Reading the Tea Leaves in Ontario's Cabinet Shuffle

 

Premier Ford has shuffled his cabinet and put in place the team for the last year of his mandate with an eye to next spring’s election.  It has been a tumultuous year for the Premier to say the least given the pandemic but with the end of the pandemic seemingly in sight, Ontario’s government now has to plan for dealing with the aftermath of the pandemic as well as the future.  Key portfolios remain in the same hands, but there are some notable changes.

 

Health and long-term care will continue to be important portfolios and here there is both continuity and change.  Christine Elliott remains Minister of Health and is Deputy Premier an indication of both her importance as well as the centrality of health.  As for long-term care, Merrilee Fullerton has been replaced by Rod Phillips.  This change has received a lot of media attention mainly because Fullerton’s departure is seen as a demotion and the resurrection of Phillips comes after last winter’s travel escapade to St. Barts and the theatrical staging to mask his absence.   However, going to Children, Community and Social Services is not necessarily a demotion given the size of the ministry in terms of its budget share.  And as for Mr. Phillips, well he has atoned for his sins and not allowing an otherwise competent person back into cabinet does not seem particularly productive.

 

The more interesting analysis and discussion with respect to health and long-term care is what the challenges are and how Elliott and Phillips will deal with them.  In the case of health, the pandemic has disrupted the system and along with everything else the FAO now predicts that it will take years to address the backlog of surgeries in Ontario that were delayed by the pandemic.  Indeed, the elective surgery backlog will reach 419,200 procedures and the diagnostic backlog will reach nearly 2.5 million procedures by the end of September 2021.  This is on top of dealing with COVID and its after-effects, the risk of another wave in the fall should the variants outstrip vaccination efforts and the human resources issues of a stressed health care sector.  This will all cost a lot of money.

 

As for long-term care, the long and short of the matter is that bed numbers from the early 2000s to the election of the Ford government stayed flat at just under 80,000.  The pandemic and its toll on long-term care homes resulted in thousands of beds being removed from service because they were 3-4 resident bedrooms more conducive to infection spread thereby reducing capacity even further.  On top of this the government has promised raising daily hours of care per resident from 2.75 to 4 hours, hiring 9,000 more PSWs and adding another 30,000 beds to this system.  This will all cost a lot of money,

 

As for money, the spring 2021 Ontario budget provided some interesting projections of spending by general category up to 2029-30.  Between 2020-21 to 2029-30, health spending is projected to rise from $66.7 to $82.0 billion.   This may seem like a lot but if you take the medium-term population projection scenario from the Ministry of Finance, assume inflation of about 2 percent and convert to inflation adjusted dollars, once the COVID-19 spending spike dissipates real per capita health spending can actually be expected to decline by about 11 percent from 2022 to 2029.  In moving forward their priorities, one hopes that both Elliot and Phillips are really good friends with Peter Bethlenfalvy who remains Minister of Finance though his Treasury Board responsibilities now go to Prabmeet Singh Sarkaria.

 

In other news of note, Ross Romano is no longer Minister of Colleges and Universities and has been moved to Government and Consumer Services.  One suspects there has been some displeasure with the handling of that portfolio by Minister Romano given that Ontario is the first province in Canada to see a university declare insolvency and seek creditor protection under the CCCA while simultaneously creating two new universities – Hearst and NOSM.  Such a feat of creative destruction has not gone unnoticed and the move to Government and Consumer Services is hopefully not a strategy to put Minister Romano in charge of a process to have the entire province of Ontario's operations seek CCCA protection given the ballooning size of the provincial debt and deficit.

 

The new incoming minister for Colleges and Universities by the way is Simcoe North MPP Jill Dunlop who moves there from being Associate Minister for Children and Women’s Issues so this is definitely a promotion.  Given that Minister Romano was from the north and thoroughly disrupted a northern university, one is a bit concerned that there may be a curse attached to this portfolio and Minister Dunlop may be fated to disrupt post-secondary education in Simcoe County.  That is of course the home of Lakehead’s Orillia Campus and one wonders if we are in store for the freeing of yet another institution from its administrative shackles by creating another stand-alone university?  Residents of Simcoe County who are planning to create an Orillia University Liberation Army may want to take notes from the Dean of the Northern Ontario School of Medicine.  In a recent virtual town hall, the Dean apparently referred to creation of a new medical university separate from Lakehead and Laurentian as “Emancipation.” I suspect that no one ever truly realized that the poor medical students in northern Ontario had actually been enslaved for the last fifteen years.  

 

On a final note, Greg Rickford is truly now King of the North.  The MPP for Kenora-Rainy River, assumes a merged role as Minister of Northern Development, Mining, Natural Resources and Forestry, as well as Indigenous Affairs.  Mr. Rickford has gained a reputation as being quite competent and unlike some ministers, he never makes the boss look bad.  He follows the last true King of the North who was Leo Bernier, a minister in the Davis government of the 1970s.  And another of my favorite northerners and the only current cabinet minister I have ever had the pleasure of meeting, Vic Fedeli, remains Minister of Economic Development, Job Creation and Trade and is Chair of Cabinet.  Congratulations to both Mr. Rickford and Mr. Fedeli. 

 

 

Thunder Bay's Worsening Tax Arrears Problem

 

This Monday evening, one of the items on the discussion plate at Thunder Bay city council will be the newest report on tax arrears.  This year’s report shows that the problem is definitely worsening in terms of the number of properties in arrears as well as the value of those arrears and the revenue foregone.  This year’s list also features the waterfront Delta Hotel which owes $865,277 in taxes to the city of Thunder Bay.

 

Indeed, 2019 sees a jump in both the number of properties in arrears as well as the value as Figures 1 and 2 illustrate. The total number of properties in arrears grew from 266 to 389 – an increase of 46 percent while the value in total arrears grew from approximately $2.5 million to $4.4 million – an increase of 76 percent.  The total value of tax arrears since 2008 comes in at over 10 percent of the value of the tax levy.  Residential properties in arrears grew from 232 in 2018 to 338 in 2019 – an increase of 46 percent.  Non-residential (i.e. business properties) in arrears grew from 34 to 51 – an increase of 50 percent.  Along with the Delta Hotels, some prominent businesses in arrears include the owners of Kangas Sauna as well as Arnone Transport. 

 

Now of course, some might be inclined to argue business has been hard hit by Covid-19, especially in the travel and accommodation sector given Delta Hotel's tax bill but the reality is the money owed is from 2019.  Part of the longer-term problem is the economy has been slowing in recent years and tax rates increasing.  Part of the problem is also that it is apparent that some businesses are engaging in creative payment solutions – essentially not paying their taxes – until they absolutely have to.  It is a bit of a creative financing game that essentially defers taxes into the future while allowing firms to retain the money in the present. 

 

Perhaps the penalties for deferring your taxes in this fashion are not sufficiently large for businesses?  According to the City of Thunder Bay:

 

“All payments must be received by the City by the due date to avoid penalty. Penalties will not be cancelled if you did not receive your bill. You will be charged a late payment penalty of 1.25% on your outstanding balance if your bill is not paid by the due date and on the first day of every month on any outstanding balance. The Not Sufficient Funds (NSF) fee is $40.”

 

However, one wonders if the creative business approach to property taxation offers a way out for beleaguered homeowners to register their displeasure with the City of Thunder Bay?  Just imagine if all those leaky pipe home dwellers actually got organized and started to withhold their payments by six months or so – on an average bungalow with say a $4,000 tax bill, you are probably looking at penalties of about $50 dollars a month (an upper bound based on $4000 - remember you pay in  installments so  the penalty on a missed installment is less).  True, after six months or so that is a substantial amount of change but just imagine if large numbers of homeowners in Thunder Bay got sufficiently incensed to seriously disrupt the City of Thunder Bay’s short-term cash flow – the penalties six months or a year later be damned?  Irresponsible? Yes.  One should always render unto Caesar what is Caesar’s.  Still, one really wonders what it will take to get City Council’s attention? Perhaps business is showing us the way forward?

What Drives Ontario University Deficits?

 

In the wake of the Laurentian insolvency, there is growing interest in the state of university finance in Ontario – at least amongst universities.  For the most part, for the Ontario government Laurentian and its plight  might as well be on the moon.  They would undoubtedly be much more preoccupied had the insolvency happened to the University of Toronto or Ryerson and then maybe not given at least one pundit has suggested that the current government really knows nothing about universities.

 

In any event, the final report on what happened at Laurentian that might shed a definitive story of what has happened there  is still to come though one media account summarizes it as too many programs, too many instructors, too many managers, too few students and not enough money.  And the previously mentioned pundit would add that tenured professors are overpaid while part-timers are underpaid, though relative to who or what is never elaborated upon.  That is essentially the level of financial debate regarding universities in Ontario.

 

So, what can we learn from  the information available on the recent state of university finances?  Well, an examination of university financial reports for 2020 is one way to start by comparing the deficits (-) or surpluses (+) of 20 Ontario universities.  It turns out that in 2020 a surprising number of universities did run a deficit – seven to be precise – but the majority ran surpluses.  The range runs from a deficit of -$21.5 million for Ryerson to a surplus of +$441 million for University of Toronto.  The interesting thing is how could both the largest and the smallest university deficit both be in downtown Toronto institutions given the similarity of the operating environment but there it is.

 

Comparing deficits for Ontario universities really needs to be adjusted for the scale of institutions in terms of enrollment given that total enrolment in 2020 (as taken from the AUCC web site) ranged from a low of 1,370 for Algoma University to a high of 93,081 at University of Toronto.  Using absolute deficit numbers is not going to tell you much.  Figure 1 thus presents the deficit (-)/surplus (+) per student.  The largest deficit per student is actually Wilfrid Laurier at -$527 per student in 2020 followed by Ryerson at -$455 and then Nipissing and Laurentian at -$374 and -$339 respectively.  Deficits are not a specific northern Ontario problem given the list includes Wilfrid Laurier, Guelph, Ryerson, Windsor and Ontario Tech. 

 

 

 

Are there any characteristics that might explain why these institutions  had deficits in 2020 while the others had surpluses – the largest at Algoma and University of Toronto respectively, now there is an interesting juxtaposition – at $5364 and $4,738 respectively.  The first and the last in terms of total enrollment both have the largest surpluses per enrolled student.   Who would have thought?  Algoma and U of T as the Alpha and Omega of Ontario universities.

 

Why not address the elephant in the room.  Do deficits or surpluses have anything to do with how generous faculty salaries are?  Figure 2 provides a ranking of average faculty salaries (all ranks) for these 20 universities taken from Statistics Canada with the exception of Algoma, which for some reason is not in the salary statistics for universities from Statistics Canada.  However, I took an average of the salaries provided in the latest Ontario salary disclosure (which I would imagine actually biases the number upwards a bit).

 

 

 

The results here are also interesting.  Unlike the steepness of the deficit/surplus profile, this profile is rather gentle going from a low of $111,000 at OCAD to a high of $176,550.  University of Toronto not only manages to generate the largest surpluses in both absolute and per student across all of Ontario universities, but it has managed to do it with the highest average faculty salaries. Laurentian, is decidedly middle of the pack when it comes to faculty salaries along with Wildfrid Laurier and Western.  Indeed, if you plot the deficit/surplus against the average faculty salary for these 20 universities, you get Figure 3 which gives the counterintuitive result (especially if you are an Ontario cabinet minister) that higher faculty salaries are correlated with bigger university surpluses.

 

 

 

Of course, Figure 3 is only an association.  What you really want to see is if there indeed is a statistically significant relationship between the two variables after controlling for some confounding factors.  Figure 4 presents the results of a very simple linear regression of the surplus per student on average faculty salary (avgfacsal), per student tuition revenue (perstudenttuition), whether or not the university has a medical school (medschool)  (which can be an expensive proposition), and the ratio of government grant revenue to tuition revenue (granttuitionratio) for the university.  Moreover, to account for the scale of institutions it is a weighted regression with the weighting factor being total student enrolment. 

 

 

 

The results show that arguing that higher faculty salaries will give you a better financial position is indeed not the right call.  On the other hand, the coefficient is also not negative nor significant for that matter.  In the general scheme of things, universities are not so dopey as to go around paying more than they should for the help nor are they captives of fiscal terrorist faculty associations when it comes to compensation.  Guess what? Having a medical school is not significant to a deficit/surplus position.  More interesting,  neither is the ratio of grant revenue to tuition revenue.  That is to say, government support of universities has stagnated so much that it really was not a statistically significant determinant of a university’s financial health in 2020. That is not to say it could not be or never was but in 2020 it is not.

 

What is the most significant determinant in this albeit limited set of variables?  Tuition revenue per student.  The regression coefficient is positive and quite significant.  Figures 5 shows that there is indeed a nice positive slope to the relationship between surpluses per student and total tuition revenues per student.  And who are those two high-flyers at the far northeast corner of the chart? Why the Alpha and Omega of Ontario universities - you can decide which should be which.  Figure 6 shows it is little Algoma U – obviously the little university that could - and big U of Toronto – which is really not a surprise.  They appear to have boosted their enrolment as well as got the right mix of students (i.e. higher paying international students) to ensure their financial survival – at least for 2020.  Who knows what the future will bring?

 

 

 

 

 

Input Into the Federal 2021 Budget Process

 I had the opportunity to present via Zoom at the House of Commons Standing Committee on Finance today. It was a very good experience with interesting questions and discussions afterwards. Here is the prepared text of the remarks I delivered during my five minutes:

Dr. Livio Di Matteo

Professor of Economics, Lakehead University, Thunder Bay, Ontario

 

Presentation for House of Commons’ Standing Committee on Finance, Pre-Budget Consultations in Advance of the 2021 Budget, December 11^th, 1-2pm

 

Good Afternoon:

 

Thank you for the invitation to speak at these Pre-Budget Consultations in Advance of the 2021 Budget. I commend the Committee for reaching out into the academic community of economists for public input on this important process.

 

It has been said many times that the COVID-19 pandemic is an unprecedented event in recent history, and this context frames my input into the federal budgetary process.

 

The Fall 2020 Economic Statement documented the unprecedented effects and response to the COVID-19 pandemic. For fiscal year 2020-21, real per capita revenues in $2014 will have declined by 20 percent from year previous while spending is up by 70 percent.  In real terms, this is the highest per capita amount ever spent in Canadian fiscal history (nearly $16,000 in 2014 dollars).  As a share of GDP, the projected deficits will be the second largest in Canadian fiscal history- exceeded only by World War II. 

 

The Fall Statement reveals spending eventually declining and a deficit approaching one percent of GDP by 2025-26 but also a federal net debt rising to $1.5 trillion and a net debt to GDP ratio remaining in excess of 50 percent. Despite current low interest rates making current debt look manageable, it remains that any sudden future shocks – to the economy or even interest rates - could be more difficult to manage as debt burdens rise.

 

The size of the initial fiscal response to the onset of the pandemic in the February to April period of 2020 was appropriate.  However, the continuing unprecedented fiscal response generated results that have not paralleled the fiscal support provided.  The fiscal assertiveness of the federal response to the pandemic was not matched by assertiveness in targeting the response as might have been afforded under the federal spending power or the power of quarantine that exists under the Constitution.  

 

Moreover, much of the spending went to individual income transfers in excess of the pandemic generated income losses.  After all of this unprecedented response, we are now in the midst of a more severe second wave that threatens the economic recovery that began over the summer.

 

The Federal 2021 budget must learn from the past and better target any additional projected fiscal response with a view to long-term economic recovery and growth.  The additional spending must be directed towards productivity boosting investments.  Even prior to the pandemic, the business investment to GDP ratio had been faltering.  While the short-term income support provided at the peak of the pandemic was important, if we are to continue to spend at these record levels, then there must be more to show for it.

 

Government spending priorities should be directed towards initiatives for boosting our long-term productivity via investment in physical and human infrastructure. Public infrastructure in roads and transport, bridges, communications, schools, health care, water, sewer and environmental systems require investment.  Education has taken a major blow during the pandemic and we need to ensure that students at the elementary, secondary and post-secondary level, do not fall behind in educational achievement and opportunities and reduce future labour productivity growth. 

 

Then, there is the matter of our national defense and security in a more multi-polar and unstable world that requires equipment and resources and vision.  And there is a need for private sector investment in sectors producing goods and services that we can export and continue to earn our way in the world. If our export markets falter and our incomes drop, there will be no international emergency response benefit payments offered to us.  The federal government, therefore, should work with the private sector in assessing its investment needs.

 

Historically, excessively large amounts of government spending are not well correlated with long-term economic growth.  It is not that government cannot help the economy.  However, effective government requires knowing when to spend and when not to spend and more importantly, what to spend the money on. 

 

If we are to embark on a program of infrastructure spending, we must ensure that projects with the best return are selected. Assorted public projects should be assessed by an arms-length panel of key leaders with expertise in business, accounting, engineering and economics who can make recommendations in areas of national interest. It would be extremely unfortunate if federal infrastructure money flowed to community or sports centres rather than say roads and sewers simply because "shovel ready" plans exist for the former but not the latter.

 

Thank you.