NORTHERN ECONOMIST 2.0

Sunday, 14 January 2018

Policing Resources and Costs in Northern Ontario: A Brief Municipal Comparison

Municipal budget season is upon us and expenditures on protection – police and fire – are some of the most important areas in which municipal tax dollars are spent. Municipal police services have the responsibility of ensuring the security of residents, businesses and visitors to their communities and the basic activities are crime prevention, enforcement of laws, maintaining public order, assisting the victims of crime as well as emergency services. Over the years, policing has become more complex dealing with new types of criminal activity in the cyber age as well as devoting more resources to social concerns.

One interesting point of comparison for the five major northern Ontario cities is the number of police officers per 100,000 of population and the trend in this number over time. Figure 1 plots Statistics Canada data on police officers per 100,000 for the period 2000 to 2016. In 2000, the largest number of police offers adjusted for population was in Thunder Bay at 171.6, followed by Sault Ste Marie at 156, Timmins at 153.1, North Bay at 147.6 and finally Greater Sudbury at 143.1. By 2016, Thunder Bay was still first at 199.5 officers per 100,000 of population. It was followed by Timmins at 196.2, Sault Ste Marie at 176.7, Greater Sudbury at 160.7 and then North Bay at 152.6.

As Figure 2 illustrates, growth in per capita policing numbers was greatest in Timmins at 28 percent, followed by Thunder Bay which saw a 16 percent increases. Next highest growth was Sault Ste Marie at 13 percent, followed by Greater Sudbury and North Bay at 12 and 3 percent respectively.

Another point of comparison is spending. The BMA Municipal Reports provide some data on the costs of providing policing services. The rankings for costs generally parallel those for police numbers. When the net costs per 100,000 dollars of assessment are compared (including amortization), in 2016 the highest cost was in Timmins at $441 per $100,000 of tax assessment followed by Thunder Bay at $434. Next was Sault Ste Marie at $402, then North Bay at $317 and finally Greater Sudbury at $299. Naturally, this ranking is influenced by the richness of the tax base and all other things given cities with a weaker total tax base can expect costs of policing per $100,000 of assessment to be higher. At the same time, over the last decade, all five cities have seen a reduction in the net costs pf policing per 100,000 dollars of assessment. This could be a function of growth in tax bases as well as other efficiencies and economies.

Friday, 5 January 2018

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.

Monday, 1 January 2018

Looking Ahead to 2018

Well, it is the New Year and as always it is a time of reflection and looking ahead to see what the New Year might bring for Canada, Ontario, northern Ontario and naturally The Most Serene Kingdom of Thunder Bay where there is always optimism. Of course, 2017 has been a pretty tumultuous year but 2018 is also looking turbulent given the changes poised to take effect as well as events around the globe. However, on the bright side, the global economy is expected to do reasonably well according to Goldman Sachs or then perhaps not if you listen to Morgan Stanley. At least, Canada will not be Venezuela which FocusEconomics expects to be 2018’s most miserable economy though Canada is expected to be in the top ten for nominal GDP.

Nevertheless, this year will certainly be a test of the aspiring nature of current economic policy in Ottawa and Queen’s Park. At the top of the list, the United States will dramatically lower business and personal tax rates effective January 1^st. The last time this happened in the 1980s, Canada countered with the federal tax reforms that lowered rates and broadened the rates. This time, no such response appears to be coming despite the fact the federal business tax rate in the United States is expected to fall from 35 to 21 percent. A saving grace is that new US corporate tax rates will match rather than fall below Canadian ones.

If the US economy booms in the wake of its tax cuts, Canada might be expected to benefit from increased trade. Yet, federal economic leadership is adrift on the trade front given the United States is playing hardball on NAFTA and talks with China and the Asia Pacific are stalled. The aspirational tone of current trade talks is not bearing fruit given Chinese and American reactions. Indeed, the possibility is high that Trump will pull the plug on NAFTA early in the New Year.

On the plus side, we can take solace in the fact that while the United States is playing hardball on trade, Donald Trump considers Justin Trudeau a “friend”. One can only imagine our trade talks with the Americans if Donald Trump was dealing with enemies. Perhaps we can look forward to a visit to Canada by President Trump in 2018.

At the federal level, we can also take cheer in the most recent Federal Department of Finance’s long-term projections (a few days before Christmas when no one is paying attention) that the federal budget is now expected to be balanced by 2045 compared to the 2050s as forecast in last year’s long-term forecast. Given the international situation with North Korea, the United States, Russia, China, and the Mid-East, the world should last so long. Where is Lester Pearson when you need him?

Added to all this are expected increases in interest rates for 2018 and the tightening of mortgage rules with a new stress test. The stress test will effectively function like an increase in the interest rate for home buyers without the added stress of implementing an actual increase for the Bank of Canada. These changes are anticipated to have a depressive effect on Canadian housing markets especially outside of Toronto and Vancouver. As for Toronto and Vancouver, being in an economic world of their own, they should only slowdown a bit.

Things are marginally better when moving into Ontario. Ontario’s economy has done relatively well in 2017 though NAFTA talks are inevitably keeping Premier Wynne awake at nights. While Ontario is expected to balance its operating budget, debt will continue to grow based on the forecast capital spending ranging from public transit to high speed rail. Yet, it is also not a done deal that Ontario’s era of deficits is over given what appears to be a ramping up of spending with implications for the future. Moreover, the increase in the minimum wage and other regulatory changes that are being phased in with respect to employment standards, scheduling, and overtime mark the debut of a massive experiment. How much change can employers absorb before throwing up their hands and scaling down their operations?

Ontario is also on track to a June election and many of the progressive initiatives of the current Wynne government are designed outflank the NDP given the Conservatives under Patrick Brown have sailed into the centre of the political spectrum with their policies. The Wynne government’s policies are aspirations for a more socially just Ontario with less weight placed on trade-off between equity and efficiency. Along with the guaranteed annual income experiment, there is also a new youth pharma care program.

In the end, all three political parties in Ontario appear to be placing themselves along a centre-left alignment meaning that Ontarians can expect government spending and debt to maintain their current trajectories no matter who wins.

Of course, more government spending will be seen as good news for northern Ontario given the economic dependence on government. While the resource sector saw some marginal improvements in 2017, the development of the Ring of Fire still appears to be quite distant though 2018 being an election year one can expect to see a number of positive inspiring announcements with respect to its future. As well, it will be interesting to see if there is any mention of the “success” of the Northern Ontario Growth Plan in the next provincial election campaign. Any mention of the 25 year plan to boost the economy of northern Ontario that started in 2011 will likely mention the wonderful things yet to come - after all, we have yet to reach the halfway mark.

As for Thunder Bay, its economic engine is government activity as the core sector with subsequent commercial and retail activity an economic multiple of this core. It is a recipe for stability that works given that the city’s economy has been static in terms of employment for several decades. Rising public sector salaries and incomes provides a base for municipal taxation and further local public-sector employment and the process will continue until the flow of public money is constricted – which does not appear to be any time soon.

Why tamper with perceived success? This means the current batch of local politicians – provincial and municipal – will all be re-elected come June and October and everyone will go back to sleep. The northern Ontario economy and Thunder Bay in particular have become a sort of economic Brigadoon – an isolated sleepy region coming magically to robust economic life every 100 years.

Yet, despite the evidence of slow economic and employment growth from Statistics Canada and the Conference Board, its boosters have often maintained that Thunder Bay is one of the fastest growing cities in Canada and with some of the lowest unemployment rates in the country. That the low unemployment rates in Thunder Bay's case also mean the labour force has been shrinking faster than employment is apparently not seen as a cause for concern.

I suppose it depends on what indicators you wish to measure growth with and your interpretation of the evidence. I guess who am I to argue with Thunder Bay’s ruling political class when it comes to the interpretation of economic arguments and indicators. In the end, their attitude towards and understanding of economists is best summarized by the line once made by one city politician:"You want to listen to economists? They record history. They don't make history."

Given the last real boom period in northern Ontario was the resource commodity and baby booms of the 1950s and 1960s, we can expect the regional economy to again awaken circa 2050 – roughly the same time the federal budget is expected to balance again. By then, perhaps the federal government will carry the public sector spending ball for northern Ontario and give the provincial government and municipalities a rest.

Happy New Year and may God save us all.

Wednesday, 27 December 2017

Thunder Bay Building Permits: A Reality Check

A recent TBnewswatch story reported the estimated value of building permits in Thunder Bay in 2017 was up substantially from the year before at 146 million dollars. Based on the numbers presented in the story, the increase in 2017 can be calculated at approximately 55 percent. This is of course an upbeat year end story. Given the coming year will see both a provincial and municipal election, one can expect these types of numbers to be presented by local politicians as evidence that Thunder Bay's economy is doing well. However, it is important to adjust these kinds of number for inflation - that is present them in real dollars - as well as look at more than two years of data.

This is done in Figure 1. Using annual total value of building permit numbers from Statistics Canada for 1998 to 2016 and adding the 2017 estimate from the City of Thunder Bay's Chief Building Official and then deflating using the CPI, the real value (in 2016 dollars) of total building permits is presented. The good news is that 2017 is indeed up from 2016 but there has been an overall downward trend from peaks in real value reached in 2012 and 2013. Over a longer term view, a fitted linear trend suggests that there has been a slight increase in the real value of permits since the late 1990s but the 2017 performance is really not much higher than a decade ago or even two decades ago.

One can view the above chart as good news in the sense that construction activity over time in Thunder Bay over the long haul has been reasonably stable and perhaps even characterized by some very modest growth. It should be noted that this activity is composed mainly of residential followed by institutional and government construction projects. Indeed, the peaks in Figure 1 are much less impressive once you remove the government and institutional permit values.

The composition of these permits is provided in Figures 2 and 3. Figure 2 presents an area graph based on annual numbers while Figure 3 simply aggregates all the permits since 1998. Nearly thirty percent building permits since 1998 are of institutional and public sector origin. Industrial permits are below 10 percent. Commercial permits have been surprisingly large as a proportion of the total which is actually a cause for some optimism given that they reflect private sector perceptions of economic opportunities in Thunder Bay.

Thursday, 14 December 2017

Thunder Bay Employment Flat for Forty Years

My recent Fraser Institute Blog post on employment growth in Canada at the provincial and CMA level since 2007 appears to have attracted a fair amount of interest if only based on the hits via my Linkedin page. The article was posted on the Fraser Blog on December 4^th and by December 14^th, it had garnered 1,515 views. The interest has been quite pronounced from Linkedin profiles in Ontario and of course particularly from the Thunder Bay area. As a follow-up, I decided to look at employment levels in Thunder Bay and Greater Sudbury from a longer-term perspective using data from Statistics Canada.

Now Statistics Canada has annual province level unemployment rates and employment data available on its site from 1976. Its annual CMA level data only appears to go back to 1987. So, in order to generate CMA employment levels and unemployment rates for Thunder Bay and Greater Sudbury prior to 1987, what I did (acting on the suggestion of my Lakehead colleague Rob Petrunia) was run regressions of CMA level employment and unemployment rates for both cities on the Ontario data along with a time trend variable. The assumption is that employment levels and unemployment rates in the two cities should reflect what is going on in the province as a whole. The regression results were then used to estimate fitted values for Thunder Bay for the period 1976 to 1987 and for Sudbury from 1976 to 1990 (Sudbury data starts in 1990).

The results are intriguing. Figure 1 plots the unemployment rates in the two cities from 1976 to 2016 and there seems to be some good news here. While unemployment rates in both cities fluctuate a great deal over time, they have generally trended downwards since the late 1970s. The average unemployment rate in Thunder Bay between 1976 and 1985 was 9.7 percent while in Sudbury it was 11 percent. Over the period 2010 to 2016, Thunder Bay’s unemployment rate was 6.1 percent while over the same period in Sudbury it was 7.5 percent.

However, the good news seems to end when employment levels are examined in Figure 2 – at least for Thunder Bay. Sudbury has seen its employment grow over time while Thunder Bay has essentially remained flat. In 1976, estimated total employment (full and part time) in Thunder Bay was 61,224 and in Sudbury it was 60,475. By 2016, Thunder Bay’s employment was 60,100 while in Sudbury it was 81,700. In other words, over 40 years Thunder Bay has essentially remained flat in terms of its employment level – indeed there has been a slight decline of 2 percent since 1976. As for Sudbury, its employment level has grown by 36 percent since its estimated 1976 value.

A declining unemployment rate when total employment is growing can be seen as good news. A declining unemployment rate when total employment is declining means that your labour force is actually shrinking faster than your employment level. For Sudbury, a lower unemployment rate is good news given that it has been accompanied by rising employment. For Thunder Bay, a declining unemployment rate is a misleading indicator and masks the moribund nature of its economy given that its employment level has been essentially the same for 40 years.