Equalization: The 800-Pound Gorilla in This Election

Scratch any problem in almost any municipality in Nova Scotia and you will likely uncover the same root cause: the province’s underfunded equalization program.

I see you over there, covering your ears and singing. And you, pretending you’re engrossed in that hardware store flyer you just fished out of a garbage can. I sympathize with you, I really do. I say “equalization” and you hear, “legal bills.” I will even admit that part of my enthusiasm for this subject stems from having been away from Cape Breton during the period in which the great equalization court case went down. But we can talk about equalization without going to court. As one equalization advocate told me, referring to the CBRM’s ‘creature of the province’ status:

“We knew that lawsuit would never work. It would be like trying to sue yourself.”

We’re agreed, then, we’re not going to court this time. But might I suggest we go instead to the barricades? Because we’re in the middle of a provincial election campaign and I have barely heard the issue of equalization mentioned. And when it was mentioned — by Liberal candidate Geoff MacLellan in his pitch to CBRM Council last night — it was mentioned almost in passing, tacked onto the end of a 15-minute presentation.

So it may be too late and it may be in vain, but I’m going to join Charles Sampson, Jim Guy, Greg MacInnis and Bill Fiander and make some noise about what I’m calling “Equalization-gate” only because the Trump-era suffix indicating scandal has yet to be determined (although my money’s on “a-Lago”).

At the heart of the matter is a simple question: what is the point of equalization?

Nova Scotia Supreme Court (Source: CBC http://www.cbc.ca/news/canada/nova-scotia/new-supreme-judges-mi-kmaq-1.3814291)

Nova Scotia Supreme Court (Source: CBC)

 

Frivolous?

According to Subsection 36(2) of the 1982 Constitution Act:

Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

Former CBRM Mayor John Morgan hoped to use that clause to force the Nova Scotia government to admit it was failing to honor that commitment, but The Honorable Justice John D Murphy of the  Supreme Court of Nova Scotia found that the clause imposed no commitment on the province that was “justiciable” (that is, enforceable by a court of law) and that the CBRM’s pleadings did not “disclose a reasonable cause of action,” that is, a reason to sue.

In May 2009, the Nova Scotia Court of Appeal rejected the CBRM’s appeal, ruling that neither municipalities nor citizens have the right to sue the provincial government over alleged disparities in equalization payments. The Supreme Court of Canada then refused to hear the CBRM’s appeal of that decision, and the great equalization court case was over.

CBRM Mayor John Morgan apparently.

CBRM Mayor John Morgan.

But in reading Justice Murphy’s decision, I was struck by his admonition to counsel for the Province of Nova Scotia which had suggested the CBRM’s case might also be thrown out on the grounds that it was “frivolous.”

Wrote Murphy:

I will first address the suggestion that the proceeding falls in the “frivolous” category…In its submissions, the Province invoked very strong language, which ought to be reserved (if it would ever be helpful in a legal brief) to impugn only the most abusive, frivolous, or vexatious allegations. For example, in its written representations, Nova Scotia used terms such as “absurd,” “entirely bizarre”, “completely incoherent” and “nonsensical” to describe a pleading or position being advanced by CBRM. The Province described one of the Municipality’s arguments as “meager”,  referred to one claim as “merely a generalized rant”, and on one occasion portrayed CBRM’s analysis as “a recipe for chaos consequent upon a pleading that is absurd, frivolous and vexatious.” In my view, neither the proceeding nor any submissions made on the Municipality’s behalf can properly be described in any of those or similar terms. CBRM’s Application represents a genuine effort to bring a matter before this Court; the proceeding is neither frivolous nor vexatious…

Which is cold comfort but comfort all the same — the CBRM was not being “nonsensical” or “bizarre” or “incoherent” in suggesting that an equalization system that has left it with elevated levels of child poverty, significant levels of debt and funding insufficient to cover much beyond the basics of fire, police and roadwork is an unjust system.

And whether it can be enforced in a court of law or not, the spirit of that Constitutional clause seems clear enough — Canadians are entitled to reasonably comparable levels of public services at reasonably comparable levels of taxation.

 

Autographed photo of John Buchanan. (Source: eBay)

Autographed photo of John Buchanan. (Source: eBay)

Fairness

Federally, equalization payments were approved in 1957 under Liberal Prime Minister Louis St.-Laurent and introduced under Progressive Conservative Prime Minister John Diefenbaker. The province of Nova Scotia brought in its own system of equalization payments in 1980, under Tory Premier John Buchanan.

Under the province’s Municipal Grants Act (S.8, s.19A):

The grants are calculated using a formula that measures: municipal need — by developing standard expenditures per dwelling unit for certain municipal services for the various classes of municipalities; and the ability of municipalities to fund their need — by calculating a “uniform assessment” for each municipality, which is the total taxable assessment plus the capitalized value of grants-in-lieu of taxation from the province, the federal government, and Aliant.

Under this formula, the CBRM is entitled, on average, to 50% of all equalization grants each year (I say that not by way of boast).

The good folks at Nova Scotians for Equalization Fairness (NSEF), a watchdog group that has been tracking equalization payments in the province for years, say there are two big problems with the way the system works in Nova Scotia.

The first is the percentage of the overall federal transfer that is passed onto the municipalities in the form of equalization grants. NSEF argues that since a percentage of the federal equalization transfer to Nova Scotia is allocated “due to the province’s relative weakness in property tax fiscal capacity,” and since it’s municipalities, not the province, that rely on property taxes, that percentage of the grant should be allocated to the municipalities.

In 2012-2013, for example, NSEF put that percentage at roughly 26% (a figure it said was confirmed by the federal finance department). Had the province transferred 26% of that year’s federal transfer of $1.7 billion to the municipalities, they would have received $445 million.

Of course, the province doesn’t transfer 26% of its federal equalization to the municipalities. In fact (and this is the second big problem), the province has capped equalization funding to the municipalities since 2002/2003 at $31 million, even as federal transfer payments rose from $1.1 billion in 2002/2003 to $1.8 billion in 2017/2018.

But forget the 26% share — NSEF says if the province had simply fully funded equalization according to its own formula over the past 15 years, the CBRM would have received at least an additional $142 million. (I say “at least” because NSEF has been unable to calculate the figures since 2014/2015 because, rather than fully funding equalization, the McNeil government has simply stopped publishing figures for the total equalization to which municipalities are entitled and the total which they actually receive. Problem solved.)

 

John Savage, John Hamm, Darell Dexter, Stephen McNeil

John Savage, John Hamm, Darell Dexter, Stephen McNeil

 

Blame all round!

Now the part where we implicate all three major political parties.

First the Progressive Conservatives, because it was John Hamm’s PC government (a government that included Cecil Clarke, now mayor of the CBRM) that capped equalization in 2002/2003, a situation that drove then-CBRM Mayor John Morgan to pen a 2005 editorial on the subject for the Chronicle Herald. The government’s response was supplied 11 days later, in the same paper, by Barry Barnet, then-minister of municipal relations (now, according to Wikipedia, executive director of the All Terrain Vehicle Association of Nova Scotia) who wrote:

Mayor Morgan has the good fortune to be the elected leader of a municipality filled with the very best Nova Scotia has to offer: a spirit of entrepreneurship, a commitment to community service, a pride in what’s been accomplished so far — and the potential to do even more.

Mr. Morgan is correct that we have ‘red-circled’ municipal equalization grants. This is a transitional measure to avoid the potential of municipalities facing unexpected financial shortfalls.

Either it wasn’t actually a “transitional measure” or we’re still “transitioning” because those equalization payments have been frozen ever since.

Thanks, Barry.

Hamm was replaced as PC leader and premier in 2006 by Rodney MacDonald who did nothing to address the equalization problem.

MacDonald lost to Darrell Dexter’s NDP in 2009. Although Dexter had made noises about equalization while in opposition, his government did nothing to address the situation either.

Dexter lost the 2013 election to Stephen McNeil whose solution, as mentioned above, was to stop publishing equalization numbers.

 

Service exchange

Along the way, there have been other provincial developments and decisions that have not helped the CBRM’s financial situation either.

N.S. Premier Donald Cameron, 1993. (Source: Youtube https://www.youtube.com/watch?v=54awySxFZRs)

N.S. Premier Donald Cameron, 1993. (Source: Youtube)

Take the tinkering that’s been done around service-exchange agreements. The idea stems from the Graham Report, a Royal Commission on education, public services and provincial-municipal relations established in 1970 by Gerald Regan’s Liberal government and led by Dalhousie economics prof John Graham.

One of the report’s key recommendations, as discussed by Paul Hobson, David Cameron and Wade Locke in their 2005 report for the Union of Nova Scotia Municipalities, was that Nova Scotia draw a clear line between services that were provincial responsibilities (and should be fully funded by the province) and services that were municipal responsibilities (and should be fully funded by the municipalities).

Of course, such a line is not easily drawn — Graham suggested “local” services (like police, fire, roads) be the responsibility of municipalities while “general” services  (education, public health, welfare) be the responsibility of the provincial government.

Nothing came of the Graham Report, which went to that great bookshelf in the sky until 1991, when Donald Cameron took up Graham’s suggestion about drawing a sharper line between provincial and municipal responsibilities, proposing a “service exchange” that would see the province take on full responsibility for some items (social services, public health and justice) while municipalities took on full responsibility for others (police — except highway patrols — and roads — other than arterial or collector roads).

So far so good, but there are two problems with this, as pointed out by Hobson, Cameron and Locke (who sound like a ’70s folk-rock trio): first, Cameron’s service exchange didn’t cover education, which was the biggest single expense for municipalities; and second, he insisted that the entire process be revenue neutral.

The Graham Report, as mentioned, had recommended education be taken on entirely by the province. It had also calculated (how accurately I cannot say) that the entire exchange would be at the expense of the province, but since the additional spending would constitute 2% of its overall budget, it could be easily absorbed.

Cameron’s plan, instead, called for cuts in municipal funding to make up for the $13 million in fiscal benefits the service exchange would otherwise have brought the municipalities.

In the end, the services to be transferred were trimmed considerably, and the ultimate effect, as Michigan State University Professor  Igor Vojnovic explained, in an article entitled, “The fiscal distribution of the provincial-municipal service exchange in Nova Scotia,”  depended on where you lived.

If you were in one of the four municipalities that would form the Halifax Regional Municipality, you enjoyed a net gain of $8.5 million. If you were in one of the eight municipalities that would comprise the CBRM, you faced a $4.9 million deficit.

Additional attempts at “revenue neutral” service exchange agreements have led to the CBRM’s current reality, which is that the value of the mandatory annual payments we make each year to fund “provincial” services (education, corrections, the Property Valuation Services Corporation and public housing) now exceeds the value of our equalization grant.

Not exactly what Professor Graham had in mind.

 

By SMU Central University Libraries [No restrictions], via Wikimedia Commons

This photo will make sense when you’ve read the rest of the article. (Photo by SMU Central University Libraries, via Wikimedia Commons)

Make some noise

Clearly, this discussion of equalization, while rather exhausting, is not exhaustive. We’ve barely dipped our toes into the great equalization debate, but at least we’ve done that. As I said at the outset, the most striking thing for me about the issue in 2017 is how little it is raised. How can you run for office in Cape Breton without at least addressing the question of equalization?

How can you campaign for a month without somebody asking you why people living in the CBRM pay higher taxes than those living in HRM and get less in return?

We used to be a lot feistier. Maybe the drubbing in court took its toll. Maybe we’re starting to believe (as, I’m sure, many Haligonians do) that between federal support for its coal mines and provincial support for its steel plant, Cape Breton has seen more than its fair share of public money. Maybe we’ve just forgotten how to make what one of my childhood heroes, Ramona Geraldine Quimby, would have called a “great big noisy fuss.”

As I was researching this piece, I kept coming across quotes from CBRM councilors and officials on the subject of equalization that were frank and (sometimes very funny). I wrote down a bunch of them and I’m just going to leave them right here for your enjoyment — or perhaps, inspiration:

The place is falling apart and [Cape Breton MLAs and MPs] aren’t doing a damn thing about it. They are out there kissing babies and cutting ribbons but where are the dollars for infrastructure? — CBRM Councilor Claire Detheridge (Cape Breton Post, 1 August 2002)

There is a crisis and we have to identify that and move ahead. Anyone that can’t see that we aren’t being treated fairly, there is something wrong with them. They are not looking. — CBRM Councilor Jim MacLeod (Cape Breton Post, 12 November 2003)

It’s about being accountable to the people we represent, the people who work and slave every day of their lives to provide a way of life for their families. — CBRM Councilor Mae Rowe, speaking in favor of motion to consult constitutional lawyer. (Cape Breton Post, 19 November 2003)

We have to say to the province, ‘You created us, you tell us what services to deliver, yet you don’t provide necessary funding.’ — CBRM CAO Jerry Ryan (Chronicle Herald, 10 March 2005)

Our citizens are entitled to modern transport, good roads, water and other services but the reality is for this municipality, we can’t do that. Until the provincial equalization program is fixed, we have to hold things together until we can get the provincial government to treat us fairly. — CBRM Mayor John Morgan (Chronicle Herald, 17 June 2005)

Children in Halifax are getting better educations than children living in CB. The province is creating two class levels of society because of their funding. — CBRM Mayor John Morgan (Cape Breton Post, 17 June 2005)

We’ve reached the point where we must tell the province to stuff it. I feel like we’re buffaloes headed toward a precipice. — CBRM Councilor Wes Stubbert (Chronicle Herald, 17 June 2005)

We’re getting screwed, there’s no other way to put it. [MLAs are] more interested in going for steak and beer at the Midtown [Tavern, in Halifax] instead of sticking their necks out for residents. — CBRM Councilor Vince Hall (Chronicle Herald, 9 June 2006)

 

Featured photo: Western lowland gorilla, Jock, born in Bristol Zoo, by Jackhynes (Own work) CC BY-SA 3.0, via Wikimedia Commons (cropped)

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