Aug 12, 2013 – 6:02 PM EDT -
In the weeks since Detroit formally filed for bankruptcy, some Canadian officials have been pooh-poohing the suggestion that the Motor City meltdown might affect us.
Oh, don’t worry, they say. Detroit is a special case that won’t spread. Besides, we have a completely different system here in Canada. Those U.S. problems can’t hurt us.
Well, that’s demonstrably wrong. Detroit’s bankruptcy is already rippling through world financial markets and is driving up borrowing costs for everyone. And it will affect us, too.
Last week, Battle Creek and two other Michigan communities with good credit ratings yanked back $130 million worth of bond sales because they found the cost of municipal borrowing had suddenly spiked.
Experts told the Detroit Free Press that bond buyers were “frustrated” by what was happening in Detroit, where they are going to be left holding the bag for the lion’s share of the $18 billion or more the city owes – most of it for pensions and benefits – and can’t pay back.
Some bond holders are dumping their holdings. Bond yields, or interest paid, jumped by 18 basis points to 3.72 per cent last week, erasing $14 billion in value from the $4 trillion U.S. municipal bond market, according to S&P Dow Jones.
That will affect Canadians because our cities have the same major problem that sunk Detroit: we borrow too much on the international bond market and we carry massive, unfunded pension liabilities on our public books that most voters don’t know about.
The province of Ontario’s unfunded liabilities alone are more than $100 billion, according to the PC Party. Ottawa’s unfunded liabilities are estimated to be more than $200 billion, the Canadian Taxpayers Federation say. Our cities owe tens of billions of dollars more, and some of them won’t be able to pay it back when interest rates rise again, as they will.
Canadian public pension expert Bill Tufts told me Monday that the day of reckoning will be no less painful on this side of the border when we eventually notice the cancer eating away at our own government finances.
For instance, pension costs are so high for the City of Montreal, which has $600 million in pension liabilities, that pension contributions are the second-largest budget item, after the police budget.
Per capita, the City of Windsor’s situation is even worse. It carries $317 million in unfunded pension liabilities on its books, mostly for retirement benefits owed to retired city workers, cops and firefighters.
How bad is Windsor’s liability? “Canada’s Detroit might just be a stone’s throw across the river,” says Tufts, author of Fair Pensions For All, a critique of public pension costs.
The nasty strike Windsor went through in 2009 over post-retirement benefits shaved only $35 million off the $96 million the city owed on its books for PRBs at that time.
Compare Windsor’s skyrocketing public sector wage costs with its plummeting private sector wages and you have an “unsustainable” crisis-in-the-making, Tufts says. He calls the contrast between the city’s private and public finances “catastrophic.”
Windsor’s public sector wage and pension costs rose by 47 per cent between 2002 and 2011. Meanwhile, private workers’ wages dropped from an average of $47,600 in 2000 to $36,800 in 2011, Tufts says, quoting inflation-adjusted Statistics Canada figures.
In Windsor, the average compensation costs per firefighter were $138,000 each in 2010 including pension costs, according to Ministry of Municipal Affairs documents. Yet the average income of a Windsor retiree is $24,700. Firefighters’ pensions of about $70,00 are nearly triple the average for other workers.
“Those numbers are catastrophic and eventually you’re going to see the same hollowing out that Detroit has,” Tufts says of the burden of public wage costs on taxpayers. “That’s where Detroit was a decade ago.”
If Windsor raises taxes to cover those costs it will almost certainly experience an exodus of its remaining employers, Tufts warns. He quotes U.S. municipal bond expert Meredith Whitney’s description of the tax/exodus relationship as “the vortex of hell.”
Windsor’s unfunded liability problems are so severe they rate a prominent mention in the city’s Standard and Poor’s credit rating. Despite Windsor’s low debt, the agency said last year: “the city’s large unfunded liabilities, particularly the post-retirement benefits, which are considerably higher than those of domestic peers, somewhat encumber its profile.”
“It will happen here – it’s beginning,” Windsor Mayor Eddie Francis acknowledges of Detroit’s debt crisis. “It’s just taking a different form here.”
When a city like Toronto finds it can’t afford to build a new subway line because all of its resources are eaten up by wages, and asks the province to raise taxes to pay for one, that’s an indication of how badly budgets are out of whack.
“Governments aren’t investing in infrastructure any more, they just keep raising taxes,” Francis points out. The day of reckoning is reached when they can’t raise them any more – a point Windsor reached years ago.
Tufts believes other cities will reach that point after the next big financial shock, which is coming. “We don’t know when it will be of what it will be, but it’s coming and it will shock the foundations.
“I think it will cripple a lot of (Canadian) cities and put them on their knees.”