Detroit and the lost history of Canadian municipal insolvencies

How to prevent a return to the past? Through data visualization, of course.

Eric Thayer / Reuters

Detroit has gone bankrupt once before — sort of. In February 1933, before U.S. municipal bankruptcy laws were enacted, the city defaulted on its $350 million in outstanding debt (equal to $6.4 billion today). Many of its suburbs joined in the insolvency. On the American side of the border, Dearborn, Farmington, Pontiac and Royal Oak all defaulted; on the Canadian side, Windsor, Ont. went down with the lot.

In those days, Windsor was a much smaller city. East Windsor, Sandwich and Walkerville were separate municipalities and all were in default by 1934. A 1935 act of the Ontario provincial legislature consolidated these cities and their debts into contemporary Windsor, and the debt was slowly repaid.

The situation is very different today. Canadian cities have been remarkably reliable financially since WWII — much more so than their American counterparts. In 1933, though, you’d never have guessed things would turn out that way.

Municipal insolvency was common elsewhere in Ontario and in the rest of Canada. As much as 11 per cent of Canadian municipal debt was in default in 1935 – a much higher rate than in the U.S.

While Canada’s flurry of municipal defaults back then was triggered by the onset of the Great Depression, its true cause was over-issuance of debt, which had left cities vulnerable to a downturn. Between 1919 and 1932, municipal debt outstanding rose by 90 per cent ­– reaching a stunning 36 per cent of Canadian Gross National Product. This was just local government debt: As I reported in a Macdonald-Laurier Institute study last year, provinces also carried heavy debt loads at the time.

By the late 1930s, however, the Canadian municipal default crisis was well on its way to resolution. After WWII, I could only find one post-war Canadian municipal bond default – that of the now dis-incorporated city of Jacques Cartier, Que. during the 1950s.

Canadian cities appear to have benefited from much stronger provincial control over their borrowing relative to that which existed before the Depression and what we see today in many U.S. states. Some provinces must approve individual municipal bond issues, while others limit a city’s debt outstanding or debt service costs. Overall, municipal debt servicing burdens in Canada are quite low. According to Statistics Canada, the nationwide ratio of municipal interest payments to revenue was only 2.1 per cent in fiscal year 2013.

Still, recent declines in city debt service burdens are attributable to historically low interest rates that have persisted in the wake of the 2008 financial crisis – rather than to debt repayment. And while the debt service burden is relatively low on average, there are exceptions. Montreal’s financing costs accounted for 7.7 per cent of consolidated revenue – well above the national average. Toronto and Vancouver, by contrast, faced interest bites of less than three per cent each.

Also, municipal debt loads have generally been on the rise over the past decade. Kyle Hanniman, a post-doctoral fellow at the University of Toronto, reports that municipal debt outstanding bottomed out in 2000 and has been increasing ever since.

How to ensure municipal debt burdens don’t get out of hand again? Keeping tabs on city finances through the Internet is one way to go about it. Governments throughout Canada post their financial data online. Ontario’s Ministry of Municipal Affairs and Housing even provides a central repository for city financial reports in the nation’s largest province. But although the information is plentiful, it is presented in accounting reports — no pleasant or easy read.

We can make that information more accessible. Recently, Gabe Sawhney, director at Urban+Digital Toronto, and a group of colleagues in Toronto used a suite of open source tools published by the Open Knowledge Foundation to create visualizations of their city’s budget. Why not replicate that for all Canadian cities?

In California, I oversaw the California City Credit Scoring project. We downloaded financial reports for 260 cities with populations over 25,000, extracted relevant data and then used it to compute credit scores for each municipality. A similar effort would be possible in Canada given the amount and quality of available government financial reporting. Ultimately, users will be able to compare spending priorities across municipalities and make up their minds on whether their city is spending too much or too little on public safety, social services or culture viz a viz peer cities across the country.

Greater public awareness of how tax moneys are being collected and spent, and how much money is being borrowed, can help cities avoid the fate of Detroit. And while Detroit’s 2013 crisis is in no immediate danger of spilling over into Canada as it did 80 years ago, an ounce of prevention is worth a pound of cure.

Marc Joffe is principal consultant at Public Sector Credit Solutions in San Francisco. Until 2011, he was a senior director at Moody’s Analytics. You can contact him at: marc@publicsectorcredit.org




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Detroit and the lost history of Canadian municipal insolvencies

  1. Gee .. didn’t know that municipalities had unions and bloated
    unsupported public service pensions back then. I mean, why
    else would a municipality go bankrupt ? :)

    • He’s writing from San Francisco….and not comparing US and Canadian regulations

      On edit….I meant ours aren’t allowed to run deficits.

      • @EmilyOne: Some US states require cities to have balanced operating budgets. Like US cities, Canadian cities can and do borrow to support their capital programmes. As I say in the piece, Canadian cities are not in imminent danger of default.

        @BGLong:disqus defaulted during the Depression because of over-borrowing and declining revenue; public employees were not unionized, but some had pensions. I find no evidence that pensions triggered defaults during that period.

        • Canadian cities….I should specify Ont here… can’t have deficits. They can issue bonds to raise money for major items like infrastructure. Buying those bonds is normally a pretty safe purchase….so they’d better bloody well NOT be in danger of default. LOL

          Thanx for the reply

          • Marc- The Local Authorities Pension Plan has an unfunded liability of 5 billion dollars. In a city like Red Deer, Alberta, this amounts to a $40 million tax liability that is wholly unaccounted for in our municipal debt load. I’m sure that we’re not the only city facing this. What implications might arise in the short and long term regarding this situation?

          • If you mean that for Marc you should hit ‘reply’ on his post and reprint.

            You wouldn’t like the answer I’d give you anyway LOL

          • If you add up all Canadians government debt, add in debt, plus pensio shortfalls, crown corp losers like CHMC, Air Canada, GM, CBC et all, AECL liabilities…. city, provincial plus federal including FN and territories….

            Canada is approaching $3 trillion in governemtn debt and liabilities.

            Fact is Canada is bankrupt. Its why governemtn prints money to dilute the currency and inflation, real inflation is about 7%. Government lies about this, but beef rib eye going from $16 to $23 isn’t 1.2% inflation.

            But the liberal debt spenders and government bloat, union greed take their toll when your politicians are corrupt to the core.

          • Wrong. Toronto has billions in debt and keeps adding deficits. $4.4 bullion and rising, they have even gotten a billion dollar bailout already. Remember, when you move to a city, you inherit its debts. Part of why I would never move to Toronto, Montreal, Winnipeg or Vancouver….too much liberal spending debt.

            http://www.thestar.com/news/gta/2011/06/27/toronto_debt_44b_and_rising.html

            Above is Toronto’s debt and deficits are the addition to the debt. Fact is Toronto is hyper taxes, union bloat and massive non-value added waste with huge debts. I even told my employer in 2006 when they wanted me to move there, that I needed 25% pay premium for higher city and provincial taxes or I wouldn’t go. In 2007 I benefited as I didn’t have to move to Toronto and got a 6 month buy out. Had a job in 2 weeks and no moving and maintain lower taxes.

          • No, not wrong. Sorry.

            And you don’t ‘inherit’ any debt….people move around all the time

            Toronto has more people than Alberta

            BTW Libs left Harper a huge surplus….Harper was the one that blew it, and gave us a structural deficit instead.

          • Sure do inherit debt when you move into a city. Nothing on our taxes, visible or hidden taxes says this is for past debts you didn’t benefit from nor voted for.

            When you move to a city, if the city/province/country is in debt you inherit the payments for such when you buy/move in. It is why in some US cities you can buy homes for $1000 as no one wants the tax liabilities. So run down, 74% property tax increases just kills wanting to live there. Even renters move out as rents go crazy high for what you get. Its why so many neighborhoods were just bulldozed.

            Its why population is decreasing in Detroit, high taxes and not much services as union greed over the decades has caught up with reality. Good place not to live if you are a productive person and why Detroit incomes are so low.

          • And when you move somewhere else, that past tax bill disappears, you don’t carry it for life. While you live in the cities you get all the bennies as well you know. If you live out in the boonies, you’ll have a very low tax bill…..but you won’t have any benefits of city life either.

            ‘Union greed’ …..hahaha….what did the execs make? And they were the ones that caused the problem. The workers don’t create or decide on the cars….they just put them together.

            The burbs of Detroit are booming…..they have high tech….the old industrail base of Detroit is what crashed.

            You have confused ideology with reality.

        • Just trying to be snide, Marc .. sorry.

        • Pensions can trigger defaults as the short falls require too much pay in to compensate. Can’t put 110% of the budget to make a pension solvent. But crooked politicians make promises but never paid their way for 5 decades, the ponzi scheme fails. And it is and has been run like a pozi scheme.

      • Canadian cities most certainly do run deficits – large ones sometimes. Winnipeg had a massive debt hangover from the Norrie years that took a decade to crawl out from under.

        • A deficit and a debt are two quite different things.

          Ontario munis are not allowed to have deficits…I don’t know what Manitoba laws are like, but much the same no doubt.

          • They are allowed to run CAPITAL deficits, not operating deficits. What that basically means is they’re only allowed to borrow to finance infrastructure, not services. Provinces are allowed to run both types.

          • Then Manitoba is like Ontario. No deficits are allowed.

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