A Tale of Two Revenue Sources: The LCBO & OLG

With the aversion of a strike by Ontario’s LCBO workers, most of us will probably turn our thoughts to immersion in our favorite beverage as we move into the Canada Day long weekend.  What the recent dispute should also spark is some introspection regarding the special importance of Ontario’s crown corporations – namely the Liquor Control Board of Ontario (LCBO) and the Ontario Lottery and Gaming Corporation (OLG) – as sources of Ontario government revenue.

Comparing Homicide Rates: Why Thunder Bay Has a Problem

From a peak reached in the early 1990s, police reported crimes rates in Canada have been on a downward trend.  This is also the case for homicide rates, which have been on a downward trend nationally since the early 1980s.  There is of course variation from year to year in homicide rates so some type of regression smoothing procedure is helpful in establishing what the longer-term trends over time are.  What quickly emerges from an examination of long-term trends is that Thunder Bay followed national trends in homicide rates until the early 21^st century but that since then there has been a substantial divergence.  It is not a “northern Ontario” thing because the Greater Sudbury CMA tracks provincial and national homicide rates quite closely.

Figure 1 presents LOWESS Smoothed homicide rates for Canada and major regions from 1981 to 2015.  LOWESS is a particularly useful smoothing tool because it helps deal with “outliers” – that is extreme observations that can often distort averages taken over time. The data source is from Statistics Canada (Table 2530004 - Homicide survey, number and rates (per 100,000 population) of homicide victims, by census metropolitan area (CMA), annually).  Canada as a whole has seen a steady decline in homicide rates going from smoothed values of 2.74 per 100,000 in 1981 to 1.51 by 2015 – a drop of 45 percent.  This decline is a feature of the West, Ontario, Quebec and Atlantic Canada though Atlantic Canada sees a sight upturn after 2006.  In terms of regional rankings, homicide rates are now the highest in the West, followed by Atlantic Canada, then Ontario and finally Quebec.
 

Fire Services in the North: The Case of Sudbury

Sudbury is in a bit of a tizzy over proposed changes to its fire and paramedic services.  The proposed plan will see nine of the current 24 fire halls closed and a move to reduce the number of volunteer firefighters and hire more full time firefighters. The staff report estimates that the full-time compliment would go from 108 to 166 within the next decade, while the volunteer ranks would be almost cut in half from the current staffing level of 350.

Sudbury is a very large and dispersed municipality with the central core area served by full time firefighters and outlying areas served by volunteers who are paid part-time employees. Under the new plan, Sudbury's municipal government maintains that firefighters would be able to reach 90 percent of Greater Sudbury within nine minutes, as opposed to the current 69 percent.  Part of what is planned is an equalization of services to standardize and improve coverage and response times.  However, part of the plan also involves composite stations staffed by both full-time and volunteer firefighters, as well as increases in taxes in the areas currently served by volunteer firefighters.

It is useful to see where Greater Sudbury stands in its fire service costs relative to other cities in Ontario.  Figure 1 uses data from the BMA Management Consulting 2016 Municipal Study to plot the net per capita fire service costs (including amortization of any capital assets) for cities in Ontario with more than 100,000 of population as well as the Northern Ontario Five (N5) – Thunder Bay, Timmins, Sault Ste Marie, North Bay, and Greater Sudbury.  The results show quite a difference in per capita costs ranging from a high of $273 in Thunder Bay to a low of $102 in Milton.  Sudbury’s costs are quite modest coming in at $149 – the lowest among the N5 – and placing 22^nd among the 27 cities in Figure 1. 

Of course, one can understand the concerns of ratepayers in Greater Sudbury that the proposed changes will raise costs and therefore raise taxes. The costs of fire fighting according to the BMA Municipal Study 2016 Report can vary as a result of a number of factors, which include:

1. The nature and extent of fire risks: The type of building construction, i.e. apartment dwellings vs. single-family homes versus institutions such as hospitals

2. Geography: Topography, urban/rural mix, road congestion and fire station locations and travel distances from those stations

3. Fire prevention and education efforts: Enforcement of the fire code, and the presence of working smoke alarms

4. Collective agreements: Differences in what stage of multi‐year agreements municipalities are at and also differences in agreements about how many staff are required on a fire vehicle

5. Staffing model: Full‐time firefighters or composite (full‐time and part‐time)

Costs in the end are an interactive function of the geographic area that must be served as well as the population base in that area that is available to cover the costs as well as its compactness - in other words, population density is a factor.  The importance of population density as a determinant of fire service costs is highlighted in Figure 2, which plots the net costs per capita of Figure 1 against population density (population per square kilometer) and reveals an inverse relationship when a linear regression is fitted to the data.  It of course does not control for any other variables and there is a fair amount of dispersion (the R-squared is also very low) around the fitted relationship but if Sudbury’s population density is plugged into the relationship, all other thing given, the per capita cost of its fire services rise to 181 dollars per capita.  Thus for Sudbury to be at 149 dollars per capita it must mean there are other factors affecting its costs or it is doing something to keep its costs well below – nearly 20 percent below - what is predicted by its population density alone.

It is the volunteer staffing model which has probably been a factor in keeping Sudbury’s fire fighting costs per capita relatively low given the large land area that must be served and the accompanying low population density.  Moving away from this model will probably bring Sudbury’s per capita costs more in line with other major Ontario municipalities.  No wonder ratepayers are upset.  At the same time, making the changes needs to weigh the improvements in service and response time that are expected to emerge against the expected additional costs.  It is an important cost-benefit analysis and should make for an interesting City council meeting in Sudbury on March 21st.

Employment Growth Strongest in Ontario’s Golden Triangle: How the Major CMAs Stack Up

Employment is always an important indicator of economic growth and success and the figure below provides a good perspective on how some of Ontario’s major centers are doing when it comes to job creation.  Employment data from Statistics Canada is used to compare total employment growth between 2001 and 2016 for 15 major CMAs.  These major CMAs are ranked from highest to lowest and their employment growth ranges from a high of 38.8 percent for Oshawa to a low of -2.4 percent for Thunder Bay.

Northern Policy Institute Finally Announced!

Today, the Northern Policy Institute was finally announced by the Ontario government simultaneously at Laurentian and Lakehead Universities with the news that the institute will be jointly housed at Lakehead and Laurentian with a 10 member board overseeing the operation and with the search currently underway for a CEO.  This is a process that has been a long time in the making starting from the original North Superior Planning Board Report in 2007 on a policy institute for Northwestern Ontario and then the morphing of the concept into a pan-northern institute through the 2008 Rosehart Report and then the 2011 Northern Ontario Growth Plan.  The idea of  a policy institute definitely caught the interest of the provincial government given that during this long interim it provided 5 million dollars to University of Toronto to fund the Mowat Centre in 2010 - a public policy institute to research issues from an Ontario perspective.

According to the press release:

The institute, an independent, not-for-profit organization, will monitor the implementation of the Growth Plan for Northern Ontario and make provincial policy recommendations for the region. It will work with northern municipalities, post-secondary institutions, research groups, Aboriginal organizations, francophone groups and industry to set priorities and directions for northern development.

This is very good news for Northern Ontario as it provides the recognition that there needs to be research and policy analysis on economic, social and business issues in the North.   The Presidents of both Lakehead and Laurentian are to be commended for their work leading up to today’s announcements as are many of the local community leaders and politicians who devoted time to what at many times seemed to be a byzantine task with no end in sight.

Having followed the Northern Ontario economy and regional economic development policy for over twenty years and researching and commenting on issues affecting the region, it is reassuring personally for me to know that in a sense it will be possible to pass on the torch and finally move on confident in the knowledge that there will finally be the commitment of resources for the study of Northern Ontario issues.  Despite popular perception (even at the university where I work), as an academic economist, research and public commentary on northern Ontario or the Thunder Bay economy was never my main area of academic interest.  My fields are public finance and economic history and “northern” work took much time away from those endeavors.  While I enjoyed interacting with the local media and was always treated very well and fairly by all, this activity also took a great deal of time in the sense that it often meant completely interrupting your train of thought.  Over the last while, I have been devoting more time to interests in health economics and economic history and less to the North and so the actual operationalization of the institute comes at a good time.

I was born and raised in Northern Ontario and as an academic I made the sustained effort to apply my skills and knowledge to local and regional public policy because I felt it was important to give something back to the community and there was so little analysis of northern Ontario issues.  Over the years, many have thanked me for this work via conversations and personal notes whether it was for columns in the Chronicle-Journal, interviews on TBT or CBC Radio and most recently for my blogging on Northern Economist.  Of course, in the process I also  irritated a great many people.  I do not apologize for that.  Politicians and society’s leaders need to realize that true university academics are passionate and committed researchers who speak their minds and not cheerleaders to be trotted out as a pretty backdrop at a moments notice for the pet issue of the day.  Those politicians who think academics should simply provide blanket endorsements for government actions and policies reveal just how little respect they have for knowledge and education and the people employed in those fields. 

As for the future of the Northern Policy Institute (NPI), I would be remiss as an academic in not offering a final frank and honest assessment.  It is a great idea and concept but the fact that its role will be to “monitor the implementation of the Growth Plan for Northern Ontario” in essence undermines both its independence and its effectiveness as an advocate for the region.  Of course, these are just the words of a press release and the reality will be in implementation but the board of the NPI needs ensure that the institute sets its own research and policy agenda in terms of collecting data on economic, social and business issues that reflect the region’s priorities.   If it is simply a mouthpiece to support the latest government policy initiative in the North, then what is the point?

That’s all folks!

For additional blog postings on public policy and economics, visit my material on Worthwhile Canadian Initiative.  You will be able to continue to access Northern Economist 2.0 postings on this blog as well as my previous material at the old Northern Economist site for the next while.

Does Ontario Need Another Growth Plan?

Last Saturday’s Globe and Mail (February 18, B6) ran an article titled “Rebuilding Ontario: A Plan for the Way Forward” which laid out a discussion of Ontario's economic future. For Northerners, all the talk of decline and the need for diversification was strangely familiar.  Indeed, one can best describe what is happening as the “Northern Ontarioization” of Ontario’s economic discourse as Ontario tries to decide how to grow its future economy in the wake of the Drummond Report, which seems to have finally crystallized the fact that Empire Ontario has slipped into decline.  Of course, some of us saw the eclipse of Ontario a bit earlier than that (check out End of Empire, National Post, February 19, 2005, FP19) but better late than never.

The Globe and Mail described four options for the province to get its “mojo back”. They were financial services, technology, health care and natural resources. Missing was that perennial Northern Ontario favorite - tourism.  Despite the talk of putting a casino in Toronto, it is unlikely to see Ontario reinventing itself as Vegas North. Vegas style tourism requires a degree of individual and entrepreneurial freedom that regulatory Ontario is unlikely to acquire anytime soon.

Of all these options, the one most likely to kick start Ontario’s economy is the natural resource sector. The mining frontier in Ontario’s North – especially the so-called Ring of Fire- can serve as an investment frontier for the rest of the province much like mining and forestry did in the late nineteenth and early twentieth century.  However, this does require that the province embrace its North rather than treat it as a remote relic of the economic past.  Here, the contrast is made with Quebec.  According to the Globe and Mail: “Rather than shun its expansive north, Quebec is emphasizing it, hashing out an ambitious 25-year project dubbed “Plan Nord”.  Quebec is betting its future on developing mining, energy and forestry resources located far north of its major cities. Ontario could adopt a similar scheme.”

Really?  How interesting.  The fact is Ontario has also developed a Northern Growth Plan – a point the Globe and Mail article seemed to have missed but then Canada’s “national” newspaper is based in Toronto.  Part of what is wrong with Ontario’s economy is a myopic economic vision that does not look outside of Toronto.  Perhaps that is why since the Northern Growth Plan has been released, all that has resulted is more planning.  Given the dominance of Toronto vision in Ontario and its government, the chromite deposits of the Ring of Fire could only be developed quickly if they were at the corner of Yonge and Bloor.

Ontario does not need a growth plan.  Ontario needs a set of concrete actions to develop its northern resource frontier as an investment frontier for the province.  The North can be a place for infrastructure investment and value-added processing that can drive economic growth in Ontario.  The North can be a frontier for the deployment of Ontario’s labour skills and human capital.  Given the capital and technology intensive nature of modern mining, the North can also be a frontier for high technology industries.  And, the financial service industry in Toronto got its start in the financing of mining ventures in Northern Ontario.  Financing new mining ventures in the North can once again be a source of growth for Toronto’s financial sector.  What is Ontario waiting for?

Drummond and the North

Wednesday will see the unveiling of Don Drummond’s recommendations for the repairing of Ontario’s finances.  Ontario is not experiencing the best of times.  Along with its deficit and debt, its economic growth has stalled, its population growth rate is slowing, its high electricity costs have been a factor in the manufacturing sector’s demise, and Ontario is receiving equalization. 

The Premier has promised a “relentless attack” on the deficit. Yet, it is difficult to visualize Ontario’s education and health Premier leading an attack on the spending programs he has invested so much of his reputation in.  Given that he has repeatedly stated he will not raise taxes, he is left with the options of expenditure cuts or economies via transformation and restructuring of government. In the end, there are really only three options for Ontario’s government after Wednesday – raise taxes, cut spending or some combination thereof.  While some of the recommendations Drummond makes may complement these courses of action, there will be no miracles.

Of course, if the Premier is waiting for the Drummond report to show him the way he is bound to be disappointed.  Many of the recommendations and suggestions have already been leaked and they make eminent sense.  The real question is how to go about implementing them. It will be interesting to see what suggestions if any Don Drummond has here. 

For example, universities can possibly save money by having professors teach more and Drummond has said as much in the media.  Yet most Ontario universities have collective agreements with their faculty that specify teaching loads.  Will the Ontario government pass legislation suspending those agreements?  Will the Ontario simply create new “teaching only” universities but which entail spending more money now to save money later?  Or will the Ontario government simply cut grants to universities with guidelines as to how the cuts are to be distributed and to increase teaching loads?  Yet, the grant stick has gotten weaker over the years.  Ontario universities now only get about forty percent of their revenues from government grants.  Will they be allowed to raise tuition more?

How about health care?  Can we transform its delivery by implementing electronic health records?  Sadly, it has already been tried once via the E-Health approach and look where that got the government?  How about more private-public partnerships to create efficient and innovative new service delivery?  Have we not tried that with ORNGE in the case of transport medicine – and where are we now?  How about efficiencies via regionalization in health care by dispersing more responsibilities to the Local Health Integration Networks?  Interestingly enough, Alberta, one of the pioneers in regionalized health care delivery has gone back to a centralized model.  One suspects it is easier to cut global budgets when they are centralized.

And what about Ontario's North?  The recent Census numbers show a stagnant population in a slower growing province.  In some sense, southern Ontario is becoming more like the North given the job losses, unemployment and slower income growth though that will not likely create any additional sympathy for the North.  When the empire is in turmoil, the legions are called back first from the frontier.  Any reductions in government services will have a major impact in our geographically dispersed and thinly populated region.  And what about the Northern Growth Plan and the need for government infrastructure investments in the Ring of Fire?  The government has been remarkably quiet on the Plan to Plan all Plans and one wonders if this means a shift in priorities when it comes to northern economic development policy - assuming that it ever actually was a priority.  Will the Drummond Report deal at all with how to invest in the North's economy in a cost-effective manner?  Will the Drummond Report urge an elimination of government economic development programs such as the Heritage Fund?  Wednesday should be interesting.

Where the Jobs Are – Ontario Edition

Statistics Canada’s labor force release on Friday revealed that in Ontario there was an increase in the number of people searching for work which pushed the unemployment rate up 0.4 percentage points to 8.1%. In the 12 months to January 2012, employment in the province increased with all the growth occurring in the first half of the period.  When the numbers are examined by major urban centre, it becomes apparent that a slowdown in employment growth has begun over the last six months with much of it is being driven by the Toronto area.  The two accompanying figures show the percentage change in seasonally adjusted monthly employment for major Ontario centers January 2011 to January 2012 (Figure 1) and August 2011 to January 2012 (Figure 2).

Year over year (Figure 1), there were employment increases in Ottawa-Gatineau, Kingston, Peterborough, Oshawa, Hamilton, St. Catharines-Niagara, Kitchener-Waterloo-Cambridge, Guelph, Barrie and Thunder Bay.  The cities with the largest annual percent increases in employment were Guelph, Peterborough and Thunder Bay.  The last six months (Figure 2) reveal that a slowdown has indeed begun with employment growth slowing just about everywhere except Peterborough, Thunder Bay and Hamilton – which all saw increases in their employment growth rate.  Toronto – which accounts for 48 percent of the employment in Ontario has seen a drop in employment of just under 1 percent over the course of the year.  Brantford has seen the largest percentage declines in employment.  Over the last six months, even the usually robust Kitchener-Waterloo-Cambridge and Barrie areas have slipped into employment declines.  Right now, the best places in Ontario for job growth are Peterborough, Hamilton, Guelph and believe it or not – Thunder Bay.

Balancing the Budget: The Ontario Plot Thickens

The Conference Board of Canada has waded into the Ontario pre-budget deliberation process with a report that says Ontario will be unable to balance its budget for a decade as a result of sluggish economic growth and shrinking government revenues.  Moreover, the Conference Board has focused on reining in health care costs as the most important factor in dealing with the budget balance – which hopefully can be achieved by 2021-22.  Aging and slower labor force growth can be expected to reduce Ontario’s economic growth and hence the growth of government revenues. 

According to a report on Global News, Premier McGuinty is disputing the prognosis of the Conference Board that Ontario will not be able to balance the budget.  I have to admit that while Ontario does have a serious budget problem, the Premier is probably right in not getting too obsessed with the Conference Board report.  The Conference Board is predicting a dismal decade of economic growth for Ontario but then it has also been predicting major upturns for Thunder Bay’s economy for at least five years and that has not happened either.  (See my post Forecasting Thunder Bay's GDP Growth).  The point is, circumstances change and predictions are revised.

Ontario has been experiencing slow economic growth for about a decade now.  During the period 2000-2011, its provincial government expenditures grew at an average annual rate of 5.7 percent while its revenues grew 4.5 percent.  For the period 2008 to 2011, expenditures grew at 6.7 percent while revenues grew at 3.0 percent.  In 2011-12, total revenue was 108.8 billion dollars and expenditures 124.8 billion for a 16 billion dollar deficit.

Let’s assume the following scenario.  For 2012-13, the Ontario government freezes total government spending at 124.8 billion dollars (note the Table is in millions of dollars).  The year after, it implements some of the recommendations of the Drummond Report and then cuts 3% in spending from the total Ontario government budget – a cut of about 3.8 billion dollars in spending.  After this, it allows spending to grow at 1 percent annually.  At the same time all of this is happening, we let total government revenue grow at 2.5 percent annually - below the average rate for 2008-2011.  The result, by 2017-18, there is indeed a balanced budget (see the Table below).  This is not a painless exercise. In real terms (adjusted for inflation) these represent real reductions in resources.  Assuming 2 percent inflation, between 2012-13 and 2017-18, total spending would rise less than 1% while prices would rise 13 percent.  In real terms, government spending would shrink 10 percent. 

The budget deficit could shrink even faster if economic growth recovers somewhat and revenues rise faster, which is not outside the realm of possibility given the slight rebound being detected in the United States to which much of Ontario’s economy is tied.  It could also shrink faster if larger upfront cuts are made.   It is certainly not going to be any fun governing in a decade like this but it will be possible to balance the budget ahead of schedule provided a government is able to set out a plan and stick to it in a disciplined fashion.

Reorganizing Health in Ontario

As part of the Ontario government’s austerity drive, health minister Deb Matthews recently announced plans to save money by reorganizing health care.  To start with, the province’s family health teams will be placed under the control of Ontario’s Local Health Integration Networks (LHINS) so as to help plan and provide physician resources and care more effectively.  In addition, they want to move more routine procedures out of hospitals and into specialized not-for-profit clinics but with little detail as to what might happen.  All in all, there will be efforts to provide more community care and integration of that care with the main health system in an effort to rein in spending.  The health minister in her remarks to the Toronto Board of Trade earlier this week also remarked that the changes “will not happen overnight”.

Will this work?  Well, it has been tried before.  We only have to go back to the 1990s with hospital restructuring and the implementation of home and community care initiatives that nearly 20 years later are still not very well developed.  Why?  It turns out effective home care was really not that cheap after all.  As for handing over physician resource planning to the LHINs, well that suggests another complicated exercise in planning fraught with transaction and administrative costs especially given that the LHINs when they were created were never given any responsibility over core health spending resource allocations – physicians and hospitals.  For LHINs to be effective resource allocators, health budgets would need to be completely decentralized from the health ministry so that LHINs could tailor their health services to local and regional needs.  However, LHINs have evolved more into “planning” mechanisms rather than service providers.  Moreover, at this point Ontario would be a late comer to the regionalization game as other provinces – for example Alberta – have already tried it and it turns out they have retreated back to a more centralized model.  It turns out centralized budget decision-making is more useful when you are trying to cut costs across an entire health system.

It is difficult not to come to the conclusion given the vagueness of statements and pronouncements to date that the Ontario government is treading water on health care reform.  Health is contentious and the government has a minority.  True integration of the health care system in an effort to eliminate duplication of mandates and services, reorganization of physician services, billing practices and hospital human resources, the delisting of less cost-effective services and the transfer of additional procedures to not-for-profit clinics will be controversial.  Witness what happened after the health minister’s musings that reducing the number of C-section births would ease health-spending costs.  The media storm was immediate.  After several days, there was a statement that the government would not be delisting C-sections ands that the government would be encouraging new birthing centers as a better way. Taken at its word, this means keeping the current practices and introducing new ones – which means even more health spending down the road.  In health care reform, tomorrow is yesterday.