NORTHERN ECONOMIST 2.0

Monday, 27 July 2020

Thunder Bay's Big Municipal Debt Problem

In lead up to a decision to approve a new municipal $33 million Indoor Turf Facility that will add $15 million to the City of Thunder Bay’s debt and take the remainder from the reserves, comes the Treasurers Report that will be presented at this evening’s Council Meeting. There is a lot there for the year ended December 31^st, 2019 but one of the things that stands out is the City’s debt position which faces “challenges” that as the report notes include increasing costs of programs and services, a debt to reserve ratio that is higher than the industry average (i.e., other municipalities), reduced funding from senior levels of government and low assessment growth among other things.

The two accompanying figures drawn from numbers taken from the Treasurer’s Report highlight quite dramatically what this looks like. Thunder Bay’s per capita municipal debt (Figure 1) rose from $1,618 in 2015 to $1,839 in 2018 – an increase of 14 percent. Over the same period, its provincial municipal counterparts on average went from $699 per capita to $758 – an increase of 8 percent. By 2018, the per capita municipal debt in Thunder Bay was essentially more than twice that of the average in Ontario. Of course, if one has reserves, then the potential impact of the problem is mitigated. However, as Figure 2 shows, while the average in Ontario is essentially one dollar in reserves for every dollar in outstanding debt, in Thunder Bay the ratio is nearly double at 1.7 (i.e., $1.70 in debt per dollar of reserves).

Compared to the average in Ontario, we are more indebted and have a weaker reserve position. We are going into the 2021 budget season with what is now a “trimmed” $7 million dollar COVID-19 induced budgetary shortfall which also has to be dealt with to which one of the proposed solutions among other things is a “special one-time tax levy.” In this environment City council is considering adding another $15 million dollars in borrowing which will add upwards of $130 dollars per capita to Thunder Bay’s total outstanding municipal debt.

At this evening’s meeting, if councilors are planning another marathon 5 hour session to things like loitering bylaws and minor zoning amendments, perhaps they might consider devoting a mere hour or so of their time to understanding the financial implications of Thunder Bay’s mounting debt given its historic inability to keep it within “industry averages”.

Thursday, 23 July 2020

Should the Turf Facility Be Turfed?

There is an old joke about universities that goes as follows: When it comes to spending money, Department Chairs like new hires, Deans like new programs and Presidents like new buildings. We can extend this to municipal governments. Municipal Administrators like new staff hires, City Councilors like new programs for their neighborhoods and Mayors like new buildings. Indeed, with the proposed multi-million dollar Indoor Turf Facility our current Mayor Mauro is continuing the practice of seeking a legacy build that marked previous Mayor Keith Hobbs’ terms as he sought and ultimately failed to bring about a new Events Center.

There is nothing wrong with building a new events center or a new indoor turf facility. They are both projects that will find users and will bring about benefits to the community. The indoor turf facility will no doubt find many users in the Thunder Bay’s growing soccer community. Indeed, there are private developers quite eager to provide these facilities – which incidentally would add to the tax base – and yet their plans seem to face a lot of obstacles from the City. For whatever reason, the City does not seem to like competition from the private sector even if it enables them to save money. As much as city councilors and administrators hate to hear it, it is ultimately about economics and financial sustainability.

The Thunder Bay Chamber of Commerce is correct in wanting more detail on the finances as well as a financial plan given that the facility was going to cost $30 million, now costs $33 million and given the proposed new $15 million debenture (should federal and provincial support not materialize) will add a further $8 million in interest costs bringing the total to $42 million. Given the history of construction projects in Thunder Bay, the final bill will probably not end there and I would not be surprised to see the costs of the facility exceed $60 million when all is said and done. And then of course, there are the annual operating costs. Given the City has been closing pools and considering other closures as part of its expenditure review, it is odd to see them happily adding new potential operating costs.

This whole business is also about process and one begins to think that despite the talk about deliberation and consultation and consideration of this project, this is probably a done deal. The August 24^th meeting will be one of feigned concern about city finances followed by approval of the project. Only one councilor appears to have raised any reservations at the last council meeting. Stantec Architecture has been retained to design the facility and they have provided a glowing public presentation.

In lieu of public meetings given COVID-19, public input is being accepted via a comment form requiring registration until August 3^rd. The form simply asks one question – ‘Please provide your comments”. In that sense, it is free form enough for people to provide whatever comments they want. Yet, it is still not sufficient for a full public debate and the survey does not provide any type of costing options. If you are opposed, your comments will likely receive a smaller weighting in Council’s deliberations as they will be very free form and judged “inconsistent” or “not focused” while supportive comments will be “passionate” and “effective.”

Indeed, the impact of COVID-19 on public meetings and public debate is I think secretly welcomed by many politicians – including our municipal councilors. After all, no more pesky face to face meetings with unhappy constituents. You can receive input electronically and the beauty of that is you can choose to respond to what you want and ignore the rest. After all, expert consulting advice is being provided to Thunder Bay City Council on this matter and experts know what they are talking about. Except, the only expert advice that City Council usually wishes to hear is from paid international experts who bid for a project with parameters that essentially result in them presenting how to do what City Council wants to do as opposed to whether the project should be done in the first place.

Local experts with differing points of view and local knowledge are avoided and if too vocal are essentially derided – sometimes during council meetings themselves. As Councillor Aldo Ruberto remarked about yours truly during a 2015 council meeting on the proposed events center – "You want to listen to economists? They record history. They don't make history." For the record, I supported a downtown events center as long as Federal and provincial funding could be secured for the project but such support was not forthcoming. When the funding or circumstances change and new information becomes avilable, I change my mind. Such nuances are lost on “passionate” politicians.

Thunder Bay City Councilors do not like to talk about history much – unless it is a celebration of their own glories – because it reminds them of mistakes that have been made. Indeed, Thunder Bay City Council continues to make history as it approves decisions that add more and more spending with the buck being passed on to residential ratepayers who are now paying 70 percent of the tax levy and face rising user fees. There are certainly a lot of potential bills coming due with past decisions made on the city’s water supply. The City has been remarkably silent on pinhole leaks in the wake of the sodium hydroxide experiment to reduce lead even in the wake of direct queries.

So, should we turf the turf facility? The city has earmarked funds out of reserves for this project. For it to go ahead in a responsible fiscal manner, the project requires that upper tiers of government provide at least half of the upfront capital costs with the remainder coming out reserves – not a debenture. Yet, the talk of a debenture means Thunder Bay City Council and Mayor already suspect there is not going to be federal or provincial grant support so they are making alternate plans. After all, why would the federal government or province commit to yet another northern Ontario construction project that is not essential infrastructure and seems to have such flexible and changing construction costs? Moreover, given Thunder Bay is lamenting their $13 million COVID-19 budgetary shortfall should not reserves also be used for this rather than have a steep tax increase in 2021? The decision is pretty obvious. In the absence of upper tier grant support, you turf the turf facility and go with the private sector individuals who were ready to build and hope they are still interested.

Saturday, 18 July 2020

Thunder Bay’s Tide of Water Troubles

The Lakehead and the City of Thunder Bay are defined by water. The name itself comes from the bay between the north shore of Lake Superior and the Sibley Peninsula which was named Baie de Tonnerre by the French. Lake Superior itself is by its surface area of 82,100 square km the largest freshwater lake in the world - though not by water volume – where it comes in third after Lake Baikal and Tanganyika. The lake is not only a source of drinking water for Thunder Bay but it is an economic driver given it has made the city a major port and transhipment point.

Water is essential for life and Thunder Bay has a long history of dealings with the issues that it can bring. After more than 100 years of urban development at the Lakehead, water supply, quality and cost are still important issues for the residents, though when it comes to day to day living, most of us take water for granted as long as it flows without issues – and does not get too expensive.

At the turn of 20^th century, the former twin cities of Port Arthur and Fort William drew their drinking water directly from wells, streams and the Kam river. However, as population grew, these became inadequate to meet growing urban demand. Moreover, effluent discharge into the Kam River and the lake was also an issue given the potential for contamination. A major typhoid outbreak occurred in Fort William in 1906 which prompted its city leaders to arrange to obtain its water from Loch Lomond behind Mount McKay located on Fort William First Nation. This was a large engineering project for the time and involved drilling a pipeline through the mountain with water flowing by 1910. Inadequate supply in Port Arthur prompted its leaders to decide in 1903 to obtain water directly from Lake Superior prompting the creation of a water intake far into the lake at Bare Point with full operation in place by 1914.

As they moved into the twentieth century, Thunder Bay’s twin cities thus had two water supplies. Fort William’s citizens would boast about the quality of water from their “mountain lake” as if it flowed from an alpine glacier while its effluent continued to be discharged into Lake Superior (as did Port Arthur). Indeed, this inspired generations of Fort William school children who would apparently chant “flush the toilet, Port Arthur needs a drink” as they did their daily business.

Yet, despite the securing of adequate supply, water at the Lakehead was still an issue given the lack of proper treatment for discharges into Lake Superior as well as emissions from sawmills, pulp mills and other industry. This polluted the water and ultimately generated the infamous toxic blob in the harbour which was a large patch of creosote, PCPs and other toxic chemicals that was only cleaned up starting in the 1990s and early 2000s.

Amalgamation in 1970 which joined the twin Lakehead cities of Port Arthur and Fort William and the adjacent townships of Neebing and McIntyre brought about a one city-two systems approach to water. This concept of one-city/two systems was no doubt eventually the inspiration for the Chinese takeover of Hong Kong from the British but without a 50-year guarantee for separate water systems. Indeed, 2020 is the 50^th anniversary of amalgamation and Thunder Bay went to one water system in 2006.

Upon amalgamation, there were issues with the water system as the supply especially on the Fort William side was stretched given increasing suburban development on the rural fringes of the city as well as development in the inter-city area. Indeed, about 25 years after amalgamation, there were water quality issues with Loch Lomond from organic matter and in 1997 there was a cryptosporidium(giardia) outbreak which led to months of boil water advisories. Yet, there was still debate over retaining two water systems with the full move to one system with pumping stations to provide supply and pressure taking nearly a decade. However, discharge into Lake Superior was still an issue but it was dealt with by building a new state of the art water treatment plant on Atlantic Avenue.

However, this all came at a cost with rapidly rising water bills – which continue to rise given that the issues with Thunder Bay water are not over yet. The new water treatment plant appears to have had a design flaw in that much of its heavy equipment was prone to flooding which occurred in 2012 after heavy rains. There is extensive litigation over this involving flooding in adjacent residential areas that is still unresolved. As well, this and subsequent rainfall events have high-lighted the need for more adequate storm sewers in many parts of the city and better drainage especially in the inter-city area. Again, this costs money.

And, the woes continue to mount. Older parts of Thunder Bay like many cities in North America, have lead piping especially in their intake pipes to city water mains. Given the health issues with lead in water for about 8,000 households in the city, an effort to solve the problem was made. Of course, the capital intensive and expensive approach would be for homeowners to have their lead connection pipe replaced.

However, this pipe is on private property and therefore not a cost the city was willing to bear given it has other infrastructure priorities such as indoor sports facilities so to fix the pipe homeowners would have to spend about $3,000. Aside from the immediate cost, homeowners with lead piping in their homes would still face the lead issue and if the municipal water main in the area was still old, it meant that lead might still be a problem in the water. However, homeowners could choose to replace their lead connection when municipal rehabilitation of the water main was done in their area. However, the full mitigation process would be slow and take decades making lead a health issue for years to come.

The solution apparently devised by the City of Thunder Bay was the addition of 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 private homes and businesses Thunder Bay has gone up dramatically. Even the City’s Canada Games Complex has sprung leaks.

The geographic distribution of these cases is widespread but apparently mainly on the north side and the timing of the large number of cases follows the introduction of sodium hydroxide to Thunder Bay's water supply to address lead levels in a relatively smaller and more geographically concentrated percentage of homes. Thus, while the City and lead-affected homeowners save money upfront, the costs have been spread out across the city down the road – an interesting cost-benefit situation. However, in the wake of the leaks, sodium hydroxide has now been discontinued.

Correlation is not necessarily causation, but when variables move together, there is something going on though the exact process may be more complicated than a simple binary two-way variable association. Even if the sodium hydroxide on its own may not cause pinhole leaks, there may be other additives or natural substances in our water supply that it has interacted with that might not have been realized at the time the study and decision process was done. Or perhaps there are substantial differences in water pressure that made the north side more susceptible to leaks. So, we have a bit of a problem here.

First, pinhole leaks have also been reported in some other cities some years prior to Thunder Bay's introduction of the additive. Indeed, water treatment and water quality is a factor. Interestingly, when it comes to additives in the water, Thunder Bay has resisted adding fluoride despite decades of evidence that it worked and was safe. Yet Thunder Bay seems to have moved relatively quickly to introduce sodium hydroxide – a known corrosive chemical - to solve a public health issue relatively cheaply and the province apparently signed off on this. Why not I suppose? Why experiment with lead mitigation in Toronto or Ottawa when Thunder Bay is always so eager to volunteer to be a guinea pig whether it is dealing with water or being first with provincial school closures. The city's Environment Division director, Michelle Warywoda, has said Thunder Bay is the first Ontario municipality to report a possible connection between sodium hydroxide and water pipe leaks though the statement omitted a mention of whether we are the only Ontario municipality to have used sodium hydroxide. Some explanation is necessary here.

Second, there are definite financial implications and possibly even health concerns here. A financial burden has been placed on homeowners by this problem and it is not clear the City is planning to address this given they have noted that residents should call a plumber to deal with leaks and that there is “no outright payment for this.” While some of the leaks have been relatively minor, others have been more severe and homeowners are now feeling more stressed about the constant overhanging potential of leaking pipes. Given the pandemic causing more people to work at home, the anxiety of pinholes leaks adds to the public health issues in an already difficult environment given the pandemic. And, there are the potential long term health implications of introducing a chemical in the water and any potential effects in the longer term. While sodium hydroxide is not a known cancer causing substance, who really knows what other long-term consequences there might be?

Thunder Bay has had a long history of dealing with water issues. The early 21^st century saw substantial investment in spending to secure our water supply and improve it but two decades later it appears that are more expensive issues and fixes to come. These problems are not going away anytime soon and should be taking up a larger share of discussion time at Thunder Bay City Council and Administration. To date, there has been a lot of silence. I suppose that silence is advantageous if you are trying to listen for the drip, drip, drip of leaking pipes.

Wednesday, 15 July 2020

Ontario Employment in a Post-Covid World

As the lock downs end and Ontario embarks through various stages of reopening, the expectation is that unemployment will decline. Between January 2020 and June 2020. Total employment in Ontario fell from 7,453,900 to 6,883,100 jobs - a drop of 7.7 percent. The labour force – those willing, able and looking for work over the same period shrank slightly by 0.3 percent while the unemployment rate more than doubled from 5.2 to 12.3 percent. The participation rate – the share of population aged 15 years and over – declined slightly from 64.2 to 63.7 percent while the employment rate fell sharply from 60.8 to 55.9 percent.

The employment rate is perhaps the best measure of engagement with the labour market as it is the share of the adult population that has a job. The unemployment rate, on the other hand, is affected by not just the number of unemployed but also the size of the labour force. One can have the number of unemployed stay the same but the unemployment rate fall if the labour force shrinks.

While the fall in the unemployment rate is perceived as a key indicator of economic recovery from COVID-19, if people who lost their jobs never come back into the labour force, then the recovery picture may look better than it is. What is more interesting is whether the employment rate rebounds. As the accompanying figure shows, for most CMAs in Ontario, there does not appear to be a strong bounce back in the employment rate. Most analysts think the economy essentially bottomed out in April/May and June should see the start of recovery.

As the accompanying Figure 1 shows, the June employment rate is up from May in Kingston, Peterborough, St. Catharines-Niagara, Brantford, London, Windsor and Barrie. It has either stayed the same or declined further in Ottawa, Oshawa, Toronto, Hamilton, Kitchener-Cambridge-Waterloo, Guelph, Greater Sudbury and Thunder Bay. At first glance, It does seem that the closer you are to the GTA, the more likely the depressed employment rate in June persists with Ottawa in its own bubble. The GTA and Ottawa are the most urbanized areas and the pandemic has been especially hard on high population density areas. However, if that is the case, one should also expect to see a bounce back in the areas furthest from the GTA area – namely, low density Thunder Bay and Sudbury – which is not the case.

When you looked at the ranked percent change in the employment rate (Figure 2), Thunder Bay and Sudbury look more like areas adjacent to the GTA core rather than southern Ontario areas outside the GTA core. Another case of northern exceptionalism I guess. One suspects that either Thunder Bay and Sudbury are more closely tied to the GTA economy than one might think or some other factor may be inhibiting or delaying their employment rebound.

Thursday, 9 July 2020

One Very, Very Big Deficit

The fiscal snapshot yesterday confirmed the severity of the fiscal and economic impact of the pandemic on federal finances. GDP is expected to shrink by 6.8 percent in 2020-21, government revenues are dropping 21 percent and spending is up 63 percent. Believe it or not, the numbers say something about the elasticity of expenditures and revenues to a pandemic generated drop in GDP. Based, on these percentages, it seems that a 1 percent drop in real GDP growth is associated with about a 3 percent drop in federal revenues while the same 1 percent drop in real GDP spurs a 9 percent increase in spending. Spending is definitely more elastic than revenue.

Revenues are dropping from 341 billion dollars in 2019-20 to a projected 268.8 billion in 2020-21 while spending is going from 375.3 billion dollars to 612.1 billion dollars. As a result, the deficit is going from the original projected 34.4 billion dollars to 343.3 billion dollars bringing the federal debt to over one trillion dollars and the federal debt to GDP ratio to 49 percent. In nominal dollars, this is indeed the biggest deficit in Canadian history but as a share of GDP it comes in at 15.9 percent putting it behind the 20 percent plus ratios incurred during World War II. The accompanying figure gives a nice visual snapshot of the changes in the nominal values of some of the key variables.

The impact is serious but the economy and the federal finances should be able to absorb this as a one-time shock. Moreover, much of this new debt is being financed at very low long-term interest rates and debt service charges will not change significantly. However, if this happens twice then federal finances will head into a state where consequences will be more severe. In the end, we are a small open economy and if everyone around the world starts to borrow at such rates, the increase in demand will eventually raise interest rates. The "small borrowers" will feel the pain first.

Canadians have been truly blessed by having their federal finances in relatively good shape heading into this crisis as it enabled their government to assist them. However, the economy needs to restart and pick up steam and much of this new spending wound down over the next 6 months to a year if we are to avoid more serious restraint as well as large tax increases one to two years down the road.