December 17, 2012 - In the Financial Post this weekend, MLI's Philip Cross says, "It is no wonder so many mayors are fleeing their jobs these days. Now the tough choices lie ahead of raising taxes, cutting services or slashing costs." Read his full column below.

Cross is also mentioned in a National Post column by Terence Corcoran on city spending. Corcoran writes, "Meanwhile, city spending keeps rising, tax rates are soaring and fiscal problems mount. Since 2002, Canadian local government spending increased 64% to $140-billion, according to Statistics Canada data compiled by Philip Cross at the Macdonald-Laurier Institute. Where does the money go?" To read the full column, "City politicians focus on utopian visions while citizens just want simple things, like passable roads," click here.


Tough financial choices lie ahead for Canadian cities

By Philip Cross, Financial Post, December 15, 2012

No wonder so many mayors are fleeing their jobs these days

In a scene played out in cities across the country this fall, headlines in Ottawa trumpeted how City Hall had limited next year's tax hike to 2.1%, "the smallest increase in years."

It turns out the 2.1% refers to the property tax rate. How much the total tax bill will increase is a whole different matter. In 2011, the City of Ottawa's total revenue collections rose 3.8%, even if the rate hike was only 2.45%. Cities should focus on total revenues, since that captures all the fees, fines and taxes they collect under various guises — speeding tickets masquerading as a safety feature, or energy taxes dressed up as environmental levies. It is the concept most relevant to economists and businesspeople, since after-tax disposable income is the amount homeowners have to spend on local shops and restaurants.

Watch for cities across the country to play creative shell-games like this to distract you from the inevitability of sharp tax increases or spending cuts. Municipal budgets everywhere are under increasing pressure, and it is easy to see why. From 2002 to 2010, local government spending increased by $45-billion, but only one-third was financed by municipal taxes. Instead, cities gorged themselves on a $30-billion increase in transfers from other levels of government, capped by the orgy of infrastructure spending in response to the 2008-2009 recession.

Now restraint is working its way down the food chain. Since 2010, the federal government has cut its transfers to the provinces as well as spending on infrastructure. The drop in federal transfers worsened the already alarming state of provincial finances, which responded by cutting transfers to municipalities over the last two years. Municipalities are now looking to plug this shortfall. In the nearby graph, you can see transfers turning down after 2010, while spending continues to race ahead, like Wile E. Coyote still running furiously after he has gone over the cliff. It doesn't take a genius to realize it's just a matter of time before municipal spending comes crashing back to Earth.

It is surprisingly difficult to figure out is how much individual cities spend. Go to most city websites and you won't find simple categories like total revenues and spending with comparisons with the previous year's actual outcome. Poor financial reporting by municipalities is commonplace across Canada. A 2011 CD Howe report, Holding Canada's Cities to Account, documented the slipshod, inconsistent and incomplete approach to fiscal management by most cities. It especially noted that most cities make it impossible to compare proposed spending with actual outcomes (Ottawa is an exception). This prevents taxpayers from spotting a sudden 35% overrun in, to randomly pick an example out of the blue, road construction costs in Montreal and asking how that could happen. On the contrary, the budget process is kept as opaque as possible, so only people inside City Hall know what is going on. Good financial reporting practices are fundamental to keeping public institutions accountable to taxpayers.

Local governments apparently don't know what a tax increase is. Statisticians understand that if consumers receive lower quality for what they buy, this is a de facto price increase. So when the City of Ottawa cuts garbage collection from every week to every two weeks, as it recently did, or fills in potholes less often, these are de facto tax increases. While service cuts may allow cities to pretend they are holding the line on taxes, taxpayers won't be fooled that they are getting the same services for their tax dollars.

Instead of making their annual November pitch for more infrastructure spending by other levels of government (this year, the Federation of Canadian Municipalities described infrastructure as reaching "the breaking point"), cities would better serve the public by accepting the reality of fiscal restraint, identifying their priorities and communicating them clearly. If infrastructure work is needed, make it a priority in your own budget process, instead of foisting it on others while you pursue David Suzuki-approved green initiatives.

Of course, there is an alternative to tax hikes and service cuts. That is lowering the cost of delivering services, by cutting payrolls or contracting out work to the private sector, which would require reducing the influence of public sector unions. Here in Ottawa, a couple of years ago a local union leader boasted that he effectively ran Ottawa, which actually would explain a lot of things. City leaders should not say they have explored all avenues when they raise your taxes or cut services until cost-cutting and efficiencies have been exhausted.

No wonder so many mayors are fleeing their jobs these days, not all one step ahead of the law. The fun time for being a mayor—being showered with money from Sugar Daddy governments—has passed. Now the tough choices lie ahead of raising taxes, cutting services or slashing costs.

Philip Cross is Research Coordinator with the Macdonald-Laurier Institute and former chief economic analyst at Statistics Canada.



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