Understanding Territorial Formula Financing

The New Framework

In October 2004, the federal government replaced the previous TFF formula with a New Framework that applied to both TFF and Equalization. Key features of the New Framework for TFF are:

• The TFF formula was set aside and a fixed envelope of funding was established.

• Unlike the previous TFF arrangements, the New Framework is established in legislation and grants to individual territories are based on federal legislation (Federal-Provincial Fiscal Arrangements Act), not on separate agreements between the federal government and each territory.

• The total amount of funding to be provided through TFF for all territories was increased and set at $1.9 billion for 2004–05, $2 billion for 2005–06, and $2.07 billion for 2006–07.

• The total funding will grow by 3.5 percent a year, with a review scheduled for 2009–10.

The New Framework is a significant conceptual change for the territories, much more significant than for the provinces.

• Rather than calculating the grants to each of the territories separately, the three territories receive shares of the overall pool of TFF funds based on an average of the relative shares they received in the previous three years.

The New Framework is a significant conceptual change for the territories, much more significant than for the provinces. In addition to legislating TFF, the New Framework also means that TFF is no longer based on three separate gap-filling formulas.

The New Framework provides guaranteed and predictable overall funding increases, thereby improving the stability of TFF. It also provides fiscal benefits to the territories. The total amount of TFF funding is set in legislation and will not be reduced, even if the territories’ own sources of revenues increase. This amounts to a 100 percent economic development incentive, because the total amount of money available for TFF will not decrease, even if the territories’ own-source revenues increase.

The New Framework fundamentally changes the dynamics among the three territories because the amount they gain or lose in a fixed pool of funding depends not only on their own situation, but on changes in revenues and population in the other two territories.

On the other hand, the New Framework’s fixed escalator of 3.5 percent does not reflect the actual changes in expenditure needs in the territories as a result of population changes or growth in expenditures. It also means that the three territories share both the upside and the downside risks of changes in their own-source revenues. While the total amount of TFF funding is fixed, the shares each territory receives can vary on a year-to-year basis. For example, if revenues increased in the Northwest Territories, its grant would decline while the TFF grant to the other two territories would rise.

For this reason, the New Framework fundamentally changes the dynamics among the three territories because the amount they gain or lose in a fixed pool of funding depends not only on their own situation, but on changes in revenues and population in the other two territories.

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