Many have asked us over the past week to comment on the comparison of Detroit with Ontario cities and ask: “Could it happen here?” Our response has been that Ontario cities are facing the same funding crisis as cities across the United States.
Before we explain how this could be possible, it is essential that readers understand what caused Detroit to file for bankruptcy. Then we can compare the two precincts.
Detroit, like Ontario, was once a thriving manufacturing centre driven by the automotive industry. In the good times the City of Detroit could count on massive tax revenues from business. These taxes were spent to create the public infrastructure as we know it; schools, arenas, stadiums, police, fire departments and so on. However, more important than the services that were available was the staff required to run them.
With so much money to spend, Detroit was willing to overpay in all areas of the public sector, including wages, benefits and pensions for their employees.
We can see the similarities with Ontario. Decades of economic growth built largely around the automotive industry and fueled by the world’s lowest hydroelectric costs, provided Ontario with decades of revenue growth from taxation.
The growth of the global automotive industry, with much lower employment costs than Detroit’s highly unionized workforce, created lower-priced cars which began to erode Detroit’s industrial base. As employment became scarce, hundreds of thousands of people left Detroit for better opportunities elsewhere and the tax base was decimated.
But the public sector costs remained. And driven by highly successful unions, the public sector continued to expand.
Here in Ontario, the globalization of the auto sector combined with the mismanagement of Ontario Hydro’s costs- resulting in some of the world’s highest energy charges- has decimated the tax base growth in the same manner.
Many people suggest that cities in Ontario cannot go bankrupt because they are not allowed to run deficits in their budgets. However, they are allowed to make financial commitments against future revenue, which is essentially the same thing.
The cities of Ontario currently have a combined $17 Billion in long-term debt, $5 Billion in employee benefit liabilities and another $10 Billion debt for the pension plans of their employees.
Excessive wages, benefits and pension promises: Created cities which have some of the highest-paid municipal staffs in the world
By committing to excessive wages, benefits and pension promises we have created cities which have some of the highest-paid municipal staffs in the world. Cities across Ontario have created an imbalanced financial structure whereby more and more of your money is going into staffing costs, leaving an infrastructure deficit of $60 Billion.
What happens if this money is not found? Lets hope it does not get to the point of Detroit where the city could not even afford to run its traffic lights.
As money becomes ever tighter at the municipal level, Ontario cities are asking the province to bail them out. Is that possible? Ontario’s provincial government in the past 10 years has doubled their own long-term debt and currently is facing a bill of more than $235 Billion. Add in the uncontrolled deficits and an interest payment on our debt in excess of $10 Billion per year, and it becomes clear that Ontario is faced with its own spending crisis and clearly has no money to bail out Ontario’s Municipalities.
Cities are in a crisis in Ontario as funding for vital services is horribly inadequate. Cities know that they need to attract businesses to pay property taxes and create jobs. Unfortunately cities have felt the exodus of 255,000 manufacturing jobs that have left the province since 2003
The rise in public sector compensation happened in all cities across the province. In 2011 cities spent $16.2 Billion for compensation to its employees. The amount spent in 2002 was $8.9 Billion, almost doubling in a decade. If cities had kept their spending in line with inflation and economic growth they would have an extra $5 billion a year today to spend today. This would be more than enough to fund the province’s infrastructure needs and their share of Metrolinx too.
The cost of city pensions in the OMERS pension plan went from $400 Million in 2003 to $3.0 Billion last year. Not only have the contributions skyrocketed but the plan has an exponentially growing shortfall that is now $10 billion in the hole. And of course, this shortfall must be funded from city taxes.
Pensions were designed to keep retirees from government jobs out of poverty in their golden years. They now allow city employees to retire in the economic elite of Canada.
Now retirement comes much earlier than ever before. Many police officers for example, will retire in their early 50’s and the average city employee will leave at age 58. Employees will leave on a pension worth 70% of the final few years average salary. In the province of Ontario there are about 14,000 public sector retirees earning pensions of more than $100,000 a year.
Public sector compensation has catapulted government workers into a class of their own. In large contrast, Statistics Canada shows that Ontarians in the private sector have seen their average working wage stay flat for the past decade. It has actually shrunk since 2008 when adjusted for inflation and in 2011 the average Ontario wage was $42,600.
Could Ontario suffer the same fate as Detroit? If things don’t change, it becomes not a question of if, but rather when? Lets hope cities in Ontario wake up before it is too late.
Bill Tufts, Fair Pensions For All, founded in January 2009, our goal is to promote an honest and fair analysis of our pension system; to expose abuse and waste within the system; to develops and promote new ideas and concepts on pensions based on fairness for all.
We maintain that it is every Canadian’s right to receive sufficient income in retirement to afford an acceptable quality of life.
