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

When it Comes to Balancing the Budget, Tomorrow Never Comes

Earlier this month, Finance Minister Jim Flaherty released his fall update of economic and fiscal projections.  In releasing the update, the minister notes that Canada has performed better than any other country in the G7 in the recent global economic crisis.  The update nonetheless projects that the government’s goal of returning to a balanced budget has been pushed back another year from 2015-2016 to 2016-2017.  The longer Canada remains in deficit, the higher our debt grows and the more vulnerable Canada becomes to future economic shocks and fiscal pressures.

Since 2009, the governments’ budget reports predict decreasing budget deficits in coming years. When those years come, however, the budget deficit is almost always greater than predicted.

Federal Budget Balance, Actual*, and Projected 

Budget Balance 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
2009 Budget Balance -29.8 -13.0 -7.3 0.7 NA
2010 Budget Balance -49.2 -27.6 -17.5 -8.5 -1.8
2011 Budget Balance -40.5 -29.6 -19.4 -9.5 -0.3
2012 Budget Balance -33.4* -24.9 -21.1 -10.2 -1.3
2012 Fiscal Update NA -26.2* -26.0 -16.1 -8.6

As the Finance Minister has acknowledged, one main reason why Canada weathered the recent economic storm better than most other industrialized countries is that it entered it in a better fiscal position than most. Canada has in fact experienced the most growth among G7 countries following the recession (5% employment growth through the years following the recession, with the US second at about 3.5%).  This can be attributed to two things.  First, Canada has been fortunate due to commodities: Canada is rich in natural resources, and commodities prices—though lower than expected due to reduced global demand—have created profits in the resource sector, which have benefited Canada through the higher capital to labour ratio.  Second, the government increased spending from 2002 through 2008 to cushion the Canadian economy from the spillover effects from the US sub-prime mortgage crisis and the European debt crisis.

When the Harper government first came to power in 2006, it committed to a fiscal plan of maintaining small budget surpluses and gradually paying down the public deplaned debt.  It deviated from that plan in the aftermath of the 2008 financial crisis, which began with the subprime mortgage collapse in the US.  The government’s 2009 budget introduced significant economic stimulus to offset the fallout from the financial crisis. That stimulus was to be temporary.  The 2009 budget called for large budget deficits in the immediately succeeding years, but a return to surpluses by 2013-2014.  As the table shows, however, the budget deficits have grown much larger than originally projected and the target date for returning to surpluses has receded further into the future.  As a result, the federal government will have accumulated nearly $100 billion more debt than it planned for when it first adopted its stimulus program.  To this mounting deferral federal debt, we should also add public debts accumulated by provinces and municipalities throughout the country.  Currently, all provinces but Saskatchewan are running deficits, adding to the debt burden of Canadian taxpayers.

Canada may be performing well relative to other economies currently, but emerging economies like China, India and Brazil are exhibiting steady growth.  Against China’s 8% yearly growth, Canada, at 2%, cannot remain ahead for long.

In the times ahead, it is likely the budget will only become more difficult to balance.  The volatile situation in the Middle East and influx in globally set commodity prices could further plunge Canada into debt.  The Eurozone has further contracted, and the US fiscal cliff is impending.

It is important that Canada remain fiscally robust not only because the global economic environment remains fragile and the short economic outlook is fraught with unpredictable risks, but because of the predictable demographic challenges that Canada faces in the years ahead.  Canada’s populating is aging rapidly and this trend will impose increasingly tough strains on the nation’s finances.  Currently, Canadians of retirement age make up about 13% of the Canadian population.  In a decade, they will make up close to 22%. With the large cohort of baby-boomers entering retirement and exiting the labour market, labour force growth will slow drastically.  Economic growth can be expected to slow, and consequently government revenue growth will slow.  On the other hand, pressure on government spending will increase owing to higher pension payments and increased demands for healthcare services.  The combined effects of these forces imply increasingly tougher strains on the nation’s finances in the years ahead.  Adding to those strains by passing on today’s bills to the future is neither prudent for the Canadian economy, nor fair to future taxpayers.

-Stami Zafiriou