More case studies of municipalities becoming insolvent

Posted March 30, 2014 

Bill Tufts of the Fair Pensions for All wrote the following commentary. It has been edited for length. It reflects the growing number of municipalities across Canada concerned about the rising costs of public employees. The City of Guelph is no exception in which 80 percent of its property tax revenues are used to pay its staff of 2,063.

Bankruptcy  – a condition of financial failure caused by not having the money that you need to pay your debts”

These are a few random thoughts sent to a few of you whom I have spoken with over the past week about our state of affairs. It is not an official correspondence of Fair Pensions for All.

The writer continues to follow the country’s financial situation and see more and more indications that there is a Minsky Moment coming. Herb Duncan has been pointing out the signs and signals that are leading to this moment for the city of Saint John, New Brunswick.

A couple of cities have become bankrupt recently in Canada. It’s a progressive journey that may take several years for it to reach the end point, bankruptcy. Many years before the end is reached, the city or province will go through a process of insolvency, with different levels. Detroit for example, went through this period of insolvency for over two decades or more.

A recent report on the bankruptcy of Stockton, California highlighted the insolvency process. Stockton was the biggest municipal bankruptcy ever, before Detroit.

“While insolvency is commonly understood as a condition in which a city can no longer pay its obligations (and thus must file for bankruptcy protection), there are multiple tests for insolvency.

            1. Service Insolvency – when a city can no longer fund the consistent delivery of its current services.

            2. Future Payment Insolvency – when a city is projected to be unable to meet its future financial obligations at the rate of current spending, and must thus reduce its current service costs to stay within projected revenue.

            3. Cash Insolvency – when a city can no longer cover its current costs.” 

As the process of insolvency progresses it is evident that there are several trigger points that intensify the final stages towards the tipping point.

The final stages into “cash insolvency” are the rapid run up of employee costs that continue to consume more and more of the city’s resources. This of course leaves less for the other services that taxpayers think they are contributing taxes towards.

Before the employee cost meltdown, the city has usually financed a “white elephant” project. That may result in having an important function to provide for the city and be politically popular but have little economic value. Especially considering receiving potential tax revenue. In all probability it is a project the private sector would never build or support.

There are a couple of recent examples in Canada of municipalities that went bankrupt. They can’t really go bankrupt in the legal sense but they become wards of the province. However, technically they are bankrupt because at that point in time they just can’t pay their bills any longer. The reserves had been used; they can’t borrow more money and have no cash in the bank.

One of our directors explains it in the following explanation of how these governments go bankrupt, it happened very slowly then suddenly…

Amhertberg, Ontario

The town is a beautiful little community that has preserved some of its heritage atmosphere. It has attracted seniors because of its features including a mild climate located close to the great lakes.

The town had its white elephant project in the form of ambitious community projects including “the construction of the United Communities Credit Union Complex, the expansion of the water and waste water plants and the separation of the storm sewer system.” These projects left a large tax burden on the city.

Amherstberg, a small community with a population of 13,000, was saddled with big city costs for its municipal staff. The straw to break the elephant’s back is always the cost of police and fire. On the most recent Sunshine List, of those earning more than $100,000, the town has 20 employees on the list. Of these employees 15 are police and fire.  

The town suffered from Meredith Whitney’s vortex of hell syndrome. The vortex of hell starts with skyrocketing compensation and debt costs driving up taxes. Most of these taxes will be on corporations, a good target and they don’t vote. The corporations then decide to leave town, in this case it was liquor manufacturer Diageo, a maker of Crown Royal whiskey, who laid off 103 employees and Honeywell who laid off 75 employees. The remaining businesses in town are saddled with rising taxes to cover the cost of those who left, spinning the vortex faster.

The first move by the town to prevent bankruptcy was the elimination in 2013 of three of its biggest paid city employees. This did nothing and Amherstberg went into “provincial protection”, a process in the private sector that would be called bankruptcy.

At the time of cash insolvency the town had $41 million in debt and $14 million in unfunded retirement health care liabilities. The town has an annual debt payment of $4.1 million, raised $16 million through its property taxes and had a $26-million budget including water and sewer charges.

Springhill, Nova Scotia

This town recently went insolvent (bankrupt) and had to “dissolve itself.”

Founded in 1790, it was incorporated in 1889. It is part of the huge demographic challenges that face the Atlantic Provinces. They are seeing the working-age populations of their towns shrink at the same time aging populations, aged more than 65, are growing. The Ivany report on the province looked with some detail into the demographic tsunami. It found some towns saw heir-working age people shrink by 30% at the same time aging populations grew by 45%. 

In January of this year the town singed a new contract with its police force that saw a salary increase of 18.5 per cent over four years. By March they had created a resolution to dissolve the town on March 31, 2015, effectively becoming a ward of the province.

Keep an eye on 2014; there will be many more of these situations to come.

Is Guelph in danger of becoming insolvent? As this article points out, it builds slowly and occurs suddenly. Our city is now at a crossroads. The new council has a mandate to either continue increasing staff numbers, giving overly generous salary and wage settlements; allowing the pension liabilities to grown exponentially. Or scaling back public employee costs through attrition, staff reorganization and freezing pay until staff costs can be brought under control.

This is without doubt the least understood of all issues facing the electorate in October. It is difficult to look well down the path to understand that the actions of the present administration will affect employee costs in future years, many, many years.

Guelphspeaks, along with GrassRoots Guelph, will continue to alert citizens of this serious situation and inform citizens of the imminent dangers of failing to curtail the growth of employee costs.

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