Long-Term Municipal Debt in the Northern Ontario Big Five

 

Well, I have been reacquainting myself with municipal debt in Ontario over the last little while culminating in this short piece for the Fraser Institute and a discussion with Jonathan Pinto’s Up North focusing on northern Ontario and Sudbury in particular. There is also this interesting item regarding Farquier-Strickland which suggests that some smaller and more rural Ontario municipal governments are under quite a bit of stress and that large debt loads can have an impact on the long term financial sustainability of municipal finances.  In any event, municipalities going bankrupt in Ontario is something out of the 1930s and most of the current regulations governing municipal finances were a response to the financial turmoil of the Great Depression. 

It turns out that during the Great Depression: “By 1935, 20 percent of Ontario municipal debt was in default (Hillhouse 1936). During the early 1930s, more than 40 Ontario municipalities and school boards defaulted on their obligations.” [Cote and Fenn, 2014]. It is this historical context that haunts some of us as municipalities take on debt even though current debt burdens are well within the debt service requirements of provincial regulation in Ontario and for the most part (Farquier-Strickland excepted I suppose) Ontario municipalities have built up substantial reserves. 

Nevertheless, it is worth monitoring municipal debt levels and the accompanying figure presents the total long-term debt of the big five northern Ontario municipalities from 2000 to 2023 with data obtained from the multi-year reports of the Ontario government’s municipal Financial Information Review.  In 2000, the total debt burden of these five municipalities was relatively closely clustered with Greater Sudbury at $13.3 million, Thunder Bay at $45 million. The Sault and North Bay at $26 million respectively and Timmins close to zero. Things have progressed since then, though for the longest time it was Thunder Bay that was the long-term municipal debt outlier zooming ahead of the others such that by 2008 it peaked at $230 million before coming down somewhat.  Nevertheless, until 2019 it still had the largest total debt of any of the northern Ontario big five.

 

 

Starting in 2019, Greater Sudbury began to ramp up its municipal debt– after a more modest ramping up from 2014 to 2019 – and from 2019 to 2020 went from $70 million to $262 million.  By 2023 it had reached $325 million and is apparently poised by 2027 to reach $600 million. As of 2023, the northern Ontario big five collectively had nearly $700 million in Ontario debt.  With Sudbury’s ramping up to $600 million along with other anticipated expenditures in these other major northern Ontario cities, the total should surpass $1 billion by 2027.  Debt service costs on this debt in the case of Sudbury will likely double from the current 3-4 percent of total own source revenue but remain well within the provincial guideline of no more than 25 percent. Still, all other things given, more money for debt service means less money for current programs.  It is a trade-off that needs to be considered.

Police Month Continues! Police Spending in Ontario Municipalities

 

It appears that police month is continuing here on Northern Economist as I came across police spending data from the latest BMA Municipal Report  - the 2022 edition.  The BMA reports provides estimates of net policing costs per capita both excluding and including capital cost amortization as well as per $100,000 dollars of assessment.  These costs vary quite a bit and the BMA report has a preamble to the police cost data explaining that such costs can vary a great deal depending on the daily inflow and outflow of non-residents and commuters, the policing of specialized facilities in a municipality such as casinos or airports as well as demographic characteristics, the urban rural mix, service levels and the complexity of crimes. 

 

 

 

Having noted all that, Figure 1 provides a chart ranking policing costs per capita for Ontario’s thirty largest municipalities and they range from a high of $461 per capita for Thunder Bay to a low of 258 dollars per capita for Milton, Burlington and Oakville, which of course all share the costs via the Halton Regional Police Service. Indeed, a number of these other communities have the same per capita net costs because they are part of a regional service – Durham Region (Clarington, Ajax, Whitby, Oshawa, Pickering), York Region (Vaughan, Richmond Hill, Markham, Waterloo Region (Kitchener, Waterloo, Cambridge), Niagara Region (St. Catharines, Niagara Falls).  

 

 

 

In trying to find out what might account for these differences, the simplest starting point is a plot of net per capita costs against the number of officers per 100,000 population as provided in Figure 2.  It is a positive relationship with each additional officer per 100,000 resulting in an addition of nearly 2 dollars per capita in policing costs.  These are policing costs and are not simply the cost of an officer but include all the costs and support associated with that officer.  As you will recall in an earlier post, police forces also have a fairly large number of civilian employees as support.  However, simply stating that having more officers is going to cost more money is not terribly helpful in trying to explain differences across municipalities. 

 

 

 

Figure 3 plots the net costs per capita against the area of the municipality in square kilometers.  For most of these police forces, as area rises, the per capita cost actually falls though it starts to rise for very large municipal areas.   The plot vaguely resembles a u-shaped cost curve but it is ultimately not very satisfying chart because there is not really much in the middle to support the fitted curve.  The three communities on the far right who make up the upward sloping part of the curve are Hamilton, Ottawa and Greater Sudbury.

 

 

 

Figure 4 looks at the relationship between policing costs per capita and the community crime severity (Using the 2021 Crime Severity Index from Statistics Canada).  Once the polynomial curve is fitted to these points, one can say with a certain degree of confidence that there is an positive relationship between crime severity and police costs per capita but it is somewhat non-linear with one peak at a crime index of 50 and another at about 90.  Why this relationship might be bi-modal is either statistical luck of the draw with this data set or the subject of future research.

 

 

 

 

Finally, Figure 5 plots police costs per capita against total population to see if there are any economy of scale type relationship that might emerge.  The u-shaped curve that emerges is misleading because only Toronto is responsible for pulling up that curve,  For the rest of the communities, as population rises, per capita policing costs come down.  In a sense, throwing Toronto into the mix is not useful because it is so much larger than any other municipality in Ontario. 

 

I guess, the ultimate insight would be to run a regression with some of these variables as determinants of per capita policing costs.  Table 1 below presents the results of a very simple regression of net police costs per capita on municipal area (square kilometers), total population, Crime Severity Index in 2021 and regional fixed effects variables with the GTA/Central as the omitted comparison category.  Policing costs per capita do appear to be significant and positively related at the 5 percent level with Crime Severity and being in northern Ontario.  Population also seems to be a positive driver but again that is likely being driven by Toronto.  Still, it could be that really large populations create much more complex crime environments that really drive up police costs per capita.

 

 

So, in the end, what drives police costs in Ontario? Crime Severity is likely a factor but regional differences as captured by regional dummy variables also seems to be of some importance.  Obviously, more research is needed on this topic but that is time intensive and assumes that someone actually wants an answer.

Inflation, Wages and Municipal Monopolies

 

Statistics Canada released its April 2022 employment numbers today and the national unemployment rate edged down slightly to 5.2 percent.  Canada has low unemployment and real GDP growth in the 4^th quarter of 2021 was 1.6 percent which annualized translates into just over 6 percent real growth for 2021.  It is indeed a period of robust economic growth and of course inflation which in March was 6.7 percent.  However, if you have been to a grocery store, you will see that over the course of the last year many prices have gone up 30-50 percent and then there is gasoline which is now pretty much at 2 dollars a litre.  As a result, interest rates are up belatedly to arrest the surge in inflation to bring it back to the 2 percent range.  However, they will probably need to go higher given that inflation – while not yet stagflation despite alarmist media stories – is nevertheless quite persistent.  Still, Canada is not yet like Turkey which is seeing 70 percent inflation.

 

Stagflation a la 1970s requires a wage price spiral fueled by expectations of rising prices on the part of the labour force which become translated into effective wage increases.  However, that requires a certain amount of bargaining power on the part of labour and unionization rates in Canada today are dramatically lower than they were in the 1970s and 1980s.  If wages go up in the private sector, they are going to rise not so much because of labour action but because the labour market is seeing scarcity of workers.  As for the public sector, many provinces have some form of salary restraint – chief of which is Ontario which in 2019 brought in Bill C-124 which has kept most of the broader public sector to 1 percent annually. More on that in a minute.

 

In Thunder Bay, the unemployment rate (3-month average, seasonally adjusted) is now 4 percent – down from 4.9 percent the month before.  However, total employment in Thunder Bay is down from March going from 64,600 to 64,400 jobs, the size of the labour force has also shrunk going from 68,000 to 67,200 and the participation rate has fallen from 63.8 percent to 63.0 percent.  So, the robust low unemployment rate in Thunder Bay masks the fact that overall, there are fewer people working relative to the month before.  However, year over year, both the labour force and employment are up so all things considered, the low unemployment rate is a sign that the city’s economy is doing relatively well.  Which brings me to the main point.

 

As well as Thunder Bay is doing, eyebrows were indeed raised this week by the news that Thunder Bay City councilors have passed a 4 percent salary increase for its management and non-unionized staff and a 2.35 percent increase for councillors while unionized staff will be seeing a 1.5 to 2 percent increase.  The 4 percent increase for 319 managers and other non-unionized staff was dressed up as staggered which obfuscated from the fact that in 2022 the increase is nevertheless 4 percent.  The City Manager was quoted as saying: “The reason for [the increase] is to make the [city] more competitive against our competitors for skilled labour,” he said. “We are falling behind on a relative basis – against other municipalities, against the private sector, and against the public sector parameters we measure against.” As for the councilor increase, well it is now formula driven at half the rate of inflation so the 4.7 percent inflation in 2021 translates into 2.35 percent. It is not council deciding, it is simply the formula though they voted against taking a lower increase.

 

The point here is that municipal employees in Thunder Bay – like municipal employees elsewhere in the province - have a distinct advantage over other members of the broader public sector in that they have not been subject to the provincial salary restraint legislation in Bill C124.  In Ontario, health and education sector workers have been kept to 1 percent increases annually since 2019.  Municipalities have been exempted ostensibly because they have access to own-source revenues.  That is property taxes and user fees.  Municipalities still get a substantial portion of their revenues from the province in the form of grants though not as large a share as say hospitals, schools, and universities. 

 

Municipalities in Ontario derive about 40 percent of their revenues from property taxes, another 22 percent from government transfers, 20 percent from user fees and the remainder from licenses, permits, fines, and rentals. They can pass on their cost increases directly to their ratepayers and as a result can fund increases in spending while at the same time adding to their reserve funds with large annual budget surpluses.  In the end, they are no longer municipal governments serving the public interest but have become monopoly corporations and use their monopoly power to extract whatever revenues they need – even during the pandemic.  They have become bureaucratic maximizers of expenditures. A municipal election only every four years enhances that monopoly power.  Residential taxpayers throughout Ontario are going to see large increases in their bills down the road to fuel the spending increases that municipalities are going to bring in because of inflation. That the province has allowed this monopoly power to continue unchecked and indeed abetted it in the recent salary restraint legislation should be an election issue.