Ontario Health Spending: What's Up and What's Down

 The Canadian Institute for Health Information (CIHI) has released its 2024 National Health Expenditure Trends data and it paints an overall picture of rising health spending.  As I have noted elsewhere, total health-care spending in Canada is expected to increase by 5.7 percent in 2024, after rising 4.5 percent in 2023 and only 1.7 percent in 2022 coming on the heels of the pandemic.  The picture for provincial government health spending is also one of increase but once adjusted for population and inflation, the results are more mixed particularly if one looks at changes since the year before the pandemic.  Over the period 2019 to 2024, British Columbia and Prince Edward Island see the largest increases in real per capita provincial government spending at 17 and 16 percent respectively while at the bottom are Manitoba and Nova Scotia, which over the five years have seen their per capita provincial government health spending stay essentially flat.  Ontario, over this same period saw an increase of just under seven percent.

 

 

Figure 1 plots real per capita Ontario provincial government health spending ($2010) from 1975 to the present and the evidence shows that since 2010, real per capita health spending spending growth was lackluster at best rising from $3,617 to $3,783 - an increase of of 4.6 percent or about half a percent annually.  After 2019, the pandemic saw a ramping up provincial government health spending to a peak of $4,316 in 2021 - an increase over two years of almost 14 percent.  Since 2021, there has been a decline in real per capita spending and in 2024 it is estimated to sit at $4,040 - for a decline of about 6 percent.  Nevertheless, real per capita provincial government health spending in 2024 is still projected to be 6.8 percent higher than 2019.

 

What is quite interesting is how spending by expenditure category has performed over the 2019 to 2024 period.  Figure 2 plots the percentage change in real per capita provincial government health spending by category.  Over this five year period, the largest increase has been for real per capita spending on other institutions - namely, long-term care - at nearly 50 percent.  This is of course understandable in the wake of what transpired in long-term care homes during the pandemic as well as the promise to build more long-term care beds for an aging population.  Next is home and community care at 10.7 percent , followed by public health at 9.3 percent and then hospitals at 8 percent.  Other professionals is next with an increase of 5.3 percent followed by capital at 3.2 percent.  What comes next however is even more interesting .  All other health care net of home and community care spending is down by about a third of one percent.  Spending on provincial government drug plans in real per capita terms is down 4.4 percent while physician spending is down 5.8 percent.  Finally, real per capita provincial government health spending on health administration is down nearly 24 percent. 

 The surprise here is that spending has dropped on two items that directly affects a lot of individuals in Ontario - namely, government paid for prescription drugs and physician services.   Obviously, if one measures availability of physician services by how much is being spent per person after population growth and inflation, it is obvious that Ontario is having trouble keeping up in this category.  With an aging population, the decline in physician and also drug plan spending is definitely going to be felt even if the provincial government asks us to take solace in the increases in long-term care, home care and hospital spending. 

A Primer for Premiers: Some Health System Metrics

 Canada's Premiers are meeting in Winnipeg July 10-12 and along with all the photo opps and media availability sessions, they are also expected to have some discussions on a number of pressing policy concerns including how to spend the forthcoming increases in federal transfers.  Given that none of them have yet submitted plans on the targets and timelines they will use to convert the increased funding into health system improvement outcomes, one suspects it will be some time before the funding increases have any impact. 

 

 

 

Of course, it remains that simply increasing funding alone will not necessarily solve the current chaos as emergency rooms close down during busy summer months, the rosters of people without family physicians grows as physicians retire and nursing shortages lead to delayed or postponed procedures.  As the premiers know, Canada already is one of the biggest spenders in the OECD on health and well above the OECD average both as a share of its economy (See figure 1) and in dollars per capita (See figure 2) .  Yet, as figures 3 and 4 illustrate, this larger amount of spending does not translate into more physicians per capita or more hospital beds per capita.  

 

 

Now these simple types of comparisons can be critiqued on a number of levels.  After all, while we have fewer physicians per capita, our nurses per capita match the OECD average.  Moreover, Canada's physician to population ratio has been rising in recent years and it has been noted that simple physician to population ratios are not always helpful.  Physicians in many other countries sometimes perform a broader range of functions than physicians in Canada which means having more of them per capita is not always an indicator of greater availability.  Yet, if you look at physician consultations per capita, in 2019 - just before the pandemic - Canada stood at 6.6 while the OECD average was 7.0.  

Canadian physician consultations per capita a decade ago were above the OECD average meaning that with fewer physicians per capita and higher consultations, Canadian physicians were seeing more patients than their international counterparts.  That appears to no longer be the case. The case loads of the average Canadian physician have been declining and part of that is a change in practice culture and the arrival of the desire for better work-life balance.  And there are other indicators where Canada does not perform as well - we are below the OECD average on diagnostics such as MRI and CT scans per million population. 

So, throw in the chaos of the pandemic era, and we can see that the current problems are a function both of long term trends in Canadian health system resources, practices and staffing combined with the short-term shock of the pandemic's disruptions.   We are already spending a lot more money than many other countries but we are definitely seeing less health service outcomes with that money.  The per capita statistics also in the Canadian case reflect the fact that there are a lot more people in Canada given recent population growth which when combined with an aging population has certainly resulted in demand side increases too.  The Premiers face quite the challenge.  They will have more money to spend and do need to spend more to deal with the short term supply shortfalls.  At the same time, they need to set up mechanisms to ensure that over the medium to long term, more money does not continue the recent trends of spending more and getting less.

Ontario's Chronic Health Spending Shortfalls

 

This week’s Ontario health news featured a report by the province’s  Financial Accountability Office that the challenges facing Ontario’s health system were “expected to persist” as a result of under funding and accompanying shortages of health workers. The FAO projected total health sector spending for Ontario and compared it to the Ontario government's projections and found that between 2022-23 and 2027-28, a significant gap opens up between what the government is projecting and what the FAO expects spending to be.  The cumulative shortfall over this period will be about $21 billion which over a seven year period averages out to about $3 billion a year.

 

The FAO projections were for total government health spending but one suspects that if one takes Ontario’s robust population growth into account, the future shortfalls are probably more serious.  Indeed, per person provincial government health spending going into the pandemic was essentially flat  as Figure 1 shows.  

 

 

 

 It turns out that spending shortfalls have been a feature of Ontario health spending for some time when one compares what is actually being spent to what simple models of health spending determinants predict should be spent.  

 

Generally speaking, models of health spending determinants consider the main drivers of health spending to be income (usually measured by GDP) and aging (usually measured by the proportion of population over 65 years). Fun fact: In Ontario, the proportion of population aged over 65 was 8 percent in 1965 and in 2022 stands at just over 18 percent.  Table 1 uses data from the Canadian Institute for Health Information National Health Expenditure database as well as data from Statistics Canada to present  a simple regression of the determinants of real per capita Ontario provincial government health spending. Real per capita provincial government health spending (in 2021 dollars) from 1971 to 2022 is regressed on real per capita GDP as well as real per capita federal cash transfers (health, social, equalization) – which is really a source of provincial government income.  As well, there is included the percent of the population aged 65 to 79, the percentage of the population aged 80 years and over, and a dummy variable to capture the impact of the COVID spending surge. The results are estimated with STATA using OLS .  

 

 

 

Both per capita GDP and per capita transfers are both positive drivers of provincial government spending.  A one dollar increase in real per capita federal cash transfers supports about 50 cents in real per capita provincial health spending while a 1 dollar increase in real per capita GDP is associated in a 3-cent increase.  The results also suggest that relative to the population aged below 65 years, the real aging driver of spending is the proportion aged over 80 years.  The percentage aged 65 to 79 seems to be negatively associated with real per capita provincial government spending.  Put another way, there may be a healthy survivor effect in that if you make it to 65, you are likely to be in relatively good shape until you approach 80 when the costs of aging quickly escalate.  And, these results implicitly suggest that the proportion under age 65 is a bigger driver of spending that popular belief thinks it is.

 

The coefficients in this regression can be used to generate predicted Ontario government health spending based on the determinants and then compared to actual spending.  These results are plotted in Figure 2.  In the immediate wake of the Great recession – between 2010 and 2012, actual real per capita government health spending in Ontario exceeded what the economic determinants predicted it should be.  However, from 2012 to the onset of the pandemic, not only was inflation adjusted Ontario government health spending per person flat, but it was below what the model predicts it should have been.  For example, in 2016, Ontario spent $150 per person less on provincial government health spending - about 3 percent less per capita. When the per capita numbers are aggregated to population totals, the numbers are in the billions.  On average over the period 2012 to 2019, Ontario spent an average of 1.1 billion dollars less than what the model predicts. Some years, this shortfall was as high as 2.5 billion dollars. And, with the pandemic winding down in 2022, it appears the shortfall has reemerged with spending $2.1 billion below what it should be. 

 

 While it has long been known that per capita government health spending in Ontario is below that of the other provinces, it is also lower than what Ontario's own economic and social health spending drivers predict it should be. 

Health Care in Ontario: Not Getting Better Anytime Soon

 

Ontario’s public health care system is once again making headlines – this time with respect to emergency room waits.  In the GTA, wait times in emergency rooms can be six to eight hours while in some smaller centres in Ontario you cannot even get an emergency room physician. Hospitals in general appear to be at 100 percent capacity or more and it is not just a bed shortage but also a staffing shortage.  Growing and aging populations, continued COVID-19 admissions as well as treatment for long-COVID and not to mention the surgical backlog from procedures cancelled during the peak COVID waves and one begins to see alarming strains on a system that was already strained pre-pandemic.  All of this does not even consider what has been happening in long-term care.  And of course, a rather large chunk of Ontarians still does not have a family physician even though we now have more physicians per capita than we did a decade ago.

 

Of course, looking ahead one begins to see that Ontario’s health care spending by the provincial government – already amongst the lowest in per capita terms amongst Canada’s provinces – is not going to improve anytime soon.  Indeed, if one looks at the spring 2022 Ontario budget, makes some projections for population growth and inflation, one sees that by 2025, real per capita Ontario government health spending will be where it was in 2019 just before the pandemic.  Moreover, that spending in real per capita terms was essentially flat since the end of the Great Recession circa 2010.

 

Figure 1 provides some evidence.  Real per capita spending from 1975 to 2021 is calculated from the most recent edition of the Canadian Institute for Health Information’s 2021 National Health Expenditure Release. Another series for 2021 to 2025 is calculated from the Ontario Spring 2022 budget with the numbers assuming inflation of 2.5 percent annually until 2025 and population growth of 1.2 percent.  The money is inclusive of COVID-19 support spending with 2021 marking an interesting break point depending on whether you use the CIHI estimates for 2020 and 2021 or the Spring 2022 budget medium term fiscal plan numbers that start in 2020-21. 

 

 

 

For 2021, the CIHI has Ontario provincial government health spending forecast at $75.2 billion (including COVID-19 supports) and $71.7 billion excluding them. On the other hand, the Ontario spring 2022 budget says base health care spending for 2021 (fiscal 2020-21) will be $64.4 billion with COVID-19 limited time funding at $19.1 billion bringing us to a total of $83.5 billion.  There have been issues with what the provincial government has said they would spend on COVID-19 and what they actually have.

 

No matter, combining the numbers and going forward to 2025, real per capita provincial government spending including COVID-19 spending (in $2020 dollars) was $4,523 in 2019 and in 2021 reached $4,987 using the CIHI numbers and $5,538 using the 2022 Ontario spring budget numbers.  Spending on health in Ontario did rise dramatically during the pandemic - it is just a question of by how much.  The provincial budget then shows base spending in health rising to $78.3 billion by 2025 (up from $64.4 in 2021) while COVID-19 spending declines to $12 billion in 2022, $6.9 billion in 2023 and then is zero afterwards.  So, by 2025 real per capita provincial government health spending will be $4,486 dollars – down from $4,523 in 2019.  From 2010 to 2025, real per capita provincial government health spending will have grown from $4,388 to $4,486 – an increase of 2.2 percent spread out over 15 years – annual growth of just over one-tenth of one percent.

 

How can the Ontario government increase health spending by billions of dollars more and yet spending per person is essentially flat for a fifteen-year period?  The spending on health has essentially not kept up with inflation, and population growth as well as given the additional demands being made for new drugs and treatments and an aging population.  Moreover, compensation has grown in the health sector – with additional payments during the pandemic – and the fact is that despite all these demands for additional in real terms we will be spending the same amount per person that we were fifteen years ago.

 

From a historical perspective, flat real per capita health spending appears to be a new era given the increases of 1975 to the early 1990s and then the late 1990s to about 2010.  Real per capita spending fell from about 1991 to 1996 in Ontario as the federal fiscal crisis led to a reduction in transfer payments.  The last fifteen years are in a league of their own when it comes to trends.  Not automatically spending more every year and keeping up with inflation and population growth means that the health care cost curve that everyone was worried about as being unsustainable has been sustainable for over a decade now – once you factor out the effects of the pandemic. In some ways, one might claim this as a success story unless of course you are in an ER waiting for a bed.

 

At the same time, keeping spending per capita constant means that over time more and more difficult choices will need to be made as the population ages, labour shortages worsen, and new treatments clamour for funding.  And remember that per capita spending has been constant, but Ontario already ranks pretty much as the bottom of several health resource indicators including hospital beds per capita and spending per capita.

 

There is no immediate way out of this.  How to get more resources into the system?  You can raise taxes and spend more – an unpopular solution especially now during a time of inflation and rising costs. You can spend less on other things such as education, social services, transportation, and other government services and spend more on health.  This will of course generate political winners and losers in the government funding sweepstakes and generate as many unhappy campers as happy campers.  Governments generally like to keep as many campers as possible happy unless they happen to be considered an inconsequential voting bloc.  Just ask families with one stay at home parent when it comes to tax treatment by the income tax system.

 

You can delist services currently being provided by the Ontario public health care system and transfer them onto the public as private spending which will provide more money to spend on the remaining public services.  However, this always seems to be forbidden territory in Canadian public health care despite it being a feature of other public health care systems we sometimes hold up as models – namely western Europe - and is therefore done incrementally.  Over the years, Ontario has delisted certain services but always on a piecemeal basis rather than part of a comprehensive reform package to contain the political fallout.   It also remains that Ontario already has the largest private financed share of health spending in Canada at about 66 percent. 

 

You can try to reform the current system to make it more “efficient” but short of delivering a pay cut it is hard to see how much more efficient you can get after fifteen years of standing still in per capita terms.  Sure, there are some efficiencies from reorganizing and implementing new technology or changing payment systems for health professionals or having physicians take on more patients but that will take more money in the short term and as the aftermath of the Romanow Report shows, more money for transformative change does not always get you the change you were looking for.

 

As a result, it is unlikely that we will see any dramatic changes or improvements to Ontario’s public health care system.  Any changes will likely be a short-term response to an immediate problem driven by which affected parties scream the loudest.  Right now, its emergency services but next week it might be driven by headlines in another long-term care home or perhaps a flare-up of monkeypox.  Firefighting driven by the media focus of the moment is not the way to deal with long-term public policy but that seems to be the world we live in.  With a four-year majority mandate and a collapsed opposition, this might be a window of opportunity for more dramatic change in Ontario health care but don’t count on it.  All governments are inherently conservative when it comes to change. No pun intended.

A Spring Election Is Coming to Ontario…Money is Flowing Like Spring Melt

 

The Northwest of Ontario is still gripped in throes of winter relative to southern Ontario, but spring is inevitably on its way along with a Spring Budget at Queen’s Park (April 28^th) to be followed by a spring election in early June.  The Northwestern Ontario Municipal Association (NOMA) will hold its annual conference and general meeting April 27-29 in Fort Frances and the meetings will overlap the budget date.   There will undoubtedly be the traditional lament over the region’s needs especially in the aftermath of the pandemic, but the truth of the matter is that municipalities - even in Ontario's north - have generally done quite well financially during the pandemic as has the provincial government for that matter. 

 

Municipalities generally run surpluses (or in the language of municipalities, positive variances) and the pandemic does not seem to have changed that.  And, because of federal transfer supports and growing own source revenues, Ontario has seen provincial total revenues rise since 2017-18.  Based on the Fiscal Reference Tables and the Ontario 2021 Fall Economic Statement, total revenues were $150.594 billion in 2017-18 and reached $164.893 billion in 2020-21.  Fiscal year 2021-22 is forecast at $168.617 billion while by 2023-24 the forecast is for revenues of $178 billion. 

 

If anything, the numbers will likely be revised again in the April 28^th budget to show higher revenues than anticipated and a smaller projected deficit as even the Financial Accountability Office of Ontario (FAO) has already noted.  For 2021-22, the FAO expects a $16.0 billion budget deficit, lower than the government outlook for a $20.5 billion deficit. By 2023-24, the FAO projects the deficit will decline to $2.8 billion, compared to the government outlook of $11.4 billion.

 

So, one can expect that with robust provincial revenue growth and an election in the wind, there will be plenty of spending or “investments” in projects and programs across the province as the province fans out its ministers and spending announcements as a sort of missionaria protectiva to secure as many seats as possible.  Indeed, the spending has been underway since March and currently totals nearly 11 billion dollars.  Some of these announcements are really tax expenditure or foregone revenue in the case of the refund and cancellation of vehicle registration fees (approximately $2.2 billion) as well as the gasoline and fuel tax cut to take effect this summer ($645 billion).  Some are substantial infrastructure projects with billions of dollars for hospital and long-term care construction as well as highway projects. 

 

In terms of specifics for northern Ontario municipalities to date, there are four announcements of note: 1) The industrial electricity subsidy for northern Ontario ($176 million), the refurbishing of GO Transit train coaches’ contract for Ontario northland North Bay ($109 million) and the contract to widen the Thunder-Bay to Nipigon highway ($107) and 4) Rural Broadband internet ($900 million) which one would expect a reasonable share should flow to the north.  These are not inconsequential amounts or projects from a regional perspective and come on top of other announcements such $75 million for resumption of Ontario Northlander train service from Timmins to Toronto.  Throw in money for more medical doctor training with the expansion of NOSM and you can see a deliberate effort to woo northern voters.  Watching the opposition parties use the northern neglect line will be interesting given that many of the northern ridings are indeed held by the opposition and not the current government.

 

Of course, the budget next week will probably unveil even more spending initiatives given that revenues are likely higher than expected which means the government will be able to spend more and lower the deficit.  As for the province’s $400 billion dollar debt and high net debt to GDP ratio?  An election is coming, and an election is too important a time to worry about public finances as politicians have demonstrated since time immemorial. And besides, what politician would not want a future without challenges for their grandchildren especially when there is an election to win?

 

 

Economic Development Action in Thunder Bay: City Council’s Keynesian Economic Action Plan

 

As Thunder Bay’s leaky pipe saga continues with lawn after lawn being dug up to replace service lines likely corroded by the addition of sodium hydroxide as a lead mitigation strategy, one might indeed be hard pressed to find a silver lining.  However, one is surprised that the more pollyannish members of City Council have not seized on the obvious boost to Thunder Bay’s economy from the ample work being generated for plumbers, hardware purveyors, asphalting and landscaping companies – not to mention city employees – from the continual calls to replace interior plumbing and service lines.  Indeed, one is astounded that there has not been an economic impact tally of the boost to the city’s GDP from all the construction work and at a bargain basement price with respect to city coffers.

 

For a modest investment in sodium hydroxide of only several hundred thousand dollars a year over approximately three years – probably not more than $1 million - there have been thousands of homes that have had to incur thousands of dollars in repairs.  If one assumes only a modest 3,700 affected households (based on the current membership of the Thunder Bay Leaky Pipe Club Facebook page) and assumes an average of $5,000 in spending for each, why the direct spending impact is already just shy of $20 million dollars.  The economic multiplier is an astounding value of 20 – something unheard of in municipal economic impact circles and the likely recipient of an Economic Development Commission Powerpoint presentation or two at the next NOMA meetings.

 

It would appear that Thunder Bay City Council and Administration have been inordinately clever embarking on a massive urban infrastructure renewal program and doing it for a pittance.  Indeed, they have not even had to borrow as the stimulus spending in question has been provided directly by affected households or their insurance companies. The constant parade of diggers in many neighborhoods across town has given new meaning to the term shovel ready infrastructure projects and the demonstrable associated benefits of increased employment and income.

 

Indeed, this is the ultimate Keynesian aggregate demand stimulus activity.  It does not matter if the spending is needed or not, as long as it occurs, it can stimulate aggregate demand and create employment and boost income especially if there is involuntary unemployment. Involuntary unemployment is when a person is willing and able to work at the prevailing wage as opposed to voluntary unemployment which is something members of City Council are more likely familiar with.  The benefits of building projects was noted by Lord Keynes himself when he  noted in his General Theory that “Pyramid-building, earthquakes, even wars may serve to increase wealth, if the education of our statesmen on the principles of the classical economics stands in the way of anything better.”

 

Of course, it is unlikely that City Council deliberately embarked on this as a Keynesian economic stimulus program given that they probably do not know what Keynesian means.  Indeed, upon stumbling across  the term, they probably hear “Canesian” and think it is some type of descriptor of a program at the 55 Plus Centre on Red River for senior citizens who when afflicted with ambulatory difficulties make use of a pole-like device for vertical as opposed to fiscal stabilization purposes. 

 

However, if they are interested in expanding their understanding and implementation  of Keynesian policy, they might heed Lord Keynes when he wrote: “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig up the notes again...there need be no more unemployment…the real income of the community and its capital wealth also, would probably become a good deal greater than it is.”  One is surprised city workers are not dropping off bottles of cash for burial when water service lines are repaired so that affected homeowners can then dig them up again and generate yet another round of spending stimulus.

 

So, there you have it.  Thunder Bay truly understands the power of private enterprise and individual initiative as well as Keynesian aggregate demand policy.  That is perhaps why Thunder Bay City Council after discouraging a private solution now finally wants to harness private enterprise to build its multi-use turf facility.  The economic activity it has generated via the Leaky Pipe Expenditure Stimulator has generated enough of a boost to GDP and the tax base to now support a private sector turf facility option.

 

 

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.

 

 

Should the Turf Facility Be Turfed?

There is an old joke about universities that goes as follows: When it comes to spending money, Department Chairs like new hires, Deans like new programs and Presidents like new buildings.  We can extend this to municipal governments.  Municipal Administrators like new staff hires, City Councilors like new programs for their neighborhoods and Mayors like new buildings.  Indeed, with the proposed multi-million dollar Indoor Turf Facility our current Mayor Mauro is continuing the practice of seeking a legacy build that marked previous Mayor Keith Hobbs’ terms as he sought and ultimately failed to bring about a new Events Center. 

There is nothing wrong with building a new events center or a new indoor turf facility.  They are both projects that will find users and will bring about benefits to the community.  The indoor turf facility will no doubt find many users in the Thunder Bay’s growing soccer community.  Indeed, there are private developers quite eager to provide these facilities – which incidentally would add to the tax base – and yet their plans seem to face a lot of obstacles from the City.  For whatever reason, the City does not seem to like competition from the private sector even if it enables them to save money.  As much as city councilors and administrators hate to hear it, it is ultimately about economics and financial sustainability.   

The Thunder Bay Chamber of Commerce is correct in wanting more detail on the finances as well as a financial plan given that the facility was going to cost $30 million, now costs $33 million and given the proposed new $15 million debenture (should federal and provincial support not materialize) will add a further $8 million in interest costs bringing the total to $42 million.  Given the history of construction projects in Thunder Bay, the final bill will probably not end there and I would not be surprised to see the costs of the facility exceed $60 million when all is said and done.  And then of course, there are the annual operating costs.  Given the City has been closing pools and considering other closures as part of its expenditure review, it is odd to see them happily adding new potential operating costs.

This whole business is also about process and one begins to think that despite the talk about deliberation and consultation and consideration of this project, this is probably a done deal.  The August 24^th meeting will be one of feigned concern about city finances followed by approval of the project.  Only one councilor appears to have raised any reservations at the last council meeting.  Stantec Architecture has been retained to design the facility and they have provided a glowing public presentation. 

In lieu of public meetings given COVID-19, public input is being accepted via a comment form requiring registration until August 3^rd.   The form simply asks one question – ‘Please provide your comments”.  In that sense, it is free form enough for people to provide whatever comments they want.  Yet, it is still not sufficient for a full public debate and the survey does not provide any type of costing options.  If you are opposed, your comments will likely receive a smaller weighting in Council’s deliberations as they will be very free form and judged “inconsistent” or “not focused” while supportive comments will be “passionate” and “effective.”

Indeed, the impact of COVID-19 on public meetings and public debate is I think secretly welcomed by many politicians – including our municipal councilors.  After all, no more pesky face to face meetings with unhappy constituents.  You can receive input electronically and the beauty of that is you can choose to respond to what you want and ignore the rest.  After all, expert consulting advice is being provided to  Thunder Bay City Council on this matter and experts know what they are talking about.   Except, the only expert advice that City Council usually wishes to hear is from paid international experts who bid for a project with parameters that essentially result in them presenting how to do what City Council wants to do as opposed to whether the project should be done in the first place.     

Local experts with differing points of view and local knowledge are avoided and if too vocal are essentially derided – sometimes during council meetings themselves.  As Councillor Aldo Ruberto remarked about yours truly during a 2015 council meeting on the proposed events center – "You want to listen to economists? They record history. They don't make history." For the record, I supported a downtown events center as long as Federal and provincial funding could be secured for the project but such support was not forthcoming.  When the funding or circumstances change and new information becomes avilable, I change my mind.  Such nuances are lost on “passionate” politicians.

Thunder Bay City Councilors do not like to talk about history much – unless it is a celebration of their own glories – because it reminds them of mistakes that have been made.  Indeed, Thunder Bay City Council continues to make history as it approves decisions that add more and more spending with the buck being passed on to residential ratepayers who are now paying 70 percent of the tax levy and face rising user fees.  There are certainly a lot of potential bills coming due with past decisions made on the city’s water supply.  The City has been remarkably silent on pinhole leaks in the wake of the sodium hydroxide experiment to reduce lead even in the wake of direct queries.

 

So, should we turf the turf facility?  The city has earmarked funds out of reserves for this project.  For it to go ahead in a responsible fiscal manner, the project requires that upper tiers of government provide at least half of the upfront capital costs with the remainder coming out reserves – not a debenture. Yet, the talk of a debenture means Thunder Bay City Council and Mayor already suspect there is not going to be federal or provincial grant support so they are making alternate plans.  After all, why would the federal government or province commit to yet another northern Ontario construction project that is not essential infrastructure and seems to have such flexible and changing construction costs?  Moreover, given Thunder Bay is lamenting their $13 million COVID-19 budgetary shortfall should not reserves also be used for this rather than have a steep tax increase in 2021?  The decision is pretty obvious. In the absence of upper tier grant support, you turf the turf facility and go with the private sector individuals who were ready to build and hope they are still interested.

Thunder Bay City Budget Deliberations 2020: The Plot Thickens

Well, things should be quite interesting this evening at Thunder Bay City Council as they have their final budget deliberation meeting. Councillor Mark Bentz has staked out his position. In remarks reported in the local media, he is of the position that levy hikes are not sustainable given that tax levy increases are more than double the consumer price index over the last decade. In a very stark graph provided in the Chronicle Journal, Councillor Bentz asserts that since 2011, the tax levy has grown by 32 percent while the CPI has gone up 14 percent and the assessment base only 7 percent.  This is of course a pretty classic interpretation  of sustainability in that the tax levy is growing faster than the tax base meaning that the tax burden is essentially deepening on ratepayers.

The key question is what is the solution?   Part of the debate this evening is going to be over the list of items totaling 2 million dollars in cuts that have been produced by administration as part of getting the levy increase down from about 6 million to about 4 million dollars.  Some of the items mentioned include ending residential weekend snowplowing and closing the Conservatory and even reducing library hours.  It is quite interesting that all of these proposals entail direct service reductions to current ratepayers.  Your taxes will still go up, but you will be getting less. So there.

The fundamental problem is that the key expenditure component on the operating budget is wages and salaries.  The total wage and salary bill functions as a combination of both price and quantity – that is the salary per employee multiplied by the number of employees.  These are ultimately the items that also need to be addressed.  It can probably start with a hiring freeze given that despite a flat economy and a population total that has not budged in 20 years, there are more employees on the municipal payroll than there were 20 years ago. 

If one looks at the accompanying graph, one can see that since 1999, the number of employees of the City of Thunder has grown.  The actual number of FTEs (Full time Equivalent positions) rose from approximately 1,568 positions in 1999 to 1,840 in 2009 but by 2019 had declined to 1,715 and are now scheduled to rise to 1,724 in the 2020 budget.  The dip between 2009 and 2019 is the result of the City getting out of some of its homes for the aged obligations in 2016 so the pre-2016 figures includes more staffing for homes for the aged.  The other thing is that these total FTEs actually do not include police which in 2016 were an additional 333 FTEs.  It is possible to estimate an adjustment that removes homes for the aged staff prior to 2016 but adds police and the results show a steady increase and flattening out of employment.  

 

Between 1999 and 2019, employment as measured by these “estimated” adjusted FTE numbers may have grown from 1,642 to 2,040 – an increase of 24 percent.  Given that population in the City of Thunder Bay has been flat over the same period, the per capita numbers of municipal employees has grown substantially.  There may indeed be very good reasons why this has been the case but it needs to be discussed.  At minimum, a hiring freeze is not an unreasonable thing to do while numbers like this are discussed.  More to the point, perhaps Councillor Bentz can actually get the numbers from 2011 to 2020 on employment from administration given that in the end my numbers are only “estimates” as such data is not easily obtainable.  I would be interested in seeing the resulting charts.

Ontario Budget 2019: Some Spending Details

Well, the dust is settling from the April 11^th 2019 Ontario provincial government budget and it is time to spend a little more time looking at some of the details in spending.  There are many stories in the media about assorted cuts coming down the pipeline, but it remains that overall spending is up and projected to continue rising though at a much lower rate.  Indeed, as discussed in my previous post, total spending is expected to rise from $162.5 billion in 2018/19 to reach $164.4 billion representing an overall increase in spending of 0.6 percent. This of course is a much lower growth rate in spending than was the case under the previous government.

What is more interesting is what a more detailed analysis by ministry expense category reveals.  Approximately two-thirds of ministry expense categories are expected to decrease while one-third have actually experienced an increase. Table 1 lists the ministry expenses by ranked percentage increases whereas Table 2 does it by ranked expenditure decreases. Increases in spending range from 550 percent for the Treasury Board Secretariat Capital Contingency Fund to 0.5 percent for the Training, Colleges and University Base Budget. Despite what may seem to be very large increases for the Treasury Board Secretariat they are on amounts that represent less than one percent of total spending. With respect to the Treasury Board Secretariat, the government also notes that: “The Province has put in place a prudent Operating and Capital Contingency Fund housed in the Treasury Board Secretariat. This fund is the main driver of the increase in the Ministry’s 2019–20 budget, in addition to an increase in employee pension benefits paid.” (Ontario 2019 Budget, p. 298).  Other increase of note also include Infrastructure (Base) (261%), Total Transportation (10.9 %) and Interest on the Debt (6.4%).

It should be noted that Health and Long-Term Care and Education (Primary & Secondary) together represent in 2019/20 a total of $95 billion or about 60 percent of the spending total.  While there are changes within both these categories underway designed to create efficiencies it remains that Education is going to grow by 2.6 percent and Health by 2.2 percent.  It is fairly simply math to realize that if categories representing 60 percent of government spending are going to grow by over 2 percent when total spending is growing by 0.6 percent, then there are going to have to be reductions in many other categories which account for the other 40 percent of spending.

 
Here the list is much larger (therefore two tables) and some of the percentage increases also larger.  Reductions range from -0.4 percent for the base budget of Municipal Affairs and Housing to -67.1 percent for Natural Resources and Forestry Emergency Forest Fire Fighting.  However, the total budget for Natural Resources and Forestry is declining by -19 percent while the base budget is declining by -3.2 percent.  While the Total Budget for Training, Colleges and Universities is declining by -6.1 percent, its base budget is actually growing by 0.5 percent while the student assistance component is declining by -33 percent.

To its credit, the provincial government has embarked on what appears to be a pretty substantial review and restructuring of government spending in all categories.  Within expenditure categories it is choosing what to increase – albeit at a lower rate than in the past – and what to substantially reduce.  Some categories have been hit immediately with some large reductions.  Some of these reductions include the winding up of one-time funding and therefore appear quite large for the coming year which is why a comparison of base budget rather than overall totals might be more appropriate.  However, the ultimate aim appears to be a substantial restructuring with priorities being selected.  It would appear the priority is to deal with the province’s fiscal situation while ensuring that overall budgetary cuts do not occur particularly in the key areas of health and education.  Indeed, all things considered, the transfer partners in the municipalities, universities, schools and hospital sectors (MUSH) have gotten off relatively lightly.  This naturally means larger declines in the remaining 40 percent of government spending. It cannot realistically be otherwise.