significant and secure streams of own source revenue (OSR). However, with respect, the agenda makes little sense for the majority of First Nations that rely heavily on straight transfers from Canada.
ROYAL COMMISSION ON ABORIGINAL PEOPLES (RCAP) 14. The Commission was formed by the Mulroney government in 1993 (?) in the wake of the Kanesetake stand-off. The Commission was heavily funded and had a broad mandate to deal with fundamental First Nation and Aboriginal issues. In 1996 it eventually produced a multivolume report with hundreds of recommendations, many of a sweeping or fundamental nature. The RCAP report was ignored by Canada for over a year for several reasons, including the following: (1) the report was initiated by a Conservative government but was released during the term of a Liberal government; (2) the frosty relationship between Minister of Indian Affairs Ron Irwin and National Chief Ovide Mercredi; (3) the overwhelming breadth of the report; and, (4) the emerging policy of the federal government to cap spending on First Nations. In the fiscal area the RCAP recommended some of the institutional enhancements currently advocated by ITAB and the AFN fiscal relations unit. However, the overriding fiscal recommendation of RCAP was that the federal and provincial governments should significantly increase transfers to the First Nations over a twenty year period. This massive infusion of funds was viewed by the Commission as the only way to get First Nations out of the Third World in a reasonable period of time. With massive surpluses in place for the last couple of years, Canada now has a historically unique opportunity to implement the fiscal transfer recommendations of Penner and RCAP. However, the harsh reality is that Canada wants to spend less money on First Nations, not more. The institutional agenda of ITAB and the fiscal relations unit does not address the principal fiscal recommendations of RCAP. There is not even a hint in the institutional package that Canada should increase transfers to First Nations. In contrast, over the last couple of years the provinces have made huge financial gains by demanding more money from Canada. The provinces have sought more money, not more institutions. The institutional package presented to the Confederacy last May is based on the assumption that increased revenue for First Nations should be self-generated through local property taxation and lending based on this taxation. In my view, this is not a realistic option for nine out of ten First Nations.
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THE FEDERAL BUDGET OF 1995 18. The election platform of the Liberal Party did not indicate that it would take a radical approach to cutting the annual federal deficit. By 1995-96 this deficit had reached the range of $40 billion, though this number may have been inflated somewhat by the new Liberal government for political reasons. Nor did the Liberal Party election platform provide any hint of a radical clamp-down on spending in the First Nation area. On the contrary, the Liberal Red Book of election promises contained a very positive chapter on First Nation issues, including the promise to collaborate with First Nations on a revised fiscal relationship. Some First Nation representatives connected with the Liberal Party had a hand in drafting the promising First Nation chapter. The 1995 budget was a watershed policy document in terms of tackling the federal deficit. Finance Martin announced huge reductions to transfers to the provinces. In the area of Indian Affairs, he announced a radical reduction in the annual growth rate of spending, from 6% in 1995-96 to 3% thereafter. The rate of annual growth was reduced to 2% in 1997-98. Absolute reductions in overall spending on First Nations were implemented after 1998. Without consultation, there was an enormous shift in the bilateral fiscal relationship. Canada essentially decided that the level of spending reached in about 1997 would be it on an indefinite basis. The real value of that spending level has gradually deteriorated with the combined effects of inflation and population growth. As a result of reduced funds going to First Nations, more and more First Nations are getting into serious financial trouble. They simply do not have enough money to administer the required programs. INAC has systematically blamed the emerging fiscal crisis on First Nations. They have been accused of being bad managers and failing to exploit available sources of local revenue. A major concern with the institutional package presented to the Confederacy in May is that it falls into the INAC agenda of blaming the victim (i.e. First Nations). The institutional package is focussed on local revenue generation through taxes (Commission) and the imposition of tough accountability measures (Board). The institutional package completely ignores the obvious and, in my view, right option of going after Canada for more money. The institutional package is completely uncritical of Canada. Not surprisingly, INAC supports the institutional package and is willing to legislate it into existence. The cost of maintaining the new institutions is a few million dollars per year, literally nothing compared to the billions of dollars in new transfers recommended by RCAP.
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INDIAN AFFAIRS MODEL FINANCIAL AGREEMENTS (1996) 21. About the same time as the watershed federal budget of 1997, INAC and Justice Canada began to develop a new generation of funding agreements for First Nations. This work was secret. The principal product of the federal work (the Financial Transfer Agreement or FTA) was circulated on a piecemeal basis as a finished product. Before the multi-year FTA most First Nations were on the one-year Comprehensive Funding Arrangement (CFA). A few First Nations were on the multi-year Alternative Funding Arrangement (AFA), a practical selfgovernment product of the mid-1980's. The FTA transferred unlimited program liability to First Nations. In exchange, First Nations would receive capped or even reduced dollars from First Nations. Essentially, the FTA was a
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local flow-through vehicle for the capping and reduction of First Nation funds in the national budgeting process. The FTA did not provide for the reduction of grants based on own source revenue (OSR). However, through consolidated audits, First Nations were required to report to INAC on all OSR. It seemed clear that the long-term INAC agenda is to use the OSR information to reduce grants. 23. The FTA was fiercely opposed in Ontario. This opposition led to the formation of a bilateral committee with a mandate to study the FTA. INAC eventually re-named the FTA as the CFNFA or Canada First Nations Funding Arrangement, to avoid the bad reputation of the FTA. To this day, INAC is using positive and negative pressure techniques to get all First Nations to sign on to the CFNFA. Some of the principles of the FTA and CFNFA are repeated in the institutional fiscal relations package presented at the AFN Confederacy in May. Like the CFNFA, the institutional package does not question the reduction of overall funds to First Nations. Like the CFNFA, the institutional package imposes tough accountability measures on First Nations and promotes the self-generation of revenue through taxation and OSR. Not surprisingly, INAC supports the institutional package and is prepared to codify it in legislation. The philosophical similarity between the CFNFA and the fiscal relations institutional package raises serious questions as to whether the package is in the best interests of First Nations. In my view, these serious questions cannot be adequately answered in the next couple of months. ITAB and INAC want the institutional package approved in principle this summer, in order to set the table for legislation in the fall. In my view, the institutional package should be deferred for at least a year to allow political and legal due diligence to be exercised.
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THE FIRST NATIONS LAND MANAGEMENT ACT OF 1999 26. This legislation was sponsored by some of the same First Nations involved in the Kamloops Amendments of 1989 and the possible First Nations Financial Institutions Act of 2001. The legislation permits First Nations to opt out of certain of the land management provisions of the Indian Act in favour of new local systems. The provisions are mostly attractive to First Nations that have significant on-reserve rental income from cottagers, businesses, and the like. The Kamloops Amendments and the proposed Institutions Act are mostly attractive to the same minority of First Nations, mostly based in BC. Some of the public relations tactics used during the Kamloops Amendments are also being used for the Institutions Act. In particular, there is an attempt to limit debate on the institutional package by claiming that it is First Nation driven. The expectation is that First Nations will not be critical if some First Nations are behind the package. The package has also been sold based on its optionality and that it will only affect First Nations that decide to opt, in my view. Contrary to the public relations exercise based on the Kamloops Amendments, my view is that a minority of First Nations with very special circumstances, i.e. significant potential tax revenues, is only driving the institutional package that will impact all First Nations. Because of these realities, there should be no rush to pass it based on some artificial process deadline imposed by INAC. Rather, First Nations should have the option to carefully study the institutional package. About a year is probably required.
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NATIONAL FISCAL RELATIONS PROCESS 29. The federal government did not want to initiate a national fiscal relations process with the AFN under former National Chief Ovide Mercredi. INAC did not have a good working relationship with Ovide Mercredi. Instead, INAC focussed on the discussion process with the Chiefs of Ontario. While this discussion process was based on the technical provisions of the FTA, many of the issues on the table touched on the fundamentals of the bilateral fiscal relationship; for example, the transfer of all program liability to First Nations and the accounting or taxation of Own Source Revenue (OSR). There were preliminary discussions about expanding the process beyond the FTA and into the general realm of the bilateral fiscal relationship. At least initially, INAC viewed that Ontario process as more moderate than the national scene, and more likely to be fruitful. A national AFN process was consciously deferred in favour of the Ontario process. The process preference of INAC gradually changed. It became obvious that the Ontario First Nations committee would not accept the fundamental trade-offs in the FTA. In 1997, the policy of the new National Chief was to work more closely with INAC on issues of mutual concern. This set the scene for the ITAB to work with the AFN on fiscal relations issue. INAC quickly abandoned its fiscal relations initiative with Ontario and focussed on work with the AFN. The AFN fiscal relations process was largely uncritical of the new financial agreements and the fiscal reduction exercise of INAC. Instead, there was a focus on the revenue generation items of interest to ITAB. The end result of this process is the institutional package presented to the Confederacy in May of 2001. First, the ITAB will be statutorily entrenched as the Tax Commission. Second, municipal debentures based on property tax revenue will be issued through the Finance Authority. Third, accountability measures will be imposed through the Management Board. And, information for all these endeavours will be collected through the Statistical Institute.
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RESOLUTIONS FOR THE NATIONAL FISCAL RELATIONS PROCESS AND THE PROPOSED INSTITUTIONS 32. Generally speaking, a National Chiefs Assembly resolution was passed in 1996 to authorize national work on fiscal relations. At that point, INAC was still focussed on work with the Ontario First Nations committee on the FTA. The potential of the 1996 AFN resolution did not become actualized until 1997, with the business or working relationship between INAC Minister Jane Stewart and the new National Chief, Phil Fontaine. Particular Chiefs resolutions were passed to support the development of two particular institutions in the fiscal relations process, i.e. the Tax Comission (FNTC) and the Finance Authority (FNFA). Only Confederacy resolutions were obtained for two other institutions, i.e. the Financial Management Board (FNFMB) and the Statistical Institute (FNSI). The approval process for the Management Board and Statistical Institute were rushed earlier this year (2001) when INAC indicated that there might be an opportunity for draft legislation in the fall (2001). National Chiefs Assembly Resolution 5/96 supported the development of a new fiscal relationship with Canada. In particular, the Resolution called for a new system of fiscal transfers, including increased transfers. This aspect of the Resolution was not picked up in the later national process.
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National Chiefs Assembly Resolution 49/98 supported the creation of a Chiefs committee on fiscal relations. National Chiefs Assembly Resolution 6/99 called for the development of federal legislation to establish a Finance Authority. National Chiefs Assembly Resolution 7/99 called for the development of a Tax Commission, but there was no specific mention of a statutory basis. Confederacy Resolution 5/2000 (April of 2000) supported in principle the concept of a Management Board and supported the development of a related business plan. There was no support for legislative enactment. Confederacy Resolution 6/2000 (April of 2000) supported the concept of a Statistical Institute and supported the development of a related business plan. There was no support for legislative enactment. Overall, the level of resolution support for the institutional package is uneven. Legislative development has only been supported in the case of the Finance Authority, and this support was expressed two years ago (6/99). The Management Board and the Statistical Institute have only been supported as non-legislative proposals in Confederacy resolutions from last year. The Confederacy in May of 2001 refused to endorse the legislative institutional package. This mixed history of resolutions means that no definitive commitment of any kind has been made to the final institutional package. Chiefs this summer should feel free to assess the package on its merits. One option, consistent with past resolutions, may be to defer the package for a year for further study.
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BUREAUCRACY OF THE NATIONAL FISCAL RELATIONS PROCESS 40. Since the summer of 1997 INAC has keenly supported the national fiscal relations process administered through the AFN. This reflected the positive business relationship between INAC Minister Jane Stewart and AFN National Chief Phil Fontaine. A key component of the political understanding at the time was the significant direct and indirect involvement of the Indian Tax Advisory Board (ITAB) in the fiscal relations process. The ITAB focussed on the proposed Tax Commission institution. ITAB staff joined the AFN to work on the general fiscal relations project. ITABs involvement was probably reassuring to INAC and guaranteed a process focus on the topic of First Nation property taxation. INAC satisfaction with the make-up of the new national fiscal relations process expressed itself in healthy funding levels for the ITAB and AFN processes. As a result, an elaborate process of committees and sub-committees was formed. True to initial expectations, this well-funded process was seldom, if ever, publically critical of the fiscal policy of Canada vis-a-vis First Nations. This was remarkable during a period when Canada cut back First Nation funding, in spite of surpluses and the recommendations of RCAP. The process was very low-profile and inward-looking, examining First Nation institutional options, geared in particular to on-reserve property taxation.
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AFN-CGA COMMITTEE 42. The AFN-CGA Committee was formed at about the same time as the national fiscal relations process. The Committee and the larger process were in fact closely linked. The Committee reflected the generally conservative and non-confrontational approach of the larger fiscal relations process. The CGA component of the Committee was made up of representatives of the Chartered General Accountants association of Canada. The AFN hired a contractor to facilitate the process. The regional AFN representatives tended to be finance directors and similar officials. There was significant involvement from BC, but there was national representation as well. The Committee was viewed as being very technical in nature, with a mandate to look at accounting standards for First Nations. The Committee was instrumental in establishing a national association of First Nation financial officers. The AFN-CGA Committee deferred to the national fiscal relations process on the bigger fiscal policy issues. The Committee was self-consciously technical. However, even with that limitation in mind, it is somewhat disappointing in retrospect that the Committee did not tackle more difficult and confrontational technical issues, such as OSR and taxation.
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THE MEMORANDUM OF UNDERSTANDING (MOU) OF MARCH 2, 1999 45. This MOU involves the ITAB (Manny Jules) and INAC. The MOU extends the mandate of the ITAB to March of 2002 to work in an advisory capacity in relation to s. 83 property taxation bylaws. Section 1.6 of the MOU confirms the ITAB mandate to publish the First Nations Gazette. The vision there is to make the Gazette the official registration place of all First Nation laws. The Nault Bill may also confirm the official position of the Gazette. Section 2.1 of the MOU confirms continued discussions between INAC and ITAB on further development in the area of new fiscal relationships between First Nations and Canada. Thus, ITAB is identified as a primary contact for discussions on the bilateral fiscal relationship, quite apart from the AFN. Section 2.2. of the MOU, priority is attached to examination of the ITAB mandate with a view to exploring the ITAB role in governance issues (emphasis added). This wording seems to suggest that the ITAB might get involved in discussions on pure governance, with no particular connection to fiscal relations. This raises troubling questions about the connection with the current Nault Bill. There is no particular mention in the MOU of the Tax Commission proposal, with or without a legislative basis. It may be that the legislated Tax Commission proposal was not fully formed in the spring of 1999. The last recital of the MOU does refer to an intention of INAC to devolve the INAC Taxation Secretariat to ITAB, to provide administrative independence and to further the Boards autonomy in the development and expansion of expertise, policy and initiatives in the context of real property taxation. This is the same agenda of the legislated Tax Commission. It is unclear if the complete administrative devolution of INAC functions occurred in 1999 as planned.
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The MOU confirms that early on in the fiscal relations process INAC viewed the ITAB as a key participant in the process, quite apart from the AFN. This raises troubling questions in view of the political and legal mandate of the ITAB. The ITAB is an advisory body in relation to the passage and administration of property tax bylaws under s. 83 of the Indian Act. The ITAB has significant business connections with INAC and, from a First Nations point of view, is not very representative, being active mostly in parts of BC (and Alberta to a lesser extent). The narrow focus of ITAB on revenue generation through on-reserve property taxes may have had a limiting effect on the fiscal relations dialogue with Canada, which (in my view) should have been broad-based and flexible.
PHILOSOPHY OF THE AFN IN THE NATIONAL FISCAL RELATIONS PROCESS 51. The approach of the ITAB and the core of BC First Nations connected with ITAB heavily influenced the philosophy of the AFN in the national fiscal relations process that took flight in 1997. Generally speaking, this philosophy has at least two components. First, there is the belief that the primary means of new revenue generation for First Nations should be on-reserve property taxation. Second, there is the belief that political and economic progress among First Nations is best achieved through the creation and fostering of First Nation institutions. A key result of the inward-looking (First Nation taxation and First Nation institutions) philosophy of the national fiscal relations process is that there has been little or no scrutiny of the role of Canada in the bilateral fiscal relationship. There has been no systematic examination of the following: (1) the fiscal capping process in place since 1995; (2) an estimate of the cost of implementing the Treaties; (3) an estimate of local need; (4) the impact of the new financial agreements; (5) the federal OSR agenda; (6) the federal agenda to phase out s. 87 of the Indian Act; (7) the federal agenda to reduce grants based on property tax potential; (8) the fiscal recommendations of RCAP; and, (9) the potential to radically increase federal funding to First Nations based on the huge federal surplus. In essence, the national fiscal relations process has ignored the role of Canada in the bilateral fiscal relationship.
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CONSTITUTIONAL RIGHTS 53. From time to time the material produced by ITAB and the AFN fiscal relations secretariat suggests that the process and the products of the process (eg. the First Nations Tax Commission) are linked to the implementation of First Nation rights. This was particularly true in the early going of the national fiscal relations process. There was a connection made between the fiscal project and the implementation of the Delgamuuk decision on Aboriginal Title. The connection was probably emphasized because of the heavy influence of BC First Nations in ITAB and, in turn, the heavy influence of ITAB in the fiscal relations process. Even beyond the initial interest in the Delgamuuk case, however, the claim has been made from time to time that the work of the fiscal relations process is linked to the First Nations rights agenda (Treaty rights, the inherent right, etc.). The institutional package has nothing direct to do with the rights agenda. A case in point is Aboriginal Title, as clarified by Delgamuuk. The institutional package is fixated on the generation and accounting of property tax dollars on reserve. It has nothing to do with the assertion of off-reserve territorial rights. The same goes for Treaty rights. If the
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institutional package had anything to do with the assertion of constitutional rights, it would not be supported by INAC. THE LEGISLATIVE RUSH 55. Since 1996-97 the ITAB and the national fiscal relations secretariat had been working in a very gradual way on scoping out at least four institutions. These four institutions are as follows: (1) the First Nation Tax Commission or FNTC; (2) the First Nation Finance Authority or FNFA; (3) the First Nation Financial Management Board or FNFB; and, (4) the First Nation Statistical Institute or FNSI. Chiefs Assembly resolutions were obtained for the general fiscal relations process and for legislative development of the FNTC and the FNFA. However, as of early 2001, the process was gradual and there was no particular time frame to bring the products to any particular kind of conclusion. In early 2001 INAC officials indicated to AFN and ITAB officials that there would be an opening for a fiscal institutions Bill this fall (2001). It is an interesting coincidence that the timing is the same for the Nault Bill on governance. The Nault Bill is supposed to be tabled this fall, after a rushed and pre-determined consultation with First Nations over the summer. The two Bills may be viewed as companion pieces by INAC. There is a lot of overlap in areas such as accountability; the proposed Management Board is focussed on accountability. If the Nault and Fiscal Institutions Bills are brought forward at the same time, the political task of First Nations may be quite overwhelming. The Institutions Bill will be difficult to oppose at any level because of the measure of First Nation support, particularly from BC; this is what happened with the Kamloops Amendments of 1987 and the First Nations Land Management Act. The simultaneous processing of two complicated Bills will make it difficult for First Nations to allocate political/legal resources. As a result, the Nault Bill may have an easier time than expected. In my view, this cluttered agenda is potentially harmful to First Nations. It would be better if the Institutions Bill were deferred on an indefinite basis so First Nations can concentrate on the Nault Bill. First Nations that support the Institutions Bill are keenly aware of the negative reaction to the Nault Bill and are concerned with any political or legal connection drawn between the two Bills. A key communications message to First Nations, in preparation for the National Assembly, is that there is no connection between the two Bills. This public relations message is misleading, politically and analytically. Given that the consultation process leading up to the summer Conference is essentially First Nations talking to First Nations, it would be preferable (in my view) if a more critical approach was taken on issues such as the connection between the two Bills.
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THE NAULT BILL 59. The Nault Bill on First Nations governance was developed in secret by INAC late in 2000 and early in 2001. It was sprung on First Nations in the last days of March of 2001. The initial open consultation process is impossibly brief, given the complexity of governance issues. That consultation is supposed to be over with in September or October of 2001, at which time a full legal text of a Bill will be tabled in Parliament. The intention of the government is to have the Bill passed into law in the spring of 2002.
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In the strict sense, there is no necessary connection between the Nault Bill and Institutions Bill. That is to say, one could proceed without the other. The work on Institutions Bill (at least components of it) started back in 1996 and 1997. As noted, Nault Bill was probably first hatched in late 2000, as part of INAC strategizing tied to Corbiere decision.
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However, at a broader or philosophical level, my view is that the two Bills are intimately connected. The heart of the Nault Bill is the nearly hysterical accountability agenda of Canada. Canada believes that all of the financial ills of First Nations can be traced back to bad management and accountability practices. No thought is given to the massive under-funding imposed on First Nations since 1995. Similar assumptions underlie the Institutions Bill. No thought is given to the larger fiscal relation with Canada. Rather, the Institutions Bill stands for the proposition that financial growth can be achieved through better accountability, better management, and more local taxes. The Management Board institution is particularly focussed on accountability issues. The Nault Bill and the Institutions Bill seem to be both philosophically inspired by the Harvard Project on American Indian Economic Development. In simple terms, the theory of the Harvard Project is that First Nation economic growth is best achieved through two conditions: (1) stable local governance, and (2) First Nation institutional development. The Nault Bill addresses the first condition, at least from the INAC point of view. The Institutions Bill addresses the second condition, at least from the point of view of certain First Nations linked to ITAB. Because of the bad publicity connected with the Nault Bill, the groups behind the Institutions Bill have been pushing the public relations message that there is no connection between the two legislative projects. However, my view is that this public relations message should be carefully scrutinized. Both projects ignore the role of Canada in the current fiscal relations mess and focus all attention (blame?) on First Nations. According to the Nault Bill, the answer is more red tape for First Nation government. According to the Institutions Bill, the answer is a more sophisticated system of on-reserve property taxation. The nexus between the two projects is illustrated by their mutual handling of the issue of non-member reserve residents. The Nault Bill suggests that individual rights should be given administrative appeal rights, and possibly voting rights. Similarly, the Institutions material is very solicitous about the rights of non-member tax payers (egs. cottagers and businesses). In particular, such taxpayers will have three seats on the First Nations Tax Commission. If the two Bills are passed, my guess is that the mutual provisions on the rights of non-member taxpayers and residents will be mutually reinforcing.
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THE FOUR SISTERS 65. The end result of the national fiscal relations process is a proposal to create four institutions or sisters, i.e. the Tax Commission, the Finance Authority, the Management Board, and the Statistics Institute. In particular, the proposal is to establish all four institutions by federal legislation, tentatively called the First Nations Financial Institutions Act or FNFIA. As noted, the federal government indicated to the fiscal relations group early this year that there was a possibility of getting a Bill in the parliamentary system this
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fall. As a result, there is breakneck rush on to obtain AFN approval of a legislative package. The integrity of this consultation process may be questioned. 66. The four proposed institutions are not isolated. Rather, in my view, they are highly interrelated, a kind of vortex. The idea is that a First Nation interested in any one of the institutions will be led inexorably to being involved in the other three, whether at once or piecemeal. Thus, a First Nation interested in the loan (debenture) function of the Finance Authority will be told that debentures must be supported by a local property tax system. The First Nation then has to go to the Tax Commission. At the Tax Commission, the First Nation will be told that it has to go to the Management Board for an accountability certification. Such a certification will be a pre-requisite for the approval of a taxation bylaw. In summary, the four institutions are a kind of vortex, with multiple policy effects on any First Nation that gets involved. The proposal is to have all four institutions covered by the one piece of federal legislation, the FNFIA. There will be a part for each institution in the legislation. Draft legislation has been put together hurriedly in the wake of the federal hint earlier this year that there might be an opening for a Bill in the fall of 2001. Apart from the legislation, each of the institutions has a business plan. The business plan for the Tax Commission is well formed, reflecting the extensive and long-term work of ITAB. The other three business plans are more or less in place, reflecting the rush for the Bill this fall. The recitals of the FNFIA are profoundly conservative and do not appear to reflect a strong First Nation agenda on rights. The first and eights recitals refer to the transparency and accountability agenda of INAC, the same agenda that drives the Nault Bill and the INAC financial agreements. The third recital refers to the value of Canadas social and economic union, in language reminiscent of the federal/provincial Social Union Framework of February 4, 1999. The sixth recital refers to local taxation and borrowing for local infrastructure as the normal practice for local governments in Canada. This language reflects a strong municipal approach to First Nation government, also seen in the Nault Bill. The seventh recital presents a double whammy, speaking glowingly of the rights of non-member taxpayers on reserve and the framework of Canadian law.
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CONCEPT OF THE FIRST NATIONS TAX COMMISSION 69. The Tax Commission is a legislative version of the ITAB, with enhanced powers. It is an administrative body with the primary mission of advising INAC on the acceptance of Indian Act (s. 83) property taxation bylaws. The ultimate decision on the acceptability of a s. 83 bylaw lies with INAC. The ITAB was created in the wake of the Kamloops amendments to the Indian Act in 1987. Ironically, the ITAB is not mentioned in the relevant provisions of the Indian Act The idea behind the Tax Commission is to formalize the ITAB mandate and make it official through legislation. Once established in legislation, the ITAB (or Commission) will be a permanent body. A legislative amendment would be required to terminate ITAB. The idea of legislating a permanent existence for ITAB clearly serves the interests of the officials and First Nations connected with ITAB. These officials and First Nations believe that ITAB has completed a track record over the last 12+ years that it deserves a
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70.
permanent legislative and funding reward. A more difficult question is whether the Commission will serve the larger First Nation interest. A permanent Commission will be subsidized by millions of dollars from the common First Nation envelope. 71. I have no doubt that the ITAB has done a lot of good technical work for its constituency of First Nations interested in s. 83 taxation bylaws. However, the national mandate of the ITAB is doubtful. While the Board of ITAB has a handful of people from across the country, the reality is that ITAB has not been able to move much beyond its base in BC and parts of Alberta. There has been very little uptake of s. 83 bylaws east of the Alberta border. From this basic point of view, ITAB has not been very successful. Therefore, it is legitimate, I think, to question whether the ITAB message or philosophy should be imposed across the country through federal legislation. The Tax Commission will still be exercising delegated power from the Minister. The delegation, as expressed through the legislation, may be withdrawn by Canada through legislation. So, the legislation should not be viewed as an expression of the inherent right of self-government. This message is reinforced by the fact that the Commission will be focussed on s. 83 taxation bylaws. While still exercising delegated authority, the Commission will be significantly more powerful than ITAB. Subject to certain procedural protections, the decision of the Commission on the acceptability of s. 83 bylaws will be binding on the federal government. While this change is significant from a legal point of view, there may be little difference in practice. From the very beginning ITAB has been in tune with federal positioning on s. 83 bylaws and other matters; in practice, the advice of ITAB is almost always followed. The legislation would represent a codification of this practice. The Commission will be active beyond the power to accept s. 83 bylaws. The Commission will be active in the regulation of property tax regimes and how property tax monies are spent. The material seems to indicate a bias toward the use of tax dollars for infrastructure improvements. It is unclear why First Nations should not be able to spend their tax dollars as they please. This may reflect the INAC agenda to access tax dollars to cover items that would otherwise have to be paid for by INAC. It also appears that the Commission will have regulatory power over the setting of annual tax rates. Tax rates should not discourage investment and should not interfere with the Canadian economic union. This reflects a deeply conservative approach. The linkage to the other three institutions (or sisters) is important. A First Nation that wants to get a bylaw through the Commission will probably have to maintain a certificate of good management and accountability from the Management Board. A First Nation that wants to participate in the lending and investment pooling of the Finance Authority will probably have to have a certificate from the Management Board and have an approved bylaw from the Commission. A First Nation partaking in any of the benefits of the Commission, Board, and Authority will probably be obliged to provide statistical information to the Statistical Institute. The four institutions are like a vortex or a sticky web. Entry at any point will get a First Nation involved with everything. There is no expansion of the basic property tax jurisdiction set out in s. 83, as amended by the Kamloops package in 1987. There is no attempt to take on the larger First Nation
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72.
73.
74.
75.
76.
position of tax immunity. Basically, there is an adjustment to the approval process for s. 83 bylaws. The focus is strictly on reserve. There is no suggestion of off-reserve powers based on the Delgamuuk case or Treaty. 77. The concept of the Commission is the most developed of the four sisters. This is because the Commission is simply the evolution of the ITAB, which was established around 1989. ITAB officials and their associates in the property tax secretariat at INAC have a great deal of experience in the administration of s. 83. The business plan of the Commission is fully formed. The legislation is still in rough form. There is little doubt that, if the Institutions Bill is passed, the Commission would be up and running in short order staffed by ITAB and INAC secretariat officials (s. 1.18 of the Bill). The process of putting together business plans for the different institutions was greatly rushed in the first part of 2001. After the word from INAC that an Institutions Bill might be a go this fall, the strategic plan was to put together business plans. These plans would be used to seek quick approval from the Chiefs. They would also be used as a blueprint for legislative drafting. The business plans, some in fairly rough form, were presented to the AFN Confederacy in Vancouver in early May of 2001. The Confederacy Chiefs refused to endorse the business plans, and deferred the issue to the National Assembly in Halifax in July. It is critical for the ITAB and fiscal relations officials to get some form of approval this summer in order to pursue the objective of legislation this fall. If the matter is left unclear at the Assembly, the ITAB and fiscal relations officials may seek to rely on earlier resolutions. In my view, this kind of reliance would be inappropriate, given the newness of the some of the material, particularly the draft legislation.
78.
LEGISLATION FOR THE FIRST NATIONS TAX COMMISSION 79. The Commission is described in Part One of the draft legislation entitled First Nations Financial Institutions Act. The other three sisters (Authority, Board, and Institute) are also set out in the Act. The highest level of delegated authority is assigned to the Commission. Much of the draft legislation deals with administrative matters for setting up the Commission, eg. the make-up of the Commission, terms of office, reimbursement of expenses, and termination. The material on powers and mandate is less clear. Section 1.6 of the Bill provides that 3 of the 9 Commissioners shall be representatives of taxpayers, appointed by the federal Cabinet (s. 1.18). These will probably be nonAboriginal people tied to groups of residential tenants, utility companies, and the like. The careful attention to non-native taxpayers is consistent with the approach of the Nault Bill. I assume that the presence of these taxpayers is a fundamental trade-off for the delegated right of the Commission to approve bylaws in a final way. The other 6 Commissioners will represent First Nations on a regional basis; one region will be Ontario. At least on a transitional basis, it is likely that the existing Board members on ITAB will end up on the Commission. I believe the current chair is Chief Manny Jules. According to s. 1.14, the head office of the Commission will on the Kamloops reserve. The current Chief is Manny Jules. This reflects the flow-through from ITAB and the reality that the ITAB/Commission is very much a BC phenomenon.
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80.
81.
82.
83.
According to s. 2 of the Institutions Bill, a key purpose of the Commission is to support the expansion of First Nation revenue raising jurisdiction. This reflects the INAC agenda to exploit First Nation fiscal resources and ignores the option of increased transfers from Canada. The property tax option is feasible with the small minority of First Nations that have a significant revenue stream from cottagers, businesses, and the like. However, in my view, the property tax approach is irrelevant to the overwhelming majority of First Nations, particularly in the north, with little or no local business base. In many northern reserves in Ontario, the local unemployment rate exceeds 90% and the only real source of public revenue comes in the form of transfers from Canada. In this kind of typical situation, it is unclear how property taxes can be applied. This reality is reflected in the minimal uptake of s. 83 tax bylaws in the history of the ITAB. In s. 2.1 (Mandate) of the Bill, the third bullet point states the Commission will strive to harmonize the tax system for First Nations in Canada. This suggests two levels of harmonization. First, local tax bylaws should generally look the same. Second, First Nation tax bylaws should not be radically different from municipal and provincial tax laws. There is an emphasis in the material that First Nations must fit in with the Canadian economic union in order to be successful. All of this material reflects a strong conservative bias. This is emphasized by a reference to the INAC transparency agenda in the same section. In s. 2.1 (Mandate), the next-to-last bullet point provides that the Commission shall strive to support the integration of the First Nation tax system into national fiscal arrangements. Again, the conservative philosophical underpinning is clear. The tax jurisdiction will not be used to mark out new ground for First Nations. Rather, the idea is to blend into the municipal and provincial body of property tax laws. The fear seems to be that any significant deviation from the municipal model will discourage investment. Section 2.2 of the Bill emphasizes the desirability of coordinating the operations of the four sisters. In particular, according to the second bullet point, the Commission and the Management Board will work to develop an integrated financial management system for First Nations using the tax authority. It is likely that the system advocated by the Commission and the Board will be consistent with the accountability and other principles found in the Nault Bill. The third bullet point of s. 2.2 deals with the connection between the Commission and the Finance Authority. It seems that lending/investment support from the Authority will not be possible without some form of evaluation and certification from the Commission. This is the vortex or web effect of the four sisters. The fourth bullet point of s. 2.2 deals with the connection between the Commission and the Statistical Institute. The Commission and the Institute will share data to support local property taxation. The Commissions powers, duties and functions are listed in s. 3 of the Bill (Part One). The first bullet point states that the Commissions jurisdiction will not be limited to the approval of s. 83 bylaws. Rather, the Commission will have a continuing jurisdiction over First Nations that pass bylaws for property taxation and the collection of other fees and charges. This will include property tax administration, related tax expenditure, and the
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84.
85.
86.
87.
88.
89.
use of tax revenues for debt financing. This expanded jurisdictional scope is remarkable and merits careful political attention. First Nations will not be free to spend tax revenues as they please. It is likely, in my view, that First Nations will be obliged to spend in areas that will provide relief for the federal Treasury (eg. infrastructure). Thus the OSR and taxation objectives of INAC will be partly achieved. 90. The fifth bullet point of s. 3 sets out a kind of intervention power for the Commission in the event that a property tax bylaw is struck down or there is a problem with rate setting. The objectives of the Commission appear to be avoidance of disruption of taxpayer service and protection of the integrity or reputation of the overall tax system. These objectives reflect the conservative interest in taxpayers and the assumption that tax dollars will be used to pay for essential services that might have otherwise been the liability of INAC. In my view, there should be a political review of this potentially significant power to interfere in local First Nation government. The sixth bullet point of s. 3 describes an interesting relationship between the Commission and the Finance Authority. In the event that the Authority reports a debenture or loan default by a First Nation, the Commission may take steps to ensure that the First Nations tax system is adjusted to keep up with payments. The second bullet point of s. 3.3 provides that a First Nation must pass an annual rates bylaw. My understanding is that each rates bylaw is subject to the approval of the Commission that will ensure that rate-setting is consistent with investor expectation and harmony with the municipal taxation system. Thus, passage of a s. 83 taxation bylaw means a continuing and ongoing jurisdiction for the Commission. The Commission will essentially control the property tax system on all subscribing First Nations. According to s. 3.5, the Commission stands as an agent of the Crown, particularly in relation the approval and disallowance of bylaws. The Commission is exercising delegated authority. Section 3.13 provides that the government of Canada will finance the Commission. In other words, the funding will be drawn from the general First Nations envelope. Given the limited appeal of ITAB, particularly in Ontario, financing from all First Nations may be questioned. If the Bill goes ahead, an alternative could be to take a percentage from the property taxation revenues of all First Nations with s. 83 bylaws. This might instil more fiscal discipline to the system. Section 3.15 indicates that all Commission decisions and policies will be published in the First Nations Gazette. My understanding is that ITAB has been running the Gazette for some time. The vision of Canada may be to make the Gazette the official publication and notification instrument for First Nation legal instruments. Parallel provisions may be contained in the Nault Bill.
91.
92.
93.
94.
95.
BUSINESS PLAN FOR THE FIRST NATIONS TAX COMMISSION 96. At page 2 of the Business Plan it is noted that the ITAB already acts like a provincial body that regulates municipal property tax authorities (here First Nations). In order to continue, the ITAB feels very strongly that it should have an independent First Nation
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mandate ratified by federal statute. That is to say, the ITAB should become the Tax Commission. 97. Page 2 of the Plan refers to the four institutions to be recognized by the Fiscal Institutions Act. Working together the four sisters will create a regime for the fiscal governance of First Nations with property tax systems and other First Nations interested in that regime. At page 2 of the Business Plan, under the heading of First Nation Taxpayers there is a discussion of the appropriate expenditure of tax revenues. It is said that taxpayers are entitled to appropriate services at fair cost. Property tax revenues should be expended appropriately in an environment where there may be other demands placed on the funds or the funds could be put at risk by borrowing. This thinking is mirrored in the legislation. Property tax revenues are not in the sole and unfettered discretion of First Nations. The Commission will ensure that tax dollars are spent for appropriate local services, like infrastructure. This will reduce the demands on INAC grants. The direction of tax revenue expenditures in program and service areas that will benefit INAC is explicit in the Business Plan. In the last paragraph on page 4, it states that tax revenues will actually reduce federal liabilities and enhance the Canadian social and economic union. In other words, property tax revenue will be treated as a form of OSR that may lead to a reduction in federal grants for participating First Nations. This is a remarkably conservative agenda. It would be preferable if First Nations could depend on INAC grants and allocate any tax revenues to savings or new program and service areas. The fourth paragraph at page 5 of the Business Plan makes clear that the Commission will have the power to regulate annual tax rates. Even after a s. 83 bylaw is approved, the First Nation will continue to be under the regulatory control of the Commission. According to the Business Plan, rates will be regulated by the Commission in order to protect taxpayer interests and to protect the collective interest of all First Nations. At page 6 of the Business Plan there is a reference to the desirability of supporting Canadas economic union and reducing internal trade barriers. The language is reminiscent of the federal/provincial Framework on the Social Union (February of 1999). The clear implication is that the Commission will regulate First Nation property tax rates to ensure that they are not out of whack with average municipal rates. In my view, this constitutes a significant limitation on the ability of a First Nation to regulate its internal affairs. What if a First Nation sets low rates in order to encourage the settling of business on reserve? Would the Commission intervene in order to prevent unfairness to local municipalities? The Plan and the legislation make clear that the Commission will have a strong enforcement arm that will apply to all First Nations with tax bylaws. At page 7 of the Plan there is a further elaboration of the mandate of the Commission. Where business makes an investment in a particular First Nation, the tax system will be administered to: (1) ensure stable rates, and (2) guarantee quality service consistent with the investment. Ensuring that all of this takes place implies a strong compliance mandate for the Commission. Each First Nation must have transparent appeal and decision-making processes. Further, the Commission will ensure that tax revenues are not jeopardized by overly risky projects, that revenues are only used to finance projects pertinent to the tax account, and that tax dollars are not put at risk from borrowing
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98.
99.
100.
101.
102.
secured by non-tax dollars. Again, there is a strong sense that the Commission (and INAC) has a significant say over areas of expenditure. Businesses will be taxed and businesses should expect stable rates and good service in exchange for the taxes; taxes should be used to provide services to the businesses and the community. An important consequence is to reduce the fiscal liability of Canada. 103. At page 12 of the Business Plan it is made clear that the Commission policies will require First Nations to provide participation mechanisms for non-member taxpayers. This goes beyond the 3 representatives of taxpayers on the Commission itself. Involvement of taxpayers at the local level will be required. This approach is parallel to the Nault Bill on governance. Regulations promulgated by the Commission and INAC are discussed at page 15 of the Plan. Many regulations will be designed to protect non-member taxpayers, as such individuals cannot vote. They are entitled to stable rates and good service in exchange for the rates. There is an overriding desire to improve the investment climate in harmony with the Canadian economic union. The dispute resolution system is discussed at pages 18 and 19 of the Business Plan. It appears that the role of the Commission will be regulated. The Commission will have the authority to get involved in disputes with taxpayers. In some cases, the Commission may oblige the parties to participate in mediation. In other cases, the Commission may impose particular solutions. Finally, in other cases the parties may maintain the right to access the court system. At page 21 of the Plan there is a discussion of coordination with the three sister institutions. In particular, the Management Board is described as a comptroller for First Nation governments and institutions (emphasis added). The Board will work with First Nations to develop a financial management policy framework and conduct investigations on request. The Board will issue certificates of good management, which will probably be required for property tax regimes and lending based on such regimes. The accountability mandate of the Board seems very similar to the accountability measures of the Nault Bill. At page 23 of the Business Plan it is acknowledged that the Commission will be directly accountable to Canada through Parliament. Accountability to First Nations is lumped in with accountability to taxpayers and other interested parties. Indirect accountability to First Nations, taxpayers, and others will be through performance measures. Page 24 contains a chart of First Nations with s. 83 tax bylaws obtained through the ITAB process. Excluding the territories, there are 88 participating First Nations. Of these, the overwhelming majority (54) are in BC. There are 14 in Alberta. Outside of BC and Alberta, there are 20 First Nations with s. 83 bylaws. Outside of Alberta and BC this represents an uptake rate of about 1.5 First Nations a year since the inception of ITAB. Some of these First Nations may not be actively implementing their bylaws. Some of the First Nations outside BC may have particular ties to the BC First Nations based on the First Nations Land Management Act and other special projects; so, there might not be much potential for growth outside BC. Overall, it does not appear that the ITAB has been very successful in promoting s. 83 bylaws. Given this relative lack of success, the case
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104.
105.
106.
107.
108.
for the statutory entrenchment and empowerment of the ITAB as the Commission may be questioned. Having failed to promote s. 83 bylaws on a voluntary or suasion basis for over a decade, the underlying agenda here may be to force First Nations on board through a statutory approach. 109. A long term agenda of the Commission may be to calculate the property tax potential of all First Nations. The Statistical Institute would assist the Commission. INAC would then reduce a First Nations grant by some percentage of its property tax potential, as calculated by the Commission. The effect would be to force First Nations to install a tax collection system or simply absorb the loss of grant dollars. My understanding is that INAC already has some tax potential models in place or study in the territories. The staffing and costing of the Commission is discussed at pages 25 and 26 of the Business Plan. The administrative arm of the Commission will comprise about 20 people, drawn mostly (I assume) from ITAB. The ITAB budget would be increased given the number of commissioners and the new responsibilities of the Commission (egs. regulation process, dispute resolution, and institutional coordination). There will more of a resource focus on the Western Canada client base. I find this admission somewhat surprising, given the mandate of the Commission to expand beyond the current narrow geographical mandate of the ITAB. The ITAB budget for 2001 is projected at about $2.75 million. The new Commission budget is projected at $4.25 million, an increase of 54%! This represents a lot of money drawn from all First Nations to pay for a service with a very narrow geographic base. Assuming the Bill goes ahead, a reasonable alternative would be to make the Commission self-financing by contributions from First Nations with s. 83 bylaws. At page 28 of the Business Plan there is a reference to policy papers that the ITAB is currently working on. Such policies would naturally flow into regulations to be enforced by the Commission. Draft policy work deals with taxpayer representation, expenditure policy (particularly respecting formerly provincial portions of property tax), the use of contingency funds, and the segregation of revenue funds from general First Nation accounts. The last policy item highlights the ITAB and INAC view that First Nations should not have free reign over tax revenues. Rather, the revenues should be directed to municipal type services that taxpayers expect, thus lightening INACs fiscal burden. The reference to the provincial portions of property tax is also revealing. This refers to a situation that existed only in BC before the Kamloops Amendments. My understanding is that BC taxed businesses on leased or conditionally surrendered reserve land. This was terminated with the Kamloops Amendments, but many First Nations took up the municipal tax room and municipal service provision. In large measure this helps to explain the peculiar connection between BC First Nations and ITAB.
110.
111.
CONCEPT OF THE FIRST NATIONS FINANCE AUTHORITY 112. The concept of the Authority is based on an existing arrangement involving a small number of First Nations in BC. These First Nations, which probably all have s. 83 bylaws, pool some of their surplus cash and hand it over to a much larger municipal finance organization. This organization has its money professionally administered and is therefore able to obtain preferential rates of return. The First Nation money is a very small part of the overall municipal fund. I understand the arrangement has been in place
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since about 1995. Note the connection with a BC municipal organization; this is reminiscent of the overall approach to s. 83 bylaws in the wake of the Kamloops amendments. 113. The idea is to codify this investment club in the proposed federal statute, i.e. the First Nation Fiscal Institutions Act. With respect, my view is that the case for statutory entrenchment is very weak. The investment club is already open to all First Nations in Canada. Other First Nations may form their own pooled investment organizations. Statutory entrenchment does not make the pooled investment model more open or accessible. There is a kind of acknowledgment in the fiscal relations material that a statutory vehicle is not required for the investment pool concept. However, a novel function is being proposed, something that has not been tested by the current First Nation investment club. The idea is to mirror the ability of municipalities in BC to issue bonds or debentures. These debentures are typically repaid with municipal tax revenue and are used to pay for local infrastructure. Access to investment grade debentures probably does require a statutory base. Note again the general approach of duplicating municipal institutions, particularly BC municipal institutions.
114.
115. The idea of debentures is closely linked to property tax revenue under s. 83 bylaws. Cash flow from property taxation can be leveraged through debentures in order to pay for immediate and large infrastructure projects. The benefits to INAC are obvious. Instead of INAC paying for big capital projects, First Nations will pay through their tax revenue, whether on a cash basis or a debt basis (i.e. debentures). The Commission, the Finance Authority, and the Management Board will be there to ensure that tax regimes are maintained to pay for debentures, thus ensuring that INAC will not be liable, even in difficult financial situations. This objective of protecting INAC from liability will be achieved through mechanisms such as reserve funds and sinking funds. 116. In summary, my view is that the investment pool component of the Finance Authority does not require statutory codification. The debenture component is untested, based on a particular BC experience. My view is that the concept is not mature to the point where statutory codification this fall would be prudent.
LEGISLATION FOR THE FIRST NATIONS FINANCE AUTHORITY 117. According to s. 1.1 of the Institutions Bill (Part four), the Authority is established as nonshare capital corporation made up of subscribing First Nations. In effect, the Authority is a statutory corporation controlled by subscribing First Nations. Unlike the Commission, the Authority is not an agent of the Crown. Deposits and borrowings are made through the corporation. 118. According to s. 1.2, the initial members of the Authority are the seven current First Nation members of the investment club in BC. In my respectful view, this number is a clear indication that there is something wrong with this component of the legislation. It is one thing to argue that the ten year plus experience of the ITAB deserves a statutory upgrade. It is another thing altogether to argue that a seven member investment club with a five year history and a desire to issue debentures should be set up as a national
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model for statutory codification. The due diligence on this model has simply not been done. The fact that the Authority proposal is being taken seriously reflects a political problem with the process involving ITAB, INAC, and the AFN fiscal relations set-up. 119. According to the first bullet point of s. 2 of the Bill (Part four), the purpose of the lending or debenture component of the Authority is to secure capital infrastructure, whether owned or leased. A broad definition of capital infrastructure is suggested. The emphasis on capital infrastructure is consistent with the Tax Commission concept. The idea is that property tax dollars, whether on a cash flow or debt leveraged basis, should be used for infrastructure of a municipal share. This is good for business investment and it is good for INAC, reducing federal liability for major capital. The assumption is that First Nations are not free to use property tax dollars and related financing as they please. Instead, the tax dollars (cash flow and leveraged) must be used to pay for municipal services that keep taxpayers happy. The limitation is made quite clear in s. 3.10: Members shall only borrow for major capital through the FNFA. Section 2 also refers to coordination with the Tax Commission and the Management Board. Support of the Board and the Commission appears to be essential for a First Nation to participate in the borrowing pool of the Authority and would also have the power to intervene in any default situations. The certification function of the Board and the Commission is further specified in s. 3.4 of the Bill. This is the web or vortex model of the four institutions. There is a suggestion in s. 3.7.1 that Canada will make a matching contribution to the loan fund up to $10 million. This is a lot of money to be drawn from the general First Nation envelope. Given the extremely small number and geographic restriction of participating First Nations, the equity of this contribution of general First Nation funds should be questioned. The borrowing scheme is clearly based on property tax revenue generated through s. 83 and the Commission. However, there is a half-hearted suggestion in s. 3.11 that borrowing might also be secured against non-tax revenues (egs. casinos and land claim settlements). Bond issues based on non-tax revenues cannot be permitted to threaten the tax revenue account. This belief in the sanctity of property tax revenues is mirrored in the Commission material. Tax revenues must be kept clean in order to deliver the municipal tax services expected by taxpayers; this has the parallel benefit to INAC of guaranteeing a reduction of liability for major capital and related municipal services. Borrowing provisions of the Indian Act would have to be amended to permit the kind of investment grade bonds and debentures contemplated by the Authority. These amendments may be contained in the Institutions Bill or the Nault Bill. Overall, the draft legislation for the Authority is not as sophisticated as the material for the Commission. This reflects, in my view, that due diligence has not been completed on the concept of the Authority.
120.
121.
122.
123.
124.
BUSINESS PLAN FOR THE FIRST NATIONS FINANCE AUTHORITY 125. The Confederacy package (May of 2001) contains a glossy booklet (barely 10 pages
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including pictures) describing the Authority, with an emphasis on the current seven member investment club. I assume that this is the Business Plan for the Authority. The sketchy nature of this material raises a concern as to whether the Authority concept is mature and ready for sudden statutory codification this fall. 126. An auditors letter in the booklet makes clear that the current investment pool is a small part of a larger pool that comes under the provincial (BC) Municipal Finance Authority Act. Basically, the seven members of the current club are participating like provincial municipalities in a large investment pool. The First Nation investment club was formed in 1995. The seven First Nations would like to move beyond pooled investment and get into the pooled borrowing capacity that is available to BC municipalities. Under the current legislation, this is not permitted. This explains the desire to codify the Authority in the proposed federal Institutions Act. A simpler solution, that does not affect the rest of the country, might be for the seven First Nations to approach the provincial government for an amendment to the provincial legislation. An amendment might permit opting-in by First Nations in relation to borrowing powers. The booklet assumes that borrowing under the Institutions Act will be limited to borrowing for big capital or infrastructure. Long-term borrowing will permit First Nations to build more infrastructure, thereby encouraging investment and general economic growth. These projections appear to be very optimistic, especially for the majority of First Nations with little or no tax based as a foundation for debenture issues. The very optimistic assertions about the economic growth potential of bond issues is reminiscent of claims in the Nault material about the benefits of various red tape changes, such as the clarification of the legal status of First Nations. There is a section in the booklet dealing with the supposed benefits of the new borrowing capacity under the Institutions Act. One benefit is the promotion of sound financial management through required standardized accounting principles to fit borrowing requirements. This may be enforced through cooperation with the Management Board and the Tax Commission. The accountability and management agenda mirrors the INAC agenda as set out in the Nault package. Another supposed benefit of the borrowing capacity attached to the Authority is that First Nations will be allowed to develop own source revenues (emphasis added). The property tax base is a form of own source revenue (OSR). The tax base is used as leverage for long-term financing, another form of OSR. Investment in infrastructure is supposed to promote economic development, leading to more OSR. INAC is a key beneficiary as all of this OSR serves to reduce the fiscal responsibility of Canada for major capital and other services. The booklet, which is not really a business plan, does not contain an estimated operating cost for the Authority. This may be because the Authoritys function has not been precisely worked out. For purposes of argument, it may be reasonable to assume that the Authoritys annual budget will be the same as the Commissions budget at $4.25 million. If this is an accurate forecast, it is a lot of money for an organization with a starting membership of seven BC First Nations.
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127.
128.
129.
130.
131.
132.
Overall, the booklet presented at the Confederacy does not inspire confidence. A seven member investment club in BC with a five year history wants to bump up to investment grade debentures. To do this, the proposal is to codify the BC Finance Authority in national legislation by the fall of 2001. While the concept may have some merit, my view is that due diligence has not been completed, and it would be very imprudent to support federal legislation this fall.
CONCEPT OF THE FIRST NATIONS FINANCIAL MANAGEMENT BOARD 133. The track record of the ITAB provides a basis for the argument that statutory codification of the Tax Commission makes sense. The much thinner record of the Finance Authority in BC provides some kind of basis for at least discussing the statutory codification of a borrowing capacity of the Authority. In contrast, there is not even a meagre track record for the proposed First Nations Financial Management Board. This is something new that is being proposed by ITAB, INAC, and the AFN fiscal relations secretariat. The basic idea is to create a statutory Board interested in improving the financial management practices of First Nations. The help of the Board will be voluntary for First Nations without a property tax regime. However, the Board will have an enforcement and certification role vis-a-vis First Nations with property tax regimes and those interested in such regimes. To maintain a property tax regime a First Nation must satisfy the Board that its management practices are up to snuff, so to speak. This is designed to reassure taxpayers and the investment public. It also serves to reassure INAC that arrangements based on property taxes will be honoured, saving INAC from any unwanted liability. The Boards philosophy is very close to INACs accountability agenda, as expressed in the Nault Bill and their financial agreements (eg. CFA and CFNFA). The current proposal is that the jurisdiction of the Board will be voluntary, except for First Nations with property tax regimes. However, in the long term, the vision of INAC may be to give the Board a general power of enforcement over accountability and other rules. These rules may derive from the Nault legislation or INAC financial contracts. This delegation of the enforcement function would suit INAC for obvious reasons.
134.
135.
136.
LEGISLATION FOR THE FIRST NATIONS FINANCIAL MANAGEMENT BOARD 137. According to s. 1.4 of the Institutions Act (part three), the Board consist of ten First Nation regional representatives and five financial management and accountability experts. The Board structure is designed to make it independent of federal and First Nation political pressure (page 13 of the business plan). Section 1.9 states no one on the Finance Authority Board may serve on the Management Board presumably to ensure the objectivity of the good management certification process administered by the Board. Apart from this restriction on cross-membership, it appears there can be a lot of overlap of membership among the organizations. Further overlap may occur with First Nations involved in the Land Management Act. In other words, a
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138.
relatively small number of First Nations, mostly in BC, may end up controlling the various institutions. 139. Section 2 of the Bill deals with the purpose of the Board. A key mandatory purpose of the Board is to investigate First Nations proposing to get involved in bonds under the Authority. Only First Nations certified as good managers by the Board can proceed with bond issues to inspire investor confidence. It is also good for INAC. The certification process conforms with INACs accountability agenda. Certification will minimize the chance of bad bond issues and failed infrastructure projects, thereby minimizing the contingent liability of INAC. Section 3.1 of the Bill provides that the Board may be asked to review the financial statements of First Nations, presumably to identify problems of management and make recommendations. This review power is supposed to be subject to First Nation consent. However, in situations of co-management and the like, a First Nation may not have much real choice in the matter. According to s. 3.2 of the Bill the Board may be given a broad power to review proposed financial management bylaws under s. 83 of the Indian Act. In other words, the Board will have an advisory power over financial management bylaws similar to the current advisory power of ITAB over property taxation bylaws. Based on the ITAB experience, this may mean in practice that no financial management bylaw can go forward without the stamp of approval of the Board. This significant power will permit the Board to enquire into First Nation financial affairs; for example, the Board may request financial statements. According to s. 3.8, the Board must publish relevant bylaws and policies in the First Nations Gazette, which will be controlled by the Tax Commission. Overall, although the draft legislation is sketchy, it is apparent that the Board will be a powerful body. Taxation bylaws under the Commission and bond issues under the Authority will not be authorized without a certification of sound management from the Board. All future financial management bylaws will require the approval of the Board. The accountability philosophy of the Board reflects the accountability agenda of INAC, as expressed in the Nault Bill.
140.
141.
142.
143.
BUSINESS PLAN FOR THE FIRST NATIONS FINANCIAL MANAGEMENT BOARD 144. A 17 page business plan for the Board was circulated at the Confederacy in Vancouver in early May of 2001. The plan emphasizes the working relationship between the Board and the other three sisters. A primary purpose of the Board is to encourage among First Nations a regime of total accountability. The fiscal management guidelines of the Board will be voluntary, at least on an initial basis. However, the business plans to the vortex or web effect of the four institutions; any First Nation interested in the services of the Commission or the Authority will be obliged to adhere to the accountability rules of the Board. At page 2 of the plan, a long-term objective of the Board is to encourage greater
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145.
integration of First Nation governments into the Canadian fiscal framework. This philosophy mirrors language in the Commission material. The objective of the Commission is to encourage First Nations to enter the Canadian mainstream of municipal property taxation. An objective of the Board is to promote a culture of compliance (page 6). Very little is said about a balance in terms of First Nations traditions, laws, and values. 146. The business plan mentions two other sub-institutions or positions directed at fiscal management and accountability, i.e. a First Nation Auditor and a First Nation Ombudsman. These positions will be developed through the Board. Again, the objective is to enforce the Canadian mainstream concept of accountability and management. No details are provided on how the Ombudsman and Auditor General will fit in. Page 3 of the plan, with regard to mandate, notes that the RCAP report supported a new fiscal relationship and recognized the need for a fiscal management institution. That may be true. However, it is not likely that the new fiscal relationship envisioned by RCAP amounted to a complete surrender to the Canadian fiscal mainstream. The principal fiscal recommendation of RCAP was that federal and provincial transfers to the First Nations should be massively increased over the next 20 years. The fiscal transfer increase recommendation of RCAP is completely ignored in the current fiscal relations material. At page 5 of the plan the connection between the Board and the Authority is made plain. In order to access the debenture issuing capacity of the Finance Authority, a First Nation will have to obtain a certificate of good management from the Board. Through this indirect means, the policies and rules of the Board on accountability will become enforceable. The Board will have a similar working relationship with the Tax Commission. And, the Board is to develop financial reporting systems to support the requirements of the Statistical Institute (page 9). According to page 11 of the plan, the Board will not assume any direct role in the management of individual First Nation affairs. Presumably this means that the Board will not get involved in the business of co-management and third party management. However, the Board will be involved in the setting of guidelines and rules that will have a bearing on whether First Nations will be pushed into co-management and third party management in the future. Also according to page 11 of the plan, the Board will not be directly involved in the allocation of federal funds to First Nations. The annual budget of the Board for 2002 is projected at $3.4 million and will increase to $3.6 million by 2004. This is a lot money that will be drawn from the general First Nation envelope of funding. Assuming the Bill goes ahead, an alternative would be to resource the Board from tax revenues of First Nations participating in the Commission and the Authority. This would seem to be a more equitable approach given the limited participation rate in s. 83 bylaws. Generally speaking, the business plan of the Board is clearly laid out. However, there is not much information in the plan beyond that contained in the draft legislation and other summary material produced by the AFN fiscal relations secretariat. At page 17 of the plan there is admission that all of the detail of the Board remains to be worked out. In my
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147.
148.
149.
150.
151.
view, the plan and the draft legislation do not reflect a mature package ready for legislative enactment this fall.
CONCEPT OF THE FIRST NATIONS STATISTICAL INSTITUTE 152. The concept here is to create an Institute with a general mandate to collect and organize more reliable statistics on First Nations. The assumption that current statistics on First Nations are generally poor in quality. This may be true. However, the statistics are crystal clear that most First Nations, especially in the north, experience Third World socio-economic statistics. These crystal clear statistics have not motivated the federal government to follow the advice of INAC and increase fiscal transfers going to First Nations. Therefore, it is legitimate to doubt whether the work of the Institute will actually lead to any real improvement in the First Nation condition. The gathering of statistics by the Institute is not geared to increasing federal transfers. Rather, the Institute is tied to the work of the Commission, Board, and Authority. As First Nations participate in the other three institutions, they will be obliged to share basic statistical information with the Institute. Other aggregate information will be gathered from INAC. In these ways, the Institute will gradually put together a coherent set of data on issues like taxation, accountability, and financing. The overall objective will be to further assimilate First Nations into the Canadian financial mainstream. Statistics may be used to reassure investors. And they may be used by INAC to perform potential tax and OSR calculations. Such calculations can be used to reduce the grants of First Nations even if they refuse to pass tax bylaws and account for OSR. In an ideal world a statistical institute for First Nations may be a good idea. However, in this particular context, the wisdom of the Institute should be evaluated by its association with the other three institutions. With respect, my view is that the Institute seems to be a bit of floater. The linkages among the Commission, the Board, and the Authority seem fairly clear. To issue bonds you need a property tax regime; for both you need a certificate of good management from the Board. There is a self-reinforcing circularity to these three institutions. However, the connection to the Statistical Institute is less obvious. Put another way, the Board, Commission, and Authority could probably function quite well without the Institute. Relatively speaking, the elaboration of the Institute is the least advanced.
153.
154.
LEGISLATION FOR THE FIRST NATIONS STATISTICAL INSTITUTE 155. According to s. 1 of the Bill (part five), the Statistical Institute is established as a Public Institution, much like the Board. There will be five Directors, representative of First Nations and experts. The CEO of the Institute will be the First Nations Chief Statistician. The Chief Statistician of Canada will be an ex officio member. According to s. 1.13 of the Bill, there will be cross-references to the federal Statistics Act to ensure confidentiality of data and other values. According to s. 2, a principal purpose of the Institute is to support statistical
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156.
157.
management in a new fiscal framework, as reflected by the Commission, Board, and Authority. The statistical work will encourage accountability mechanisms and local revenue measures. There is no suggestion that statistics might justify an increase in federal transfers, as recommended by RCAP. 158. Section 3.1 of the Bill provides that the Institute will have the right to access First Nation financial and administrative data currently held by Canada. That data is very extensive given the massive reporting obligations contained in all INAC financial agreements. Read at face value, this means that the Institute will be able to access huge amounts of sensitive First Nation data without the consent of affected First Nations. This is very problematic. Generally speaking, the draft legislative package for the Institute is sketchy and requires a great deal of detail work. This may reflect the fact that the Institute seems to be a bit of an after-thought compared to the Commission and the Board. In my view, the draft legislation does not provide enough information for an informed decision on whether the Institute is a good or bad thing for First Nations. Therefore, in my view, it would be very imprudent to give the Institute a go-ahead for legislative enactment this fall. The final result might be quite surprising to First Nations.
159.
BUSINESS PLAN FOR THE FIRST NATIONS STATISTICAL INSTITUTE 160. A 32 page business plan for the Institute was shared with the AFN Confederacy in early May. The business plan is much longer than similar documents for the Commission and the Board, even though they are much more advanced in terms of concept and design. The business plan contains a great deal of verbiage and very little substance (see the only full paragraph on page 9 for an example of this). I could be wrong, but it has the aura of a document put together at the last minute by a consultant, with the objective of creating the impression that a lot of thinking has gone into the Institute concept. In fact, it seems obvious the concept has only been sketched in the broadest of terms. Page 3 of the business plan suggests that the Institute may intervene in several ongoing First Nation statistical exercises; for example, the First Nations Health Information System (HIS) and the Regional Health Survey. The projected role for the Institute, including the assumption of budgets (page 30), might come as a bit of a surprise to First Nation officials involved in these ongoing processes. At page 4 of the plan, it is suggested that the Institute may share First Nation data with other levels of government and other agencies, such as bond rating agencies. Bond agencies would tie in with the lending power of the Authority. At page 32, the suggested budget for the Design and Development of the Institute is projected at $500,000. The assumption of this figure is that the Institute is barely a sketch or idea that is borne out by the lack of substance in the 32 page business plan. The projected budgets for the first and second years of operation of the Institute are $10 million and $13 million respectively. This is puzzling as it would make the Institute the most expensive of all the institutions, even though it is the least thought out.
161.
162.
163.
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CONCLUSION 164. The four institutions (Tax Commission, Management Board, Finance Authority, and Statistical Institute) are entitled to respect and careful review. The Assembly has generally mandated the work of the ITAB and the fiscal relations unit. The Assembly has also encouraged work on the four institutions. However, these resolutions and the respect that is due to the technical work done pursuant to the resolutions does not mean that the Chiefs have to accept the institutions in a final way this summer. The institutions, if federally legislated, will affect all First Nations for decades to come. Regardless of past support resolutions, the Chiefs have the right to defer final acceptance or to reject the institutions altogether. There is some good material in the institutional proposals. For example, the Institute would undoubtedly produce some reliable statistical information that would assist some First Nations. And, for example, the Authority would undoubtedly arrange some investment and loan opportunities that would be beneficial to some First Nations. However, the fact that some good may come of the institutions is not a reason to approve all of them in a hurry this summer. I have two general problems with the proposed institutions. First, they reflect a strong conservative bias that is too close to the INAC agenda for comfort. The RCAP recommendation of increased fiscal transfers is completely ignored. Instead, the Commission will be like a super-ITAB with a statutory mandate to encourage First Nations to generate property tax revenue at the local level. The rights of non-member taxpayers are given significant weight. The Authority will arrange long-term loans based on property tax systems. The Board will force all First Nations interested in loans and property taxes to conform to tough accountability and management standards. The end result will be a reduction of the INAC liability to pay for major capital. This may be the agenda of a small number of First Nations in BC, but there is no evidence that it is the agenda of First Nations in Ontario and other parts of the country. It seems completely inappropriate to install this minority vision in a federal statute that will affect all First Nations. The second problem I have with the package is at the level of process. As noted, the Chiefs have supported the various products of ITAB and the fiscal relations unit in principle over the years. However, this support has been in principle, subject to looking at finished products in the context of reasonable consultation processes. Up until early 2001, I believe that ITAB and the fiscal relations unit would have agreed with this assessment of the overall process. However, things changed for the worse in early 2001. INAC indicated to ITAB and others that there might be parliamentary room for an institutions bill this fall, subject to First Nation support and the finalization of key concepts this summer. In my view, this predictably led to an unreasonable acceleration of the consultation process. Sketchy packages were presented to the Confederacy in May for approval. The Chiefs refused to give consent, deferring the matter to the summer Assembly. In my view, the material is still half-baked, so to speak, and it would be imprudent for the Chiefs at the Assembly to approve the package of 4 institutions. This is a First Nation controlled process, and First Nations are entitled to expect the fairest process from other First Nations; forcing the matter to a decision this summer is not fair, in my respectful view. At the same time, I think it would also be hasty to simply reject the
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165.
166.
167.
material out of hand. Instead, the package should be deferred for at least a year for review, with a view to strengthening the content. 168. Deferral of the package may have other benefits in the particular context of this summer and fall. Deferral will mean First Nations can concentrate on opposing the Nault package, assuming the Minister persists. There would be too much on the plate of First Nations this fall if the Nault Bill and the Institutions Bill were proceeding at the same time. Deferral will also better enable First Nations to participate in the Cabinet Committee planning process announced by the Prime Minister about 10 days ago. This Committee process had an open-ended potential and may lead to increased transfers from Canada. It will be difficult, if not impossible, to do anything with the Committee if First Nations are simultaneously juggling the Nault Bill and the Institutions Bill.
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Briefing Note On First Nations-Fiscal Relations Bill 2002

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BRIEFING NOTE Institutional Fiscal Relations Package

April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

the the the the

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

Fiscal Institutions Briefing Note - April 21, 2002

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