Three Case Studies of the Municipal Fiscal Crisis

In The Economics of Amalgamation, I discussed some of the structural forces bearing down on Nova Scotia’s cash-strapped municipalities. Rising costs are combining with revenue gaps from commercial closures and out-migrations, and giving pause to our small towns as they contemplate dissolution. But, this vulnerability isn’t limited to rural towns. Districts and regional municipalities are feeling the pressure, too. While my last post provided some high level statistics, this post highlights three case studies in municipal vulnerability at each of scale.

The Town of Hantsport | Population est. (2011): 1,159

When the Hantsport Town Council voted 6-1 to dissolve in April it came as a shock to many. While the dissolution of Canso, Springhill and Bridgetown were on people’s mind, Hantsport’s straits didn’t seem nearly as dire in comparison. Nonetheless, the Mayor at the time argued that the decision was forward looking and inevitable given the closures of Minas Basin Pulp and Power and the Fundy Gypsum mine. With the preliminary steps to dissolve underway, Hantsport’s financials have been analyzed by Grant Thornton and submitted to the Nova Scotia Utility and Review Board. The data give a solid footing to the Mayor’s dreary stance. As of March 2014, the Town is holding net financial liabilities in the amount of $2 million. The loss of commercial tax base has caused annual tax revenue to decrease 7 per cent in fiscal 2013 and a further 12 per cent in fiscal 2014.

Revenue's collapse as presented the Town Council's decision to dissolve.

Revenue’s collapse, as presented, following the Town Council’s decision to dissolve

Given the collapse in commercial revenue, mandatory expenditures on infrastructure would need to be debt financed over a 20-year term. Grant Thornton forecasts that the fraction of Hantsport’s own source revenue needed to service debt would climb from 12.3 to 28.5 per cent between 2016 and 2020, far exceeding the 15 per cent maximum prescribed by the province. By 2020 this will translate into a projected $1.4 million culmulative deficit. Paying for this would require residential and area property tax rates to double, generously ignoring any subsequent decrease in tax collection ability.

If this situation looks bad, keep in mind that Hantsport has actually been exceedingly prudent in its fiscal management. Over the years, the town has run modest surpluses and even set some savings aside. Yet, the small size of the town and its dependence on a couple commercial properties left it vulnerable. These challenges haven’t stopped the locals from questioning Council’s decision to dissolve. Since that fateful vote, a new mayor and several councilors pushed a motion to have the application withdrawn. The vote took place December 2nd and failed. Hats off to Hantsport for seeing the writing on the wall.

The District of Chester Population est. (2011): 10,599

In Fall 2013, Nova Scotia published its “Fiscal Review” and highlighted the particularly striking case of Chester’s creeping costs. According to the review, a pre-budget analysis for the District of Chester determined 2013/14 could expect $243,481 in revenue increases. Not bad! …except that Chester’s mandatory payments would be increasing $235,623, as well. In the words of the review:

This leaves less than $7,000 to cover any in-house cost increases, and to consider any new, expanded services. With a total budget of $22.4 million, the net increase in disposable revenue from assessment growth is less than 0.1% of the budget…

In Nova Scotia, municipalities collect taxes on behalf of the province in the form of mandatory contributions to pay for things like provincial roads and corrections facilities. Mandatory contributions represent one-fifth of municipal expenditures, the vast majority for education followed by policing. Controlling these costs is largely out of the hands of local municipal officials. While municipalities can share their perspective through an advisory committee, councils have essentially zero influence over, say, RCMP negotiations.

Cape Breton Regional Municipality |
Population est. (2011): 97,398

From the same Fiscal Review, Cape Breton is offered as an example in how regulation drives up municipal costs. The review reports that the regulatory costs to Nova Scotia of meeting new Wastewater Effluent Treatment Standards require $1 billion in upgrades by 2040. Nearly half of this cost is in CBRM, which needs “$425 million in capital investments by 2020 [and] an additional $29 million by 2040.” Expensive, yes, but it would also be nice for raw sewage to stop flowing directly into the Sydney harbour!

While the Federal government has pointed to gas tax revenues as a possible source of funds, the Mayor is reaching out for provincial cost sharing. Without support, the CRBM interim chief administrator Marie Walsh warned the upgrades would restrict them from doing any other capital projects and would dramatically increase their debt.

Whether its a town, district or region, Nova Scotia’s municipalities are being pinched at every scale. Yet, while towns like Hantsport sort through dissolution, regional municipalities like CBRM don’t have that option. In every one of these case studies, however, the cause of fiscal crisis was not actually failing infrastructure, mandatory payment increases or regulatory compliance costs. Rather, these are the sort of forces that have been ever-present for our municipalities. It just takes economic stagnation and out-migration (of people and industry) to bring them to the fore.

Samuel Hammond is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Carleton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Amalgamating Localities as a Means of Promoting Efficient Governance

New Brunswick’s (NB) system of local governance, implemented in the 1960s under the Robichaud government’s equal opportunity programme, dissolved the existing county system and replaced it with one that focused on the province’s many cities, towns, and villages. This left rural areas largely unincorporated and, since then, NB’s municipal structures have remained unchanged (other than a few forced amalgamations).

Although the rationale to dissolve the county system in the 1960s was defensible, NB has since failed to modernize its municipal system in a way that better equips local governments to deal with contemporary challenges. The infamous 2008 Finn Report on local government, for instance, noted that many of the problems associated with municipal politics–particularly, the existence of too many municipalities, local service districts, rural communities, and taxation authorities (over 400 in total)–led to a duplication of services and infrastructure and resulted in a lack of fair cost sharing between municipalities. The report also found that it led to a poor allocation of provincial and federal funding.

An example of the headache caused by NB’s multiple municipal structure is the South-East Region, otherwise known as the Westmoreland and Albert counties. The region hosts two cities, three towns, nine villages, and a rural community. In addition, it is home to four local service districts and a regional service commission.

The Finn Report notes that, since 1967, there have been over 25 studies analyzing municipal governance. It identified a lack of progress in regards to reorganizing municipalities, other than some piecemeal developments in taxation policy and policies regarding unconditional loans and grants. The report recommended dissolving all local service districts, villages, towns, and rural communities and transforming them into larger entities. In addition, the report suggested amalgamating cities and their surrounding rural communities.

Indeed, many other jurisdictions have undergone similar restructurings in Canada, such as the creation of the Halifax Regional Municipality (HRM) in Nova Scotia. A body like HRM, which is an amalgamation of Halifax, Dartmouth, and the surrounding areas, prevents service duplication and ensures fair cost sharing. Consider the advantage for an area like Saint John, surrounded by suburbs. Currently, the city is on the hook for infrastructure cost within its limits, which everyone within the commuter-shed uses. In addition, the several towns and the city duplicate services in the area, such as policing and sewers. Regional cooperation would eliminate these problems.

The most common criticism of the “regional municipality” model is that rural areas and towns will risk having their voices diluted by the larger cities with which they forge. While this does pose a serious threat for smaller jurisdictions, they generally have little influence over local governance under the current system. Local service district boards are unelected and many rural areas do not have the population to justify the expense of operating as a village or rural community. Merging with larger townships, however, affords rural areas with representation on municipal councils and, therefore, greater representation in local affairs. Preserving the community’s identify could also be achieved through the creation of community councils.

In conclusion, NB needs local governance reform as the current system is outdate and has failed to keep pace with the rest of the country. Attributed to the shortcomings of reform is political will, as municipal changes have proven unpopular in past times. NB’s dispersed population and language divide worsens the issue. (Consider an area like Moncton and Dieppe, where city limits also serve as the separation of language communities.) Ultimately, the province must work around these obstacles in order to achieve a more efficient local government.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute