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