A Spring Election Is Coming to Ontario…Money is Flowing Like Spring Melt

 

The Northwest of Ontario is still gripped in throes of winter relative to southern Ontario, but spring is inevitably on its way along with a Spring Budget at Queen’s Park (April 28^th) to be followed by a spring election in early June.  The Northwestern Ontario Municipal Association (NOMA) will hold its annual conference and general meeting April 27-29 in Fort Frances and the meetings will overlap the budget date.   There will undoubtedly be the traditional lament over the region’s needs especially in the aftermath of the pandemic, but the truth of the matter is that municipalities - even in Ontario's north - have generally done quite well financially during the pandemic as has the provincial government for that matter. 

 

Municipalities generally run surpluses (or in the language of municipalities, positive variances) and the pandemic does not seem to have changed that.  And, because of federal transfer supports and growing own source revenues, Ontario has seen provincial total revenues rise since 2017-18.  Based on the Fiscal Reference Tables and the Ontario 2021 Fall Economic Statement, total revenues were $150.594 billion in 2017-18 and reached $164.893 billion in 2020-21.  Fiscal year 2021-22 is forecast at $168.617 billion while by 2023-24 the forecast is for revenues of $178 billion. 

 

If anything, the numbers will likely be revised again in the April 28^th budget to show higher revenues than anticipated and a smaller projected deficit as even the Financial Accountability Office of Ontario (FAO) has already noted.  For 2021-22, the FAO expects a $16.0 billion budget deficit, lower than the government outlook for a $20.5 billion deficit. By 2023-24, the FAO projects the deficit will decline to $2.8 billion, compared to the government outlook of $11.4 billion.

 

So, one can expect that with robust provincial revenue growth and an election in the wind, there will be plenty of spending or “investments” in projects and programs across the province as the province fans out its ministers and spending announcements as a sort of missionaria protectiva to secure as many seats as possible.  Indeed, the spending has been underway since March and currently totals nearly 11 billion dollars.  Some of these announcements are really tax expenditure or foregone revenue in the case of the refund and cancellation of vehicle registration fees (approximately $2.2 billion) as well as the gasoline and fuel tax cut to take effect this summer ($645 billion).  Some are substantial infrastructure projects with billions of dollars for hospital and long-term care construction as well as highway projects. 

 

In terms of specifics for northern Ontario municipalities to date, there are four announcements of note: 1) The industrial electricity subsidy for northern Ontario ($176 million), the refurbishing of GO Transit train coaches’ contract for Ontario northland North Bay ($109 million) and the contract to widen the Thunder-Bay to Nipigon highway ($107) and 4) Rural Broadband internet ($900 million) which one would expect a reasonable share should flow to the north.  These are not inconsequential amounts or projects from a regional perspective and come on top of other announcements such $75 million for resumption of Ontario Northlander train service from Timmins to Toronto.  Throw in money for more medical doctor training with the expansion of NOSM and you can see a deliberate effort to woo northern voters.  Watching the opposition parties use the northern neglect line will be interesting given that many of the northern ridings are indeed held by the opposition and not the current government.

 

Of course, the budget next week will probably unveil even more spending initiatives given that revenues are likely higher than expected which means the government will be able to spend more and lower the deficit.  As for the province’s $400 billion dollar debt and high net debt to GDP ratio?  An election is coming, and an election is too important a time to worry about public finances as politicians have demonstrated since time immemorial. And besides, what politician would not want a future without challenges for their grandchildren especially when there is an election to win?

 

 

The Rancor of Vrancor

 

I was briefly in Hamilton, Ontario last week and the spillover from the GTA is starting to have an impact on Hamilton’s skyline downtown as new residential construction begins with many more proposed.   Along with some picturesque and redeveloped older buildings that retain their charm, there are entirely new projects on old sites such as the old Kresge building site downtown.

 

 

 

Some of them are indeed quite large with proposals for building ranging from a few to as many as 45 stories.  Many have attracted the rancor of residents in downtown residential neighborhoods as some of the proposed buildings are so large and dense, they effectively will more than double the population of some downtown neighborhoods and cast large dark shadows across leafy neighborhoods.

 

What is more interesting is that given the shortage of housing and the need for urban infill combined with the desire of many not to see valuable farmland filled up with subdivisions, the opposition is actually not anti-development or anti infill.  There is an acceptance that taller or more dense buildings with family sized housing units need to be built.  What is causing concern is that the proposed units violate height restrictions already in place – the scale and intensity of the development – as well as create units that really in the end are not family sized units but tiny condos destined for investors - domestic or otherwise.

 

Now there is a lot going on here and the issue is quite complicated but here is what seems to be going on with respect to several projects at the corner of Queen Street and King being both built and proposed by a company known as Vrancor which along with being a hospitality company is also property management and development company. First there a residence and hotel at the corner of Queen and King currently under construction which appears to have stalled because Vrancor now wants one of the buildings to exceed the height it had originally proposed.  The original proposal was for a 10-storey hotel and six storey apartment building. However, Vrancor has modified that to 12 storey hotel and now wants the six-storey apartment to increase in height from six to 25 storeys. The City of Hamilton has apparently approved the increase for the hotel but the other one is now at the Ontario Land Tribunal (OLT) and construction has been stalled since and now stands at a 12 storey hotel and a flat base with a construction crane.

 But then, as much as there is a building boom in Hamilton there are also some curiously stalled projects and empty lots with pictures of buildings that will probably never exist.

 

 

 

 

What is even more interesting is the proposal for the parcel of land immediately north of the Vrancor development under construction which is currently a parking lot.  Here the proposal for Vrancor Towers II is for four towers – two of 15 storeys and two of 27 storeys for a total of 762 dwelling units along with 1003 metres of commercial space and 369 parking spaces on top of a three to seven storey base.  Needless to say, this development will dwarf the adjacent residential area of single homes in the Strathcona neighborhood, effectively double its population, add to the infrastructure needs of sewer and water, cast large shadows, and generally create a spate of negative externalities.   

 

So the full scale of the development of four mega towers has attracted protest and debate. The City of Hamilton is apparently instructing its legal counsel to oppose these proposed developments at least at the scale they are intended because they do not comply with their own guidelines regarding transition, height, scale, massing, shadow, and density.  This will inevitably also end up at the OLT.

 

 

 

Given the sudden rush to add to housing stock, these types of situations will become more common across the country.  The need to intensify urban development to accommodate a larger population and preserve green space makes a lot of sense but the scale of what is being proposed seems to be a lot all at once that will overwhelm rather than complement existing uses.  Even politicians who are trying to rapidly “solve” the housing crisis after years of neglect must admit that development needs to increase density and be forward looking but it also needs to recognize the needs of existing residents who have already made investments in the area based on expectations of a certain style and quality of life.  And the residents of the area themselves are not opposed to apartment units but probably wonder why something more European in scope rather than modeled on 1950s Toronto might not be a better fit.

 

In the end, these buildings are not really family sized units but merely stacked little boxes for investors to buy and sell irregardless.  The only good thing is that for the next two years, foreign buyers are facing more restrictions and interest rates are going up.  Never mind pinning your hopes on the OLT to stop the project.  Higher interest rates alone may put an end to some of the more oversized development proposals that have been popping up in Hamilton. 

 

 

Ontario Universities: The Challenges

 

Well, the news for universities in Ontario this last week was that the provincial government was freezing tuition fees for another year.  Moving into the 2022-23 academic year, this is now the third year in a row coming on top of a ten percent reduction for the 2019-20 academic year when the freezes began.  The Ontario government is heading to an election in June and this move is ostensibly being sold as “ensuring that student have access to affordable, high-quality postsecondary education, and reducing the financial strain on families” (as stated by the Ontario Minister of Colleges and Universities).  No doubt, the current government wants to demonstrate it has a heart, is working hard and has big big dreams.  However, the goal of decreasing the financial strain on Ontario families is being accompanied by an increase in the financial strain facing Ontario universities as was noted by McMaster.  My own university seems to have remained silent with respect to public pronouncements on the matter but then as a small university its approach is probably wise and akin to being a small furry mammal that lets the larger Bronto and T-Rex universities take the asteroid impact.

 

In the wake of the debacle involving Laurentian which saw Ontario as the only province with a university going into receivership, one would think the provincial government would be more aware of the burdens facing universities during the pandemic.  Along with the program delivery, cost, and revenue disruption caused by the pandemic, universities in Ontario – which on average rely on tuition for anywhere from 40 to 60 percent of their revenues – have also been deliberately financially constrained.  They are not allowed to raise tuition fees, nor are they being provided with increases in provincial government grant funding and are being subjected to increasing oversight in terms of their programs designed to make them more business-like and attuned to market conditions.  And while restraining universities financially, the provincial government at the same time has increased competition in the provincial university sector by creating more universities. 

 

One would have thought that central planning had gone the way of the Berlin Wall but, just as autocracy has resurfaced in the world, so has central planning in Ontario.  The provincial government thinks it can have its cake and eat it too probably because under Bill 124, the province is limiting salary increases to one percent in certain parts of the public sector.  The thinking is undoubtedly that universities do not need to raise tuition if salary increases are limited to one percent.  Oddly enough, the provincial government exempted municipalities from Bill 124 under the argument that they have substantial own source revenues but not universities.  Universities really are not so much publicly funded these days as they are publicly assisted but apparently are not allowed to consider tuition as own source revenues.  There you have it. 

 

The result has been that universities, being the resourceful entities that they can be, have coped by increasingly relying on international students as a source of revenue because the tuition freeze only applies to domestic students.  International students are paying what the market will bear and the difference is an illuminating shot of what tuition fees might look like if Ontario students were paying a larger share of the costs of university education. 

 

At McMaster for example, tuition for Canadian undergraduates in 2021-22 ranged from $5,955 to $6,043 depending on program of study.  For international undergraduates, the range was $31,470 to $37,237.  At my own university, the undergraduate domestic tuition ranged from $5,398 to $5,985 while the international counterpart was $25,750 to $26,500.  Universities in Ontario for the time being have seen increasing enrollments – even with the pandemic – and rising tuition revenues from international students making the provincial government’s strategy seemingly a success - except for Laurentian of course.  However, with international enrollment approaching 20 percent even at smaller Ontario universities and an even larger share at some of the bigger ones, the question about access may shift to whether more international students are being accepted at the expense of domestic ones. 

 

True, one could argue that should not happen as international students are essentially subsidizing domestic ones and increasing resources – a win-win situation except perhaps for international students who are paying more.  However, the real issue is that universities in Ontario are becoming increasingly dependent on international students and subject to potential major fluctuations in enrollment which makes their financial stability somewhat more precarious.  Accompany that with the large amounts of debt most universities have acquired to finance expansions of classrooms and residences pre-pandemic which then sat largely empty during much of the pandemic, and you can see that finances can quickly become unpredictable.

 

With the return to in person learning at Ontario universities this fall, the financial challenges that have been provided by the Ontario government will be augmented by the transition to full in person learning which not all students welcome with open arms.  (And to be frank, not all faculty welcome it either. If you were living in the GTA, no 2 hour commutes over the last two years would have generated a lot of time for research). Many students have welcomed the flexibility of in person learning given it has enabled them to schedule their education around employment.  There may be a slip in enrollment as students decide to not return to finish programs that are fully in person given what seems to be a robust labour market now. 

 

The solution to this could be to allow universities to charge substantially different tuition fees for domestic students for in person and online classes.  If universities are really trying to fill their in-person classrooms and some students really want the flexibility of online learning, then many courses need an in-person section and a separate online section.  Hybrid – unless properly done with substantial classroom investments – ultimately becomes voluntary in person classroom attendance with fully online evaluation and the attendant issues that involves.   Those students who want online should pay for the flexibility it provides with a much higher tuition fee. 

 

How will the Ontario government deal with these challenges?  Given their approach to date, they are unlikely to give universities the flexibility and autonomy they need to implement such changes as differential pricing for in-person and online courses dependent on university needs and decision making. Given their tendency to disrupt the university sector, they are more likely to mandate that universities only offer in-person classes and set up a separate provincial on-line university to compete with them.  You heard it here first.

 

 

Thunder Bay Water Rates Still Climbing

 Municipal ratepayers and property owners are most often concerned about increases in their property taxes.  However, along with property taxes, there are also assorted fees and user charges that municipalities levy separately from property taxes which enable them to in a sense deflect from the increase in  municipal property tax burdens on homeowners given that combined numbers are rarely if ever provided.  Chief among those user fees  in most Ontario municipalities is of course water and sewer/wastewater rates.  The 2021 BMA Municipal Report provides an opportunity to look at recent levels of water and sewer rates as well as their recent growth.  The levels are for an average residential household and a comparison is provided for 2015 and 2021.

As Figure 1 illustrates, the highest water rates in 2015 for 28 major Ontario municipalities are for Sudbury, Windsor and Thunder Bay and they range from $1,278 for Thunder Bay to $1,403 in Sudbury.  At the bottom, are Timmins, Mississauga and Brampton which range from $590 for Brampton to $680 for Timmins. In the case of Thunder Bay, if you are an average bungalow and already paying nearly $4,000 a year in residential property taxes, the water and sewer rate is an additional 30 percent on top of your property taxes.  

 

 

Figure 2 plots the average annual growth rate of water and sewer/wastewater charges in these same cities over the six years from 2015 to 2021 and also ranks them from highest to lowest.  Whereas Thunder Bay is nearly at the top in terms of the level of the fees, it is mid ranked in terms of the growth rate since 2015 at about 3.6 percent annually.  But then, over the period 2005 to 2015, Thunder Bay ramped up its water charges at an average of 9.5 percent annually - thereby bringing it up to the top of the level of charges in Figure 1.  The current fastest growing eater charges are in Sudbury, Mississauga and Brampton while growth is currently the lowest in Niagara Falls, North Bay and Timmins - the latter two which have apparently seen a reduction in water rates.  Mississauga and Brampton are of course currently at the bottom of the ranking in terms of levels and their infrastrucure is likely undergoing a catch up process given the rapid growth in both these cities.

 

 

In Thunder Bay, one does not expect water rates to decline anytime soon given the numerous water related issues that have plagued the city over the last decade ranging from massive flooding of the new water treatment plant about a decade ago combined with widespread flooding across the city as well to the current leaky pipe debacle affecting thousands of homes.  In the end, both of these fiascos have generated lawsuits on the part of affected parties which if successful will generate costs for years to come.

Thunder Bay Gas Prices: Higher Than You Think

 

The current spike in gasoline prices has brought prices at the pump to the highest they have ever been.  In just over a week, the price per litre in Ontario has jumped nearly 25 cents and is hovering in the $1.80 a litre range in many places.  In Thunder Bay, the price briefly touched the $2 a litre mark at several gas stations but has since settled to about $1.95 a litre.  This spike is an exuberant uptick that is part of a long upward trend in prices which in recent years has been reinforced by new carbon taxes.

 

The accompanying figure plots the monthly price of regular unleaded gasoline at self-service filling stations for Thunder Bay, Toronto, and Ottawa over the period 1990 to 2022.  The data up to January 2022 is from Statistics Canada while the last two months are calculated from a gasoline price website.  All three series track together quite closely.  Prices were flat in the just below 60 cent a litre range for most of the 1990s and then underwent a significant ascent to Spring of 2008 when they came down.  Since then and until the start of the pandemic prices have gone up and down together in all three cities bouncing between 80 cents a litre and just over $1.40 but were most often at $1 or more a litre.  The pandemic saw another drop in gas prices back to the 80-cent level and then recovered back to the $1.40 range.  The current spike is quite evident for all three cities at the far right of the chart.

 

 

 

While the graph shows Thunder Bay’s gasoline prices nicely tracking the other two cities, the scale of the diagram masks the fact that the differential between Thunder Bay gasoline prices and that of the other two cities has grown over time.  During the 1990s, the average price per litre in Thunder Bay was about 4 cents higher than Toronto and 3 cents higher than Ottawa.  During the 2000s and the 2010s, the price in Thunder Bay average 5-6 cents more than Toronto and about 7 cents a litre more than Ottawa.  For the pandemic period of 2020 to 2022, Thunder Bay’s price per litre has averaged 11 cents more than Toronto and 12 cents more than Ottawa.

 

Notwithstanding the demand and supply shocks of the international energy market, the price of gasoline in Thunder Bay has gradually grown faster than that of the other two major Ontario cities in the Statistics Canada gasoline price data set.  Moreover, that differential has spiked since the start of the pandemic.  Why?  While no doubt local gasoline purveyors will argue that it has to do with rising costs and supply chain issues, the reality is that casual observation over the years reveals that over the last decade the number of gasoline retailers in Thunder Bay has shrunk considerably.  While that has been a process underway in many cities, it is particularly noticeable in Thunder Bay now as the relative lack of competition has allowed prices to be higher than they otherwise need to be.