What’s Wrong with Municipal Bonusing?

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OntarioUntil the early 1970s, municipalities in Ontario were involved in a free-for-all competition to attract business and industry. They offered tax breaks, free land, free infrastructure, utilities or services, housing — whatever it took to get a plant or office to open within their boundaries. A lot of small Ontario communities were able to attract businesses that way, and many got major industries.

Of course, the local taxpayers paid for these benefits, but the towns subscribed to the theory that eventually the extra jobs and tax revenues coming into the municipality would pay for the up-front largesse through increased revenue across the community. The plants would bring jobs, which would translate into new homes and property taxes, and the increased population would create a demand for other businesses such as retail stores, restaurants, and the service industry, themselves creating new jobs.

For a while, that system worked, mostly to the advantage of municipalities which could both afford the largesse, and had the land and services readily available. Not everyone considered such competition the best way to run a province, however, and there were arguments that through bonusing, municipal taxpayers were increasing the profits of private enterprises.

Then, in 1974, the provincial government stepped in and said the practice wasn’t fair. All municipalities, the province decided, should compete on a level playing ground: bonusing of this sort was made illegal in Section 106 of the Municipal Act. The Act even makes loans illegal:*

Assistance prohibited
106. (1) Despite any Act, a municipality shall not assist directly or indirectly any manufacturing business or other industrial or commercial enterprise through the granting of bonuses for that purpose. 2001, c. 25, s. 106 (1).
(2) Without limiting subsection (1), the municipality shall not grant assistance by,
(a) giving or lending any property of the municipality, including money;
(b) guaranteeing borrowing;
(c) leasing or selling any property of the municipality at below fair market value; or
(d) giving a total or partial exemption from any levy, charge or fee. 2001, c. 25, s. 106 (2).

David Sunday, a lawyer writing on the Sorbara Law website, noted in late 2014:

Section 106 of the Ontario Municipal Act, 2001 is a much worried about “anti-bonusing” provision of broad application. It is worrisome because its limits and applications are far from clear. By its terms, the provision purports to create an unqualified prohibition on municipalities directly or indirectly assisting any manufacturing, industrial, or commercial enterprise through “bonusing”. The scope of prohibited “bonusing” extends to the giving or lending of any municipal property, including money, guaranteeing borrowing, leasing or selling any municipal property, or giving a total or partial exemption from any levy, charge, or fee.

The change was made more than a generation ago. Since then, the Auto Pact has become defunct, the Canadian dollar has risen too high to offer the economic benefit that once attracted U.S. firms and its recent slide came too late to turn things around. Many factories closed in North America and reopened in Asia, creating massive unemployment everywhere. Consumer buying trends have shifted from quality products to the least expensive on the big-box store shelf. Wages, especially in unionized plants, have escalated to uncompetitive levels compared with Asian workers. It’s a different, more challenging world today.

[youtube=https://www.youtube.com/watch?v=KVybNCPzG7M]

Ontario’s municipalities outside the already-congested Greater Toronto Area have few tools or benefits they can use to attract new businesses. The GTA has the benefit of a large workforce, widespread transportation network, and proximity of suppliers. How can a small community located 100 or more kilometres away on a two-lane highway compete?

It can’t. It can try to sell itself on its charm, its appearance, its vaguely beneficial “lifestyle” attributes — but none of these can compete with the lure of a tax moratorium or free, serviced land; the attractive offers of yesteryear.

By definition, small towns start with a disadvantage: a smaller workforce pool. They need something to overcome that and appear attractive to potential industries. Keep in mind that the deciding bodies – corporate boards and committees – who make the final choice in any plant relocation or opening, are not doing so while sitting in a quaint cafe in your small town: they’re doing it in an urban boardroom looking over a spreadsheet of numbers, analysing the cost-benefit factors, not the scenery.

Is charm worth more to a company than easy access to the transportation network? Or lower taxes? Not likely. For most firms, the bottom line rules decision making. Charm simply doesn’t have a place in the accounting.

Many of the plants that were built in small communities in Ontario through the boom years of the ’60s have since closed, many moving south of the border or even consolidating in China. The jobs they left behind – in the hospitality and service sectors – offer nowhere near the wages or benefits the usually-unionized factory jobs offered.

Many Ontario communities have suffered the crisis of widespread unemployment as a result of plant closings, confounded by increased costs for services, infrastructure, and provincial downloading. Over the last few years, major plants have closed across the province: UnileverKellogg’s , NovartisA.O. SmithHeinzHershey, Caterpillar are just a few.

Blogger Jeff Rubin wrote in late 2013:

Since 2002, Ontario’s manufacturing sector has shrunk by nearly 30 percent—or more than 300,000 jobs. The story is similar when you look at real manufacturing output, which is down almost 20 percent over the same time.
Look back to the 1990s, or indeed most of the post-war period, and manufacturing could be counted on as an engine of economic growth for the province. Today, the opposite is true. The shrinking sector is a drag on growth and part of the reason Ontario’s economy has been a laggard versus other provinces over the last decade.

In some towns, a few remaining plants struggle along – and in a rare few like Collingwood, they have even expanded (Goodall expanded here in 2014). But those are the exception: closures loom in others. And for all of us, the tax base shrinks while municipal expenses continue to rise.

Homeowners shoulder greater burdens every year to maintain existing services, making the cost of living there perilously expensive. Rising taxes further push homeownership out of the reach of the lower-to-middle income earners left behind after the plants close. It’s a downward spiral.

In Collingwood alone — a mere 120 km north of Toronto — a carpet plant, an automobile hose plant, an automobile wheel plant, a playground set manufacturer, a seatbelt manufacturer, a pottery manufacturer, a starch plant, a large furniture maker, an ethanol plant, and a massive shipyard have all shut down since the late 1980s. All of them offered solid work at good wages. In their place, the town has seen two decades of sporadic growth in big-box retail, franchise and hospitality sector businesses — all at, or close to, minimum wage, many offering only part-time employment — but nothing on the scale of any of these lost industries.

Collingwood is typical of the situation across southern Ontario. It oozes small-town charm, it has four-season amenities, a beautiful downtown, clean air and water and an administration eager to work with business — but it can’t offer even a minor a tax break to keep existing businesses from closing, let alone attract new companies to relocate there.

The temptation, however, is always there to see how far one can walk over the line before it gets challenged in court. As Steven O’Melia of Miller Thomson wrote:

Despite their increasing responsibilities, municipalities continue to rely on property taxes as their principal source of revenue. Business assessment is the high-yield segment of the property tax base, and if a one-time municipal investment can encourage the establishment or retention of a long-term source of that tax revenue, conferring the necessary advantage can be viewed as a sound business decision. Similarly, if municipal participation in or contribution to a project can produce larger or more immediate benefits for a municipality’s residents, it is a rare politician who first wants to endure a legal lecture on the pitfalls of the somewhat arcane anti-bonusing provisions. Municipalities are being urged by their tax-weary residents to “do more with less” and public-private partnerships, where benefits and risks are apportioned in ways unimagined in an earlier municipal context, are seen as one way of attempting to achieve that goal.

David Sunday further outlined the challenges municipalities face trying to clarify the inherent vagueness in the Municipal Act, given that a well-intended decision could easily end up a costly court case:

The challenge with the anti-bonusing provision lies in the application of these principles to the facts of any particular situation. Determining whether there has been a contravention of the anti-bonusing provision requires a judgment call as to whether there has been an “obvious undue advantage” or, stated another way, an “unmerited windfall” to some enterprise. These are inherently subjective concepts. In the absence of further judicial guidance, precisely how municipalities and their advisors should go about making such a judgment call remains unclear.

If the province wants to keep its 400-plus smaller municipalities alive, it needs to re-open the debate on bonusing. Municipalities should be able to choose for themselves whether they want to carry the costs of bonusing to attract new business. Section 106 has only rarely been litigated, and the court decisions to date suggest that there is some leeway in making private-public partnerships, if not in outright bonusing, so perhaps the province will be amenable to expanding municipal opportunities for economic development.

It’s a far more cut-throat and competitive environment today for municipal economic development than it was in the ’70s, but the province’s policies have not changed with the times. That has to change.

Municipal issues were not strong in any party’s platforms in Ontario’s recent provincial elections – despite the huffing and puffing to the audience by party leaders at the AMO convention – but  municipal organizations like AMO have advocated strongly for them, often successfully. Perhaps AMO will take on the collective responsibility to have this debate reopened, not simply at the legislature but within every municipality.

Municipalities not only demand change, they need it.

~~~~~
NB. I wrote the original of this piece for the Huffington Post a while back, but thought it was timely to post an updated version here.

* This is not the same bonusing provision found in Section 37 of the Planning Act, which allows municipalities to trade with developers for additional height and density. Considered by many as a useful tool for municipal planning, others consider it problematic and filed challenges through the OMB over such provisions. This happened in Collingwood, where an approved six-storey downtown development was derailed when it was challenged by a special interest group – the result ending up an undeveloped hole on the main street for the past seven years.

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