Chapter 2: Challenges Facing Local Government

Golden Ears Bridge

Local governments in British Columbia are facing several key economic challenges that will have serious implications for revenues and expenditures. Concerns about the environment are fundamentally altering the global economy, significant population structure changes are coming, the role of municipal government is changing as it takes on greater responsibility, and the BC economy is in the midst of a major transition.

These macro-level changes are creating two British Columbias by widening the divide between – on the one hand – the rapidly growing population centres in Metro Vancouver, the Capital Regional District, and the Okanagan and – on the other hand – the resource-based communities in the rest of the province. Very different challenges are facing local governments in both situations.

Economic Impacts of Environmental and Energy Policy

[Back to Top]

Sustainability is a fundamental goal for British Columbia’s future economic development. This necessitates looking at value-creating activities in terms of their environmental impacts. The goal of sustainability poses a challenge for policy makers, as our economy continues to depend on industries such as construction, mining, oil and gas, transportation and forestry.

At present, industrialized societies face a monumental challenge to reduce greenhouse gas emissions. Most experts agree on the need for dramatic measures to address this problem. The challenge in BC is very similar to that of other industrial economies, with transportation, buildings operations and temperature control, and large industry each contributing close to one-third of total greenhouse gases.

Simultaneously, we should anticipate that energy prices will climb over the next two to three decades, as the cost of extracting scarcer fossil-fuel energy sources increases, and as climate change policies begin to shift more of the environmental costs of energy production onto the end user. For energy intensive industries in BC, the long-term trend toward higher energy prices signals that investments in energy efficiency and energy-saving technologies are a strategic priority.

Most analysts agree that part of the solution must be to shift the BC economy to a much “greener” base. This shift is needed not only to reduce greenhouse gases, but also to compete with economies in Europe and Asia who, as early adopters, threaten to move well ahead in the transition to a more energy-efficient economy. We must make not only greater efficiencies in the consumption of energy, but also major investments in the production of new technologies that will make dramatic gains possible.

The first major economic shift required is the rapid development and production of new technologies. The second is the rapid adoption of new technologies in goods and services production. In terms of the first, many nations and jurisdictions are pursuing industrial strategies that will generate rapid growth in the production of green technologies. To date, there has been only limited progress in BC. However, we expect the pace of adaptation to accelerate as policies favour reduced greenhouse gas emissions.

Implications of these changes for local governments are not entirely clear. Many local governments are under pressure to make shifts in their own practices. As global energy costs increase, the cost of operating municipal utilities, buildings and vehicle fleets will inevitably also increase. Senior levels of government will likely pursue policies that will inevitably shift some of the responsibilities and costs for reducing greenhouse gases onto local governments.

The tax base of local governments may also be affected by adaptations to climate change. One example of how climate change is affecting the economy of BC communities is the pine beetle epidemic. Without sustained cold weather in the winters, the pine beetle has been able to thrive and destroy large tracts of BC forest. Other industries such as agriculture, fisheries, and tourism may also be impacted by climate change. As some of the more intensive greenhouse gas emitting industries come under increasing demands to reduce emissions, there may be further industrial dislocation.

Local economies will be faced with additional and unpredictable demands and pressures going forward toward a goal of sustainability. The impacts on local governments’ costs and revenues cannot be ignored.

Population Structure

[Back to Top]

In many ways, population changes are more predictable than the other three challenges that will affect BC’s collective economic future. Over the next two decades, British Columbia’s population will continue to grow, age, become more concentrated in large urban areas, and become more diverse and multi-cultural. These four demographic developments will have financial implications for BC’s municipalities.

i. Growth

BC’s population will grow by approximately one million people over the next 20 years, and about 500,000 over the next ten years. Such population growth will exert significant pressure on local governments for new infrastructure and additional services. A growing population will create some economies of scale and a broader base to absorb some of these costs, but there will also be significant additional costs. Of particular concern is the need for local governments to provide new infrastructure sufficient to handle larger populations.

Chart F

ii. Aging

The general contours of the aging of the population are quite well known. The post-war baby boom had dramatic impacts on the age distribution of populations, which continue to be felt. Dependency ratios measure the relationship between those in their working years (aged 18 to 65) and those who are under 18 and over 65 and dependent, to one degree or another, on the adult working population. The following table sets out the changing dependency ratios over the years.

Chart GTable 3

Implications of an aging population for municipalities are considerable, as the shift in dependency ratios from youth to the elderly has dramatic implications for service needs. In response to this shift in the population, all governments will have to address new configurations of needs for housing, transportation, infrastructure, community facilities, health care services, education, and security services.

Furthermore, public services and public service employment are anticipated to change in response to these population changes. For example, need for nurses and home care workers may increase, while that for teachers may decrease.

iii. Regional Distribution

The largest rates of growth in population will continue to be in the Lower Island, Greater Vancouver and the Okanagan. In several regions, local communities will experience stagnation or declines in population. As these population changes take place, the impact on the revenues of local governments will be complex. For many rural municipalities, serious questions arise about the viability of the existing systems of financing and service delivery under these conditions.

iv. Immigration

British Columbia has – and will continue to have – relatively high in-migration over the next 20 years. Net movements from other provinces will average about 10,000 per year and immigration from other countries will be about 40,000 per year.

New immigrants, particularly from other countries, create both opportunities and challenges for local governments. A full realization of the potential contribution of immigrants often requires complex services. Roles of the provincial government, local governments, and contracted non-governmental organizations in providing settlement services vary widely throughout the province. Where service gaps exist, local government must often bear the costs of assisting individuals in crisis.

Changing Role of Municipal Government

[Back to Top]

Over the past two decades, local governments have increasingly been expected to take on many more roles than was the case in the past. However, while the roles and responsibilities of municipal governments have grown, the revenue tools and fiscal environment have actually become more constrained.

Just over 30 years ago, the BC government distributed substantial amounts of revenue to local governments on the basis of equalization principles. However, due to fiscal choices made at the provincial level, the municipal financing system has actually reverted back to earlier, less supportive principles. In addition, many less affluent BC communities often have relatively more pressing demands for supportive services, while at the same time having a lesser capacity to meet the costs.

Greater pressure is put on municipal revenues by increased competition for investment and human capital. Other challenges for local government include more complex social conditions, emergency preparedness and public safety, growing environmental problems, and other societal challenges. For example, infrastructure and housing are two areas where BC’s local governments have been asked to do more with less for many years.

i. Infrastructure

Local governments have always played a major role in infrastructure, but senior government off-loading has added considerably to that burden. When Think City asked BC’s local government leaders what their priorities would be if they could increase their revenues by five per cent, survey respondents indicated that repairing and upgrading local infrastructure was at the top of the list, far ahead of any other spending priority.

Over half of the entire infrastructure in BC is the responsibility of local governments. In the face of continuing population growth, the costs of developing and maintaining that infrastructure have become impossible for local governments to meet within the existing fiscal model. Urban transportation is one aspect of the infrastructure gap, with Metro Vancouver as an especially serious case. A large financing gap must be addressed in order to meet the needs for a modern, efficient public transit system.

Many local governments have deferred or put off expensive infrastructure projects due to lack of funding. Collectively, these decisions have resulted in the much discussed infrastructure deficit; a bill that can be delayed, but cannot be avoided. Meanwhile, the cost of maintaining and repairing an aging infrastructure is increasing. Modern, efficient infrastructure is absolutely critical if BC is to overcome the major economic challenges outlined in this chapter. The current local government infrastructure gap in BC – the gap between needed and available revenues – is in excess of $10 billion.

ii. Housing

Housing is another area where local governments have found themselves squeezed by more complex social problems on the one hand and less senior government support on the other. Housing was traditionally the jurisdiction of senior governments, but the federal government walked away in the 1990s and the provincial government followed in the early 2000s.

Housing costs in British Columbia, and particularly in the Metro Vancouver region, are very expensive. Recent data from Canada Mortgage and Housing Corporation (CMHC) shows that Metro Vancouver has the least affordable housing market in Canada. A January 2010 report from Demographia International surveyed 272 metropolitan housing markets worldwide and found Vancouver had the least affordable housing in the world when median housing sale values were compared to median household incomes. According to this study, the median house in Metro Vancouver sells for 9.3 times the median annual salary.

The average two-bedroom apartment in the Vancouver region rents for $1169 per month. To achieve the CMHC’s affordability threshold, which states that housing costs not exceed 30 per cent of income, this two-bedroom apartment requires occupants to earn a minimum household income of $46,750. The 2006 census revealed that 21 per cent of Vancouver’s renters, comprising 57,000 households, pay more than 30 per cent of their income in rent. And those numbers are certainly higher now. Last year, average rents in Metro Vancouver increased ten times faster than the rate of inflation.

Metro Vancouver has conducted homeless counts in 2002, 2005, and 2008. In 2002, 1,121 homeless people were counted. In 2005 there were 2,174, and 2008 saw an increase to 2,592 homeless individuals. Approximately 60 per cent of these homeless people were counted in Vancouver, while the remaining 40 per cent were counted in other municipalities throughout the region. A reasonable estimate of Metro Vancouver’s homeless population in 2010 is approximately 3,000, a figure that has almost tripled since 2002.

In the absence of adequate housing, local governments experience the frontline affects of housing inadequacy. Poverty, mental illness, drug dependence, violence and abuse, and discrimination all find immediate expression on the streets and in public spaces. Local governments cannot help but take responsibility in the face of senior government neglect, but the costs are very high. Local governments must, and do, address housing and other causal factors associated with these issues. Yet, with senior governments off-loading much of their long-standing responsibility and now providing little or no help to municipalities, the ballooning needs for housing and housing-related services are putting local governments in a near impossible situation.

BC’s Economic Transition

[Back to Top]

British Columbia’s economy is going through a major transition. In part, this transition is due to a larger trend in the industrial world that is moving toward more services and less manufacturing as a proportion of the economy. BC is also unique in a number of ways. In particular, sectors such as manufacturing and renewable resources and processing are seriously threatened.

During recent years, aspects of this economic transition were – to some degree – masked. While the pine beetle epidemic has done long-term damage to BC’s forests, the forestry sector did benefit from the short-term harvest of the pine beetle-infected stands. Further, before the onslaught of the recession in 2008, elements of apparent prosperity appeared for a short time as a result of booms in the housing market, government-financed infrastructure projects, consumer spending, and natural gas production.

In order to fully appreciate the direction of the BC economy, it is important to pay special attention to the resource sectors. Land and resources have long been the primary sources of wealth for many, and the sources of great riches for some. The fishery, now in serious if not fatal decline, was at one time at the core of the BC economy. Forestry, always a source of considerable wealth creation, was the single most important contributor to BC’s ascendancy within the Canadian economy by the middle of the last century. Mining and petroleum were always considerable industries but somewhat lesser sources of wealth and employment. However, over the last few years a transition has begun in the BC economy.

Fisheries and forestry are in decline due to markets, unsustainable management and other industrial and policy failures. A comparative look at the role that forestry has played in the BC economy shows the industry’s evident decline. Ten years ago forestry contributed directly and indirectly to over 35 per cent of the annual income and wealth generation in BC. It is now well below 10 per cent. Forestry revenues to the BC government in the form of stumpage and various taxes were close to $3-billion dollars only 10 years ago. Today, the figure is less than $500 million. Currently, timber-harvesting jobs are less than one-third their number in the mid-1990s. Mills have closed all across the province and more closures are expected over the next two to three years.

Furthering BC’s transition, natural gas, and to a lesser extent mining, are displacing renewable resources in economic importance. While natural gas saw a period of strong markets and extremely high prices for a short period preceding the recession, accounting for close to 10 per cent of provincial government revenues, the outlook for the next decade is much less encouraging. Prices have dropped by two-thirds of their peak, and market oversupply will dominate over for a prolonged period as new sources are discovered and developed.

Beyond resources, other areas are changing too. BC’s manufacturing sector has struggled to attract new capital investment, and the high tech sectors, a hoped for source of new opportunities, have grown very little. The growing sectors, in terms of job creation, are construction, tourism, public-sector employment, and lower-paying jobs in the service sector.

Overall, the transition over the last few years has been one of decline in the high-value sectors. Construction, non-renewable resources and government spending have provided a temporary cushion, but do not have the capacity to support a long-term sustainable economy based on high wages and strong returns to investment. A transition that has the capacity to support long-term prosperity and wealth creation requires growth in high-value sectors adequate to replace the relative loses in the weakening sectors.

Construction as a major source of growth in jobs and business activity is largely the result of a housing construction boom and large government spending on infrastructure. Neither of these factors can be sustained at recent levels. Housing demand is hard to predict, but the unusual circumstances of the pre-recession years are unlikely to continue. Moderating house prices, higher interest rates, and a slow recovery from the recession will all have a depressing effect on the pace of new construction. Government spending on construction will also moderate as the deficit and debt reduction assume a greater importance in government spending plans.

Chart H

Chart I

Chart J

BC’s competitive position is weak due to the weak transition to a high-value economy. The most important measure of competitiveness is output per capita. BC is the only province in Canada where business-sector productivity actually fell between 2003 and 2008. Output per capita is below that of Canada as a whole and of the major competing provinces.
A productive, competitive economy today depends upon high levels of new investment in modern plants and equipment, and on robust research and development spending. BC is lagging in both respects.

It is widely agreed that a competitive, high-productivity, high-value economy must look to external exports as a source of markets. Studies overwhelmingly find that the less a modern-industrial economy sells into export markets, the less it is able to achieve economies of scale and acquire technology needed to be competitive. Again, BC performs badly in terms of exports.

Creating Two British Columbias

The four challenges to BC’s economy, as discussed, result in a growing economic gap between the rural and large urban areas – two British Columbias. Unemployment rates in many rural communities are now double that of large urban communities. Average incomes are significantly lower as well.

A recent study by BC Stats looked at BC regional districts in terms of the economic hardship their residents are experiencing. The ten worst off communities are listed below.

Any district with a hardship index above zero is suffering an unusual degree of hardship – the higher the index rating, the worse the hardship in that community. The ten worst off, out of a total of 26, are all in difficult straits. Tellingly, all but one region is rural and all are resources dependent.

Chart K

Chart L

Rural, resource dependent, remote and northern communities face special challenges. Economic distress and uncertainty is endemic in such communities today. For example, the loss of forestry product mills removes an important part of the tax base without a corresponding reduction in costs. In turn, this situation undermines a community’s ability to achieve financial viability.

Table 4

Such communities must, and are, turning their attention to economic development and diversification. In the absence of a viable economic base, there is little possibility of maintaining a tax base sufficient to finance needed services. Moreover, when the economic base is threatened, the local property-tax base cannot support investments in the very economic renewal needed to reverse this decline in local government revenues.

[Back to Top]