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.

Municipal Government Inflation Rates: How Much higher?

On Tuesday night this week, Thunder Bay City Council began its budget deliberation process and there was a fair amount of grilling of City Administration by councilors with respect to the overview of where spending and tax rates would be going over the next few years.  Apparently, councilors were surprised when Administration said that the city had a $20 million annual infrastructure gap for the next 15 years as well as projected tax increases at over 3 percent – 3.83 percent for 2020 alone – until 2024.  Part of the questioning involved the standards being applied to estimate the infrastructure gap and clarification was requested. This of course is a reasonable question given the extremely wide range of estimates available for infrastructure gaps at least at the national level.

I tuned in for a bit on Tuesday night and caught part of an exchange between Councilor Mark Bentz and City Manager Norm Gale in which Councillor Bentz expressed some disquiet at the projected tax increases until 2024 being well in excess of increases in the Consumer Price Index inflation rate. The reply from the City Manager was that the Municipal Consumer Price Index was not the same as inflation from the Consumer Price Index and that it was indeed much higher.  So, I decided to do a little digging to see what the source of such a statement might have been and to see indeed how much higher an inflation rate you could get for government spending in general.

It turns out the City of Edmonton actually did a bit of research into this issue and published a report titled Municipal Price Index 2018 in which they compared consumer inflation and municipal inflation from 2012 to the present and provided some forecasts for the future. It turns out that based on their estimates for Edmonton, the inflation rate for municipal government services was indeed higher than for consumer prices but as Figure 1 illustrates, the gap is not as large as one might think. Over the entire period 2012 to 2019(forecast), the average consumer price inflation rate for Edmonton was 1.6 percent while the average municipal inflation rate was 2.2 percent for an average difference of 0.7 percent.  
 

So, what about Thunder Bay?  Well Figure 2 plots the inflation rate since 2012 for Thunder Bay based on the CPI.  It then plots inflation based on the Government Expenditure Implicit Price Index obtained from the 2018 CIHI National Health Expenditures Data Appendix A.  It then also plots the municipal inflation rate for Edmonton from Figure 1 and the annual increases in Thunder Bay’s municipal tax levy.  Note that for 2019, the CPI Inflation rate for Thunder Bay and the GEIPI rate are both assumed to be 2 percent.  So, what do we get?

Thunder Bay’s municipal tax levy increases since 2012 and forecast into 2019 are generally all well above any of these measures of inflation including the municipal inflation rate calculated by the City of Edmonton. The average CPI inflation rate for Thunder Bay over the 2012 to 2019f period is 1.5 percent.  The inflation rate based on the Government Expenditure Implicit Price Index (GEIPI) is 1.4 percent while the municipal inflation rate for Edmonton is 2.2.  The average Thunder Bay municipal tax levy increase for this period was 3.3 percent.

So, unless one is going to argue that municipal “inflation” in Thunder Bay is nearly double that for consumer prices – and I would need to see some evidence for that rather than just a blind assertion by City Administration – then one would have to conclude that this year’s 3.25 percent proposed increase in the tax levy is too high.  Obviously, the rate of municipal inflation is going to be partly determined by the City in terms of what they negotiate to pay for various goods and services as well as the choices of what goods and services to consume or provide.

If we go with the Edmonton forecast for municipal inflation of 2.7 percent – then to bring the tax levy down from 3.25 percent to 2.7 percent, there needs to be about $1.7 million dollars in reductions from this year’s proposed tax levy increase.  If you want to bring the levy down to a two percent increase, then there would need to be a $2.4 million reduction in the proposed levy.  So, whichever way you look at it, we can probably do better than 3.25 percent this year.

Thunder Bay Budget 2019: Onward and Upwards Simply Won't Do This Time

The 2019 Thunder Bay municipal budget has arrived, and the proposed budget projects a total increase in the municipal tax levy of 3.25 percent. The proposed levy is $195.9 million which represents an increase of $6.2 million over last year’s budget of $189.7 million.  You can get a nice summary of the proposed changes in this summary article by Jeff Walters given that the actual executive summary document released by the City of Thunder Bay is really quite lengthy and as usual a rather opaque document with its summary of total tax supported(gross) spending, tax supported (Net), rate supported (Gross) and rate supported (Net) spending all of which include capital spending and government grant supported spending and are all well in excess of the $195.9 million tax levy which is not mentioned until the second page.

This first budget is an important test of the new Mayor and City Council in that it will provide an indication of their approach to municipal fiscal matters.  Indeed, the incoming Mayor in his assessment of major issues facing the City noted that taxation levels were one of his top three priorities  (along with infrastructure and crime).  There is of course a difference between the level of taxation and the size of a rate increase – reducing the level of taxation actually means having a negative rather than positive change to the net municipal levy. However, as Figures 1 and 2 show, the trend over the last two decades has been one of constant increases with a median increase in the levy of 3.1 percent. That is to say, half of increases were above 3.1 percent and the remainder below with the lowest increases being for the years 2000 at 1.1 percent and 2010 at 1.2 percent.  Hopefully we will not again see years like 2004 and 2006 as given the current levels of taxation they would represent an economic disaster for many local households.

 

 

An important issue for Council to ponder is the recent tendency for municipal budgets to generate large surpluses as was the case with the 2018 budget which was on track for a $3.6 million surplus as of October 2018.  While such surpluses are often used to replenish reserve funds, it remains that it becomes easy to budget when one overshoots with spending estimates and banks the savings at taxpayer expense.  Given that the increase in the municipal tax levy in 2018 was $5.75 million, it suggests that one could have had a much smaller tax increase and still run a modest positive variance in the $1-$2 million range.   And the fact is that 2017 also saw a budget surplus in the range of $8 million as a result of “one-time costs” that were lower than expected.  Essentially, municipal services - some of which are more regional than local it is to be noted - are being funded by local ratepayers as well as a broader range of cultural and social services and added to that a municipal "savings program" designed to build up reserves. Moreover, the residential ratepayer has been bearing a rising share of the tax burden given the decline in the city's industrial base.

I suppose whether you think using municipal property tax revenues to hit such a wide range of targets is a good idea depends on whether you believe the purpose of property taxation is to fund local services or whether it has a broader range of goals.  Municipal taxation is traditionally supposed to be "benefit" taxation - that is it is to be used to fund local services to residential property and property owners - rather than a form of wealth taxation - which is actually how the tax is levied.  If benefits and services to property are tied to the value of the property, then  the current approach works.  However, we all know that there is a wide variation in services to property.  As well, the aim should be for prudence in the budgeting to provide services with some effort to maintain reserves for unforeseen expenses.  At the same time,  the municipal ratepayer should not be treated as a sort of unlimited liability insurance provider when it comes to budgeting by being used to generate large surpluses that result in taxes higher than needed to fund operating service and needed capital projects.

So, what should this year’s increase in the municipal levy be?  Well, increases in levy supported spending should not exceed the rate of growth of population and inflation.  Given inflation in the rate of 2 percent and population increase of zero you are looking at 2 percent rather than 3.25 percent as the upper bound for this year’s increase.    True, unforeseen circumstances could cause more spending than anticipated later on in the year rather than a reduction but then that is what reserve funds are for and they have seen some healthy replenishment over the last few years.  Going ahead with the 3.25 percent increase is an indication of business as usual as 2017 and 2018 also saw increases in the total levy of over three percent.  Council will need to go through the list of proposed increases and ask for a pretty good justification of why they are needed.  Onwards and upwards is simply not a good option this year.

Thunder Bay's Tax Levy Debate

It would appear that the municipal election campaign is starting to heat up with the outgoing Mayor taking issue with the Thunder Bay Chamber of Commerce's recent election policy document which among things argues that the City of Thunder Bay's tax levies have increased by an annual average of 3.36 percent over the last decade.  Their graph is for the period 2012 to 2022 which includes projections for the 2018 to 2022 period which is not exactly the last decade. The Mayor maintains that the average tax levy change over the past eight years is only 2.4 percent - after new growth in the tax base was factored in.

This is all really quite entertaining because what matters is the increase in the total tax levy - that is what is being drawn from the tax base and used to fund spending.  The tax levy is essentially an expenditure estimate for taxpayer assisted spending and in the end what matters is the total amount of the revenue taken in and its growth and not whether some of it comes from the existing base and some of it is coming from new assessment growth.  The latter argument is really only being advanced to deflect attention from the overall increases.


So, what are the numbers?  Well, here is my two cents worth.  The accompanying figure plots the annual tax levy increase for the period 2008 to 2018 based on total tax revenue numbers from the Financial Information Returns from the Ministry of Municipal Affairs and Housing (with the exception of the last couple of years which come from City of Thunder Bay budget documents).  If you take the average, it comes out to comes out to 3.3 percent which is pretty close to the Chamber estimate.  If you take the average for only the 2011 to 2018 period, you get an average of 3.4 percent.  The last four years average out to 3.7 percent which is a rate well in excess of the rates of inflation and income growth in this city but the number is skewed by the 5.7 increase in 2015 - the year right after the last election. In the end, the tax levy in Thunder Bay has increased at an average of over 3 percent annually for the last decade and based on the chamber numbers is projected to continue doing so.

Economics News Around the North: January 25th Edition

Here are the economic news stories that have caught my interest over the last little while in northern Ontario.  The start of the new year has been a bit slow when it comes to economic news in the region but then there is so much else going one politically, economically and otherwise in Ontario, Canada and the world especially as we move into a critical phase with the NAFTA negotiations and the start of election campaigning in Ontario in the run up to the June election.

Here goes....

Architect envisions creative solutions to re imagine existing buildings. TBNewwatch, January 24th.

Well, this looks like a creative way to try and create some type of downtown event centre/conference facility in Thunder Bay.  Of course, you can add Victoriaville as well as the empty Sears store at intercity to the list of underutilized space in Thunder Bay.  Personally, it would be nice to see the Sears store retooled in a circular two level galleria space of small stores around a public space that could be used to house the farmers market.  The only problem would be to find tenants for the small retail spaces given that rents at the ISC are apparently pretty steep.

Record year for airport. The Chronicle Journal, January 25th

The airport's economic role in the city of Thunder Bay and region continues to grow.  Passenger volumes in 2017 were 844,627 which represents an increase of 4.6 percent from 2016.  Since 1997, this represents an increase of over 60 percent.

In not so positive transportation news, cab fares in Thunder Bay are going up by 15 percent. They were already quite high.  And if that is not enough, it looks like the increase in Thunder Bay's tax levy is going to stay at around 3.6 percent as the budget remains pretty much unchanged.  Living in Thunder Bay does sometimes seem like a sort of reverse Walmart marketing jingle - pay more, get less.

On the bright side:

Getting more out of wood. The Chronicle Journal, January 23rd.

More federal funding to support initiatives in the bio-economy.

Conference explores growing economy. Sudburystar.com. January 7th, 2018.

On Feb. 6-7, the Greater Sudbury Chamber of Commerce will host its inaugural PEP (Procurement, Employment and Partnerships) conference and trade show presented by SNC Lavalin in partnership with the Canadian council for Aboriginal Business.

And of interest if you are planning to pursue resource development activities in the region North of 50....

Northern communities face threat of climate change. TimminsPress.com, January 24th.

Meanwhile, in the Sault....

New Sault company aims to create jobs, produce gadgets for all ages at soon-to-open shop. SooToday.com, January 23rd.

Of course, Sault Ste. Marie is disappointed that they did not make the 20 city short list for Amazon's second corporate campus and joins other disappointed Canadian cities, but not Toronto which remains under consideration. 

In North Bay, they are hoping home construction is going to jump start their economy.  Not sure where the housing demand is expected to come from but it is important to be hopeful.  Perhaps if Toronto gets the Amazon campus, given the cost of housing, Amazon workers will live in North Bay and commute to Toronto.

North Bay community is up to housing-construction challenge. North Bay Business Journal. Jan 2nd.

So that is what has caught my eye across this vast expanse at least economically.  One other bright item of news involves this morning's decision in a Thunder Bay courtroom exonerating the Chief of Police. Great to hear. All the best.