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.