Rising Surpluses, The Other Shoe Drops...and Manure

 

Well, the City of Thunder Bay’s finances just keep getting better. After projecting a positive variance of $3 million for the 2021 budget year, and then a surplus for 2021 that was supposed to be coming in at $5.6 million, the 2021 surplus has now come in at $10.9 million.  Thunder Bay will have its seventh consecutive positive budget variance making for accumulated variances of $31.3 million over seven years.  Indeed, this is the largest surplus in seven years.  While much of the savings will come from lower-than-expected COVID costs for which the city has received substantial  federal and provincial support, it remains that the City of Thunder Bay could obviously use some some help in crafting their budget projection and forecast models. 

 

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, there is now a surplus of $10.9 million – which is more than double the original tax levy increase of $4.3 million.  This is indeed a first, a surplus bigger than the  year's tax levy increase.  I suppose if they had some creative economists working for them, the City of Thunder Bay could spin this as a tax levy surplus multiplier of 2.53.

 

 

 

If Thunder Bay had been able to correctly forecast the surplus each year and implement a tax increase incorporating the surplus and balancing the budget, what could 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.  The year 2020 saw an increase of 2.7 percent but all that was needed is an increase of 0.6 percent.  Meanwhile, the surplus for 2022 means that rather than a 2.1 percent levy increase, there could have been a levy reduction of 3.3 percent. 

 

 

 

Outrageous?  Not so much as the other shoe that has dropped in the face of growing surpluses - a hefty pay increase for some City Managers.   Some managers this year will see raises as high as 12 percent with the range for 319 management and non-union staff ranging from 4 to 12 percent this year.  Given the stress of managing city services during a pandemic, one can certainly understand the need for raises.  At the same time, there have been a lot of stressed-out public-sector employees in health and education and guess what?  The provincial government held them at one percent a year for the last three years.  What should we think of all this during a municipal election year?  Well, here is another great juxtaposition – the City of Thunder Bay is offering free compost to residents while quantities last with a half-ton load limit per person.  With a $10.9 million dollar surplus, one would think the supply of compost would be endless.  They really have stepped into it this time.

Thunder Bay City Finances Reporting Another Surplus

 

The City of Thunder Bay is now projecting a positive variance of $3 million for the 2021 budget year.  Despite the ongoing COVID-19 pandemic and its costs, the City of Thunder Bay is receiving more financial support than expected from both federal and provincial levels of government.  As well, policing costs as well as other expenses such as debt interest are coming in lower than expected.  If the assumptions underlying this budget update forecast come to pass, then for 2021, Thunder Bay will have its seventh consecutive positive budget variance making for accumulated variances of $17.1 million over seven years. 

 

Needless to say, this “good news” will be used to lend a positive vibe to discussions of spending more money on big capital projects such as a revised Multi-use Indoor Turf Facility project or the new proposed police facility.  After all, with City finances in such “good shape”, we can afford to spend more. Until next fall of course when the discussion will tilt to how we need to raise taxes 3-4 percent. It would appear that the budget spin in Thunder Bay changes from quarter to quarter depending on the need to support the needs and aspirations of the moment.

 

Positive variances are an odd term.  The term variance makes it sound like all that has happened is that the numbers they are getting now are somehow at “variance” with the original budget.  The degree of economic literacy in the general public and maybe amongst a few of the city councilors is such that they probably do not realize that a “positive variance” on the budget is not some type of COVID-19 hybrid spreading to the finances but rather than what it really is: a surplus.  What the city is really saying is that they either have or are projecting an operating surplus on the tax supported budget.  At three million dollars it is just about the size of the tax increase they brought in this year meaning that once again taxes came in much higher than if spending estimates were on the nose.

 

Of course, this is a COVID-19 year and a lot of unexpected things can happen.  Moreover, while having very large positive variances means that the tax rate levy that was imposed was again higher than it needed to be in 2021, one does not want municipalities to become spendthrifts and needlessly run down their reserves.  After all, it was not that long ago that negative variances were more of a concern as the accompanying figure illustrates.  As the numbers for the City of Thunder Bay show, negative variances used to be a problem but to its credit the city actually got a handle on its spending to the point where the financial leaks have been plugged.  Too bad, they could not solve the City’s ongoing leaky water pipe crisis too.

 

 

 

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 can be used to augment reserve funds.  At the same time, many municipalities – Thunder Bay included – are now in the practice of running habitual surpluses funded out of tax increases that are often higher than they need to be. Enjoy the surplus. We are paying for it as ultimately it comes from taxpayers at either the local, provincial or federal level.