Mayor Don Iveson's dream to knit Alberta's sprawling capital city together with light rail lines could be in jeopardy as the provincial government has announced it will fund only 25 per cent of infrastructure projects under a new federal program.

Alberta's decision comes after the federal Liberals announced that Ottawa would spend $120-billion on infrastructure over the next decade and would cover the cost of up to 50 per cent of each project. While the funding formula for the bulk of the money has yet to be set, Alberta Infrastructure Minister Brian Mason says the cash-strapped province can't afford to spend the billions cities want.

"Given the difficult financial position the province is in, this is what we felt we could sustain," Mr. Mason said.

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The lower-than-expected contribution has dashed the hopes of some Alberta mayors that they could finally begin to build infrastructure to serve their fast-growing cities. But Mr. Iveson says he will work to persuade the province to reverse its position.

The government released an economic update on Tuesday that showed Alberta is facing the longest recession in its recorded history. The impact of this year's Fort McMurray fire is primarily responsible for a revised deficit forecast of $10.9-billion, in contrast with the $10.4-billion estimate made in the NDP government's April budget.

However, at a union conference in Ottawa on Wednesday, Alberta Premier Rachel Notley said now is not the time to back away from her government's ambitious policy agenda.

Mr. Iveson said he was "side-swiped" by the province's decision to fund only 25 per cent of infrastructure projects at a time when Alberta's unemployment rate is at its highest level since the early 1990s.

"I don't want to seem ungrateful; we're receiving over $200-million to renew our transit system and plan for expansion, but when it comes to building it out we'll need a better formula to match the federal government's leadership," Mr. Iveson told The Globe and Mail.

In recent years, the federal government, province and city had split transit project three ways. However, Prime Minister Justin Trudeau's Liberals increased the federal government's share to 50 per cent, reflecting the federal government's taxation powers and the need to invest in crumbling roads and transit systems.

As for Alberta's funding, Mr. Mason said that his department is still covering half of the amount Ottawa won't be paying. While that was 33 per cent in the past, that contribution has now dropped to 25 per cent under the more generous federal formula. The minister said mayors were wrong to assume Alberta would provide more.

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"I want to make one thing really clear: We have not changed the amount that we will contribute. We never said we'd contribute one-third, that was an assumption, an unwarranted assumption," Mr. Mason said. "I'm surprised they find it anything but generous."

Alberta and the federal government have yet to sign an agreement covering the new infrastructure funding. A signature is expected within a few weeks, but Mr. Mason warned that he wasn't sure all projects could break ground before the construction season ends in the fall.

Mr. Iveson suggested a better formula for funding future projects would be 50 per cent federal, 40 per cent provincial and 10 per cent municipal. The lower amount from cities recognizes that they need to pay to operate and maintain new transit infrastructure in perpetuity, he said.

"If the current formula becomes the precedent for the next phase of the transit plan, we will struggle to keep up with the federal government's ambition for big transit buildouts in the large cities," Mr. Iveson said, warning the city might have to back away from projects and leave money on the table.

Alberta is expected to spend $34.8-billion on infrastructure projects by 2020. The government has said it hopes the spending will help stimulate the economy and create jobs in the short and medium term.

While B.C. has maintained a 33-per-cent share under the new program, Alberta isn't the only province to cut back. Some infrastructure projects in Ontario will now have no provincial funding.

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A spokesman for federal Infrastructure Minister Amarjeet Sohi said Ottawa was not setting standards on how provinces and municipalities should split the 50 per cent not covered by the federal government.

Edmonton city council voted on Tuesday to increase the city's spending on the current round of infrastructure spending to $79.3-million from $56.1-million, reflecting the province's lower contribution.

The city expects to receive $297.3-million for transit projects under the program.

Money for revamped light rail crossings, replacing electrical transformers and buying new buses are not glamorous projects that lend themselves to ribbon cutting, but they will make the transit system more comfortable and reliable for riders, the mayor said.

Alberta Finance Minister Joe Ceci announced Tuesday that the provincial debt would grow to $32-billion this fiscal year as the province's economy is now expected to contract by 2.7 per cent.

Speaking with reporters after a speech in Ottawa to a friendly audience of Unifor delegates, Ms. Notely said there is no reason for the government to change course on its economic agenda.

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"The fundamental thing is this: You have two choices when you are faced with rough waters, which we are in Alberta. You can engage in an austerity budget or you can invest in helping your province to get out of it. So as long as you keep an eye to the long-term path to fiscal health, that's important."

Stronger oil prices of late and rebuilding efforts after the Fort McMurray fire are expected to boost growth in the province next year.

Ms. Notley was the afternoon's keynote speaker at a week-long national convention for Unifor, Canada's largest private sector union. (Editorial, advertising and circulation employees of The Globe and Mail are also members of Unifor.) In the morning, Mr. Trudeau spoke to delegates.

In his speech, he referred to the Alberta Premier as "a friend of mine." The speeches of the Liberal Prime Minister and NDP Premier touched on many of the same themes. Both leaders argued in favour of investment over austerity, a focus on skills training, climate change, support for aboriginals and increasing taxes on high-income earners in order to hike benefits for low- and middle-income Canadians.

Mr. Trudeau suggested the government would be acting soon to implement Liberal campaign promises related to more flexible parental leave and Canada Labour Code amendments to allow workers to formally request flexible work arrangements.

"These initiatives are good for families and good for the economy," he said.