Reprint: Making the Neighbours Pay: The Hidden Costs of Municipal Amalgamation

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Making the Neighbours Pay: The Hidden Costs of Municipal Amalgamation

This article contained in a newsletter published by the Bar Association  is a well written and qualified piece arguing against the notion of “amalgamation”. The writer, in house lawyer for Kings County, makes interesting commentary. 

While we have been careful that we are not advocating “amalgamation” clearly the message or concern of our political friends that this is our end game. To be absolutely clear we strongly believe whatever the outcome of a study, it is paramount the community identity is preserved which  is undoubtedly the wish of all citizens.

By HEIDI WALSH SAMPSON
Municipality of the County of Kings

Nova Scotia is facing challenging demographic and economic trends which have placed some of our municipal units in financial distress.  In the face of an aging population, outmigration, reduced labour pool and a shrinking tax base, dissolution of some of our smaller, rural municipal units may become an unavoidable fact of life.  In the quest for dissolution of financially troubled municipal units, the focus has been to ask whether amalgamation can provide the ‘absorbed’ communities with adequate government service while avoiding ‘bankruptcy”.  Another question which may deserve more attention is what the financial impact of amalgamation is on the ‘receiving’ municipal unit is as well.

There is a cautionary note to sound when we approach amalgamation as a broad-scale solution to the demographic and economic challenges.  Amalgamation has garnered some currency amongst citizen advocacy groups interested in streamlining local government and reducing what is perceived to be a disproportionate tax burden for the services received.   As tempting as amalgamation may seem, it may fail to offer the benefits hoped for and may ultimately result in a less responsive local government with less representation and higher costs.

In theory, the argument for amalgamation of municipal units is compelling. However, a review of scholarly work reveals that substantial cost-savings cannot be obtained through the consolidation of municipalities.1 The question then becomes, if the scholarly literature discredits the cost-effectiveness of amalgamation, why does it continue to hold such allure for its proponents.  “It has been argued and shown that, the consolidation approach is underpinned by what can only be characterized as leap of faith assumptions.  These assumptions pertain to the probability of creating more cost-effective structures of municipal governance.”2 An examination of these leap of faith assumptions bear further examination to determine whether amalgamation can, indeed, offer a more cost-effective, efficient and responsive local government for amalgamated municipal units.

The costs associated with municipal amalgamation are twofold: (i) the transitional costs; and (ii), the future operating costs.  Proponents of amalgamation will often argue that the onetime upfront costs arising from amalgamation far outweigh the long term savings to be gained by amalgamation.  Again, the reality indicates that these cost-savings are illusory as the transition costs almost always exceed projections.3 For example, the amalgamation that resulted in the creation of the Halifax Regional Municipality was projected to cost less than $10 million but resulted in actual costs exceeding $40 million and the projected cost savings and economies of scale that were promised never materialized. More troubling was that taxes to residents as well as municipal debt increased significantly.4  Part of the problem lies in buried costs which may not be apparent when planning for amalgamation.

The second element of the cost savings debate is the anticipated savings to be gained by eliminating duplicate administrative branches.  The Canadian experience has been, however,   that the projected savings from municipal amalgamations do not materialize. “When municipalities amalgamate, some duplication is obviously eliminated.  In particular, the number of politicians and bureaucrats may be reduced.  On the other hand, when municipalities with different service levels and different wage scales merge, expenditures may increase.” 5  It has also been observed that “(s)alaries and benefits tend to equalize up to the level of the former municipality with the highest expenditures. This upward harmonization of wages and salaries generally outweighs any cost savings.” 6   Therefore, in smaller municipal units, those employees who survive the cut will want to demand wage parity with their counterparts at the larger municipal unit and this will result in higher operating costs for the amalgamated unit.

The empirical evidence indicates that the ‘economies of scale’ argument fails as well.  It has been observed that “(r)esearchers seem broadly to agree that roughly 80% of municipal services enjoy no economies of scale. The evidence says pretty unambiguously that the lowest observable level of per unit costs for most services are compatible with very small municipal units.[..] Moreover, there are significant diseconomies of scale beyond relatively small populations numbers.” 7  This should be of concern for amalgamating municipalities as it has been “found that service delivery and administrative efficiencies are achieved with high-density developments, but are compromised with spreadout, low-density developments that are more costly to serve.” Accordingly, amalgamation may not achieve the economies of scale hoped for rather it merely avoids insolvency for the dissolving unit by spreading the operating costs of the dissolving unit over a wider tax base.

Even if we accept that amalgamation does not offer improved efficiency, access or cost savings, amalgamation of municipal units may be unavoidable in Nova Scotia as a result of the specific demographic and economic trends that we are facing.  It has been observed that the risk for bankruptcy of municipal units in Nova Scotia is actually quite low in comparison to other more notable municipal failures such as the City of Detroit.  This is a function of the tight borrowing restrictions placed on municipal units in our municipal legislation.  Although there may be limited risk of default on municipal debt that may not account for some other liabilities, including significant environmental liabilities, which arise from poorly managed or aging infrastructure in the dissolving municipal unit.  Where a municipal unit has failed for years, and in some cases decades, to upgrade or maintain sewer systems, water utilities and roads systems, what was formerly considered an asset of a municipal unit may, in fact, be more properly considered now a liability.  In instances such as these, unless the receiving unit receives financial support for other levels of government, amalgamation may result in the receiving municipal unit absorbing a sizeable infrastructure deficit formed by the dissolving unit over a considerable amount of time.  For the dissolving municipal unit, it may simply be a way to make the neighbours pay for years of poor management and bad decisions.

1 Sharma, A, The Paradox of Amalgamation: An Analysis of Municipal Restructuring in Ontario, School of Graduate Studies, McMaster University, June 2004 at page 3
2 Sharma at page 16
3 Slack, E, ‘Does Municipal Amalgamation Strengthen the Financial Viability of Local Government? A Canadian Example’, International Center for Public Policy Working Paper 13-05 March 2013 at page 14
4 Cowley, Brian Lee, ‘Surviving and Thriving in an Irrational World’, Presentation of AIMS, April 30, 2009 at Page 7.
5 Slack and Bird at Page 7
6 Slack at Page 21.
7 Cowley at page 5.
8 Slack and Bird at Page 6.

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