NORTHERN ECONOMIST 2.0

Monday 26 April 2021

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.

Tuesday 20 April 2021

Federal Budget 2021 Snapshot

Yesterday’s federal budget – the first in two years – made up for lost time and came in at a hefty 724 pages. With total expenditure in 2021-22 projected at $497.6 billion, that works out to about $687 million of spending per page. The budget theme was essentially a long-term recovery plan for jobs, growth and resilience to finish the job against COVID-19 but it is not so much spending to drive economic growth as it is spending designed as a platform for the next election. The government is gambling the public is ready for a larger government and has provided initiatives targeted to families, seniors and assorted other interests. In many respects, if you look hard enough, there is something for almost everyone, but it is very often a case of what the governing party thinks you should have. A case in point is post-secondary education where there is more money being provided for specific initiatives in technology/life sciences research but not for basic research. The Liberal Party’s vision for the future is one of bigger government but also one that is more directive.

For 2020-21, total spending, the tally came in at revenues of $296.2 billion, expenditures of $634.9 billion and a deficit of $354.3 billion – down from projections of nearly $400 billion. Believe it or not, Finance Minister Freeland was on the news stating something to the effect that this was an accomplishment and that the government had saved the taxpayers money by bringing in only a $354 billion deficit. For 2021-22, revenues are expected to rise 20 percent as the economy recovers reaching $355.1 billion and spending will fall 21 percent going to $497.6 billion.

The deficit to GDP ratio goes from 16 percent in 2020-21 to 6 percent this fiscal year. However, the net debt rises to $1.333 trillion this fiscal year and by 2025 is expected to reach $1.5 trillion – nearly doubling from what it was in 2019. However, the net debt to GDP will peak at 55 percent and then decline slightly thereafter because the economy is on fire this year with real GDP growth of seven percent this year and 4 percent next year. However, despite this being a budget for long-term growth, according to the forecasts, real GDP growth reverts to the moribund two percent rate by 2024.

COVID-19 spending in 2020-21 was $264.6 billion and much of that will go in 2021-22 even with continuation of assorted supports and only amount to $71.9 billion. However, the government is bringing in $101 billion in new spending over the next three years with the bulk front ended this fiscal year which means there will be about $50 billion in new spending this year. Indeed, there is a permanent increase in spending being put into place and by 2025, federal government spending will be about one third higher than it was in 2019.

There is $30 billion over five years for $10 a day national day care. However, this requires matching 50/50 financial participation from Ottawa and the provinces and given that the provinces have always felt they were burned by a promise of 50/50 funding for Medicare and health transfers that ultimately vanished, you can be sure they will not agree unless there is more money. Incidentally, health transfers are not going up this budget. There is also money for long-term care, a ten percent increase in Old Age Security for seniors, millions for entrepreneurship, life science research, indigenous affairs, tourism, regional economic development (there is more money for FEDNOR), and the list goes on.

The government is not concerned about the deficit or the debt. Indeed, there is no plan for balancing the budget in the medium or long-term. It is hoping to grow its way out of any fiscal problem. As long as interest rates remain low and there is no recession, it will probably get its wish. However, given the economy has apparently done better than expected, why is so much stimulus – sorry, investment in the future – needed? Interest rates are low fueling a housing frenzy. Canadians have accumulated a large pool of savings – over $100 billion – during the pandemic that they will be looking to spend. Permanently boosting federal spending by one-third is really adding fuel to the fire. Even the $30 billion child-care plan is in the end potentially a source of stimulus. After all, given that some families are spending between $1,000 to $2000 a month for child-care, a $10 a day child-care plan frees up thousands of dollars a year for spending on other things – probably housing. The economy is going to be awash in money but supply of just about everything seems to be limited. It does sound like a recipe for demand side inflation.

Sunday 18 April 2021

Are Doug Ford's Days as Premier Numbered?

The most interesting development over the last few days as the Ford Government deals with the spread of the pandemic's new variants was the announcement of new restrictions including giving the police enhanced powers to stop and question people as to where they were going. Even more interesting was the response of those charged with enforcing those rules - the police. A number of forces actually said they would not be enforcing the rules. And, in the wake of the backlash, the Ontario government has scaled back this measure with many forces now saying they will simply educate people they come across who are obviously out and about where they should not be.

This may be nothing but from my experience, when the palace guard decides it will no longer do as told, it means that a coup is in the offing. It is quite remarkable when the civil authorities are told to do something and they simply respond with no. And now, the story is that the provincial government is going to suspend the legislature. Ostensibly, this sounds as a measure to provide protection from the pandemic and keep the legislators safe. However, if you were Premier and had gotten wind of a bunch of back benchers, who were plotting to remove you as leader given the growing dis-satisfaction with the pandemic management, why not deprive them of a stage? Or perhaps the party has already delivered the grim news to the Premier and the legislature is being shut down because really, who wants to have a coup and transition of power while the legislature is sitting.

While the current government has always been a sort of shoot first and then backtrack type of administration, it has gotten worse. The party may want to preserve its governing role and their own seats prior to the next election by dumping Mr. Reverso and bringing in a fresh face. However, one has to wonder if it will be too little too late to save them given that it may simply be the case of new face, same gene pool when it comes to the ability to govern effectively. The hospitals are filling up and the situation is worse than last spring because essentially that time, hospital capacity was saved by first, shutting down surgeries, and then simply not treating those most affected - seniors in long term care homes - in a hospital setting. This time its different. It is difficult to shut surgeries down given the obvious costs of that strategy the last time and the ill are not dementia patients who cannot advocate for themselves but younger ambulatory people who show up at emergencies.

There is plenty that has gone wrong during this pandemic at the federal and provincial level. And, the stiff-necked Ontario public which either cannot comprehend rules or does not want to, has not been much help either. Moreover, the sparse staffing and hospital capacity in Ontario is the outcome of decades of government under-funding and not just the current government. Still, how to fix things in a pinch? Unlike Ontario universities which can be treated as expendable because the anti-intellectual climate of our times allows governments to foster the view that they are simply teachers with longer summers, now is probably not the best time to restructure hospitals yet again. However, Premier Ford's call this week for health workers from other provinces and an appeal for federal assistance suggests a desperation that means things are really about to go sideways. The federal government as the cavalry to save Ontario now? The federal government is too busy monitoring vaccines and trying to re-invent public spending and society on a grand scale. Stay tuned for announcements and decrees from the balcony of the Pink Palace in Toronto.

Saturday 17 April 2021

Woes of Northern Ontario Universities: Bad Medicine at NOSM

In the wake of the news of the Laurentian layoffs and the provincial government’s unwillingness to assist the situation there in any direct financial fashion, a new disruption to northern Ontario’s universities was announced. The Ontario Government apparently without consulting with the affected stakeholders is now proposing that the Northern Ontario School of Medicine and the Université de Hearst become independent, stand- alone universities. The Northern Ontario School of Medicine (NOSM) opened in 2005 and is currently a not-for-profit corporation of Lakehead University in Thunder Bay and Laurentian University in Sudbury. Obviously, the province is using the current restructuring and chaos at Laurentian to pursue other agendas that include interfering in existing corporate arrangements. Clearly, it does not have enough on its hands with the pandemic.

The creation of NOSM was a long-term effort by many in northern Ontario and since its opening 2005 an ongoing partnership has been forged with university faculty and staff on both campuses, health-care providers, Indigenous communities, community and regional business leaders. The academic oversight provided by Lakehead and Laurentian has created a unique curriculum that has trained over 600 physicians in a learning model that spans the entire region and conducted research and training relevant to health needs in the north. NOSM has made use of infrastructure – buildings, administration, services and otherwise – on both campuses that have generated substantial cost savings for the government. Given the Ontario government has already stressed university finances by cutting tuition 10 percent and freezing it and keeping provincial grants frozen, why would it continue to stress specific institutions in northern Ontario further by subjecting them to the disruption and costs of tearing asunder something that is working?

This development is really quite remarkable, and one wonders if the province is planning to sever the Michael G. DeGroote School of Medicine from its affiliation with McMaster or unilaterally grant the University of Toronto’s Faculty of Medicine independent status also? Probably not, because those are settled southern schools in the provincial heartland and the core of Ontario civilization which is nestled in a 10-kilometer swath alongside the 401 Highway corridor. Meanwhile, the Northern Ontario School of Medicine is so far away and therefore is still considered part of Ontario’s colonial administration heritage. The colonialist overtones of this intrusive activity are even more remarkable given that NOSM in particular has a focus on rural/remote and indigenous health and services. Or, has the provincial government already obtained buy-in from First Nations in Ontario’s North? There has been silence so far from Alvin Fiddler, the Grand Chief of Nishnawbe Aski Nation who is usually quick to respond to injustice.

The provincial government news release calls this action “Steps to Strengthen Postsecondary Education in Northern Ontario.” How making NOSM with 460 students and Hearst with 160 students separate independent degree granting institutions strengthens the system by adding two tiny universities that will require endless subsidization beyond what they are already getting is considered sound public policy is a good question. And one imagines that in the case of NOSM, the fact that it was on two campuses was never something that it liked and may even be complicit with the government in getting separate status so they can move to a shiny new campus in one location. After all, even if the province did not consult with Lakehead or Laurentian before announcing their proposal, they must have discussed it with NOSM’s administration, right? I would not be surprised if NOSM’s future new stand-alone home is a nice new mega building and campus in Sault Ste. Marie, home of the current minister of Colleges and Universities. Who benefits from government policy is always a good question to ask.

Tuesday 13 April 2021

Costing of Ineptitude in Thunder Bay

Well the leaky pipe saga continues in Thunder Bay if one is to judge from the continued entries on the Facebook page of the Leaky Pipe club which now has 3600 members. For those seeking a quick recap, in an effort to mitigate the environmental effects of lead pipes for an estimated 8,000 households in Thunder Bay, the City of Thunder Bay added sodium hydroxide to water which changed the pH level of the water (reduce its acidity) and therefore helped neutralize the lead content. However, this additive was put into water going to all homes and it was apparently successful in reducing the amounts of lead. However, after full extension of the procedure in 2018 following the 2016 pilot it appears that the incidence of pinhole leaks in copper piping of private homes and businesses in Thunder Bay has gone up dramatically. In the worst-case scenarios, not only is there corroded copper piping in the home springing leaks but also the service line goes necessitating repair bills in the tens of thousands of dollars.

While there are neighborhood concentrations of affected homes, chats with plumbing and restoration company employees – not to mention the odd nameless municipal worker - indicates the problem is actually more widespread than the City will acknowledge with homes across Thunder Bay affected and indeed even affecting relatively newer homes constructed over the last 10-15 years. It appears this chemical is highly correlated with the corrosive damage and the City of Thunder Bay stopped the additive in February of2020 in response but remains tight-lipped even in the face of the obvious continual plight of homeowners who during a pandemic have also been afflicted with the anxiety and trauma of every morning wondering if they are going to be the next “winners” of Thunder Bay’s leaky pipe lottery. The fact is that probably all of Thunder Bay’s housing stock has been compromised to some extent and the question is only when things are going to happen.

In the end, this is all part of Thunder Bay’s complicated ongoing 25-year water infrastructure saga which has seen the move to one source water supply in the wake of the giardia saga on the south side two decades ago, the rapid increase in water rates to fund all the new infrastructure and maintain the old, the flooding of the new East End water sewage treatment plant – and surrounding neighbours - the introduction of sodium hydroxide to reduce lead in pipes on the cheap, and the removal of sodium hydroxide in the wake of numerous reports of pinhole leaks and more flooding All of this has also generated several major lawsuits – for flooding in 2012 and now pinhole leaks in 2020.

It is a mess and characteristic of municipal decision making in Thunder Bay given that in an effort to do important things cheaply – the best decisions are not made. In the case of lead mitigation, the best long-term strategy is pipe replacement by the homeowners. There should have been a proper financial incentive put in place by the City long-ago to get people to do it but that was probably seen as “expensive.”

Instead, despite concerns raised, the City of Thunder Bay went with sodium hydroxide. While the City of Thunder Bay can argue that they made the decision with the best available information at hand, the province made them do it, and other cities have used sodium hydroxide with no such consequences it remains that something in Thunder Bay has gone horribly wrong. Was it something about the chemistry of Thunder Bay’s water? Was it the application process when the chemical was introduced? And what about the response of the City to so much distress? In the end, even if one can accept that they made a decision based on the “science”, the response to so much resulting misery has been appalling.

If one wanted to do a simple summary tally of this penny-wise and pound-foolish approach of the ultimate costs of this entire imbroglio, it would be something like as follows:

Lead mitigation on the cheap by adding sodium hydroxide to City of Thunder Bay water: Annual cost of $264,000.

Potential savings to the 8,000 homeowners with lead pipes by not having to replace their pipe at their own expense or at City of Thunder Bay expense: $40 million.

Potential cost to the City of Thunder Bay of lawsuit from homeowners affected by Leaky Pipes: $350 million.

Potential cost to the City of Thunder of lawsuits yet to come from insurance companies seeking to recoup their costs from all the claims in Thunder Bay: Yet to come.

The value of Thunder Bay’s short-sighted behavior, ineptitude and callousness in dealing with the fallout: Priceless.

By the way, in case you are wondering, I finally got to win big with Thunder Bay's newest lottery this week.