Municipal Surpluses Are Not That Unexpected

  

The news that the City of Thunder Bay has an “unexpected” operating surplus for 2025 has been greeted with a mixture of commentary including some remarks that it should be spent on crumbing roads or perhaps a tax break.  Apparently much of the additional revenue came from the liquidation of an investment portfolio and as is standard policy, will be added to the reserves.  None of this is really a surprise because if one looks back on past budget years, often, there is an operating surplus or what is referred to as positive variance. 

 

Figure 1 plots City of Thunder Bay operating surpluses from 2012 to 2025 and two-thirds of the time the city has had an operating surplus.  Indeed, the accumulated operating surpluses since 2012 sum to about 17 million dollars.  However, this is not the end of the story because this is only the operating surplus.  The City of Thunder Bay has both a capital and an operating budget and over the 2009 to 2024 period (2025 for Thunder Bay is not available yet on FIR), the total surplus (the difference between total revenues and total expenditures) was only in deficit twice as illustrated in Figure 2.  Indeed, the accumulated total surplus since 2009 has been 376.1 million dollars.

 

This is not a Thunder Bay thing. Across Canada, municipalities are not separate tiers of government but essentially wards or creatures of the province. Provinces keep a tight rein over municipalities and their finances ensuring that they generally run surpluses and that those surpluses go into reserves.  As Figure 3 illustrates, periods of deficit in the national local government sector have been few with only the four years from 2000 to 2003 showing a deficit.  So, Thunder Bay is not exceptional in generating repeated surpluses – it is something that is the norm.  The greater concern would be municipalities running perpetual deficits but that is something generally indulged in by the federal and provincial governments.  By comparison, municipalities are paragons of fiscal rectitude.

 

City Council's One Percent Solution

 

After projecting a positive variance of $3 million for the 2021 budget year, it would appear the final tally for a budget surplus for 2021 will be coming in at $5.6 million.  Thunder Bay will have its seventh consecutive positive budget variance making for accumulated variances of $26 million over seven years.  Much of the savings will come from lower-than-expected COVID costs for which the city has received a lot of federal and provincial support.  While Thunder Bay budgeted for a $7.2 million cost from the COVID-19 pandemic this year, a third quarter variance report now forecasts COVID costs at $5.5 million, based on trends to the end of September.

 

Figure 1 plots the annual tax levy increase since 2015 against the corresponding surplus at year end.  For example, in 2015, the tax levy increase was $9.4 million – a 5.7 percent increase on a $164.7 million levy the year previous. The year’s end saw a positive variance of about $1 million which on $174 million tax levy was just over one-half of one percent.  Since 2015, however the size of the surplus has increased substantially, often coming close to matching the size of the tax levy increase that year.  In 2017 for example, the levy increase was $5.96 million – a 3.3 percent increase – but the year-end surplus came in at $5.6 million – almost 95 percent of the value of the original levy. For 2021, we have a first – a surplus of $5.6 million – which is larger than the original levy increase of $4.3 million. 

 

 

The surplus is generally put into city reserve funds which in general is a prudent strategy.  However, the fact that there are consistent surpluses means that there has been a consistent practice of overestimating expenditures and underestimating revenues.  Given that the tax increases have been much larger than what was required given the ultimate need, one can only conclude that this has become a sort of forced savings strategy.  The City of Thunder Bay raises the tax levy more than is needed with the goal of boosting its reserves for whatever long-term plans they might have for spending from those reserves. 

 

Thunder Bay has been raising taxes consistently more than it has needed to for some time now and that money comes out of the pockets of its residents.  During the pandemic, while other cities were trying to keep tax increases at zero, Thunder Bay managed an increase of 2.7 percent in 2020 and 2.1 percent in 2021.  Accompanied by generous provincial and federal COVID-19 support, the result has been large and growing surpluses.

 

One could pose the following counterfactual.  If Thunder Bay had been able to anticipate the surplus each year and implement a tax increase incorporating the surplus and balancing the budget, what would have the alternate tax levy increase have been? Figure 2 plots the actual percentage tax levy increase since 2015 and the alternate increases.  In 2017, for example, the budget could have been balanced with an increase of 0.2 percent but instead there was an increase of 3.3 percent.  Last year – 2020 - saw an increase of 2.7 percent but all that was needed is an increase of 0.6 percent.  Meanwhile, if 2021 continues on this track, it means that rather than a 2.1 percent levy increase, there could have been a levy reduction of nearly 1 percent.

 

 So, here is the thing.  Over the period 2015 to 2021 the actual tax levy increase has averaged 3.1 percent.  The average levy increase required to meet expenditures has been 1.1 percent.  City council for 2022 has directed administration to prepare a municipal budget with a 2.25 percent levy increase.  I would suggest that based on the City’s financial performance to date that they could easily cut that in half.  One percent sounds about right.

Thunder Bay City Council Swimming In Cash - Again.

 

Well, after a break of a few weeks, Thunder Bay City Council will be back in session this evening and the agenda is long.  Of course, much of the attention will be focused on Councillor Peng You’s move to put a question on the next municipal ballot regarding the size of council that specifically would ask: “"Are you in favour of a smaller city council, one made up of 8 councillors elected at-large and one mayor elected at-large?"  This is an old issue in Thunder Bay and usually resurfaces the year before an election and is a cheap and convenient way for a councillor to get attention as being fiscally responsible while not having much happen afterwards.  As we all know, the current arrangement consists of 12 councillors (seven ward and five at large) as well as the Mayor elected at large.

 

Reducing the size of council as an economy measure is largely symbolic as a $200 million plus tax supported budget is not going to be significantly affected by having four fewer councillors.  The quality of council is a more significant factor in driving the budget than the quantity of councils and council would be better off having fewer councillors and paying them more to attract better candidates able to actually analyze issues and make better decisions.  So, the question Councillor You wishes to place on the ballot is typical in that it is a simplistic question designed to address a much more complex issue.  A smaller city council makes sense as a symbolic political gesture and would be more useful if some of the meagre savings were reallocated to attract better candidates. 

 

However, there is also another issue here and that is the effectiveness of democratic representation.  Moving to a completely At-Large system potentially reduces accountability for neighborhood issues.  Councillors must be assigned to a Ward.  Otherwise, you have a council composed of a mayor and eight mini mayors each of whom will be more concerned with the big picture at the expense of the more mundane grass roots concerns of constituents.  It is a question of balance and a completely at-large-system runs the risk of affording councillors the opportunity to shirk even more when it comes to neighborhood issues they would rather avoid.  It is bad enough now having a mayor and five prima donnas with the ward councillors having to pick up the slack.  Good luck getting attention once they are all at large.  

 

However, that is only one of many issues this evening.  The other, tucked away near the end of the 248-page Committee of the Whole document, is the non-consolidated financial statement and reserve fund update.   It turns out that even with the ravages of the pandemic and the wringing of hands about budget problems and the need for resources, the City of Thunder Bay has turned out to have a net positive variance in 2020 of $4.1 million or in other words a surplus.  Moreover, in terms of total assets: “Cash and investments of $131.6 million have increased by $11.7 million from the prior year, primarily resulting from an increase in reserve funds of $21.8 million.”  It would appear that all that federal and provincial money was not all spent on the pandemic and substantial savings were generated.  Given that Thunder Bay was projecting a $3 million surplus for 2021 at the same time that 2020 seemed to only be on track for a $1 million surplus, it would appear that things have improved even more. 

 

Now of course, municipal governments of course are not allowed to run deficits on operating expenditures by the provincial government, so deficits are covered out of reserve funds while surpluses augment reserve funds.  Having reserves is important and fiscally responsible. At the same time, many municipalities – Thunder Bay included – are now in the practice of running habitual surpluses funded by tax increases that are often higher than they need to be. The 2020 and 2021 tax hikes are in the end larger than they needed to be.  The City of Thunder Bay consistently overshoots with the increase used to fund a savings program at ratepayer expense. For 2020, there was additional help from Ottawa and Queen’s Park and Thunder Bay is now swimming in cash.

 

 

 

 

Saving Money in a Roundabout Way

 

The theme at the November 2^nd Thunder Bay City Council, Meeting will be “saving money in a roundabout way.”  Despite all the hand wringing and gnashing of teeth during the spring and summer over the impact of COVID-19 it turns out that for 2020 the City of Thunder Bay will be seeing a positive variance on their operating budget – that is, a surplus – of about $1 million.  However, this positive outcome is not really the result of any great fiscal sacrifice or structural reforms on the part of our municipal councillors but mainly the result of money from other levels of government coming to the rescue. 

 

While there was indeed some cause for concern as user fee revenues dried up when the pandemic took hold, the City has been bailed out by other levels of government.  First, there was over $9 million dollars in assistance from federal and provincial levels of government of which some will carry over into 2021. Second, the city was quick to issue temporary layoffs to about 800 workers which was not as regrettable as city officials might have you think because with layoffs in early April, most would have ended up on the Federal CERB – more government money. 

 

The positive variance for 2020 means another $1 million will end up going to reserves which again means business as usual as the last five years will have now seen nearly $14 million dollars in accumulated positive variances.  The City of Thunder Bay seems to typically overestimate spending and underestimates revenues and the inevitable resulting surplus is then banked.  Taxpayers are thus not only paying for services but also for an indirect roundabout municipal savings program with tax levy increases since 2015 ranging from 2.3 to 5.7 percent. 

 

There is fiscal prudence and then there is crying wolf. Indeed, between the “accidental surpluses” and the deliberate direction of funds into reserves as part of operating and capital budgets, the City of Thunder Bay has seen its reserve funds grow from approximately $99 million in 2015 to an estimated $137 million in 2019. Returning at least a portion of the “accidental” surplus to ratepayers in the form of lower tax levies is not something the City seems interested in doing given its insatiable need for more legacy projects.  For 2021, ratepayers in Thunder Bay have already been prepared in a roundabout way for a tax levy increase of 3.45 percent as bringing about only a two percent increase would require $5 million in “savings”.   

 

And speaking of savings and roundabouts, the other way to save money that will come up at this week’s meeting is a proposed roundabout at the intersection of Redwood and Edward.  The concept of a traffic roundabout is actually quite good and common in many other cities – particularly in Europe.  It can help smooth traffic flow provided they are properly constructed and properly used given the average Thunder Bay driver’s pathological inability to manage a merge lane.  There is a small roundabout at Marina Park but that is not a real test under traffic flow conditions as it essentially connects road access within the park to parking lots.

 

The initial proposal was for a roundabout at Ford and Victoria but the City’s Engineering Division after a study said the intersection did not warrant one.  A proposal for one at Edward and Redwood seems odd given that the intersection was just fixed and repaved but apparently there is more sewer work planned so now is a time to replace more expensive traffic lights with a roundabout.  While building the roundabout will cost $1 million dollars compared to $850,000 for regular traffic signals, savings will emerge over time in a roundabout way through lower operating costs over 20 years which will be $150,000 annually compared to $275,000 annually for traffic lights. That seems like a lot for annual maintenance for either option given that in other cities the annual maintenance estimates are closer to $10,000 but hey this is Thunder Bay so let us go with it.

 

If you simply sum up the costs over 20 years, the traffic lights will cost $5.6 million over that period but the traffic roundabout $3.85 million generating a total cost difference of $1.75 million at the end of 20 years.   If we assume that the numbers for maintenance over 20 years are instead totals over 20 years then what you actually get is a total cost of $1.15 million for the roundabout and $1.125 million for the traffic lights - making the roundabout only slightly cheaper over 20 years.  So, what really should be done is a cost benefit analysis under differing interest rate/discount rate scenarios.  That is, there needs to be not only an estimate of the costs but a monetary estimate of the benefits in terms of commuting time saved or lives saved and injuries from the expectation of fewer accidents in a roundabout relative to traffic lights. 

 

And you also need to apply a discount factor or interest rate given the weighting of benefits over time – a dollar today is not the same as a dollar tomorrow.  Basically, projects with high-up front benefits and lower-upfront costs tend to be favored in any cost-benefit analysis but we have really no way of determining that in this case because all we have are cost estimates and no publicly available monetary estimate of anticipated benefits.

 

Still, costs are what are going to be used and it looks like savings so the Councillors will go for it whether there really are going to be savings over the next 20 years or not.  It is likely none of them will be on council 20 years from now for a final reckoning.  The Councillors are desperate for some feel good achievements given the beating they have taken over the spending on the turf facility and their cone of silence on the pinhole leak issue.  At the midpoint of their mandate, they are not doing so well politically given a recent TBNewswatch Poll grading their performance that saw 50 percent of respondents give them a collective “F” and another 25 percent a D. Only 1.6 percent gave them an A.  With those kinds of marks, none of them will be going to Thunder Bay’s political graduate school – higher political office.