NORTHERN ECONOMIST 2.0

Thursday 26 May 2022

Bailing Out Laurentian: The Province as Landlord?

Well, the Laurentian saga continues to develop in interesting ways and the latest developments are part of the rescue package by the provincial government. Better late than never one supposes though doing things late often leads to additional complications. Obviously, Laurentian and the province are trying to make up for what they failed to do earlier on given the preliminary report of the provincial Auditor General concluded that Laurentian did not need to file for CCAA protection.

There is a detailed document related to the return to court May 30^th, but briefly the package for Laurentian to date is $35 million in operating money, COVID-19 funding of up to $6 million and up to $22 million dollars in funds to compensate for the drop in enrollment. Incidentally, applications from high school are down 43.5 percent. However, on top of all this, the provincial government is offering to buy $53.5 billion worth of Laurentian University’s real estate – namely land or buildings.

Laurentian is apparently asking the province to put the buildings of the newly independent NOSM University at the top of the list which would be 60 percent of the Health Services Education Resource Centre and the Medical School/NOSM building. Dr. Sarita Verma, NOSM University's President, Vice Chancellor and CEO, and one of the most powerful physicians in Canada, said she has not been privy to any discussions around the province's proposed purchase of Laurentian real estate. But then Dr. Verma apparently was also not initially aware the province was going to make NOSM a university either. However, lack of awareness has not stopped her from suggesting that it would be ideal if land adjacent to the two building was also part of the deal to accommodate “expansion.” Nimbleness of narrative is an obvious requirement for broader public sector CEOs these days.

So, what to make of all this? Well, for those worried about provincial government intrusion into university management, becoming a university’s landlord is definitely going to be an interesting development. If a market based rent is charged, there will be claims of gouging. If a very low or zero rent is charged, then it will be seen as a unique and special subsidy and one suspects other medical schools in the province not to mention other universities will raise the issue. And, as for the $22 million dollars to compensate for an enrollment drop, that also sends another message from the province. The provincial government was obviously sufficiently rattled by the prospect of a university going bankrupt on its watch that it is making a major effort now. Can other universities also count on the same assistance should their enrolment drop without having to wait for bankruptcy proceedings? After all, to almost lose one university is unfortunate but having several go would suggest a disregard bordering on carelessness, neglect and other things we teach our children to avoid.

The final interesting message is for Thunder Bay and Lakehead University. Let us be clear. There is no danger of NOSM leaving Thunder Bay or the northwest. At the same time, should NOSM acquire convenient expansion space near its Sudbury site, the odds are the bulk of expansion is going to go into the Sudbury campus with Thunder Bay becoming a satellite in endless orbit around its Sudbury star. Needless to say, such projections of potential outcome will be dismissed as the delusions of yet another tenured university faculty member with no real world experience. I say, you have been served notice.

Wednesday 18 May 2022

Dealing with Homelessness

Among the growing problems of affordability in cities across Canada including Thunder Bay, is the specific issue of homelessness. The latest point-in-time survey by the District of the Thunder Bay Social Services Administration Board that was published in January of 2022 of 221 participants documented that 43 percent used emergency shelters. Indeed, the Board estimates that there are closer to 700 people experiencing homelessness in the 103,000-square-kilometre district of about 146,000 people and about 70 percent of them identify as Indigenous. Finding solutions to this complicated set of issues is an on-going process and into it has stepped the City of Thunder Bay.

Thunder Bay City Council has decided to move ahead on a recommendation to establish a $1 million fund to support local capital projects addressing poverty and homelessness in Thunder Bay. The fund is not intended as a stand-alone source of financing and is expected to leverage additional support from the federal and provincial government as well as other funders that could include private sector sources, philanthropic organizations as well as First Nations organizations. The projects are designed to be in the area of transitional or affordable housing and grant applications will be reviewed by a committee of senior city staff. The idea, initially proposed by Councillor Bentz, is innovative and perhaps one of the first in Canada and comes in the wake of the 2022 federal budget which has committed more funds for homelessness as well as a commitment to the redesign of federal housing strategies.

This program represents a start to fixing problems in a community that has received its share of bad press in the national media lately when it comes top homelessness, poverty and racism. City council approved the recommendation though there was one dissenting vote from Mayor Mauro. Mayor Mauro argued that such a fund would replace federal dollars and that the City is going to pour resources into projects that would have occurred with federal funding anyway. The Mayor is technically correct that funding to end homelessness is likely going to flow in greater amounts from the federal government anyway. Moreover, the housing crisis is a federal and provincial responsibility to solve even if its effects are felt largely at the local level. However, that does not mean a municipality should sit back and wait for someone else to start solving the problem.

At the same time, providing the municipal resources represents a way to kick start some aspects of the process in a cooperative manner given that the funds are expected from federal and provincial governments as well as other partners. In some respects, it represents an action in tune with basic principles of subsidiarity in fiscal federalism by signalling change from the grassroots. Rather than replace federal dollars, the Community Partnership Fund Thunder Bay is creating may actually attract more funding and give the option to the other levels of government, as well as private agencies, First Nations Organizations and philanthropy groups of an opportunity to accompany their verbal pronouncements with more effective actions. And besides, the political optics for Thunder Bay with this fund are positive even if the marginal impact is ultimately small. Change requires first steps to be taken and that is what this is.

Thunder Bay City Council has done some boneheaded things in the past but this is not one of them.

Monday 9 May 2022

Is Thunder Bay About to Reverse its Conservative Drought?

The Ontario provincial election is now well underway and the poll tracking results to date suggest that the Conservatives under Doug Ford are poised to win another majority government. The Liberals are projected to increase their seat count but largely at the expense of the NDP. The Conservatives have adopted policies and platforms that are appealing to a largely centrist voter profile and there are substantial infrastructure spending announcements sprinkled across the province designed to consolidate their support. In some respects, all three parties are making spending announcements like it the 1960s- money seems to be no object. While still early days, the opposition parties have yet to really come across as a credible alternative but who knows.

Here in Thunder Bay, the question is whether the provincial Conservatives can reverse what has been a historic pattern of Liberal representation punctuated with bouts of NDP as a palate cleanser. Last time around, the NDP took Thunder Bay Atikokan from the Liberals narrowly edging out the Liberals with the Conservatives a distant third though they did increase their support by about 10 percent and did better than the Conservative on the north side. This time around, the incumbent is NDP, and the two opponents have somewhat lower profiles in the riding than what one might expect. Still, the NDP incumbent won by a rather small margin and depending on how the campaign shapes up, there is always the possibility of change. The south side Conservative candidate does have a background in municipal politics.

On the north side, things are more interesting. With the incumbent not running due to health concerns, there is more of a race in progress. The liberal incumbent won but by a relatively small margin and the runner up last time – NDP Lise Vaugeois – is running again. The Liberals have current south side Northwood municipal Councillor Shelby Ch’ng running while the Conservatives have recruited municipal Councillor Peng You. This is a riding that historically is even less fertile ground for the Conservatives than the south side of Thunder Bay. And yet, the conservatives probably have their best shot here at reversing their Lakehead drought.

Councillor Peng You is personally very popular with an extensive network of friends, acquaintances and supporters acquired via his years as a Tai Chi master. His victory as an At-Large Councillor in the last municipal election saw him top the candidate totals with the largest tally of votes. He has facilitated a lot of international exchanges and is well liked by those who know him. While his performance as a municipal councillor has occasionally been erratic, that can be attributed to the previous lack of political experiences and a business background not schooled in the byzantine bureaucracy of municipal affairs. He has also been engaged in extensive door knocking across the city. And the provincial government has announced several high-profile infrastructure projects in the region to boot.

Will all this be enough to get a Conservative victory? Who knows? However, the recruitment of Peng You is the most serious attempt by the Conservatives to attract a high profile Thunder Bay candidate to run in years. The possibility to have someone on the government benches is probably not lost on some of the locals especially given that the prospects of a majority government look high. It will be an interesting merry month of May.

Friday 6 May 2022

Inflation, Wages and Municipal Monopolies

Statistics Canada released its April 2022 employment numbers today and the national unemployment rate edged down slightly to 5.2 percent. Canada has low unemployment and real GDP growth in the 4^th quarter of 2021 was 1.6 percent which annualized translates into just over 6 percent real growth for 2021. It is indeed a period of robust economic growth and of course inflation which in March was 6.7 percent. However, if you have been to a grocery store, you will see that over the course of the last year many prices have gone up 30-50 percent and then there is gasoline which is now pretty much at 2 dollars a litre. As a result, interest rates are up belatedly to arrest the surge in inflation to bring it back to the 2 percent range. However, they will probably need to go higher given that inflation – while not yet stagflation despite alarmist media stories – is nevertheless quite persistent. Still, Canada is not yet like Turkey which is seeing 70 percent inflation.

Stagflation a la 1970s requires a wage price spiral fueled by expectations of rising prices on the part of the labour force which become translated into effective wage increases. However, that requires a certain amount of bargaining power on the part of labour and unionization rates in Canada today are dramatically lower than they were in the 1970s and 1980s. If wages go up in the private sector, they are going to rise not so much because of labour action but because the labour market is seeing scarcity of workers. As for the public sector, many provinces have some form of salary restraint – chief of which is Ontario which in 2019 brought in Bill C-124 which has kept most of the broader public sector to 1 percent annually. More on that in a minute.

In Thunder Bay, the unemployment rate (3-month average, seasonally adjusted) is now 4 percent – down from 4.9 percent the month before. However, total employment in Thunder Bay is down from March going from 64,600 to 64,400 jobs, the size of the labour force has also shrunk going from 68,000 to 67,200 and the participation rate has fallen from 63.8 percent to 63.0 percent. So, the robust low unemployment rate in Thunder Bay masks the fact that overall, there are fewer people working relative to the month before. However, year over year, both the labour force and employment are up so all things considered, the low unemployment rate is a sign that the city’s economy is doing relatively well. Which brings me to the main point.

As well as Thunder Bay is doing, eyebrows were indeed raised this week by the news that Thunder Bay City councilors have passed a 4 percent salary increase for its management and non-unionized staff and a 2.35 percent increase for councillors while unionized staff will be seeing a 1.5 to 2 percent increase. The 4 percent increase for 319 managers and other non-unionized staff was dressed up as staggered which obfuscated from the fact that in 2022 the increase is nevertheless 4 percent. The City Manager was quoted as saying: “The reason for [the increase] is to make the [city] more competitive against our competitors for skilled labour,” he said. “We are falling behind on a relative basis – against other municipalities, against the private sector, and against the public sector parameters we measure against.” As for the councilor increase, well it is now formula driven at half the rate of inflation so the 4.7 percent inflation in 2021 translates into 2.35 percent. It is not council deciding, it is simply the formula though they voted against taking a lower increase.

The point here is that municipal employees in Thunder Bay – like municipal employees elsewhere in the province - have a distinct advantage over other members of the broader public sector in that they have not been subject to the provincial salary restraint legislation in Bill C124. In Ontario, health and education sector workers have been kept to 1 percent increases annually since 2019. Municipalities have been exempted ostensibly because they have access to own-source revenues. That is property taxes and user fees. Municipalities still get a substantial portion of their revenues from the province in the form of grants though not as large a share as say hospitals, schools, and universities.

Municipalities in Ontario derive about 40 percent of their revenues from property taxes, another 22 percent from government transfers, 20 percent from user fees and the remainder from licenses, permits, fines, and rentals. They can pass on their cost increases directly to their ratepayers and as a result can fund increases in spending while at the same time adding to their reserve funds with large annual budget surpluses. In the end, they are no longer municipal governments serving the public interest but have become monopoly corporations and use their monopoly power to extract whatever revenues they need – even during the pandemic. They have become bureaucratic maximizers of expenditures. A municipal election only every four years enhances that monopoly power. Residential taxpayers throughout Ontario are going to see large increases in their bills down the road to fuel the spending increases that municipalities are going to bring in because of inflation. That the province has allowed this monopoly power to continue unchecked and indeed abetted it in the recent salary restraint legislation should be an election issue.

Friday 29 April 2022

Ontario Budget 2022: Analysis

The Ontario government presented its budget yesterday and given there will be an official election call any time, one is left to conclude that the budget is at best an aspirational document of what the government might like to do if re-elected in June. Despite what currently seems to be a boom period in the Ontario and Canadian economies, it remains that given the volatility of the global economy, Finance Minister Bethlenfalvy’s reluctance to explicitly state whether he would re-introduce the exact same budget if re-elected is understandable. After all, four or five months from now, the fiscal and economic ground may have shifted yet again.

Figures 1 to 3 provide some material to summarize the budget. Figure 1 shows that total revenues are projected to rise from $173.6 billion in 2021-22 to $196.9 billion in 2024-25 while expenditures (net of the contingency reserve) are projected to rise from $187.1 billion to $203 billion. Once the contingency reserves ($ 1 billion in 2022-23 and $1.5 billion in each of the subsequent years) are factored in, the deficit is expected to be $19.8 billion in 2022-23 and should decline to $7.6 billion by 2024-25.

Figure 2 plots the average annual growth rate of assorted revenues and expenditures over the period 2022-23 to 2024-25. Own source revenues are expected to grow an average of 5.6 percent and total revenues at 4.3 percent while total expenditures will grow at only 2.8 percent. Thus, projected revenue growth is expected to do the heavy lifting when it comes to deficit reduction with the accumulated deficit from 2021-22 to 2024-25 still clocking in at $53.3 billion dollars. Interestingly, debt charges are expected to grow at 4.7 percent annually while nominal program spending will only rise by 2.6 percent. Once you factor in inflation and population growth, real program spending is declining.

Of course, what is also of interest is that while the additional accumulated deficit in the next few years going forward will be $53.3 billion, the net debt over the same period is expected to grow from 373.6 billion to 468.8 billion – an increase of $95.2 billion (Figure 3).

This is because along with an operating deficit, the provincial government is planning many billions more in infrastructure spending covering roads, hospitals and even a new prison correctional complex in Thunder Bay (which is expected to be $1.2 billion). If you add the planned $36.9 billion in infrastructure going forward starting 2021-22 to the accumulated deficit, you get pretty close to the $95.2 billion increase in the net debt. However, GDP growth is expected to remain robust so the net debt to GDP ratio is expected to plateau at about 41 percent for the next few years.