It Is Not Over Yet

 

On Monday evening, Thunder Bay City Council halted the process of constructing a new indoor multi-use turf facility by voting to not award the tender for the project.  This does not mean that the project is dead.  Rather, it was a decision made by the majority of councillors – many of whom are in fundamental agreement with the project but not its timing or cost – to not go with the current lowest bidder.  From an initial proposed $33 million, the project including interest on the 25-year debenture has now climbed to $46 million. That the project is not dead yet was confirmed by the Mayor in an interview this morning on CBC radio as well as other public comments made by proponents of the project.  This push to continue the project is also occurring despite what appears to be a rather large – albeit unscientifically polled – majority of 80 percent opposed.

 

The meeting on Monday evening was made remarkable by the concerted push by council members supporting the project to become increasingly strident about the need to invest in the multi-use turf facility project.  The standard claims about improving quality of life and attracting people to Thunder Bay were made but then the debate went a bit off the rails.  One councillor embarked on a sarcastic speech that essentially amounted to bullying the other councillors into seeing things his way by shaming them by arguing that they preferred to do nothing rather than something.  One is surprised that the councillor did not regale the councillors with a lengthy speech about how doing nothing does not make history.

 

The same councillor also tried to guilt the opponents with a fairness argument that other sports groups had gotten city-built facilities and now it was the turn of the groups using the Turf facility.  Indeed, in striking a coalition of support, the list of users for the facility now goes beyond soccer and apparently includes some eleven groups including Thunder Bay’s legendary pickleball players.  Moreover, the facility can even be used to host conventions.  It apparently is a reincarnated Events Center also - which incidentally a half-decade ago was also unable to garner federal and provincial support.  With all the proposed users, one wonders how many children will actually get field time to play soccer?

 

However, Thunder Bay’s grand recreational expansions of the past were done at a time of a much more buoyant tax base and economy.  It is not the 1970s anymore.  True, there will always be griping and opposition to spending on large projects but the other pressing issues facing the City – social housing for the homeless, crime, water infrastructure via the leaky pipe drama affecting thousands of homeowners – were conveniently not brought into the picture. Moreover, treating the turf facility as an isolated stand alone project when there are other infrastructure projects to be decided  - including a new police station - is disingenuous to say the least.

 

The councillor then began to draw comparisons with the Thunder Bay Art Gallery project despite the fact that the $30 million gallery project was largely being funded by its own fundraising campaign with a five million dollar contribution by the City of Thunder Bay as opposed to the Turf facility which will see its entire cost funded by the City via its own money  and a debenture. The Turf facility project was initially advanced as going ahead with partners at the federal and provincial level and funding from these other levels has never materialized.

 

The Mayor was somewhat more diplomatic saying he did not want to make comparisons but then proceeded to draw comparisons to the hospital project twenty years ago when the City made a $25 million contribution to the largely provincially funded project that was to be funded by a temporary tax levy increase.  The Mayor neglected to mention that after the funds had been raised, the tax levy was never removed and became permanently entrenched.  Moreover, unlike the Turf facility which had a private sector proposal for alternate facility that was rejected by City Council, hospital construction and operations in Ontario have always been largely public sector driven.  Even more, hospitals are seen as public necessities whereas sports facilities, while valuable and important, are difficult to place on the same level.

 

More interesting were the comments on the CBC radio interview this morning where the Mayor stated that the City’s finances were very good with only a $1.15 million deficit projected for 2021 and the lowest tax increase in a decade and that we could obviously afford the project.  Making long term commitments based on one year’s finances is never a good idea particularly giving recent City Budget projections calling for tax increases of 3-4 percent in years to come.  Moreover, not so long ago there was a wringing of hands over the cost of COVID-19 and only a few weeks ago the Mayor was again lamenting the need for more provincial financial support. 

 

The thing here is that in the end, in true Thunder Bay fashion, there were two groups involved in getting a new facility that were unable to work together.  One side earlier on seems to have successfully torpedoed the alternate group’s private sector proposal and have essentially gotten key city politicians and administrators on side with their idea for the publicly funded facility.  The initial proposal was for $33 million and was expected to garner support from other levels of government.  As noted, the total cost is now expected to be $46 million and shovels have not even gone into the ground yet, which once begun will no doubt reveal cost surprises. Given the history of rising costs in Thunder Bay public sector projects some councillors have rightly begun to balk. 

 

Yet, in the end I think the project will not die.  In Thunder Bay, proposed public spending projects are never too costly to completely die - they just need to evolve and stay the course.  The reason the Events Centre died in 2015 was the complete dearth of support from other governments. This time they can apparently at least tap into the Federal Gas Tax money.  The next two weeks are going to see a lot of horse-trading and behind the scene maneuvering led by the Mayor in particular in an effort to salvage the project in some format. Some of it will involve providing assurances regarding the state of the finances of the city and project costs.  As many have noted, all Monday’s vote did was turn down the current bid.  Even many of those who have been publicly branded by proponents as short-sighted civic do nothings for not supporting the project are actually not opposed to the turf facility – they are concerned about the timing and cost of the project.  If there is a convincing operatic performance by proponents that we can afford this after all, it will go ahead.  Unfortunately, this is simply business as usual when it comes to public spending and project development in Thunder Bay and continues Thunder Bay’s increasingly outdated civic vision.

 

 

University Insolvency in Ontario: Who Might Be Next?

 

Laurentian University’s filing for insolvency and creditor protection has of course sparked some concerns that other Ontario universities may also be close to the brink.  Alex Usher in his HESA Blog has done a number of posts on Laurentian and university finances in general as of late and did some digging looking at Canadian universities in general with an emphasis on their deficits.  While much has been made about the impact of COVID-19 on university finance, it remains that in the case of Laurentian, the problems appear to be long-term and structural with years of repeated deficits combined with weakness in in tuition revenue and student enrolment growth.  This of course raises the question as to how the other universities in Ontario have been faring with these types of indicators.

 

Using consolidated financial statements for Ontario universities, the following figures plot three variables and rank the performance universities from highest to lowest.  With the exception of Ryerson university, which only posts the last three years of financial statements, all of the other universities have them posted with some going back nearly two decades.  Figure 1 plots the ratio of long-term debt to university revenues to provide an indicator of the indebtedness of universities.   

 

 

 

While interest rates are currently quite low and debt service costs not a large burden, it remains that some universities face higher burdens than others here.  Figure 2 plots the number of deficits since 2010 (with Ryerson* based only on the last three financial statements).   

 

 

 

Finally, Figure 3 works out the average annual growth rate of student fee revenue from 2015 to 2020 as an indicator of recent revenue growth (with Ryerson* again only available for the last three years).

 

 

 

In terms of debt to revenue ratios, the most indebted universities are Ontario Tech, Ottawa, Wilfrid Laurier, Lakehead and Windsor.  In the best shape are Guelph, McMaster, Toronto, Carleton and Waterloo.  Interestingly enough, Laurentian is mid-ranked with respect to long-term debt suggesting it is not a key source of its current problems.  While long term debt is not all of a university’s long-term labilities (for example, the cost of pensions and other employee liabilities are omitted), it nevertheless suggests that some have acquired a lot more debt than others – much of it before 2010 during a capital expansion phase.  However, long-term debt acquired for capital projects has not been the source of problems per se given that interest rates are low and debt servicing costs for most universities not that substantial.

 

In terms of deficits since 2010, the winner is Laurentian which has accumulated nine.  Closely following is another northern Ontario university, Nipissing, which comes in at seven.  After that are the Ontario College of Art Design, Brock and Windsor though it should be noted Brock’s four deficits were before 2015. At the other end of the spectrum, Carleton, McMaster, Waterloo and Western appear to have not had a deficit since 2010.  This is a key part of the problem for university finances given that some universities appear to have been persistently unable to balance their budgets over the long term indicating a deeper structural imbalancebetween revenue and spending.

 

Finally, when one looks at the average annual growth rate of student fee revenue since 2015, it is a northern Ontario university – Algoma – that does the best in the wake of it opening a satellite campus in Brampton.  Following it with annual tuition revenue growth well over 5 percent annually are Toronto, McMaster, Waterloo, Queens, Trent, Lakehead, OCAD and York.  The weakest performers are Ontario Tech, Laurentian and Nipissing.  Tuition revenue growth is important given that government grants have been frozen.  Even if there is a bit of a tight situation between revenue and spending, keeping the student fee revenues up by increasing enrolment keeps you ahead of the problem.  Falling behind here simply allows the other problems to add up.

 

The consistently worse performers across the deficit and tuition revenue categories are Laurentian and Nipissing.  Ontario Tech does not do so well on the tuition revenue growth front while OCAD has had deficit issues.   If there are future problems in the Ontario university sector, they may likely emerge first across these universities but who knows. Life can be full of surprises.    Much of course depends on the continued flow of students and tuition revenue and the interesting development this year is the fact that first choice Ontario applications were down for all but six of Ontario’s universities. Of course, these application statistics do not take into account out of province applicants or international students but nonetheless they are a cause for worry. 

 

Can any university expect any government assistance if enrolment tanks? Probably not.  The provincial government was aware of Laurentian’s problems and to date has chosen to let them resolve their issues via insolvency and restructuring no doubt pour encourager les autres.  In any event, government has been a contributing factor by cutting tuition ten percent and then freezing it to score political points while freezing grant revenue for years.  Universities are asked to operate like a business and be more customer oriented but their prices are regulated. Universities caught in financial difficulties may really have no option in the wake of a fall in student demand but to cut costs and in the case of Laurentian that may result in layoffs and program reductions. However, the reforms should not focus simply on short term cost cutting.

 

At least one astute observer has noted that many universities are over governed with high administrative and overhead costs and part of reforms of the university sector to reduce costs need to address this over governance.  There is simply too much middle management with numerous faculty Deans, Executive Deans and Vice-Provosts and their associated retinues of assistants, coordinators and facilitators.  Part of this is self-induced empire building but part of it is also federal and provincial regulatory make work environments.  Getting rid of middle management and decentralizing more to Department levels or simply combining faculties is one way to go.  A case in point, many smaller universities like my own which two decades ago had simply one faculty for Arts and Sciences and another for Professional Schools each with a Dean now have many more faculties. 

Why Laurentian Has Filed for Creditor Protection and Not Lakehead

 

Yesterday’s news that Laurentian University is facing insolvency and has filed for protection from its creditors in the wake of a deteriorating financial situation brought about by the impact of COVID-19 is an important development in Ontario’s university sector.  Laurentian’s President Robert Haché said the move was necessary to put Laurentian on a firm footing after years of deficits and that: ““We are facing unprecedented financial challenges and our financial health is currently amongst the weakest in the province compared to other universities.”

 

Among the compounding factors to the impact of COVID-19 on the university’s finances were years of recurring deficits, the poor demographics in northern Ontario, the closing of the Barrie campus project and the Ontario governments decision to first cut and then freeze tuition fees.  Needless to say, the recent Ontario University application numbers showing a drop in first choice applications for nearly two-thirds of Ontario universities and surges in applications for the remainder – McMaster, Waterloo, Toronto, Western, Ottawa and York - has not helped matters.  Obviously, given the COVID situation, all the GTA students really want to stay in the GTA next year though how they are all going to be accommodated is beyond me.  There may be online recruitment opportunities for the smaller universities outside the GTA.

 

Of course, Laurentian’s predicament and that of smaller universities in Ontario in general is not that surprising.  As noted over a decade ago, one of the perils of being a small university was the bigger burden of debt acquired in the first decade of the 21^st century as universities undertook massive capital spending projects to deal with rising enrollments, infrastructure renewal and program expansion even though long-term demographic projections suggested that enrollment growth would eventually ebb .  Long term debt as a percentage of total university revenue was higher in smaller Ontario universities though a decade ago, Wilfrid Laurier, Lakehead and UOIT seemed in worse shape than Laurentian.

 

So, why is Laurentian in trouble and not say Lakehead? Using data from annual financial statements, it is fairly easy to piece together some answers.  The two universities are fairly similar, in terms of their total enrollment, though Laurentian is slightly bigger at just over 9,000 students in total enrollment while Lakehead is just over 8500.  Total revenues and spending are shown in Figures 1 and 2 and they also show similar size total revenue and spending envelopes over time.    

 

 

 

They also now have similar stocks of debt.  On the surface, Lakehead has a bigger stock of long-term debt than Laurentian (see Figure 3) but the stock of debt has gradually diminished since 2011-2012 whereas Laurentian appears to have acquired its debt more quickly in recent years. 

 

 

 

 In a sense, Lakehead has had more time to deal with its debt stock in the wake of the rapid acquisition prior to 2006. Most of it is also the result of capital projects rather than cumulative deficits.  Since 2006, Lakehead has only run deficits three times (Figure 4) whereas Laurentian has managed to run one 11 times. Continual deficits have a nasty habit of adding up over time.

 

 

 

Given nonexistent growth in government grants, a big difference between the two institutions has to do with where the recent revenue growth.  Laurentian as a bilingual university has had difficulty maintaining and staffing the range of programs necessary to attract enrolment to offset weak grant revenues and the tuition freezes.  Offering programs in both languages in a sense has harmed potential economies and the cancelled Barrie campus was supposed to be an avenue for growth though how successful it might have been is an interesting question.  Lakehead on the other hand has been able to expand into international enrolment and particularly graduate international enrollment and attract them to their campus.  Unlike residents of the GTA, international students seem willing to try out Thunder Bay. 

 

 

 

As Figure 5 shows, Lakehead’s tuition revenue since 2006 has been consistently above Laurentian – even though it is the slightly larger university – and it has actually grown rapidly over the last few years.  Laurentian has not and its persistent deficits mean that it will need to take some steps to deal with its finances though advertising to potential students you are insolvent is probably not the best recruiting tool.  Given the application drops across the Ontario system for smaller universities, the Ontario government will be facing increasing issues in its university sector in the wake of it deciding to hamstring university revenues on the tuition front.  In the end, universities need to make sure that their costs are balanced by their revenues and that will be a challenge in the current environment.

The Shape of Federal Fiscal Things to Come: Chrystia Freeland’s 1 Percent Solution

 

Yesterday’s Federal Fall Economic Statement is actually quite a remarkable document. On the one hand, given the expectations being raised that the deficit for 2020-21 might reach $450 billion, coming in an $381.6 billion has probably caused many to heave a sigh of relief.  That was probably the intention. Of course, that $381.6 billion figure is the lower bound estimate given economic assumptions and could be as high as just under $400 billion.  Moreover, none of the scenario deficit projections were factoring in the $70-$100 billion in stimulus spending that was to be spread over 3 years once the pandemic was brought under control.

 

The Fall Economic Statement appears to be as much a political as it was an economic and fiscal document in that it continues federal spending and support for the pandemic as well as positions the government for substantial spending announcements of stimulus spending in the spring probably in advance of a federal election once the pandemic appears to be under control – which it currently is not. 

 

If one takes the base case scenario, revenues for 2020-21 will be $275.4 billion and spending $641.6 billion for a deficit (after actuarial adjustment of federal liabilities – the recent twist in federal finance reporting) of $381.6 billion.  For 2021-22, revenues are expected to rise to $335.9 billion and spending decline to $441.5 billion for a deficit of $121.2 billion.  After that, deficits will continue to decline reaching $24.9 billion by 2025-26 and returning us to the deficit range of the 2018 to 2019 period.  This period of deficits will take the federal net debt from $772.1 billion in 2018 to reach $1.494 trillion by 2025.

 

The document is quite clever because it lays out a fiscal plan with a target – which critics have been clamouring for – without actually stating there is a fiscal target.  The pandemic is essentially a dis-equilibrium situation for the federal government’s finances and the federal government hopes to return to its version of equilibrium finances by 2025 at which point revenues will be higher at $417.3 billion and spending at $484.4 billion.  

 

 If one takes their GDP growth forecasts into account, the deficit to GDP ratio for 2020-21 is actually just over 16 percent but will decline to 5 percent the year after and then essentially reach 1 percent.  Prior to the pandemic, a deficit to GDP ratio of 1 percent was what the federal government saw as perfectly reasonable given low interest rates and GDP growth rates and that is what they want to get back to.  It is the 1 percent solution.

 

To place all of this in very long term visual perspective, data from the Jorda-Schularick-Taylor MacroHistory Data Base, Statistics Canada, my federal fiscal history and the 2020 Fall Economic Statement is used to generate figures 1 and 2 below. Figure 1 shows real per capita federal revenues and spending from 1870 to 2018 and then forecasts from 2019 to 2025.   

 

 

 

If all pans out as forecast, then the surge in spending and revenue collapse of the pandemic will subside with real per capita revenues and spending eventually up 2.5 percent and 3.4 percent respectively from their 2018 amounts.  That will be viewed as a perfectly acceptable growth when spread over 5 years. Figure 2 presents the deficit to GDP ratio with the pandemic showing the second largest deficit to GDP ratio in history but with a return to roughly where it was just prior to the pandemic.

 

 

 

This is the shape of federal fiscal things to come, assuming the federal government’s vision pans out.

 

 

 

 

A Primer on Recent Municipal Finance for Thunder Bay City Council

 

Well, it is going to be another fully packed agenda at the meeting of Thunder Bay City Council on Monday October 5^th.  There is the usual plethora of reports and decisions to go through most notable of which are yet another vote on the proposed Thunder Bay sign and a report on Thunder Bay’s Centennial Botanical Conservatory recommending substantial re-investment in the facility.  Of course, this is contrary to what was recommended in the program and service review which recommended closing it.  

 

For those of us of a certain vintage, we are able to remember that the Botanical conservatory project was a Canadian centennial year project in 1967.  It has provided an oasis of greenery during harsh winters here but over the years was allowed to deteriorate to the point where it seemed the facility was on the chopping block. Thunder Bay in general likes shiny new things and once acquired, tends to neglect them.

 

However, it appears it will be saved after all and the estimated costs for updating facilities at the Conservatory prepared by Gord Wickham, Vice President of Colliers International Projects Leaders sums to about $951,000 and not the estimated $2.8 million to $3.2 million originally stated.   Of course, given that the new turf facility will sum to over $50 million by the time it is done, just under a million dollars is  a modest amount to invest for a city with a tax levy pushing $200 million annually and growing by about $6 million a year.   

 

The art of good municipal public finance is making decisions that represent good use of taxpayer dollars and reinvesting in the Conservatory would be a good 50^th anniversary project for the City given it also rebuilds something that was built in commemoration of the 100^th anniversary of Confederation.  Two birds with one stone so to speak in a city with a lot of targets and not enough stones.  More to the point, it is something that would not exist without public sector investment – unlike a turf facility for which there are qualified private investors who would have built on their own but now do not wish to compete with the city.

 

Of course, not on the agenda is the recent Fraser Institute report on municipal spending and finances in Canada authored by yours truly but also worth a read by the councilors as it represents a nice primer on the forces driving municipal spending.  Local Leviathans: The Rise of Municipal Government Spending in Canada, 1990-2018 argues that Canada’s municipalities have increased their spending and employment over the last two decades while maintaining that they are fiscally challenged. Between 1991 and 2018, total real local government revenues in Canada grew from $107 billion to $186 billion—an increase of 74% while real per-capita total revenues have grown from $3,831 in 1991 to $5,024 in 2018—an increase of 31%. Total real property-tax revenue in 2018 dollars grew from $42.2 billion in 1991 to reach $71.7 billion by 2018—an increase of 70%. Meanwhile, revenue from government grants grew from $48.7 billion to $80 billion for an increase of 64%, while all other revenues grew 107%—from $16.6 billion to $34.4 billion. Thus, own-source revenues of one type or another saw the most robust growth.

 

The increase in operating spending is driven by several factors. Growing revenues from property taxes, intergovernmental grants, and the sales of goods and services are positively related to rising per-capita municipal expenditures. Essentially, one can argue that municipal spending rises to fill the revenues available. Moreover, on the cost side, increases in the number of municipal employees coupled with their pay rates is also a positive driver of rising municipal spending.

 

This suggests that municipalities in Canada for the most part have increased  their  spending  because  of  a  more  than  adequate ability to generate revenues to fuel that spending. The municipal wage rate and the number of municipal employees both are positive and significant determinants of per-capita municipal spending. As well, the size of the real per-capita municipal operating surplus is positively and significantly related to real per-capita property-tax revenues and real per-capita grant revenues.  Indeed, over the long term, municipalities have played an interesting game. They are required by provincial legislation not to run operating deficits and they have not only managed to balance their budgets but generate operating surpluses most years and potentially add to their reserves. Over the period from 2008 to 2018, the operating surplus for municipalities in Canada ranged from a low of 6.1% of revenues in 2014 to a high of 11.9% in 2017.

 

Given the significance of both municipal wage rates and employment numbers as positive drivers of spending and negative drivers of the operating surplus, it stands to reason that municipalities need to make more of an effort to address their spending. Only after such an effort, can it be reasonable for municipalities to request additional support from upper tiers of government or increased taxes from their own ratepayers. Municipal ratepayers and provincial and federal governments alike need to be cautious that the current COVID-19 crisis is not used by municipalities as simply an opportunity to finance a long-term enrichment of their spending.

 

Food for thought but I suppose many councilors are not that hungry.

 

 

Higher Taxes AND Higher Debt: Municipal Finances in Thunder Bay

Thunder Bay’s per capita municipal debt rose from $1,618 in 2015 to $1,839 in 2018 – an increase of 14 percent.  Over the same period, its provincial municipal counterparts on average went from $699 per capita to $758 – an increase of 8 percent.  As a result, by 2018, the per capita municipal debt in Thunder Bay was essentially more than twice that of the average in Ontario.  One might creatively argue that a reason for our higher debt levels is that we have been keeping our property taxes below the provincial average in an effort to be competitive with other municipalities.  However, it turns out that is really not the case once you adjust for population.

The accompanying figure takes data from the Ontario Financial Information Returns and past City of Thunder Bay Budgets to make a comparison of average per capita own purpose municipal tax revenue for Ontario and Thunder Bay.  For Ontario as a whole, between 2009 and 2020, per capita property taxes rose from $1,176 to $1,492 – an increase of 27 percent. (Note that the Ontario tax revenue numbers for 2019 and 2020 are estimates based on linear extrapolation as the FIR provincial numbers go to 2018. Population was obtained from Statistics Canada).  Meanwhile, Thunder Bay’s per capita municipal tax revenue over the same period goes from $1,320 to $1,879 – an increase of 42 percent.  Thus, Thunder Bay not only has more municipal taxes being paid per person in every year since 2009 but it has increased faster than the provincial average.

 

In 2009, the average municipal taxes per person were $144 higher than the provincial average whereas by 2020 they were $387 higher.  Put another way, Thunder Bay’s per capita municipal taxes were 12 percent higher than the provincial average in 2009 and are now 26 per cent higher.  It has not helped that since 2009 Thunder Bay’s population – that is the City of Thunder Bay and not the CMA – has declined by 1 percent whereas Ontario’s has grown 13 percent.  Total municipal tax revenue (as opposed to per capita) between 2009 and 2020 has actually grown 44 percent in Ontario and 41 percent in Thunder Bay but Ontario’s increase in being spread over a larger population while Thunder Bay’s is being spread over a stagnant population base – hence the surge in per capita municipal taxes. Creative councilors and administrators at the City might reply that municipal property taxes are not paid per capita, that they are paid per "bungalow" and we are "mid ranked" there.  My response to that is ultimately, people pay taxes and not their bungalows.

So, not only are we a higher debt municipality but we are also a higher tax municipality and a slower growth municipality.  The sustainability of rising taxes on essentially a stagnant resource base given the dearth of major industrial and commercial development is a serious issue but one that rarely seems to be at the fore of debate at municipal council.  City Administration now is apparently on the basis of “new and emerging information” recommending that the vote on the new $33 million Indoor Turf Facility be postponed until November 2021.  Given that there is an anticipated COVID-19 budgetary shortfall, economic uncertainty, a failure to date to obtain financial support from higher levels of government for the facility, a high debt level and a program spending review under way (not to mention the private sector is already building a similar facility) it stands to reason that they take a pause on this one - for now.

It is not that Thunder Bay would not benefit from new all season sports facilities for its population but at what price?  Are we willing to accept even higher debt and taxes at a time when we already have more of both relative to the provincial average?  Do we want a “special one-time tax levy” to deal with COVID-19 and an indoor turf facility?  Our municipal finances are already quite special when compared to the provincial average as are our other problems ranging from crime to our water system travails.  How much more special do we want to be?

Ontario’s Finances: A Quick Review of the November 6th Fiscal Statement

The 2019 Ontario Fall Economic and Fiscal statement was delivered by finance minister Rod Phillips today and the basic message is that the deficit is down from the 2019 budget projection but spending on government priorities is up - notably in health and education.  Compared to last spring, this is a “good news” statement and the outcome of a process of retreat that has marked the Ford Government over the last six months given the outcry from a number of directions that restored among other things, funding for autism programs and a new French language university. 

Revenue growth is greater than anticipated, given Ontario’s booming economy and this has allowed for a smaller deficit as well as more spending.  The deficit is now projected to be $9 billion which is down from the original budget estimate of $10.3 billion – but based on interim numbers had already come down to $9.3 billion. 

Based on the interim numbers since the budget, spending is up from $163.4 billion to $164.8 billion (which incidentally includes a $1 billion reserve) billion but revenues are up $154.2 billion to $155.761 billion.  Revenues are basically about $1.5 billion dollars more than anticipated while total spending including the reserve has gone up by about $1.4 billion.  So, the deficit is lower than what was both in the budget and in the interim update but at $9 billion, it is still the largest deficit since 2014-15 when it stood at $11.268 billion.  Moreover, it is expected to decline to $6.7 billion in 2020-21 and $5.4 billion by 2021-22. As a result, the net debt will rise though the net debt to GDP ratio will stay flat at about 40 percent.  Nevertheless, the net debt but is expected to be $353.7 billion – up from $338.5 billion in 2018-19.

So, based on the 2018-19 numbers, by 2021-22, revenues will have grown by $11.7 billion – an increase of 7.6 percent - while total expenditures will grow by $9.7 billion – an increase of 6 percent.  So, the plan is essentially to slow expenditure growth and wait for revenues to catch up which is a traditional approach used by Ontario governments before this one.  Revenues in 2019-20 are definitely up with CIT revenue $936 million higher and PIT $525 million higher than anticipated.  As well, if the government holds the line on further spending, the reserve will likely be applied to the bottom line allowing the 2019-20 deficit to come in at closer to $8 billion. 

Nevertheless, despite all the cries of austerity, it would appear that its business as usual in Ontario given the “grow your way out of deficits” approach that is being used – again.

 

What a 2.4 Percent Municipal Tax Levy Increase Really Means

Thunder Bay City Council has voted to pass the 2018 municipal budget and will formally ratify it at a vote this evening.  The Mayor and Council have of course been patting themselves on the back about how it is a “responsible budget” and how it keeps the tax levy increase in spending within the average of the last two terms of council.  The tax levy increase is now coming in a 2.4 percent now – just above the rate of inflation - which is down from the 3.03 percent increase that was originally on the way after several weeks of deliberation and debate.  This was managed by essentially taking out about $1 million from the city reserve fund to lower the levy against the advice of City administration it turns out who also noted that the reserves – used to cover unexpected costs or deficits throughout the year - have been declining since 2012

What this all really means is that this is an election year.  The average municipal tax revenue increase over the period 2011 to 2018 has averaged 3.3 percent and ranged from a high of 5.7 percent in 2015 to a low of 2.2 percent in each of 2014 and 2016.  The increase of 2.2 percent in 2014 was also during an election year and was followed by a 5.7 percent increase in 2015.  Keeping the increase low this year can be interpreted as a deliberate political strategy to not raise the ire of ratepayers in the lead up to the October election and one can expect a hefty increase to make up lost ground when the 2019 budget comes in.

In the end, a tax levy increasing at just above the rate of inflation is not much of an accomplishment given that it was done by dipping into the reserve fund.  While much was said during council debate about the hard decisions that have been made the fact remains that spending is going to go up by the amount originally agreed upon – just over 3 percent – but it is going to be subsidized by borrowing from the reserve fund. 

But then, cost control is hard work and in the end some of the efforts at cost control have backfired.  One need only look back at the attempt by Thunder Bay to reduce garbage collection costs in 2017 which were supposed to eliminate a truck and labour costs via attrition while at the same time reducing bag pick-up to two bags from three with additional bags requiring a tag.  And what was the end result?  After a period of chaos, the truck was reinstated but the three-bag limit was not and things have remained very quiet since.  So, one has to conclude that costs have remained the same while less garbage is being collected and revenue is probably up for the City from the bag tags. It was certainly a win for the City of Thunder Bay but not for rate payers who altogether have to pay more but are getting less.

We can expect more of the same next year after the dust clears from the election.  The current cast of councilors will largely be returned to office and the cycle will start anew. We will be paying more and getting less, and the debut will be a hefty tax levy increase to replenish the reserve fund as well as boost spending to make up for the previous year’s slowdown.  There will be the usual grumbling and complaints, but they will be dismissed because after all Thunder Bay voters are the ones doing this to themselves by falling for the same thing election after election.  Why would city politicians take them seriously when they complain?

Additional Note: February 6th - Well, the budget did pass last evening. Please note that the 2.4 percent levy increase coming in is "net" or after factoring in "new growth".  The gross levy increase is actually 3.13 percent.  Originally, the net increase was going to be close to 3 percent and the gross increase nearly 3.6 percent.  So, total spending is still going up 3 percent and the net is 2.4 because of the use of projected surplus funds from 2017 budget away from the reserve fund and towards the tax bill.  However, apparently there was an effort to move even more of the projected 2017 budget surplus away from the reserve but it did not succeed.  Of course the 3.13 percent does not mean that everyone's tax bill will be going up 3.13 percent or 2.4 percent if you are an "existing" ratepayer.  That is the total increase in tax financed expenditure. Much of the burden of the increase will go to residential ratepayers. See my post last month here for a more detailed discussion.   

Some Federal Fiscal Highlights

I have a new report out by the Fraser Institute in celebration of Canada's 150th Anniversary.  It is titled A Federal Fiscal History: Canada, 1867 to 2017 and tracks federal government spending, revenue, deficits, debt and spending and revenue composition from 1867 to 2017.  You can get the executive summary and the full report here.  However, is a quick round-up of some federal fiscal highlights over the years: