Ranking Thunder Bay's Tax Levy and More...

 

It is municipal budget season in  Ontario and Canada and this year’s proposed budget increases appear to be quite large.  Toronto, for example, has proposed a 10.5 percent tax increase while Hamilton initially was looking at a 14 percent increase. Vancouver is going up 7.5 percent while Montreal seems set to go up 5 percent which while seemingly modest given the comparisons described here is nevertheless Montreal’s largest increase in 13 years. And then there is Thunder Bay which for 2024 is proposing a 6.1 percent increase in the total tax levy which “after growth” will be 5.5 percent. 

 

While one might argue that Thunder Bay's increase seems modest compared to these other metropolises, much like the case of Montreal, the more apt comparisons are with the past rather than other cities.  Even in the case of Ontario municipalities, there are differences in municipal structure with Thunder Bay as a single tier municipality not always directly comparable to other cities – the famous apples versus oranges argument city administrators usually bring up at budget time.  Ultimately, one needs to look at how Thunder Bay’s tax levy and proposed levy increase stacks up against past ones.

 

Figure 1 plots a two-axis chart of the total tax levy as well as the dollar change in the levy from year to year going from 1990 to the proposed 2024 figures.  In 1990, the tax levy was 63.4 million dollars while today the proposed amount for 2024 is 231.7 million dollars.  And of course, this is just the tax levy and not the total budget which is funded by both tax levies and government grants and comes in including operating and capital at a combined total of approximately 538 million dollars.  The trend has been upwards with an increase every year with the exception of 1995 which appears to have seen a drop in the levy of 1.3 million dollars.  The proposed increase for 2024 is 13.3 million which is well above the average annual increase for the 1991 to 2024 period of 4.95 million dollars.

 

 

 

How does this year’s percentage increase in the tax levy stack up to past ones? Figure 2 plots each percent increase in the total tax levy from 1991 to 2024 ranking them from highest to lowest and at 6.1 percent, the proposed 2024 levy increase is the 5^th highest in over thirty years (but second highest in strict absolute dollar terms). The increases range from a high of 21.8 percent in 1998 to a low of -1.7 percent in 1995.  All other things given this year’s proposed increase is at the higher end of the range in percentage terms.

 

 

 

Of course, it is often argued that the reason taxes go up apart from new needs or mandated responsibility increases from the province is a general rise in costs driven by inflation. Inflation certainly has been in the headlines the last year, so it is worth checking out the correlation between the CPI inflation rate for Thunder Bay and the percent change in the tax levy.  Oddly enough, when a linear trend is fitted to the scatter plot of tax levy increases versus the inflation rate, the relationship appears to be slightly negative – that is, higher inflation rates were correlated with lower tax increases. 

 

However, one could argue that these results are driven by 1998 with its 21 percent levy increase (If you recall the late 1990s was an era of municipal restructuring with changes in how taxes were allocated between residential and business and also local education and of course social service downloading).  However, if you omit that year as an outlier, what you get is essentially a flat curve.  That is, the rate of inflation does not seem to drive the rate increases.  They are being driven by other factors and since we don’t know what we don’t know, those factors are best left up to city administrators who are in the know about what they may or may not know.  Nevertheless, do not expect a straightforward answer as the factors over and above inflation are indeed complicated.

 

 

 

Many people find the budgeting process of the City of Thunder Bay (and indeed municipal governments in general) rather arcane and overly complicated.  Indeed, even those of us with a public finance background find municipal budgets particularly confusing and exasperating as they are indeed laid out in a manner that does not inspire clarity.  They look nothing like a federal or provincial budget which a least provide a one- or two-page table easily summarizing revenues and expenditures.  Now one may argue that this is not good for local democracy if ratepayers do not understand municipal finances because they are not readily transparent. 

 

This is where the ratepayer errs.  This is actually not about democracy.  It is about the needs of the corporation and corporations are perpetually lived entities with limited liability and interested in their own financial preservation.  They respond more often to the money rather than to voter pressure.  The phrase “You Can’t Fight City Hall” does not exist for no reason.  Remember, like other municipalities, our city government is The Corporation of the City of Thunder Bay.  Despite popular sentiment and belief, municipalities in Canada are not independent tiers of government but creatures of the provinces.  Local service provision has essentially been contracted out by provincial governments to municipal corporations.  The democratic accountability for municipal government ultimately lies in provincial elections rather than local ones. 

 

City councils are essentially boards of directors, and they serve to demonstrate responsibility for corporate direction but little else in terms of day-to-day finance and operations.  True, ratepayers engage with the corporation by selecting the board of directors in elections and participating in numerous surveys and public consultations but then any corporation worth its salt always is doing customer satisfaction surveys.  The real business and complex operations geared around the financial operations of the corporation is conducted by its officers and employees and generally behind closed doors. 

 

The members of the board - our councilors – are essentially a large focus group attempting to promote public relations engagement in a theatrical setting for the people the corporation ultimately derives its revenue from and provides services to. That usually explains why so much of council meeting’s time is usually taken up by discussion of minor manners that galvanize emotions (time to change street names again anyone?) and complicated large multi-million-dollar decisions seem to occur quickly on the advice of administration. There are exceptions when fate delivers exceptionally persistent and informed councilors - witness the turf facility debate to date - but corporate administrations play the long game and eventually wear out the opposition.

 

Even the current review of the size and structure of Thunder Bay City Council is largely designed to create a sense of public engagement with the process rather than any actual decision making.  Remember, Thunder Bay was created by an act of the provincial government.  Thunder Bay can certainly try and change its system of municipal representation and structure, but the province will have the ultimate say and the corporation will implement that.  Remember Toronto in 2018?  The number of wards  (and councilors) was reduced nearly 50 percent in the middle of a municipal election but not as a result of a grass roots consultation but by the provincial government because they wanted to and they could.

 

The point of all this?  The City of Thunder Bay needs a 6.1 percent in the total tax levy to fund its operations and tinkering around the edges aside, will get most of that increase.  And will we get a revamped municipal ward and councilor structure? Certainly. But only if the province goes along with it.

Ontario's Spring Budget Approaches

 

Ontario will be announcing its 2023-24 budget on March 23^rd in the wake of its third quarter fiscal update in February which reported a $6.5 billion deficit for 2022-23, an improvement over the Fall Update which had the deficit pegged at nearly $12 billion.  It would appear that fiscal circumstances are shifting rapidly as the Ontario economy appears to continue to exhibit robust growth resulting in revenues rising more than expected.  Indeed, revenues in 2022-23 are projected to be $16.6 billion higher than forecast in the 2022 budget and $9.6 billion higher than was projected in the Fall 2022 update.  Meanwhile, expenditure growth appears to be somewhat more restrained.  Compared to what was projected in the 2022 budget, 2022-23 is only up $3.3 billion. Even in the case of health spending – a contentious area given shortages and waiting lists – the province’s financial Accountability Office has noted that going forward, the province appears to be allocating billions of dollars less than what is required.

 

Indeed, a glance at some charts shows that these shifting projections go back even further to the 2021 budget that came as the pandemic recovery began in earnest.  Figures 1 and 2 plot revenues and expenditures as laid out by fiscal documents starting with the 2021 budget, the 2022 budget and the fall 2022 economic and fiscal update.  Both expenditures and revenues have shifted upwards with subsequent budgets and updates, but the shifts are more dramatic for revenues than expenditures.  Compared to revenues in 2019-20 of $156 billion, for 2022-23, the 2021 budget forecast $160 billion, the 2022 budget forecast $180 billion and the Fall 2022 update forecast nearly 187 billion to which the third Quarter update has now brought us to $196 billion.  Despite the pandemic and fears of deflation and revenue collapse, revenues today are $40 billion higher than 2019-20 – an increase of 26 percent.    

 

 

 

As for expenditures, from $165 billion in 2019-20, for 2022-23, the 2021 budget forecast $186 billion, the 2022 budget forecast nearly $199 billion and the Fall 2022 update a few hundred million more but still rounding out to $199 billion.  We are now looking at expenditures based on the third quarter update of nearly $202 billion.  Since 2019-20, expenditures have grown by $37 billion – an increase of just over 22 percent.  

 

 

 

What comes next over the course of fiscal year 2023-24 hinges on how the economy performs.  If we assume inflation coming down to 4 percent and real GDP growth of 2 percent, that still brings us to nominal GDP growth of 6 percent.  While 6 percent nominal growth is down from the nominal growth rates in 2022 and 2023, there is no reason to believe it will crash given the overall robustness of the Canadian and Ontario economies despite increases in interest rates. Historically, a one percent increase in the province’s nominal GDP is correlated with a greater than one percent increase in total revenue meaning that one can probably expect total provincial government revenues to rise by over 6 percent this year bringing revenues up easily another $15 billion.  With a deficit for 2023-23 now being projected as per the third quarter finances at $6.5 billion, it would not be a surprise if it comes in even lower and 2023-24 actually presents us with a hefty surplus.

Thunder Bay 2023 Budget Is Out: Highest Tax Levy Increase Since 2015 Proposed

 The City of Thunder Bay has released its proposed 2023 budget and it looks like the biggest tax increase in recent years.  The proposed budget is increasing the tax levy by  6.18 percent (just under 6 percent after tax base growth) which will raise the total tax levy by nearly 13 million dollars and bring the total tax levy to over 220 million dollars.  As the accompanying figure shows, this will be the largest tax increase since at least 2015 and probably since 2006.  In terms of tax levy increases for the 1991 to 2023 period,  since 1991, Thunder Bay tax levy increases have ranged from a high of almost 22 percent in 1998 to a low of -1.7 percent in 1995.  If enacted, this proposed levy increase will be the fifth highest since 1991.  The current Mayor campaigned on keeping the tax increase low and reduce bureaucracy but this proposed budget comes apparently with an additional 50 full time equivalent employees.  With inflation running at over 6 percent, the proposed budget comes pretty close to the inflation rate which is not unexpected as signals to this effect have been ongoing for months.   However, one suspects the Mayor will at least make an effort at vocal displeasure at this increase given that it is the fifth highest increase since 1991, the highest increase in nearly twenty years and he was the mayor from 1997 to 2003 which means he was also in office as the Mayor during the highest levy increase in the 1991 to 2023 period.  A legacy associated with some of the highest tax increases in Thunder Bay's municipal fiscal history is not something the mayor probably is interested in.  The reaction of the rest of council and the public will be key.  These are of course very preliminary numbers and reaction on my part and the full budget has yet to be posted on the city web site at the time of writing but will take a look at the details in coming days.

Ontario Budget 2022: Analysis

 

The Ontario government presented its budget yesterday and given there will be an official election call any time, one is left to conclude that the budget is at best an aspirational document of what the government might like to do if re-elected in June.  Despite what currently seems to be a boom period in the Ontario and Canadian economies, it remains that given the volatility of the global economy, Finance Minister Bethlenfalvy’s reluctance to explicitly state whether he would re-introduce the exact same budget if re-elected is understandable.  After all, four or five months from now, the fiscal and economic ground may have shifted yet again.

 

Figures 1 to 3 provide some material to summarize the budget.  Figure 1 shows that total revenues are projected to rise from $173.6 billion in 2021-22 to $196.9 billion in 2024-25 while expenditures (net of the contingency reserve) are projected to rise from $187.1 billion to $203 billion. Once the contingency reserves ($ 1 billion in 2022-23 and $1.5 billion in each of the subsequent years) are factored in, the deficit is expected to be $19.8 billion in 2022-23 and should decline to $7.6 billion by 2024-25.  

 

 

 

 

Figure 2 plots the average annual growth rate of assorted revenues and expenditures over the period 2022-23 to 2024-25.  Own source revenues are expected to grow an average of 5.6 percent and total revenues at 4.3 percent while total expenditures will grow at only 2.8 percent.  Thus, projected revenue growth is expected to do the heavy lifting when it comes to deficit reduction with the accumulated deficit from 2021-22 to 2024-25 still clocking in at $53.3 billion dollars. Interestingly, debt charges are expected to grow at 4.7 percent annually while nominal program spending will only rise by 2.6 percent. Once you factor in inflation and population growth, real program spending is declining.

 

 

Of course, what is also of interest is that while the additional accumulated deficit in the next few years going forward will be $53.3 billion, the net debt over the same period is expected to grow from 373.6 billion to 468.8 billion – an increase of $95.2 billion (Figure 3).   

 

 

 

This is because along with an operating deficit, the provincial government is planning many billions more in infrastructure spending covering roads, hospitals and even a new prison correctional complex in Thunder Bay (which is expected to be $1.2 billion).  If you add the planned $36.9 billion in infrastructure going forward starting 2021-22 to the accumulated deficit, you get pretty close to the $95.2 billion increase in the net debt.  However, GDP growth is expected to remain robust so the net debt to GDP ratio is expected to plateau at about 41 percent for the next few years.

Thunder Bay: The Challenges Ahead in 2022

 

The start of a new year is always a time for reflection on the past and a looking ahead to the future.  During a pandemic which has yet to see its end, the temptation is to simply to hunker down and focus on the present. Yet, Thunder Bay is a city that needs to look ahead given the collection of challenges that it faces.  One could summarize the challenges as threefold - the social fabric, the economy and civic finances – which are often considered as separate compartments, but which move together as one given, they are all related and intertwined.  Our tendency is always to compartmentalize because that is of the course the easiest way to try and understand the problems, but it is important to realize that the solutions themselves are not organized in watertight compartments.

 

To start with, there is the deteriorating social fabric that has created two Thunder Bays – a Thunder Bay of crime, homelessness, poverty and addiction and another that is a relatively prosperous enclave that on a day-to-day basis does not see the other side.  Intertwined with all of this has been a history of racism with respect to Indigenous peoples in the community. Occasionally, there is spill over between the two worlds especially with respect to crime and addiction but for the most part they are indeed two separate worlds.  One of the best recent overviews of poverty and social issues in Thunder Bay comes from a 2019 community report by the Wellesley Institute documenting Thunder Bay social and developmental indicators that lag the provincial average as well as note a high proportion of households with an average income below $20,000 .  Indeed, compared to the rest of the province, a higher proportion of youth in Thunder Bay live in low-income households.

 

The deteriorating social fabric has generated a growing long-term demand for emergency services. Indeed, many of the demands made on police, paramedics and fire are social and domestic disputes or relate to mental illness.  The statistics for crime are telling because while total criminal violations per 100,000 are down somewhat, those for homicides have been on an upward trend for quite a few years now as Figure 1 illustrates.  Table 1 illustrates the rate per 100,000 for several select criminal code violation categories and they suggest that despite an aging population and a decline in some types of crime, Thunder Bay has become a more violent place in general as the number of total violent criminal code violations per 100,000 has grown by 17 percent since 2015.  

 

 

 

Per 100,000 population, homicides have been the highest in the country for several years now while the city’s booming gang related drug trade has also resulted in a nearly 50 percent increase in total drug violations since 2015.  At the same time, the pandemic itself has resulted in fewer service calls for police especially around property crimes given more people are at home thereby better safeguarding property.  However, other emergency services – namely the Superior North EMS paramedic services have seen an increase in service calls per capita and are forecasting large increases well into the 2020s.  Indeed, even city officials have acknowledged that the rising demand for emergency services in general is leading to cost increases that are unsustainable when it comes to the city budget.

 

Aggravating the social distress by fueling homelessness is the rising cost of housing in the city both in terms of rents as well as the price of homes.  While Thunder Bay’s housing prices remain a far cry from Vancouver or the GTA, since 2010 they have grown at an uncharacteristically fast pace with the average MLS price being $144,034 in 2010 and forecast at $289,186 in 2022 as illustrated in Figure 2.  While the demographic trend towards smaller households and low interest rates have been factors as demand drivers, also important is the slow pace of new residential construction in Thunder Bay on the supply side.  Housing starts are at their lowest point in decades while new apartment construction has been unable to fill the gap.  The average of course masks the range in prices and there are homes approaching $1 million in Thunder Bay.  As for rents, since 2010, the average rent for a 2-bedroom apartment in Thunder Bay has grown from $761 to $1,089 while the rent for a larger three bedroom went from $867 to $1,358 – increases of 43 and 57 percent respectively.  

 

 

 

These social issues in the end are effectively compounded by an economy and by extension a property tax base that has not really grown in several decades.  As Figure 3 illustrates, employment in Thunder Bay has essentially been flat for almost 20 years.  If the rest of the province was in a similar boat that might be somewhat more palatable but going only forward from the Great Recession, Thunder Bay has seen a decline in employment growth not to mention a compositional shift. Indeed, a rising share of that employment – approximately 30 percent - is now in the broader public sector given the declines in industrial employment over the last two decades.  

 

 

 

For decades the top ten employers in Thunder Bay have been broader public sector institutions ranging from municipal, provincial, and federal governments to school boards, the hospital, and the post-secondary sector.  And of course, there is construction which has been increasingly dominated by public sector projects of one type or another. While the regional mining sector has been a bright side in Thunder Bay’s role as a mining services sector it remains that the mining sector in the region is not as labour intensive as it was in the past. And yet, Thunder Bay appears at least in some regards to still have some substantial gleams of prosperity if the number of shiny new trucks being driven around can be taken as an indicator.  But then, the pandemic has seen the city, like much of the country, awash in government support payments.

 

Which then brings us to the final challenge which is really driven by the first two.  The economy in the city and private sector wealth generation has not been robust.  We have a set of social issues which has been fueling increasing demand for services in health and emergency services – many which are provided by municipal government. And we have a municipal government whose finances are stretched given the demands being placed on it and the resources available.  The sources of municipal financing are threefold -the property tax, government grants and assorted user fees and other own source revenues including a dividend from the municipal telecom company.  Of these, only taxes and user fees are directly within the control of municipal government, and they make Thunder Bay property owners the main funders of increases in municipal spending.

 

In the case of Thunder Bay, the property tax is increasingly borne by the residential taxpayer especially given the decline in industrial and business assessments over the last two decades.  Grants in per capita terms have essentially been flat notwithstanding the COVID-19 supports which have helped fuel some of the surpluses of recent years.  Nonetheless, the 2022 budget exercise will be an important one given the projected gross tax levy increase of 2.44 percent which would raise the tax levy by almost $5 million and bring the total levy to nearly $209 million.  Water infrastructure issues are being dealt with by a 3 percent increase in water rates.  However, the gross- tax supported budget – when one adds the capital budget – will be up about 23 percent mainly because of the near doubling of the capital budget with major capital projects planned such as a new police station at nearly $60 million.  Given the limits of the tax base and available reserves, this new capital spending is going to be funded primarily by debt.  While interest rates are still at historic lows, increasing the city’s debt will have ramifications down the road with increased debt servicing costs.

 

There is no easy solution to these problems.  Crime and social problems cannot be solved on a municipal budget alone and require provincial and federal support.  At the same time, raising municipal taxation rates more will continue to place the burden of these problems squarely on the residential taxpayer.  The municipal tax base was designed to provide revenues to service property. It was not designed to provide a broad range of social and health services to the public.  Yet, municipal councillors do not always seem to be sensitive to this point.  In response to the release of the 2022 budget, one councillor has already stated that we should add $1 million to an already rising police budget –already up by $1.8 million - to hire more officers. How simply adding more officers will fix the complex problems of crime and social issues needs to be explained.  As another councillor has noted, the costs for emergency services are exceeding inflation for the city again reinforcing the issue of sustainability.  It is only a matter of time before yet another helpful councillor with aspirations of grandeur will suggest that tax increases should match the new higher inflation rates nearing 5 percent nationally.  Unfortunately, residential ratepayers pay taxes out of current incomes that do not rise lockstep with inflation.

 

If Thunder Bay wants to spend even more on police as a solution to its crime and social problems, then it will have to spend a lot less on other things.  In the absence of external resource increases from the provincial or federal government, you cannot spend more on police services and just as much more on everything else and limit the tax levy increase to 2.44 percent.  There really is no other way to explain it. 

 

Thunder Bay Budget 2022: Once Again the Drama Begins

The City of Thunder Bay has launched its Budget 2022 consultation process with a town hall meeting that occurred on Tuesday of this week.  The online meeting hosted by the elected chair of the finance committee as well as the treasurer and city manager, provided an overview of city finances as well as the opportunity to ask submitted questions.  Of course, this ensured that nothing would be said about the ongoing leaky pipe saga which continues unabated in city neighborhoods or indeed anything else deemed too awkward. Not surprisingly, given the federal and provincial abundance that has been showered on municipalities everywhere, the financial impacts of COVID-19 in 2020 were borne well and even generated a surplus of about $4 million.   The presentation also made the usual plea for funding infrastructure deficits which apparently is estimated at $20 million every year.  It is a deficit which no matter how much is spent just seems to get bigger.

The presentation on the city's finances was actually useful in that it tried to present a discussion of how the basic budgets fitted together in terms of tax and rate supported expenditures as well as the capital budgets and provided a breakdown of where the money went.  The City Manager did go on to say that the budget was complex and the plethora of multi-colored slides did certainly convey an impression of complexity.  However, municipal budgets are actually not that complex - they are only presented in such a manner because it is to the advantage of administrators who may want to manage the amount of scrutiny. 

The CD Howe Institute has already noted that municipal budgeting in Canada is a bit of a travesty with opaque and late budgets that impede understanding and accountability.  Moreover, the format of budgets differs from the public sector accounting standards used in year-end financial statements making budgeting very  confusing, even for elected councilors. The fact is the budget is really quite simple.  Money comes in and money goes out.  In general, more money comes in than goes out which is why there is an operating surplus that is then placed into reserves.  

The most entertaining part of the evening was the City Manager's response to a question as to why Thunder Bay's municipal staffing levels seemed to be so much higher than other municipalities with comparable populations which of course leads to the real elephant in the room, the number of employees on the provincial sunshine list.  The answer provided was that the comparisons provided - municipalities like Kingston, Cambridge, Guelph, Waterloo and Whitby - were not really appropriate because they were lower tier municipalities.  Thunder Bay was a single tier municipality and responsible for delivering police, fire and paramedic services whereas these other lower tier municipalities only had to do fire. Indeed, the dancing around required to answer this question and other questions suggests that the current City Manager may have a promising future as a chief medical officer of health at either the federal or provincial level.

Now, Ontario does have two broad  types of municipalities: upper-tier and local with the latter divided into lower tier and single tier municipalities.  County and regional municipalities are considered upper tier.  A single tier municipality is a lower tier municipality that is not part of an upper tier.  A lower tier municipality is a municipality that is part of an upper tier - the City of Waterloo for example is lower tier because it has both a local municipal authority and is part of a regional municipality.  On the other hand, all the northern Ontario municipalities are considered single tier - including Sudbury, which despite being considered as a regional municipality, is regional only in terms of its geographic coverage. 

So, given that we should compare apples with apples, let us compare the five major northern Ontario municipalities in terms of their sunshine lists: Thunder Bay, Timmins, Sault Ste Marie, Greater Sudbury and North Bay.  Figure 1 presents the number of municipal workers earning more than $100,000 in 2020 and not surprisingly, the numbers track pretty closely with population size with Sudbury in first place with 592 employees on the list and Thunder Bay next at 557.   North Bay comes in next with 187, then Timmin with 144 and Sault Ste Marie - which is actually bigger than North Bay or Timmins - at only 114.  

 

 

Figure 2 takes the total salary bill for its members on the provincial sunshine list and divides by the number of employees on the list to provide the average salary per municipal sunshine lister.  In this chart, North Bay comes out on top at $131,015 per municipal sunshine lister followed by the Sault at $127,787.  Then comes Thunder Bay just below the Sault at $127,319 followed by Timmins at $121,643 and then Sudbury at $120,912.   This particular ranking would probably be the most pleasing to city administrators as it places Thunder Bay in the middle of the pack.  Expect to see this slide in a future City of Thunder Bay budget presentation.

 

 

However, the real comparison should be relative to your resources available and in this regards it is always per capita comparisons that should be done if you want an estimate of per person effects.  Population is correlated with the size of your economy and resources available so what happens when we take the total salaries paid to municipal sunshine list members and divide by city population?  Figure 3 shows this and reveals that Thunder Bay spends about $640 dollars per capita on its municipal sunshine list employees, well above the next highest North Bay at $475.  Sudbury is next at $434 followed by Timmins at $419 and Sault Ste Marie at $199.  Thunder Bay spends 35 percent more than North Bay in per capita terms and 47 percent more than Sudbury - which stylizes itself as a "regional" municipality.

 

 

The truth probably is that Thunder Bay spends so much because it is behaving on the expenditure side like a regional government especially in district housing, paramedic services and public health but it has the resource base of a single tier municipality.  Needless to say, we have here an irresistible spending force which has yet to come up against an immovable budgetary object.  That immovable budgetary object is the property tax and rate paying property owner of Thunder Bay whose taxes on comparable properties across these five cities are generally higher.  Property owners in Thunder Bay are essentially helping to pay for a regional empire they probably did not ask for.

Ontario’s Spring 2021 Budget: The Future Looks Bleak for Health Care

 

Well, the Ontario 2021 budget came out yesterday and it is rightly preoccupied with the COVID-19 pandemic.  COVID-19 funding and support will continue to flow for the next couple of years and along with the $20.1 billion of support in 2020-21, there will be an additional $6.7 billion and $2.8 billion in the subsequent two years before the government anticipates a return to  some type of normalcy. 

 

For 2020-21, the deficit is estimated at $38.5 billion and for the 2021-22 fiscal year it is expected to be $33.1 billion and then $27.7 billion the year after.   However, the government has actually proposed a fiscal plan for getting to a balanced budget –but it is very long-term.  Deficits are projected to continue falling until 2029-30 when there will finally be a $900 million-dollar surplus – assuming the projections for economic growth and spending take shape and indeed, that the world should last so long.

 

Figure 1 presents the numbers for total revenues, total expenditures and the deficit out to 2029-30 but also puts them into historical perspective.  The numbers are from the Fiscal Reference Tables for the 1990 to 2019 period with GDP numbers from Statistics Canada and the Ontario 2021 Budget for the years after up until 2029. If these projections come to pass, Ontario will have run since 2008-09 a total of 21 budget deficits before reaching “balance” in 2029-30 resulting in accumulated deficits of $284.9 billion.  By 2029, Ontario will be taking in $210.1 billion in revenues – up 35 percent from 2019-20 – and then spending $209.1 billion- up 27% from the same reference point. The net debt that will rise from $397.2 billion in 2020-21 to reach an astounding $585.3 billion by 2029-30 and a net debt to GDP ratio that will remain just short of 50 percent for an entire decade.  Moreover, as the stock of debt rises, so does debt service and its rises from $12.5 billion in 2021-21 to $20.6 billion in 2029-30 – an increase of 65 percent.

 

 

 

It indeed will be the roaring twenties when it comes to the growth of net debt and debt service costs in Ontario.  Ontario’s fastest growing expenditure category from 2021 to 2920 will be debt service costs.  The average annual growth rate for nominal health spending is expected to be 2.6 percent.  Education will grow at an annual average of 1.1 percent, post-secondary education at 1.2 percent, children and social justice comes in at 0.6 percent annually (so much for children as the future) and interest on the debt at 5.1 percent. 

 

The results for health care spending are particularly at odds with the Ford government’s commitment to increasing hospital capacity and long-term care.  While base health spending – that is not including the short-term COVID-19 bump -  is projected to grow at 2.6 percent a year, it means that given population growth of about 1 percent annually and inflation of 2 percent, real per capita spending on health will at best stay flat and even decline somewhat.  

 

This will come after nearly a decade of relatively flat real per capita provincial government health spending in Ontario and it seems to conflict with government claims it is going to boost health and long-term care. We do seem to be heading for a rather dire fiscal future in which the budget is not going to be balanced, the public finances are not sustainable and spending on important things like health will actually decline in real per capita terms.  It is indeed a rather bleak looking future for health care in Ontario despite all the government spin.

What Ontario Needs to Do In Today's Budget

 

The Ford government will table Ontario’s 2021 budget on March 24, at a time when there’s an overflowing plate of pressing policy issues. Along with continuing the fight against COVID, sorting the ongoing fallout in long-term care, promoting economic recovery and addressing solvency issues in the university sector, there’s also the matter of the province’s finances.

Indeed, there are probably not enough hours in a day for the government to deal with the onslaught of policy issues and their cost-benefit calculations. So, one must prioritize.

First is COVID-19, which is seeing a renewed rise in cases. Given the public fatigue with restrictions, it’s now a race between the virus and vaccinations. The vaccination process is ramping up, but speed is the question. To vaccinate 14 million Ontario residents (with just one dose) by the end of June requires dispensing nearly one million shots a week effective immediately. Ontario usually orders enough flu shots to vaccinate 30 to 40 per cent of its population every year with five to six million flu shots dispensed in just a few months. As such, it should be well within the province's technical ability to effectively double that rate in an emergency. Indeed, Premier Ford has affirmed the province’s ability to administer 4.8 million vaccine shots a month. Yet it’s currently running at about a quarter of that rate—or about 1.2 million shots a month—because in the end, you still need a consistent and abundant vaccine supply.

Second, there’s the economic recovery, both short and long-term. According to the Financial Accountability Office of Ontario (FAO), the broad-based lockdowns have resulted in a 5.9 per cent drop in Ontario real GDP in 2020, the largest annual decline in economic output on record. However, assuming vaccines are distributed to the general population over the course of 2021 and government lockdown restrictions are progressively eased (and this third wave does not spiral out of control), Ontario’s economy should rebound strongly. The latest labour force numbers from Statistics Canada suggest employment is rebounding, with 100,000 jobs created in February and the unemployment rate falling a full percentage point to 9.2 per cent.

However, most of Ontario’s February employment gains were in part-time work with notable increases in accommodation, food and retail trade. These are fragile gains for an economy that seems to always be teetering on the brink of yet another lockdown. Moreover, the long-term picture is more ambiguous. On the one hand, the U.S. economy is recovering robustly, and given Ontario’s integration of exports and production with American business and supply chains, one might expect smooth and sustained growth prospects once the pandemic is behind us. The province’s northern resource sector will certainly benefit from the uptick in commodity prices for minerals and lumber.

At the same time, the Biden administration is sending mixed signals on its degree of economic engagement with its traditional partners. One of President Biden’s first actions was an executive order imposing strict new made-in-America rules for U.S. government spending with limited exceptions, meaning the spillover from the U.S $1.9 trillion stimulus program could cut Canadian companies out of the procurement process.

And third and finally, there’s the elephant at the cabinet table—Ontario’s fiscal picture. According to figures released in the fall, the 2020-21 fiscal year was expected to see a $38.5 billion budget deficit followed by $33.1 billion in 2021-22 and $26.2 billion in 2022-23. This would see Ontario’s net debt climb to $472.9 billion from $335.2 billion in 2019-20. While one could opine that the scale of deficits and pace of debt accumulation is mainly a function of the short-term rise in spending needed to fight the pandemic and the short-term collapse in revenue, the government must provide some plan to balance the budget over the medium term. Next week’s budget is a good place to start.

In a sense, these three policy problems are all related. End the pandemic and the economy will recover. Once the economy recovers and growth resumes, government revenues will recover and it’s reasonable to expect the deficit to shrink. The problem is, this has been the standard way to deal with Ontario’s budgetary shortfalls—hope you can grow your way out of it. One might term it faith-based fiscal planning, and its track record has not been successful.

According to figures from Finances of the Nation, the last time Ontario’s budget yielded even a small surplus was in 2000-01. Since then, there’s been a budget deficit every single year with nominal net debt rising from roughly $130 billion to reach nearly $400 billion by 2020-21. Apparently, there’s never a good time to deal with Ontario’s long-term structural gap between revenues and spending. If its not a recession, it’s a global financial crisis. If it’s not a financial crisis, it’s weak economic growth. If it’s not weak growth, it’s a need to invest in the future given low interest rates. And now, with a pandemic, one does not have to be very imaginative to see where this is going.

In the absence of a concerted effort to address its structural fiscal gap, the pandemic will pass but Ontario’s net debt will continue to grow.

This originally appeared in the Fraser Institute Blog, March 22^nd, 2021.

The Zaniness Continues at Thunder Bay City Council

 

Canada’s longest running combination of basic income for politicians experiment and situation comedy continues with the weekly meetings of Thunder Bay City Council as they wrap up their budget reviews and deal with their usual business at hand.  For those of us of a certain vintage, the online meetings do look like a continually shifting combination of the Brady Bunch intro and Hollywood Squares and during the long meetings one can draw some amusement from deciding which councillor or administrator is playing the role of Paul Lynde, or perhaps Gladys, Marcia or Peter. 

 

Nevertheless, even the councillors themselves seem to be increasingly exasperated by the meetings with last week seeing one councillor complain out loud about accomplishing nothing after several hours of debate on the presence of hockey nets at city skating surfaces produced no solution.  Several weeks ago, the chair of the budget committee’s facial expression was priceless as one councillor for whatever reason went on a bit of a rant that the city budget was so complicated that it made him dizzy.  It would appear that fiscal vertigo is one of the job hazards of being a Thunder Bay City Councillor.

 

And last week’s meeting also dealt with the free transit fare proposal and produced a suggestion that given the cost of implementing a completely free fare system, that perhaps there should be one free day a month.  One is surprised that the more progressive minded members of council did not use this opportune juncture to  borrow from the collective wisdom of our current Prime Minister and recently departed Governor General to state that we all experience reality differently and that transit patrons should simply decide when boarding the bus if they thought it was a fare free day.  In the end, Council simply decided to freeze transit fares saving riders $68,000 as it would appear that the $115,000 cost of one free day a month was better spent on a new Thunder Bay waterfront sign.

 

There are of course more serious issues to be discussed but councillors in Thunder Bay prefer spending time on these digressions to avoid the more serious business at hand.  To use yet another colorful marine metaphor, it would appear they are simply a school of freshwater smelts who rather than swim upstream to perform their reproductive duty as nature and need mandate, prefer to linger in the shallows, dally around the shore and even go in the opposite direction by joining the flow downstream.   In the end, they do not accomplish what they should and all they manage is entangling themselves on hockey nets and other debris. 

 

Among the more serious issues are two in particular.  First, there is the matter of the 2021 budget which after several review meetings has done little to further reduce the levy.  Apparently, the few hundred thousand dollars in savings that have been generated by the ponderous line by line review is seen as sufficient given that the starting levy increase came in at about two percent.  Suggestions of making more substantial reductions were rejected by most councillors and the Mayor, because they have apparently already made so many and they have been keeping levy rate increases after assessment growth at an average of 2.39 percent since 2012. 

The selective mathematical analysis leaves out the point that the total levy increase since 2012 has actually averaged just over 3 percent annually.  Moreover, one wonders how they can continually say they have made reductions when the total tax levy continues to grow faster than the rates of population growth and inflation combined.  It remains that the councillors have yet to seriously deal with the spending and staffing reform necessary to reduce the tax levy to more sustainable levels.  As stated previously on Northern Economist, given that nearly 60-70 percent of the municipal tax levy is spending on wages, salaries and benefits, there needs to be a policy of reducing the staffing footprint via attrition with reallocation to priority services and functions. 

 

The hard work of making more lasting structural changes in spending, given that Thunder Bay spends substantially more than other municipalities particularly on protection services and administration, is too much for our councillors to handle.  Instead, as shown in last week’s meetings, the councillors prefer the parry, thrust, dodge, spin approach to policy debate with several councillors shedding crocodile tears for the taxpayer’s burden and then calling for tax reform at the federal and provincial level to reduce the reliance of municipalities on property taxation.  No doubt, they will next send a delegation to Belgium requesting Pfizer speed up vaccine deliveries to Thunder Bay because the High Council of the Lakehead has decreed it.  Of course, there is a certain irony in the fact that external powers often respond to our City councillors and administration with the same casual indifference that Thunder Bay ratepayers have come to know.

 

And speaking of casual indifference when responding to constituents, secondly, there is the perpetually pesky matter of the pinhole leaks in the wake of the addition of sodium hydroxide to the water supply.  Thunder Bay City Council and Administration have delivered their reply in court.  In response to the lawsuit filed by St. Joseph’s Care Group (SJCG), they simply deny any responsibility for the problem.  Indeed, their position is summarized by:

 

·       the city reasonably and in good faith exercised its power resulting from policy decisions concerning the management, maintenance and modification of the water system

·       the city denies that its acts or submissions caused or contributed to the presence of pinhole leaks in copper water pipes

·       the city lawfully carried on its responsibilities for the general benefit of the community at large

·       the city at no time made non-natural use of its water supply or infrastructure

 

None of this is surprising as the City has basically denied any responsibility all along, nor has it offered any assistance given the hardship thousands of homeowners and institutions have suffered in Thunder Bay.  Indeed, the real problem with the pinhole leaks issue is not only whether they followed an approved process but also the City’s reaction of doing absolutely nothing to assist property owners once the problems became apparent. 

 

What is more surprising is the assertion that: “The plaintiff knew that its pipes were old and beyond their reasonable life expectancy, yet they took no steps to replace them, nor did they install water leak detection systems.” What they are essentially saying is that if your house in Thunder Bay is more than 30-40 years old, you should go probably go out and replace all of your piping as preventive maintenance.  The building codes in Thunder Bay are so high quality that houses have a forty-year expiry date.  That should be an interesting addition to Thunder Bay’s marketing as a destination for prospective businesses and immigrant seeking to come and set up shop in Thunder Bay.

 

Moreover, while the SJCG is represented by Cheadles LLP of Thunder Bay, the city has used the tax dollars of the affected parties to hire the Toronto Law Firm of Theall Group thereby ensuring the leakage of water pipes is being supported by the leakage of spending power out of the local economy.  But then, the hiring of Toronto law firms to deal with local residents whether it is litigation or labour bargaining has become a feature of publicly funded institutions in Thunder Bay.  No doubt, councillors will assuage their consciences by intoning the importance of shopping local in Thunder Bay and asking for the rest of us to support local business as we select companies to replace our copper pipes.  If that does not stimulate the economy, then having your housing stock expire every forty-years should do the trick in generating new housing construction projects for a non-growing and aging population.

 

The zaniness continues and we are all paying for it.

 

 

Why Can Ignace Get Nice Things and Not Thunder Bay?

 

It turns out that Ignace is getting its municipal snow grader outfitted with a “snowgate”.  Essentially, the snow plough is going to have a gate on it that lowers at the end of the blade when in front of a driveway thereby preventing snow from blocking the driveway while snow on the street is removed. Needless to say, the thought of not having to deal with a foot high pile of crushed ice and snow at the end of a driveway after a major storm makes winter much more bearable. However, given it is budget season, one wonders how expensive this might be?

 

As noted in the CBC story: “The gate cost $15,000, and is easy to operate, Taylor-Hertz said. The operator of the grader flips a switch, and the gate lowers when going in front of a driveway. Once past the entrance, the gate comes up, pushing snow to the side of the road. ‘A couple of our department heads got together, and talked about getting a snowgate for the snowplow, or the grader attachment, and it has alleviated a lot of problems for our elderly residents in our community, by taking the windrow away at the end of the driveway’."

 

The “snowgate” is of course essentially a windrow prevention program as opposed to a windrow removal program but in Thunder Bay it is apparent our municipal government is capable of neither.  The possibility of windrow removal in Thunder Bay is not a new issue.  During the 2020 municipal budget season, this very idea was discussed in Northern Economist but to no avail.  As noted on their web site by the City:

"No, windrows across driveways will not be cleared by City Crews. Residents are responsible for the maintenance associated with their driveway, including the portion that is on City property. It is that portion of the City property which has been designed to provide snow storage during the winter. The City does not give up the right to store snow in that area of the boulevard when it allows the residents’ driveway to encroach across City property. It is important to note City crews have the important task of plowing snow on all City streets as quickly as possible. Snow removal from driveways is not a program offered by the City. "

 

Apparently, our driveways over the boulevard to access the street are an "encroachment" on City property so they can do whatever they want with the land.

 

And of course, it is not just Ignace that seems to be adept enough to cater to the needs of its municipal ratepayers.  Richmond Hill has the Cadillac of programs and now removes the windrows on all residential driveways.  Richmond Hill windrow removal was implemented in 2019 for all 55,000 households for a total annual cost of $4.4 million dollars. Markham also does windrow removal but for qualified registered applicants who must either be over 60 years of age or if under 60 have a medical note saying they cannot shovel snow.  Even Toronto has some windrow removal depending on where you live in the city. 

 

While one does not expect the Richmond Hill program, it remains that when it comes to windrow removal, Thunder Bay is not even trying. Why?  That is a good question.  After all, when it comes to municipal spending, Thunder spends one of the highest amounts per capita across major Ontario municipalities.  How onerous might the total cost of $15,000 per city plow be given a $200 million dollar tax levy supported budget?

 

The answer is it is all about priorities.  While Thunder Bay does spend one of the highest per capita amounts of major Ontario cities, it has chosen to prioritize three things: general government, police, and fire services.  Indeed, of 27 major Ontario municipalities, Thunder Bay spends the most dollars per capita (about $1,000)  of its tax levy supported operating budget on these three things as illustrated in Figure 1.  Indeed, nearly 60 percent of Thunder Bay’s operating tax levy is spent on these three items - again, the highest of these 27 major municipalities.  

 

 

 

However, as we all learn in first year economics, given a fixed budget, more of one thing results in less of something else.  As a result, as shown in Figure 2, once police, fire and general government are removed from its spending, Thunder Bay spends the second lowest amount of the same 27 major Ontario municipalities and the lowest of the five major northern Ontario municipalities.  That means relative  to other cities, less money is spent for snow removal, parks and recreation, public transit, environmental services and numerous other things.

 

 

 

How can this be?  In the wake of my last colorful comparison using marine metaphors, think now of the City of Thunder Bay as a Roman war galley.  The municipal taxpayers are the galley slaves at the bottom of the galley propelling the City forward with their property taxes while sloshing about in the cascading bilge water provided by innumerable leaky pipes.  On the top deck, along with the municipal council gathered around their decision table sitting comfortably on their high chairs, are the neatly arrayed officers of the ship – police, fire and administration standing between the elevated stern of a new Turf Facility and a prow marked by a new police station.  They are looking proudly forward as they steer the ship into the wild blue fiscal yonder. One can almost hear the beat of the budget drum as the municipal council intones to the ratepayers in their best imitation of Quintus Arrius that “We keep you alive to serve this ship. Row well and live.”

 

You would like a “snowgate” you say?  Don’t be silly.  The City of Thunder Bay has already decided what we need.  Keep rowing.