NORTHERN ECONOMIST 2.0

Monday, 12 February 2024

Municipal Spending Evolution in Thunder Bay

As the 2024 municipal budget season wraps up, it is worth looking at where Thunder Bay has been going over the last decade in terms of the composition of its total municipal expenditures (all spending, tax and grant supported, capital and operating). Using multi-year financial data (2002 to 2022) from the Ontario Ministry of Municipal Affairs Financial Information Review, one can obtain an overview of the trends. In 2012, total municipal expenditures in Thunder Bay were 505.4 million dollars and in 2022 they were 599.8 million making for an increase of 19 percent. Compared to some other municipalities, this was actually a rather modest increase as over the same period, Greater-Sudbury saw an increase of 41 percent, Windsor 26 percent, Barrie 29 percent and Kingston 41 percent. At the same time, over this entire period, Thunder Bay nevertheless still managed to have the largest municipal expenditure to GDP ratio of these cities.

What is more interesting is the evolution in functional composition. Figure 1 illustrates that in 2012, the City of Thunder Bay spent 5 percent of its budget on general government, 14 percent on protection of persons and property, 12 percent on transportation, 12 percent on the environment, 5 percent on health and emergency services, 13 percent on social and family services, 9 percent on cultural and recreation services, 2 percent on planning and development and 28 percent on "other". This last category reflects Thunder Bay’s ownership of its municipal telecom utility (TBayTel) as well as differences in the way Thunder Bay approaches social housing given we have a district board – the District of Thunder Bay Social Services Administration Board.

Figure 2 presents the 2022 composition. General government showed a decline to 4 percent, protection to persons and property rose to 21 percent, transportation remained at 12 percent as did the environment. Meanwhile, health and emergency services grew to 7 percent, social and family services declined to 7 percent, and both recreation and culture and planning and development remained the same at 9 percent and 2 percent respectively. Meanwhile, the "other" category's share declined to 26 percent.

Of course, for the composition to change, it means that these categories have grown at different rates and so Figure 3 presents the percent change in total spending by category over the 2012 to 2022 period. In accord with general local perceptions, the largest increases in spending have indeed been in protection services and health and emergency services at 76 and 73 percent respectively. Next is recreation and culture at 25 percent, followed by the environment at 14 percent, planning and development at 13 percent, "other" at 12 percent and transportation at 11 percent. There were two categories that saw declines in total spending: general government fell by 6 percent (there have indeed been some administrative economies) while social and family services fell by 32 percent.

Given that social issues have been front and center in Thunder Bay over the last few years, this allocation does provide some insight into how Thunder Bay is dealing with some of its social issues. Resource allocation appears to have targeted the more direct outcomes and fallout of the assorted social ills afflicting the streets of Thunder Bay. This is to be expected. What is somewhat more disturbing is that there has been an expenditure drop in family and social services which one might expect would be a longer-term spending approach to addressing some of the causes of social issues. Whereas, in 2012, 64.4 million was being spent on family and social services, this has declined to 44 million by 2022.

It is interesting to note that of the five cities mentioned at the start of this post, between 2012 and 2022, Thunder Bay saw the largest percent increases in dollars spent on protection to persons and property as well as health and emergency services. With respect to spending on family and social services, only Barrie saw a decline while Greater-Sudbury, Windsor and Kingston all saw increases. Windsor, Barrie, Greater-Sudbury, and Kingston also all increases in social housing spending (though Greater-Sudbury's was quite small). However, in the case of Thunder Bay it is difficult to tell from these numbers if we are indeed spending more in social housing in the "other" category. Ultimately, such differences across urban centers will provide an interesting laboratory experiment on how municipalities are dealing with issues like poverty, addiction and crime.

Sunday, 4 February 2024

Measuring Municipal Public Sector Size

Public sector size and its impact on the economy is a long-standing research question in public finance. In the case of Canada with its federal system of government, measures of public sector size often focus on either total public sector size or break it down into measures of federal and/or provincial public sector size. These measures commonly take government spending or government revenues as a share of GDP to estimate the size of the public sector footprint. Less common are attempts to related municipal public sector size to the size of their local economies.

Data is always an issue when trying to get an empirical handle on measuring things like public sector size. Fortunately, in the case of Ontario municipalities, it is possible to get annual data on total municipal government expenditures and revenues from the Ontario Ministry of Municipal Affairs Annual Financial Information Returns which are filed by municipal governments. Also fortunate is that Statistics Canada now provides some estimates of GDP for major census metropolitan areas going back to 2009. While the data is a bit onerous to compile and put together, the preliminary results for Thunder Bay and three other Ontario municipalities are interesting.

Figure 1 plots total municipal expenditure as a share of CMA GDP from 2009 to 2022 for Thunder Bay, Greater Sudbury, Windsor, and Barrie. These are relatively smaller Ontario urban centres well outside the GTA/Niagara region with two in northern Ontario. Greater Sudbury is always an automatic comparison for Thunder Bay on many levels given that it is the largest city in northern Ontario with Thunder Bay second. Also, note that for 2021 and 2022, GDP was estimated using the annual average growth rate of GDP for the 2010 to 2020 period.

The results reveal that total municipal expenditures in these four cities as a share of GDP reveal that Thunder Bay has a larger municipal footprint than the other three. Over the entire period 2009 to 2022, Thunder Bay’s municipal expenditure to GDP ratio averages 9 percent while Sudbury is at 6 percent, and Windsor and Barrie each at 5 percent and 4.7 percent respectively. In terms of trends over time, since 2011, Barrie has been trending slowly downwards, Windsor is stable, Sudbury has been growing while Thunder Bay managed a small decline that was reversed during the pandemic. Indeed, the two end points of this chart are both associated with economic trauma in that the start is marked by the aftermath of the Great Recession and Financial Crisis and the end by the COVID-19 pandemic.

Nevertheless, the results suggest that based on this albeit limited sample, the two northern Ontario municipalities have larger municipal public sectors than ones in southern Ontario. Even within the north, Thunder Bay is certainly in a league of its own when it comes to the size of its municipal footprint. Some of these differences across the cities can of course be ascribed to the generally more robust southern Ontario economic environment and better economic growth performance which naturally spills over into GDP. At the same time, Thunder Bay is different, and the question as always is why?

One might argue that the municipal public sector in Thunder Bay is larger than these other cities because it has a weaker economy. Given that so much municipal spending is mandated or guided by the province, Thunder Bay does not spend more per se but does relative to the size of its economy. This is the “province makes us do it defence”. On the other hand, one could argue that more spending is also a choice and Thunder Bay and the Lakehead cities that preceded it have always because of their isolation engaged in more municipal spending to provide services they feel ought to be available. In this regards, part of the difference between Thunder Bay and other cities lies in municipal utilities given that the City of Thunder Bay essentially owns TBayTel- its own municipal telecom utility.

In some sense, neither explanation is terribly flattering in explaining why Thunder Bay’s municipal public sector can be nearly twice as large as that in some other southern Ontario cities. We have a weak economy which despite all efforts continues to be weak and our municipal government plays the role of an economic stabilizer. Or, ownership of TBayTel aside, we may simply like to spend more than other cities and are quite comfortable with the City of Thunder Bay being as large an economic driver as it is. One suspects both these explanations are potentially inconvenient truths no one in Thunder Bay really wants to hear.

Friday, 2 February 2024

Ontario Economic Decline is Real and Substantial

This post originally appeared in the Fraser Institute Blog.

A spectre is stalking Ontario, and it’s the spectre of decline. For most of post-war Canadian economic history, Ontario has had a per-capita real GDP substantially above the Canadian average. At the same time, Ontario has had real per-capita GDP growth relatively close to the Canadian average.

This dominance was rooted in Ontario’s role as Canada’s industrial heartland that developed in the wake of Confederation. Ontario was indeed a beneficiary of Canada’s national economic development policies based on development of the Canadian prairie wheat economy, a tariff wall to protect domestic manufacturing and an east-west railway transport corridor. At the same time, Ontario’s economy was also marked by prosperity driven by market-based economic development best described in the words of economic historian Ian Drummond as “progress without planning.”

Ontario’s performance can be summarized in two charts using data from the Macro-data Base of Finances of the Nation. The first chart below plots real per-capita GDP separately for Ontario versus the rest of the country (Canada without Ontario) from 1990 to 2022.

CanvasJS.com

The second chart plots the average annual growth rate for Ontario, the rest of the country and all of Canada for the 1990 to 2022 period and the approximately 30-year period preceding it. The evidence suggests that during the 1990s, Ontario fell dramatically below the rest of the country in terms of its real per-capita GDP growth. In 2006, the rest of the country surpassed Ontario’s real per-capita GDP and remained higher for a decade before converging from about 2015 to the pandemic era. However, in the immediate post-pandemic era, Ontario has once again fallen behind the rest of the country.

CanvasJS.com

During the 30-year period prior to 1990, Ontario’s real GDP per-capita growth was quite close to the overall Canadian average and that of Canada without Ontario. What’s remarkable is what’s happened since.

Ontario’s average annual growth rate of real per-capita GDP fell from 2.6 per cent to 0.6 per cent. To be fair, a productivity decline has also marked the rest of the country. Indeed, Ontario and the rest of Canada appear locked as partners in a long-term productivity and growth decline, but Ontario’s performance is both dire and unique. The rest of Canada since 1990 saw its per-capita income growth rate cut in half. While hardly a sterling performance, compared to Ontario it was a veritable boom given that Ontario’s post-1990 average annual growth rate was barely one-quarter that of its 1960 to 1990 growth rate. One can argue that Ontario is dragging down the overall Canadian growth rate.

One can construct all kinds of palatable and soothing stories to explain why this has happened and why it’s not as unflattering as these statistics suggest. For example, one can argue that convergence of income is a good thing as it provides for a more economically balanced federation and is a logical outcome of economic development spreading across the country. At the same time, convergence could also mean that once per-capita incomes have equalized, growth rates should be similar, too, which is not the case here.

One could argue that Ontario was exceptionally hard hit by the economic adjustment its manufacturing base underwent during the 1990s in the wake of the 1998 Canada-U.S. Free Trade agreement and then NAFTA. Yet most of that adjustment was done in the 1990s and a breakdown of growth rates in the 1990 to 2022 period shows 1990 to 2000 had higher per-capita income growth than afterwards. One could also argue that the real per-capita slowdown is an illusion fuelled by rapid population growth. This of course ignores the reality that Ontario’s population has been growing about the same as the rest of the country and its share of total Canadian population today remains pretty much the same as 30 years ago.

Another potential argument is that the relatively better performance of the rest of the country is the result of natural resources with Alberta, Saskatchewan and Newfoundland and Labrador doing much of the heavy lifting. Yet this ignores that Ontario, and especially its north, is resource rich with abundant minerals and hydropower resources. Yet Ontario has been planning for more than two decades to access its Ring of Fire and little yet emerged. If the early 20th century could be characterized as “Progress without planning” then the early 21st may as well be “Planning without progress.”

Finally, one could argue it’s all just a rough patch for Ontario and that things are about to turn around. At the 1960 to 1990 growth rate, Ontario’s per-capita income would double in about 30 years. At the post-1990 average annual growth rate, the next doubling will take more than a century.

These are all ultimately unconvincing stories strung together to provide a comforting and bearable account as to why we shouldn’t worry and indeed shouldn’t do anything at all. Yet the first step to a solution is acknowledging a problem exists. Unfortunately, Ontario seems serene in the confidence it does not have to worry. Ontario needs to wake up and realize it has a problem.

Saturday, 27 January 2024

Ranking Thunder Bay's Tax Levy and More...

It is municipal budget season in Ontario and Canada and this year’s proposed budget increases appear to be quite large. Toronto, for example, has proposed a 10.5 percent tax increase while Hamilton initially was looking at a 14 percent increase. Vancouver is going up 7.5 percent while Montreal seems set to go up 5 percent which while seemingly modest given the comparisons described here is nevertheless Montreal’s largest increase in 13 years. And then there is Thunder Bay which for 2024 is proposing a 6.1 percent increase in the total tax levy which “after growth” will be 5.5 percent.

While one might argue that Thunder Bay's increase seems modest compared to these other metropolises, much like the case of Montreal, the more apt comparisons are with the past rather than other cities. Even in the case of Ontario municipalities, there are differences in municipal structure with Thunder Bay as a single tier municipality not always directly comparable to other cities – the famous apples versus oranges argument city administrators usually bring up at budget time. Ultimately, one needs to look at how Thunder Bay’s tax levy and proposed levy increase stacks up against past ones.

Figure 1 plots a two-axis chart of the total tax levy as well as the dollar change in the levy from year to year going from 1990 to the proposed 2024 figures. In 1990, the tax levy was 63.4 million dollars while today the proposed amount for 2024 is 231.7 million dollars. And of course, this is just the tax levy and not the total budget which is funded by both tax levies and government grants and comes in including operating and capital at a combined total of approximately 538 million dollars. The trend has been upwards with an increase every year with the exception of 1995 which appears to have seen a drop in the levy of 1.3 million dollars. The proposed increase for 2024 is 13.3 million which is well above the average annual increase for the 1991 to 2024 period of 4.95 million dollars.

How does this year’s percentage increase in the tax levy stack up to past ones? Figure 2 plots each percent increase in the total tax levy from 1991 to 2024 ranking them from highest to lowest and at 6.1 percent, the proposed 2024 levy increase is the 5^th highest in over thirty years (but second highest in strict absolute dollar terms). The increases range from a high of 21.8 percent in 1998 to a low of -1.7 percent in 1995. All other things given this year’s proposed increase is at the higher end of the range in percentage terms.

Of course, it is often argued that the reason taxes go up apart from new needs or mandated responsibility increases from the province is a general rise in costs driven by inflation. Inflation certainly has been in the headlines the last year, so it is worth checking out the correlation between the CPI inflation rate for Thunder Bay and the percent change in the tax levy. Oddly enough, when a linear trend is fitted to the scatter plot of tax levy increases versus the inflation rate, the relationship appears to be slightly negative – that is, higher inflation rates were correlated with lower tax increases.

However, one could argue that these results are driven by 1998 with its 21 percent levy increase (If you recall the late 1990s was an era of municipal restructuring with changes in how taxes were allocated between residential and business and also local education and of course social service downloading). However, if you omit that year as an outlier, what you get is essentially a flat curve. That is, the rate of inflation does not seem to drive the rate increases. They are being driven by other factors and since we don’t know what we don’t know, those factors are best left up to city administrators who are in the know about what they may or may not know. Nevertheless, do not expect a straightforward answer as the factors over and above inflation are indeed complicated.

Many people find the budgeting process of the City of Thunder Bay (and indeed municipal governments in general) rather arcane and overly complicated. Indeed, even those of us with a public finance background find municipal budgets particularly confusing and exasperating as they are indeed laid out in a manner that does not inspire clarity. They look nothing like a federal or provincial budget which a least provide a one- or two-page table easily summarizing revenues and expenditures. Now one may argue that this is not good for local democracy if ratepayers do not understand municipal finances because they are not readily transparent.

This is where the ratepayer errs. This is actually not about democracy. It is about the needs of the corporation and corporations are perpetually lived entities with limited liability and interested in their own financial preservation. They respond more often to the money rather than to voter pressure. The phrase “You Can’t Fight City Hall” does not exist for no reason. Remember, like other municipalities, our city government is The Corporation of the City of Thunder Bay. Despite popular sentiment and belief, municipalities in Canada are not independent tiers of government but creatures of the provinces. Local service provision has essentially been contracted out by provincial governments to municipal corporations. The democratic accountability for municipal government ultimately lies in provincial elections rather than local ones.

City councils are essentially boards of directors, and they serve to demonstrate responsibility for corporate direction but little else in terms of day-to-day finance and operations. True, ratepayers engage with the corporation by selecting the board of directors in elections and participating in numerous surveys and public consultations but then any corporation worth its salt always is doing customer satisfaction surveys. The real business and complex operations geared around the financial operations of the corporation is conducted by its officers and employees and generally behind closed doors.

The members of the board - our councilors – are essentially a large focus group attempting to promote public relations engagement in a theatrical setting for the people the corporation ultimately derives its revenue from and provides services to. That usually explains why so much of council meeting’s time is usually taken up by discussion of minor manners that galvanize emotions (time to change street names again anyone?) and complicated large multi-million-dollar decisions seem to occur quickly on the advice of administration. There are exceptions when fate delivers exceptionally persistent and informed councilors - witness the turf facility debate to date - but corporate administrations play the long game and eventually wear out the opposition.

Even the current review of the size and structure of Thunder Bay City Council is largely designed to create a sense of public engagement with the process rather than any actual decision making. Remember, Thunder Bay was created by an act of the provincial government. Thunder Bay can certainly try and change its system of municipal representation and structure, but the province will have the ultimate say and the corporation will implement that. Remember Toronto in 2018? The number of wards (and councilors) was reduced nearly 50 percent in the middle of a municipal election but not as a result of a grass roots consultation but by the provincial government because they wanted to and they could.

The point of all this? The City of Thunder Bay needs a 6.1 percent in the total tax levy to fund its operations and tinkering around the edges aside, will get most of that increase. And will we get a revamped municipal ward and councilor structure? Certainly. But only if the province goes along with it.

Wednesday, 17 January 2024

Reforming Thunder Bay City Council: The Journey Begins

It appears that Thunder Bay City Council has finally decided to get serious about looking at its size and composition with the move to appoint a six-member citizen committee that will lead a review process over the next year that might actually result in changes in time for the 2026 municipal election. The committee will have a far-reaching mandate to explore the size of council, their status as full or part-time membership as well as the structure of the current at-large and ward hybrid model that has governed Thunder Bay municipal politics since the 1980s. When Thunder Bay was created it 1970, it began with a mayor and 12 councillors elected evenly across four wards which was revised to seven wards in 1976 and then took its current form of seven ward and five at large councillors in 1985.

This is coming about nearly three years after a previous council began to explore the issue and which ultimately generated this post which concluded: “it would be better if more of an effort was made to commission an independent arm’s length panel to review the situation and present options to council.” Well, a committee has finally been appointed by City Council and is made up of six members. The committee is chaired by former councillor Rebecca Johnson and vice-chaired by another former councillor Cody Fraser as well as citizens Riley Burton, Wayne Bahlieda, Heather McLeod and Carlos Santander-Maturana.

The committee will conduct a two-phase consultation with the public. The first phase includes a survey to ascertain how the public engages and interacts with City Council and examining if they have a desire to see changes to the composition of council. Phase two will include discussion and consultation with the public on potential options that could result in changes to council composition and/or the ward boundaries. The committee will then take all of this information and “provide a report to City council with recommended changes to the composition of council or the ward system next year”.

The wording on the City of Thunder Bay website seems to imply that there will be changes and the chair of the committee in a TBTNewswatch story seemed to say that she believed that this time there were going to be changes made. Indeed, phase two already says it is about options for change even before phase one has ascertained a desire for change This is somewhat disconcerting because it suggests that someone or somebody somewhere has already decided that changes will be made, and the only real question is what those changes might be. When put alongside a less than transparent process for committee member selection that were apparently “carefully chosen” and a survey that requires registration, one begins to wonder if the result is already a foregone conclusion. Of course, one should be charitable on an issue that has reared its head up numerous times over the years and has only finally resulted in a serious attempt to examine it. Given the length of time it has taken to get to this point, I suppose one should simply be grateful a committee has been struck even if the process seems akin to foxes guarding the hen house.

It is fair to ask what possibly an economist could contribute to a debate on municipal governance? However, barring the reality that economists are municipal citizens too, it remains that economists are fully capable of examining the costs and benefits of institutional arrangements and their evolution as well as public finance aspects. It is not an incursion into new territory to be staked out but rather an extension of what many institutional economists and economic historians already do. In the case of the size, structure, composition and representativeness of the current institutional arrangement, there needs to be a framework for the decision making as well as an examination of what issues need to be addressed with the change.

A change in the current arrangements of municipal council represents an institutional change or innovation and such changes should be made if the perceived net benefits of the new arrangement exceed the net benefits of the previous one plus the costs of transitioning to a new arrangement – both social and economic costs. It requires in the end an analysis of the current system and its benefits and costs not just economically but in terms of effectiveness in democratic representation and decision making as well as community spirit and engagement.

What is not functioning under the current arrangement? What could be improved? What are the advantages of the current system of seven ward and five at-large representatives plus a mayor and what are its drawbacks? In other words, what exactly are we trying to fix or improve. What is driving the need to make changes to city council? For example, simply being unable to get a consensus on building a new turf facility is not a reason to change the decision-making mechanism. Similarly, rancorous meetings are also not a reason to reform city council if the debate results in things getting done or poor decisions avoided.

Much of the debate in the past has focused on issues like ward councillors being too focused on their wards and not seeing the “bigger picture” when it comes to city issues. Other times, there have been concerns that at-large councillors by not being tied to a ward and its needs were somehow shirking their duties by picking and choosing what they wanted to focus on. Indeed, Thunder Bay politics at the municipal level has occasionally seemed like council consisted of a mayor, five mayors in waiting and seven dwarf councillors left to do a lot of the heavy lifting on local issues. On the other hand, one could also argue that having five at large councillors allowed for citizens to go beyond their immediate ward councillor when lobbying if they felt they had not had their issue addressed.

And the hybrid system itself with two types of councillors is rather unique – why is it that Thunder Bay cannot have either a system of all ward councillors or all at large councillors? What was the original purpose of going to a hybrid model and have those reasons shifted? Then, there is the issue of the total number of councillors given the population size as on a per capita basis Thunder Bay probably has more councillors than many other cities in Ontario. Burlington, for example, with a population nearly double that of Thunder Bay, has six ward councillors plus a mayor. Kingston, on the other hand, which is one and a half times Thunder Bay’s population, has a mayor representing “the city as a whole” and twelve district councillors.

Perhaps fewer councillors but all full-time rather than the current part-time might make for better decision making. However, that would likely mean a higher stipend and part of the argument for reducing the size of council is a belief that somehow there are going to be cost savings. If you are indeed looking at cost savings in municipal government, reducing the number and salaries of councillors is merely symbolic as the real savings lie elsewhere. On the other hand, one can argue that being a councillor is about community service and the money should not matter.

Would having all councillors as ward councillors make the council too parochial as each seeks only to look after neighborhood concerns? Or will having all at-large councillors undermine the position of mayor as all councillors can claim to have a city-wide mandate from the electorate? Indeed, if all the councillors are at large, why elect a separate mayor at all? Make the mayor the at-large councillor with the most votes. Or, if we move to an all-at-large approach, will only high-profile individuals and financially better off individuals being able to run for council given that ward races can favour ward residents with close neighborhood ties while city wide campaigns are more expensive to mount?

And all of this of course is intertwined with the issue about whether we need to or should redesign our ward system given the current imbalances in population across wards as populations in the city have shifted. Should we go to eight or ten numbered as opposed to named wards with approximately equivalent populations, as well as a mayor? Should the councillors be all at-large or all ward based or some new type of hybrid? What should the borders of the new wards be? Will changing the number of wards and councillors as well as redesigning borders lead to better democratic accountability? More citizen involvement? And on top of all of this – do we want a first past the post system electing our councillors? Ranked or weighted ballots – especially for at-large candidates?

As mentioned before, all of this is really not new territory for an economist. Institutions and their quality are fundamental to successfully functioning economies. Has Thunder Bay been hurt economically by its current municipal institutions? Indeed, one could in a moment of introspection go further and ask if amalgamation was responsible for the economic slowdown after 1970 given a monopoly one-city government replaced what were a set of competitive municipalities. There can be a lot at stake here as change for the sake of change without understanding the reasons for change as well as the long-term ramifications can leave us worse off. Borrowing from the words of our outgoing City Manager, if you “don’t know what you don’t know”, then how can you know that what you are doing is the best decision possible? The committee indeed has its work cut out for it and one hopes that they are independently minded enough to be able to know what questions to ask, when to ask them and more importantly, when to suggest to do something and when to do nothing.