GENERAL ARTICLES

Municipal Debt

Herewith the views of Canada's No. 1 authority on the pressing problem of municipal finance

THOMAS BRADSHAW June 1 1935
GENERAL ARTICLES

Municipal Debt

Herewith the views of Canada's No. 1 authority on the pressing problem of municipal finance

THOMAS BRADSHAW June 1 1935

Municipal Debt

Herewith the views of Canada's No. 1 authority on the pressing problem of municipal finance

THOMAS BRADSHAW

Editor’s Note: Whenever any municipality gets into financial trouble, nearly always the suggestion is made, “Send for Thomas Bradshaw.” Mr. Bradshaw has studied municipal finance from many angles. As a partner of an investment house before the war, he saw one side of it and made himself an authority on the subject. He was drafted during the war to the position of Commissioner of Finance for Toronto. He engaged in the business of administering the finances of Canada's second largest city. Now he is president of the North American Life Assurance Co., which is a large investor in municipal bonds. But he is almost universally regarded as a man whose viewpoint on the question has no prejudice from any angle.

In these depression years he has made special studies of the finances of Windsor, Winnipeg and Vancouver, and has acted as chairman of supervisory boards managing the affairs of a dozen or more Ontario municipalities in default.

NOT LONG AGO, mayors of some sixty-five Canadian cities met in Montreal to discuss the financial problems of their communities.

In a body, they travelled to Ottawa to lay before the Cabinet their claims for relief from relief and their hopes for a lightening of the burden of interest charges on their debt.

This mass meeting of mayors brought home to Canadians the acuteness of our Canadian municipal ills.

Many of these ills were outlined at Montreal and Ottawa. Some startling facts came out. There are towns and cities with from twenty-five to fifty per cent of the people on relief. Many municipalities are collecting but a small percentage of their tax levies. A large number have debts amounting to much more than $200 per capita, as high as $1,000 in one case.

Municipal finance has become a major national problem. It is a complex problem, with many elements in it. There is no single cause and no easy cure. Its solution demands much study; much more than it has been given.

There are certain basic elements in the problem common to all or most municipalities. These may be defined as follows:

1. A heavy burden of debt incurred as a result of undue optimism, often under the stimulus of boom conditions or through the unwarranted extension of municipal activities.

2. Widespread over-assessment of properties—the source of from eighty to ninety per cent of municipal revenue—in comparison with present day values.

3. Over-taxation, sharply revealed in declining tax revenues and mounting tax arrears, caused by failure to live within income.

4. The new burdens occasioned by the depression, the chief being the cost of unemployment relief.

In greater or lesser degree these problems are common to most municipalities. In many they have led to acute

financial crises, too frequently manifested in a default on bonds or even the threat of repudiation of debt.

Canada has had an honorable record in public finance. And until these depression years came upon us, the record of Canadian municipal finance was excellent. Most of our towns and cities managed their affairs well and took pride in keeping their promises to investors.

Today, defaults by municipalities have become alarmingly common. Of our nearly 1,400 million dollars of outstanding municipal debt, more than 140 millions is in default—nearly eleven per cent of the total. In Ontario, the province whose municipal bonds have always ranked among the highest types of investment, approximately one bond in five is in default.

Only in the three Maritime provinces is there no such blot on municipal credit. The explanation undoubtedly lies in the careful, frugal spending of the people of that area. Even in Quebec the number of defaults is small. Quebec Province has the reputation of regarding a municipal default as a serious matter, and immediately applies remedies to effect a cure.

If these defaults were the product merely of depression conditions, and if they were all accompanied everywhere by an earnest effort to remedy the conditions that brought them about, we might regret them but we could not properly criticize anyone’s good faith. But this is not the case. There are two unpleasant facts we must face:

1. A large percentage of the defaults is the result of a past disregard of sound business principles. The depression merely brought on acute trouble which would have come anyway some time.

2. In many municipalities, and not only in those that have defaulted, there is widespread indifference to the

rights of those from whom money has been borrowed. In short, this means indifference to the municipality’s credit. This attitude reflects a shocking deterioration in our standards of public morality.

Municipal defaults do not comprise the whole of our problem of civic finance. They are only the most acute manifestation of it.

The Stigma of Default

TET US deal with the four chief problems outlined at the •*-' beginning; first with the problem of debt. Canada’s municipal debenture debt of 1.400 million dollars, if evenly distributed over the whole country, might not constitute an excessive burden. But there are some municipalities with no debt at all, and some with very reasonable debts. Others have excessively high debts. Only the latter will face serious difficulties in meeting their obligations. The others can handle their problems.

In numerous cases default on bonds has been resorted to, either because there seemed to to no way of raising the funds to pay tond interest or principal, or because it seemed easier to stop paying interest than to effect drastic economies or adjustments in other directions.

We may regret but we cannot seriously criticize the enforced default of an honorable debtor. Such a debtor is the one who frankly, if regretfully, acknowledges his position, discloses full information about his affairs, and seeks to arrive at a mutually satisfactory settlement in a spirit of common accord.

But even among our own Canadian municipalities, there are some debtors who are less honorable than that. They attempt to disguise their true jxisition. They decline to make any earnest effort to improve their financial affairs. Instead, they appear to spend more of their energy in evolving vote-catching ]x>licies, necessitating increased expenses and salaries, in order to ensure their own re-election. They seek or take advantage of provincial legislation, which in effect confiscates the creditor’s capital. Their

administrators attempt to put the creditor in a false light by applying unpleasant epithets to him. They do not hesitate to misrepresent what has been done in other circumstances, to urge unfair adjustments in their own case. They make addresses on the evils of our economic system to divert attention from the obligations that civic credit and personal honor impose upon them. This is the timehonored trick of the demagogue.

To cry aloud for social or economic reform is no way to meet one’s obligations. To such reform, every forwardlooking citizen is committed. But reform need not imply breaking faith with those to whom one has made solemn and equitable pledges.

And one reform above all others which is urgently demanded by our conditions in Canada is a reduction in

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the cost of government, and what should follow—reduction in taxation. The elimination of duplicate and costly services, extravagant expenditure of the citizens’ tax money, presents an opportunity for the greatest of economic reforms.

Dishonest or careless default is not reform. Neither is callousness of any kind toward public credit.

The banker’s three “C’s” of credit— character, capacity and capital—apply to public borrowers as well as to private borrowers. Character comes first.

The chief asset ol any municipality is its credit. When its credit is gone, its ability to meet the expanding needs of its citizens in the future will be seriously cramped.

No city can fail to meet its obligations when due without suffering impairment of its credit, for which every citizen for generations to come, including children unborn, will pay.

It will cost more for such municipalities to borrow the essential capital for services that citizens need and will need. Industries will avoid the town whose credit is poor, and there will be less employment in the community.

The citizens of any municipality should be prepared to make any reasonable sacrifice to avoid the stigma of default. But if default is unavoidable, then it is even more necessary to avoid that type of default that carries with it any suggestion of sharp dealing or lack of honorable treatment of those from whom money has been borrowed.

How to Reduce Debt

THE PROBLEM of excessive municipal debt can be solved. In the case of most municipalities, the burden can be gradually lowered by:

1. More careful and economical sending policies to effect a gradual reduction of taxation and debt.

2. Refunding of bonds as they mature at the lower rates of interest now available to all sound borrowers.

3. Adoption for the future in a greater degree of the “pay-as-you-go” policy, and issuance of bonds for a shorter average term.

For the municipalities that have been forced to default, a reasonable and early settlement with creditors is essential.

Municipalities are brought into being by the various provinces, which are therefore directly responsible for their conduct. The parent body has accorded them in most cases too much latitude. They have allowed them to have their own way in creating debt, incurring expenditures, not balancing budgets, faulty assessments, inequitable taxation. Little or no supervision has been maintained over their records, inspection of their affairs, or auditing their yearly accounts. Recently some endeavors have been made by legislation to cure these defects.

The provinces have failed to realize that the debts incurred by their municipalities constitute a mortgage on the provinces’ assets, and that when a municipality gets into disgrace it is a reflection upon the province and injurious to its own credit. The power that created municipalities should feel the responsibility of its guardianship, and strive to bring them up in the way they ought to go.

New money can today be borrowed at lower rates. Gradually the interest burdens of the municipalities, the Dominion and the provinces are being reduced, and can be reduced further, so long as capital is assured of honorable treatment.

But such a policy can benefit only those borrowers who endeavor to protect their credit standing. Only the municipality whose credit is sound will be able to borrow money except at very high rates.

Unsound finance or dishonest action on the part of a municipality is much against its interests. Even the threat of these things is harmful. A single ill-considered and

inflammatory speech by the mayor oí a municipality may cost his town or city many thousands, even millions, of dollars over a term of years.

Avoid Rooms

rT'HE SECOND problem cited was that of inflated assessments.

Despite ingenious new taxes that have been devised by municipal authorities all over this continent, approximately ninetenths of civic income is derived from the tax on real estate. Real estate values have declined. They always decline when the general level of commodity prices goes down. Obviously, the assessor when he makes his rounds, should write down the assessment of each property to allow for the drop in value. But two things, apart from the difficulty of determining the extent of the drop, stand in the way.

One is that the municipality's bonds have been issued with the assessment roll standing as evidence of the value back of them. A rise or a fall in the taxable assessment brings about a rise or fall in the bond-issuing limit of a municipality. If the municipality is close to its limit, then a drop in the assessment may mean that borrowing must stop. This may prove embarrassing.

The other reason is that, just as realty values can decline more rapidly than assessment can be adjusted, both of them have had greater mobility than the scale of civic expenditures. Mayors, reeves and councillors can get votes more easily, in all except the smaller towns and villages, by spending money than by refraining from spending it. Once an expenditure has been established, it becomes someone’s vested right and is difficult to cut off.

So cutting the assessment often necessitates raising the tax rate. That is something that is very unpopular. Spending gets votes, but the tax rate that results from spending does not.

The most acute condition of overassessment, like the largest debts, is found in those municipalities that experienced the most “active” prosperity in the pre-depression days.

Towns and cities that “enjoyed” real estate or industrial booms, that overextended their investments in streets, sewers, schools, etc., that increased their assessments and spent money lavishly under the stimulus of general optimism, are today in very bad shape. There is one municipality with nearly $4.000.000 of bond and bank and other debts, that last year collected only $72.000 in taxes to pay all its expenses including bond interest. It was just another boom town gone wrong; one of those municipalities where a false optimism was promoted coolly and efficiently by people with factory sites or residential subdivisions to sell. There are other municipalities that have had similar experiences.

It is a question if any municipality can ever afford a boom. If “happy is the land that has no history.” then equally happy is the municipality that has no record of that kind of prosperity. Not only have land values dropped farther and tax arrears climbed higher in these municipalities, but there is more unemployment and thus relief charges are higher.

Assessments will have to be reduced gradually over a term of years. As the city's taxing power and its bond issuing authority rest upon the foundation of the assessment, this also will force a reduction in spending both on current and capital account.

There is only one sound principle in assessment and that is to make the assessment 100 per cent productive. Inflating the assessment effects no permanent increase in taxation sources.

And if, as we have seen, the chief cause of inflated assessments is a “boom.” nothing will contribute more to the stability of municipal finance in this country than a complete avoidance of real-estate and industrial booms. Many a city has experienced the. tragedy of unwise extension of the city boundaries and the city’s services into thinly populated areas. Always the hope is that the new taxable values created will

provide income to meet the interest on the ! money borrowed for the improvements. It ¡ does not always work out that way. The city often has to go on carrying the cast of | the improvements while the land served ; failed to earn any return either for its I owners or for the municipality. It comes I back on the hands of the municipality in the I form of tax-sale lands.

Any rapid boom that inflates city assessments and increases city expenses is gravely likely to be followed by a period of adjustment. This will be serious for the municij palitv just in proportion to the extent of the j false prosperity enjoyed under the boom.

Why So Much Education?

npHE THIRD problem cited was overtaxation of the citizens.

Income of the country has been cut by the depression. Practically everyone has shared ; in the reduction. People have less money to pay rents or to pay taxes. Properties that used to carry themselves do not do that now. Their owners have smaller reserve sources of income to meet the tax payments. So tax arrears have piled up.

Many municipalities have been very laggard in insisting upon prompt payment of taxes. They spend the full year’s budget, but collect only a portion of the revenue. The rest of the money is borrowed from the bank. This introduces another new item of | expense—bank interest. Much of the tax j arrears will never be collected. The burden falls on other property owners.

When you see a municipality with its ! tax arrears piling up. you may take for 1 granted that the municipality is levying i upon the property of its citizens a higher ¡ total of taxation than that property or those citizens can pay under present conditions.

Unpaid taxes, besides being the second chief problem of the municipalities, are the chief indicator of present or prospective financial difficulties in a municipality.

One reason for excessive taxation is the degree to which municipalities have taken on themselves new activities for the supposed benefit of their citizens. The list of municipal enterprises financed out of tax money runs all the way from abattoirs to zoos, and includes dozens of other activities in between.

Many municipal authorities claim that it is impossible to finance the modem municipality out of land taxes alone, or even largely so. That is quite true if municipalities are to continue to take up every new idea presented by public, politicians or press. Citizens should not clamor for services for which they cannot pay.

Again the basic cause is overspending. So the basic remedy is obvious: It is to reduce spending.

Most municipalities would have little difficulty in finding ways to do this within reason. Compared to the economies that private individuals have had to make, few towns and cities have done more than make a gesture of economy. *

Nearly every municipality has some one or more extra activities or enterprises lightly assumed when conditions were good, but now losing money that the citizens can ill afford to spare. No municipality should carry on any service that it cannot afford.

Educational costs absorb about one-third of municipal taxes. Free education is a splendid thing but the logic of burdening real estate so heavily to provide free education at a cost of $70 to $90 per child per annum, is doubtful. Should we not limit free education to that given in public schools, or else find some other source of revenue for continuing it beyond that? Education costs can be cut. Education may be good without being luxurious, and it is questionable if it needs to be carried to the present extremes in the upper forms of secondary education.

Above all, municipalities should cease to regard themselves as agencies for effecting large-scale social reforms that must be carried out on a national scale.

Progressive reform is just as desirable as is cultural advance. Most municipalities are ill-equipped, in technical personnel or in tax

revenues, to be the instruments of largescale social reconstruction. One must have some sympathy with the municipalities in the growing disparity between the jobs they have to do and the revenues they are able to collect. Provincial and Dominion finance legislation has imposed many new responsibilities on the municipalities, and reform of this legislation to relieve the municipalities of some of their resixmsibilities is undoubtedly necessary. But apart from new responsibilities imposed by outside legislation, a great many municipalities have walked blindly and blithely into new responsibilities that have proved much more expensive than they ever thought possible.

Finally, we come to the vexing problem of relief.

Governmental Supervision

IT IS NOT necessary to go into the long story of the experiments in meeting depression relief, of our belated recognition of the true nature and extent of the problem, of the dispute between different classes of governments as to who should pay the cost, and who should do the administration. Every municipality has had to meet this new expense, and the extent of the burden has not been evenly distributed.

One of the most iniquitous outcomes of the present system is the exploiting of the moneys disbursed for relief, and also those on relief, by candidates running for municipal office. In some places it is a by-word and a reproach. The whole thing should be administered free of local politics.

Some municipalities have paid the cost of relief out of taxes, wisely trying to save the money in other directions. Some have paid the bills by borrowing money, thus adding a larger interest charge to their burden. But everywhere relief has been a burden and promises to remain so for some time to come, even if in lessening degrees. Municipalities should not, by borrowed money, shift the entire burden of relief on to posterity—which undoubtedly will have its own problems.

The root of our relief problem is, of course, our unemployment situation, and its solution will automatically solve the other. It is not likely to be completely cured by Dominion or provincial action, but may be made less burdensome by each municipality courageously attacking its own local unemployment problem.

If fifteen out of every 100 men and women are out of work, could not the other eightyfive, by enlisting the help of industry, press, churches, social agencies and other organizations, help to place a substantial proportion of these fifteen back to work? If this were earnestly attempted in every community, we might find that our relief problem would assume relatively smaller proportions.

The municipal troubles that have been outlined and that have culminated in this wave of default, will have to be worked out slowly but certainly over a term of years. The solutions will be aided, let us hope, by an improving tone in world economic affairs. They will not be aided by a disregard of sound financial methods or a disregard of honorable obligations.

For the future, it will be necessary to provide stricter provincial control of municipal borrowings. All new civic or local improvement developments should require the approval of an independent provincial board and no borrowing should be permitted without such approval. The best place to control finances is in the control of new capital expenditures. Not all municipalities are equipped to exercise proper control, but a province can hire the best technical assistance and the best financial brains, and make these available to the municipalities in the control of their borrowings and in the audit of their accounts.

There is opportunity, too, for considerable reduction in the number of municipal units in the country. Obviously, we do not require all of our present total of over 4,000 borrowing, spending and taxing municipal governments. There are too many hands in the public purse. This is a job for the provinces individually to tackle.

Out of our experiences we may learn the lesson of the need for more cautious expansion, for more competent and even frugal administration. We will see how important it is to interest the more capable business men in civic affairs, so that the professional politician may have his unfortunate influence lessened.

Has not the local press—which should be the guide and philosopher of the community -—a duty to perform? Should it not, in season and out of season, aim to keep the municipality’s administration sound? Should it not be the fearless critic of fanciful spending and uneconomic schemes? The taxpayers, who are its subscribers and readers, expect this. And the influence of the press is mighty.

The chief asset of a municipality is not its citizens, for they are the municipality. Rather it is its good credit standing, the product of careful and wise administration of its affairs. A municipality with a good credit standing is certain to be one where the taxes are reasonable and civic services adequate.

In the case of an individual or firm who acknowledges bankruptcy, speedy action is taken. Within the space of a few days, an investigation is made. Assets are appraised; liabilities determined. A meetingof creditors is called and the full facts presented and considered. The debtor generally submits his offer. It is examined, and if found fair, and the creditors have confidence in his bona fides, it is either accepted, modified or the business ordered to be sold.

With a defaulting municipality, the matter is not so easily disposed of. Liabilities in the nature of debenture debt, extending many years into the future, have to be provided for. The only way is out of future taxes. Then the taxpayers’ ability to bear taxation must be measured. Nevertheless, if the proper provincial machinery is established to deal with such cases, it should not take more than, say, a year to determine the relief that should be given and to re-establish the municipality. True, its finances should be under governmental supervision for several years, even after an adjustment has been made.

The longer it takes to right the affairs of a municipality, the more difficult is it for the property owner. No one wants to deal with a bankrupt municipality. No one wants to locate in such a place. In fact, those there sometimes want to move away. No new businesses will be attracted to it. In the meantime, there is no movement in property. Values are declining. No new construction is carried on. Less and less pride is taken in the municipality by its citizens.

Provincial municipal departments and governments should speed up their investigation, the calling of creditors, and assist in the making ot honorable proposals for adjustment. In Ontario alone there are thirty-four municipalities in default, whose affairs have not been adjusted.

Could these and other Canadian municipalities have avoided default? It is believed that most could, if they had had sound business administration; if they had been properly controlled and supervised by the provinces which created them. Briefly, it is the view that each province should have a department of municipal affairs, which would superintend and effectively control the affairs of the municipalities in respect to budgets, debts, assessments, taxes, etc.