The 2008 Report Card for Municipalities: A Failing Grade

As mentioned in my last post (March 8), municipal governments in Canada are growing rapidly, which is bad news for taxpayers given the demonstrated inability of municipalities to operate efficiently and control costs.

A review of key indicators for municipalities for 2008 shows why their performance deserves a failing grade.

Salaries and benefits for employees typically represent more than 50% of the operating budget of a municipality. Since municipalities are unwilling to take the steps necessary to bring the escalating costs of employing their existing workforces under control, the next best option is for municipalities to minimize the growth in the number of their employees.

Indeed, a strong argument can be made that municipalities should freeze the growth in the number of their employees until they are operating as efficiently as the private sector. That would require resolute action by a majority of elected municipal representatives and unfortunately shows no sign of happening.

Then what to do? Restricting growth in municipal employment to no more than the growth in population would be a reasonable starting point.

Canada's population grew by 1.2% in 2008. In sharp contrast, municipal government employment grew by an astounding 3.9%, over three times faster than the growth in population. In addition, employment at business enterprises owned by municipalities, such as public transit companies, grew by 3.5%.

Are taxpayers receiving any new services as a result of this hiring rampage by municipalities? It is hard to think of any. Most municipal governments actually are quite vocal in claiming that property taxes have to rise much in excess of the inflation rate simply to, at the very best, maintain the existing level of services. So the question remains: what are all of these additional employees doing for taxpayers?

Several sub-components of the Consumer Price Index (CPI) also provide important indicators of how municipalities are performing. They all show a failing grade.

The appropriate benchmark is the increase in the overall CPI in Canada, which for the 12 months ending in December 2008 rose by 1.2%.

Three sub-components of of the CPI are directly under the control of municipal governments. The most significant of these in terms of its impact on taxpayers is property taxes. They rose by 3.2% in 2008, over two and a half times the overall increase in the CPI.

If municipalities are cutting back on services (two examples would be: reducing the frequency of recycling pick-ups or extending the time before your street is plowed to remove snow), which many are, this 3.2% increase actually underestimates the rate of inflation in property taxes. The reason for this is that the CPI property tax component is based on the assumption that municipal services continue at the same level. If Statistics Canada, which produces the CPI, actually did measure the level of municipal services and found a decline, it would adjust upward the increase in the property tax component of the CPI to reflect this.

The CPI sub-component for water rose by a staggering 9.1% in 2008, nine times more that the overall rate of inflation. This sub-component of the CPI is separate and distinct from property taxes and measures the prices charged by water utilities which are generally all owned and operated by municipal governments. Given that municipalities do not pay anything for water, these cost increases are entirely related to the operation and maintenance of water and sewer systems.

The third separate sub-component of the CPI for which municipal governments dictate price levels is local and commuter transport, which includes bus, subway and taxi fares. This CPI sub-component rose by 3.6% in 2008.

Each of these indicators demonstrates an important area where Canadian municipalities performed poorly in 2008. Taken together, they reveal a major failure by municipalities to deliver essential services to taxpayers at a reasonable cost.

Distressingly, there is no sign of an improvement in performance in 2009. In an environment where hundreds of thousands of Canadians in the private sector have lost their jobs (with even more job losses predicted) and where inflation is expected to be in the area of 1.0% for the year, Toronto has already announced an increase in property taxes of 4.0% and the city of Ottawa an increase of 4.9%.