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 Budget 2021: And Now for New Police Facilities

Thunder Bay is surveying its residents for input into the 2021 budget and as part of the budget input process a virtual town hall was held Wednesday this week to overview and answer questions.  Surprisingly, no questions were answered about the pinhole leak problem but then it was not a live phone or zoom in but one with “submitted questions” and this careful screening undoubtedly eliminated such awkward inquiries.  As part of its new autocratic behaviour, Thunder Bay City Council is rapidly overtaking the Communist Party of China for the breathtaking nature of its staged theatrical consultations. 

The 2021 budget includes a tax supported infrastructure deficit estimated to be $21.7 million annually, while the rate supported infrastructure deficit is estimated at $7.6 million annually.  The budget process is still advancing the prospect of a two per cent tax levy increase.  However, that does not factor in expenses related to the ongoing COVID-19 pandemic which would result in a 6 percent tax levy increase.

While the town hall noted that the City will be looking to reserves and other sources to mitigate the impact of COVID-19 it remains that the words of the Finance Committee Chair alone are not enough to keep the levy at 2 percent.  Many of the councilors will be happy with exploring an increase between 2 and 6 percent as part of a convoluted political ballet of creative manoeuvre to pursue additional spending agendas.  

In terms of spending, along with the coming Turf Facility (with a cost range of anywhere from $30 to $42 million), many have forgotten that new police facilities are also coming down the pipeline and Monday night’s meeting will see a needs assessment study with a veritable alphabet soup range of options -  A,  B, B1, B2, C, C1, D and E – with options B1 and B2 in particular reminiscent of beloved  Australian children’s television characters.

In brief, with estimated construction and separate total project costs at the end of each option, here are the nominees:

OPTION A Base Case New HQ any location $45,025,668 / $ 49,875,204

OPTION B New Central HQ with South Satellite (south core satellite includes Exhibits, Comm Services) $48,638,522 / $ 54,117,483

OPTION B1 New Central HQ with South Satellite (south core satellite includes Patrol & Comm Services) $49,568,285 / $ 55,068,311

OPTION B2

New Central HQ with South Satellite (South core satellite includes Patrol) $48,736,702 / $54,078,066

OPTION C

Existing HQ with South and North Satellites (perhaps they will be named Deimos and Phobos though being associated with Mars they are also the Greek Gods of fear, panic and terror and therefore probably not appropriate names to be associated with modern policing) (South core satellite includes Exhibits, Range North core satellite is covert (no public access) $50,939,978 / $ 62,626,447

OPTION C1 Existing HQ with South & North Satellites (south core satellite includes Comm Services Support Bldg includes Exhibits, Range, Comm Services) $49,133,748 / $ 62,878,096

OPTION D
New South HQ with North Satellite (satellite is covert (no public access) includes Range) $48,371,662 / $ 53,581,582

OPTION E

New South HQ with North Satellite (north satellite includes Comm Services). $46,635,047 / $51,791,507

This is going to be a fairly complicated decision but the long and short of it is that new police facilities will have a total cost of anywhere from $ 49,875,204 to $62,878,095 and that is before any of the inevitable cost overruns that usually characterize public sector construction projects in Thunder Bay. Some of us are now old enough to have seen it all and examples of cost overruns include the new hospital – whose costs ultimately more than doubled from initial estimate to final project - to most recently the Marina Park pedestrian overpass refurbishment which is now $500,000 overbudget – an increase of 38 percent.   

The direction of the project is definitely towards a new build, not only because the word “new” appears in 6 out of the 8 options but because the existing HQ with north and south satellite options (C and C1) seem to have the largest spread between construction and total project costs and ultimately the highest total costs.

So, the die is cast.  Not only is $40 million dollars or more headed towards a new turf facility but another $50-$55 million dollars is headed towards a new police facility which is close to $100 million in new capital infrastructure spending before the inevitable costs overruns of which only 30-40 percent is probably a lower end estimate.  It is no wonder Thunder Bay City councillors and staff are remaining silent on fixing the leaky pipe infrastructure – they have other priorities for Thunder Bay’s tax dollars which incidentally are financed by the second highest residential tax rates of 35 Ontario municipalities.

 

 

 

The City of Thunder Bay Has Spoken, The Case is Closed

Thunder Bay City Council and its municipal administrative apparatus seems to have embarked on its Roman imperial phase with respect to community relations with its taxpayer base.  In response to those who provided input ( my input here ) on the 105 Junot Avenue South Rezoning application and following the October 21^st decision to uphold the rezoning in a 7-5 vote, the Office of the City Clerk provided a Notice of Passing decree that begins as follows:

“The Thunder Bay City Council passed By-law 94/2019 on the 21^st day of October 2019, under Section 34 of the Planning Act, R.S.O. 1990 as amended.

Public comment has been received and considered and had no effect on Council’s Decision as the application is consistent with all relevant planning legislation and represents good planning.”

I suppose all that was missing at the end of this statement was a simple “All Hail the Glory of the Emperor” to convey the full message of conquest and victory.  The implied message seems to be that any resistance to the edicts of City Council is futile and has no effect.   Whatever is decided is consistent, represents good planning, and the final collective decision is ultimately infallible. 

The entire public drama and division over 105 Junot was amplified by The City of Thunder Bay because they encouraged the Ontario Aboriginal Housing Corporation to expand the scale of the transitional project from 20 to 58 beds to “maximize” the use of the site which one suspects probably really means greater property tax revenues for the City - assuming that the OAHC pays property taxes.  A smaller scale facility more in keeping with other such projects around the province would have been more suitable given the many concerns raised by residents in the area and generated less discord. 

Unfortunately, the Aboriginal Housing Corporation was caught in the middle of this unfortunate situation and making it into an emotional issue that attracted the attention of the Globe and Mail did not serve anyone’s long-term interests.  What the City of Thunder Bay should have done in response to the input received was return to the original proposal of 20-beds but that would have required actually listening and accepting at least some of the arguments made by those who presented their concerns.  Really, how can a facility approved on a much larger 58-bed scale in a neighborhood with the social and crime issues that were raised be “good planning?" 

In the end, it is water off a duck’s back because many members of council believe they have been annointed as “progressive” thinkers who love their community.  The strength of their love means that they are doing good and therefore the ends always justify the means.  If that means tacitly implying that opponents to their good works are insensitive to poverty or diversity, then so be it.  They constantly solicit input from constituents but listen through a set of political noise cancelling headphones so that the discordant notes from any input not coinciding with their vision of fighting social and economic injustice is politely filtered out.

Those in Thunder Bay who uncritically champion all social injustice issues with unquestioned fervour and feel they have the ear of City Council and its municipal-corporate apparatus should be cautious.  In the end, any dispensed progressive works are to be accepted on The City’s terms because they know what is best for you.  Take the example of Dease Pool as a case in point.  Here, a long-standing community pool in what is considered a disadvantaged neighborhood was closed because it was old and needed substantial and expensive renovations.  There is continuing opposition to the closure but The City forges ahead.

The proposed new draft plan (available here) will essentially replace the pool area with a tennis court and a community garden.  Given that swimming pools accommodate a greater and more diverse number of users than a single tennis court, it seems like an oddly elitist rather than progressive use for the site.  However, consciences will be soothed with a multi-user community garden – which also atones for the environmental sin of an asphalt surface on the tennis court.  If all this redevelopment was designed to somehow deal with the rising costs of an old and aging pool, those of us with a more fiscally conservative bent could be understanding.  However, this will still cost a lot of money and in the end not fully serve the needs of the area.

As for the money that will be spent, it does not seem to matter because a “progressive” council that wants to do great things will simply raise the tax rates on its residents - who by the way are now responsible for the lion’s share of property tax revenue given the declining industrial and commercial base.  Be prepared this year for an initial budget proposal that stakes out a high increase in the tax levy.  This will be blamed on the provincial government who, being conservative rather than progressive, are the source of all fiscal evil.  After a cleansing public ritual of debate and input of appropriate length, The City will then retreat to an increase of between 3 and 4 percent thereby demonstrating that it is both fiscally responsible and generous in matters of expenditure. 

We should not complain too much.  We elected them.

 

What a 2.4 Percent Municipal Tax Levy Increase Really Means

Thunder Bay City Council has voted to pass the 2018 municipal budget and will formally ratify it at a vote this evening.  The Mayor and Council have of course been patting themselves on the back about how it is a “responsible budget” and how it keeps the tax levy increase in spending within the average of the last two terms of council.  The tax levy increase is now coming in a 2.4 percent now – just above the rate of inflation - which is down from the 3.03 percent increase that was originally on the way after several weeks of deliberation and debate.  This was managed by essentially taking out about $1 million from the city reserve fund to lower the levy against the advice of City administration it turns out who also noted that the reserves – used to cover unexpected costs or deficits throughout the year - have been declining since 2012

What this all really means is that this is an election year.  The average municipal tax revenue increase over the period 2011 to 2018 has averaged 3.3 percent and ranged from a high of 5.7 percent in 2015 to a low of 2.2 percent in each of 2014 and 2016.  The increase of 2.2 percent in 2014 was also during an election year and was followed by a 5.7 percent increase in 2015.  Keeping the increase low this year can be interpreted as a deliberate political strategy to not raise the ire of ratepayers in the lead up to the October election and one can expect a hefty increase to make up lost ground when the 2019 budget comes in.

In the end, a tax levy increasing at just above the rate of inflation is not much of an accomplishment given that it was done by dipping into the reserve fund.  While much was said during council debate about the hard decisions that have been made the fact remains that spending is going to go up by the amount originally agreed upon – just over 3 percent – but it is going to be subsidized by borrowing from the reserve fund. 

But then, cost control is hard work and in the end some of the efforts at cost control have backfired.  One need only look back at the attempt by Thunder Bay to reduce garbage collection costs in 2017 which were supposed to eliminate a truck and labour costs via attrition while at the same time reducing bag pick-up to two bags from three with additional bags requiring a tag.  And what was the end result?  After a period of chaos, the truck was reinstated but the three-bag limit was not and things have remained very quiet since.  So, one has to conclude that costs have remained the same while less garbage is being collected and revenue is probably up for the City from the bag tags. It was certainly a win for the City of Thunder Bay but not for rate payers who altogether have to pay more but are getting less.

We can expect more of the same next year after the dust clears from the election.  The current cast of councilors will largely be returned to office and the cycle will start anew. We will be paying more and getting less, and the debut will be a hefty tax levy increase to replenish the reserve fund as well as boost spending to make up for the previous year’s slowdown.  There will be the usual grumbling and complaints, but they will be dismissed because after all Thunder Bay voters are the ones doing this to themselves by falling for the same thing election after election.  Why would city politicians take them seriously when they complain?

Additional Note: February 6th - Well, the budget did pass last evening. Please note that the 2.4 percent levy increase coming in is "net" or after factoring in "new growth".  The gross levy increase is actually 3.13 percent.  Originally, the net increase was going to be close to 3 percent and the gross increase nearly 3.6 percent.  So, total spending is still going up 3 percent and the net is 2.4 because of the use of projected surplus funds from 2017 budget away from the reserve fund and towards the tax bill.  However, apparently there was an effort to move even more of the projected 2017 budget surplus away from the reserve but it did not succeed.  Of course the 3.13 percent does not mean that everyone's tax bill will be going up 3.13 percent or 2.4 percent if you are an "existing" ratepayer.  That is the total increase in tax financed expenditure. Much of the burden of the increase will go to residential ratepayers. See my post last month here for a more detailed discussion.   

Thunder Bay Taxes Are Going Up Again!

It is municipal budget season in Thunder Bay and the inevitable process of thrust, parry and spin is well underway. First the thrust: the amount spent by the City of Thunder Bay obtained from the tax levy is going up by 3.6 percent.  Moreover, water and sewer rates as well as tipping fees at the landfill will be going up by three percent.  In an effort to forestall the inevitable complaints that these increases are too high, the resulting parry and spin on the part of the City appears to be as follows. 

The 3.6 percent increase in the tax levy will only be a 2.9 percent increase to existing ratepayers after factoring in assessment growth.  According to the budget chair: “This is a budget that stays the course in terms of not reducing services but maintaining investments while living within our means.”

Moreover, much of the increase is going to hire new full-time positions and vehicles for the Superior North EMS.  The paramedic service has seen call volumes grow substantially in recent years as a result of the aging population and the opioid crisis. As well, according to the budget chair, in an ideal world “we would stay below the level of inflation,” but there has been a reduction in provincial transfer payments.

The efforts by the City to justify a 3.6 percent increase in the levy – that is in tax financed city expenditure – are pretty standard.  Differentiating between existing ratepayers and “new growth” conveniently sidesteps the fact that in the end it is all tax revenue coming from city ratepayers.  Arguing that we are “investing” in services and living within our means needs to be considered within the context of whether the services are cost-effective as well as the fact the money is not from some kind of endowment but comes directly from city ratepayers.   

As for the paramedic service, it would be nice to see some kind of breakdown in statistics as to exactly what the sources of the increased demand are in terms of case mix and demographic breakdowns.  In an interview on CBC Thunder Bay radio this morning, the chief of the Superior North Emergency Medical Services also noted that the city has a large transient population that is a source of increasing demand.  This raises the question as to whether city ratepayers rather than the province should be on the hook to fund what is increasing regional demand for emergency health services. However, as noted above, the province is apparently not very interested in raising its grant contribution.

The most entertaining line was the one that ideally, we would see tax increases that stay below the rate of inflation.  The last four years have seen increases in tax revenue all above the inflation rate suggesting that this aspiration has yet to be achieved by the current city council.  Nevertheless, given that it is an election year one should have goals and dreams to campaign on.

Given that it is an election year, it is also important to take a longer term look at municipal finances – in particular I want to focus on Thunder Bay municipal own-source revenue – that is tax and user fee revenues and then provide some comparisons to basic economic indicators for the city. The data on total municipal tax revenue, residential and non-residential tax revenue, and user fees spans the period 1990 to 2016 and is from assorted past City of Thunder Bay Consolidated Financial Statements as well as from the Financial Information Returns (FIR) maintained for each municipality by the Ministry of Municipal Affairs and Housing.  For 2017 and 2018, I use current City of Thunder Bay budget summaries with the total for 2018 a forecast based on the tax levy increase of 3.6 percent. From Statistics Canada, I have the inflation rate - inflation is Ontario’s Consumer Price Index with 2002 as the base year – as well as median total tax filer income and annual employment for Thunder Bay. Population figures for Thunder Bay are from the Census of Canada.

One point with respect to City of Thunder Bay financial data is that the summaries and budget information over the last few years do not seem to provide the tax revenue breakdown between residential and non-residential revenue. I suspect the reason for this has less to do with economy of presentation and more to do with drawing attention away from the fact that the residential share of tax revenue has risen dramatically. While FIR does provide this information, unfortunately it only becomes available with a lag and 2016 is the last available complete set of FIR data. Overall, municipal finance data is rather opaque and difficult to use not just in Thunder Bay but Canada as a whole.  Cities could do better when it comes to being accountable to their ratepayers via concise, comprehensive and easy to use statistics.

For the period 1990 to 2016 (but forecast to 2018 for taxation revenue), Figure 1 plots taxation revenue and its two components – residential and non-residential taxation (commercial and industrial).  It then also plots user fee revenue (water & sewer and other fees) and then the total of taxation revenue and user fees. In 2016, tax revenues grew 2.2 percent with residential tax revenue growing at 3.8 percent and non-residential tax revenue actually declining 1.1 percent.  User fee revenue also declined 2.5 percent (despite rate increases the previous year). As a result, own source revenues in 2016 grew a modest 0.6 percent compared to 5.3 percent the year before.  If one looks only at total municipal tax revenue, it grew 5.7 percent in 2015, 2.2 percent in 2016 and based on recent estimates (and not FIR data) grew at 3.3 percent in 2017 and will grow 3.6 percent in 2018.

Figures 2 and 3 provide composition information for taxation revenue and total own source revenue for the period 1990 to 2016. When one considers only tax revenue, from a 50/50 split in 1990 the distribution by 2016 had evolved into a 70/30 split.  The residential ratepayer in Thunder Bay now provides the City of Thunder Bay with 70 percent of municipal tax revenue. When the picture is broadened to total own-source revenue, the residential ratepayer in 2016 provided about 46 percent of own-source revenue, the non-residential ratepayer 21 percent and user fees – which incidentally are paid by both residential and non-residential ratepayers -about 34 percent.  
 

Figure 4 plots the average annual growth rates for total taxation revenue as well as residential and non-residential tax revenue and user fees, alongside the growth rates for Thunder Bay’s population, employment and median total tax filer income and Ontario’s inflation rate.  The average annual growth rate for taxation revenue has been 4.1 percent but residential tax revenue has grown at 5.6 percent while non-residential taxes have been growing at 2.3 percent.  On average, both residential and non-residential taxes revenues have grown faster than either population (-0.2%), employment (-0.1%), inflation (1.9%) and median tax filer income (2.2%).  User fee revenue has also grown faster than all of these indicators at an average of 5 percent.

So, the 2018 municipal budget year is shaping up to be somewhat modest in terms of increases at least by historical standards.  Total tax revenue is anticipated to only go up 3.6 percent (as opposed to 4.1 percent) while user fee increases of 3 percent look pretty good compared to average increases of 5 percent.  But then, 2018 is an election year and I suspect that we will be in for some pretty steep increases in 2019 once the election dust clears.  If one goes back to the 2014 election, that budget year saw a 2.2 percent increase in municipal taxation revenue but they made up for it in 2015 with a 5.7 percent increase.

It probably is a smart strategy to moderate tax increases in an election year and then raise them steeply early on in the new mandate so that their memory fades by the time the next election rolls around. It may perhaps be seen as calculating and opportunistic behavior on the part of our municipal politicians but it seems to work. Thunder Bay residents keep re-electing the same people over and over again.