12 January 2010

Changes to pensions just tip of public sector fiscal iceberg

The provincial government is considering making some changes to public sector pensions, according to the Telegram.

Options include additional funding for the plans, reducing benefits, or increasing premiums, according to Finance Minister Tom Marshall.

The review includes not only the pension plans themselves, but also other financial liabilities associated with retired workers.

Anyone trying to figure out why pensions are under review need look no farther than advice from the guy who appeared to be the guru of financial policy in the Williams administration during its early days.  That would be a former deputy minister of finance during the 1980s, David Norris.

He wrote a paper for the Vic Young royal commission on the provincial government’s finances. What’s interesting is that what Norris identified as the major problems coming out of the grimes administration has actually turned out to be true for the crowd that replaced Roger Grimes and his crew:


i)  Escalation in Health Care Costs associated with increased drug costs, service costs, increased demand, new diagnostic and other equipment, facilities upgrading, expansion and replacement.

ii) Salary and Wage Settlements over the past two to three years which are only now being fully reflected in the Budget.

iii) Relatively High Program Spending per capita which reflects the fact that as the population base has declined, program spending has not been reduced on a pro rata basis. Furthermore, new spending initiatives have been undertaken in successive budgets.

iv) Interest costs associated with funding the province’s annual deficits and new borrowings to retire obligations associated with the $3.4 billion unfunded pension liabilities.

Now while a lot has changed in the past six years, the period of abnormally high oil prices really has served to mask the underlying problems with the provincial government’s financial situation. For example, Norris projected  a cash deficit in 2003-04 of between $250 and $500 million on a cash basis;  that’s a figure he clearly found alarming since he suggested the need for a dramatic change of policy.

As it is, the provincial government maintained a policy of deficit budgeting.  The salvation came each year as abnormally high oil prices produced staggering cash windfalls.  This year is different.  There’s a $1.3 billion deficit forecast (on a cash basis) and that doesn’t looks pretty good to come true.

But fundamentally, the financial problems Norris identified have remained, hidden by the oil money.  That, too, is something Norris warned against, noting that oil revenues would decline within a decade as production dwindled.

In light of the news that the provincial government is taking a look at pensions and is starting to think about program cuts – think radiology review – it is rather interesting to look at Norris’ recommendations from eight years ago and compare them to what the current provincial administration actually did.

i) A comprehensive government-wide program review (including government agencies) to evaluate the effectiveness of the various programs, to reassess relative priorities, and to reduce/eliminate programs of low priority;

[BP: They started it but let it die quietly without producing any tangible results.]

ii)  A concentrated overhead reduction initiative aimed at reducing the overhead costs of government in recognition of the population decline of over 10 per cent in the last decade (and which is ongoing);

[BP:  They never even tried.]

iii)  A thorough assessment of those program areas where the cost of program delivery exceeds the national average and where the differential continues to grow. While it is to be expected that some of the differential will be attributed to demographic factors, the analysis should examine the potential areas where the method of program delivery might be modified and the cost structure reduced;

[BP:  Again, there’s no sign anything of this sort was even attempted.  program spending has grown apace and new programs have been introduced without eliminating any old ones.]

iv) Maximize the attrition opportunity. It is understood that the age profile of the public service indicates that a significant number of public servants will be retiring in the next three to five years. This could present a crucial opportunity to implement the cost reductions in a way that is less harsh than would otherwise be the case;

[BP:  Using Stephenville and Grand Falls as prime examples, the Williams administration has continued the trend of the post-1996 Liberals using public sector jobs as a substitute for private sector economic development.  There are more public servants in the province today than there were in 2003.  People think the boom on the Avalon is fuelled by the oil industry.  Guess again.  Hebron can’t be causing anything since Hebron doesn’t really exist yet. It’s all public money spent by public servants:  more people with big wage increases does wonders for local businesses.]

v) An assessment of the cost escalation associated with all the public sector pension plans. This would include a review of the benefit trends, the rate of escalation in the unfunded liability, and a reassessment of the province’s funding strategy to determine if modifications are required;

[BP:  Here’s the one the Telly uncovered.  Don’t expect the provincial government to opt for putting more cash into the pension plans.  The objective will be to cap what’s going in and reduce the financial burden over the medium- to long haul.  Think benefit reductions and higher premiums for those still working.]

vi) Consideration should be given to regular increase in various fees and certain taxes to preserve the revenue base on a go-forward basis. But, in so far as possible, increase in sales tax, personal tax and corporate income taxes should be avoided;

[BP:  Some fees went up but they came down again in 2007 as an election gimmick. Personal and corporate taxes went down.  ]

vii) The potential merits of privatizing various functions currently  provided by government and its crown agencies should be examined. In this regard it may be instructive to explore the experience of other provinces and any successes that have been recorded to date in this generally sensitive area;

[BP:  Consider that this one was laughed out of the room as cabinet voted to create an energy company funded through cash hand-outs from the treasury and permission to borrow over half a billion dollars.]

viii) Leadership from the top - a demonstration of commitment to the process through high profile expenditure reductions by the Premier and cabinet members.

[BP:  Anyone have any sign of anything that looks like a cut in the cost of cabinet?]

Changes are coming to the province’s public sector pensions.  Some of those changes will be very hard for some to swallow.

One thing you can count on, though, is a reference to the cost of the debt associated with those pensions.  David Norris’ paper was working with a figure of $3.4 billion in unfunded pension liabilities.

Guess what figure turned up in finance minister Tom Marshall’s briefing notes, as reported by the Telegram?

Combined, unfunded pension shortfalls and those other retirement benefits represent a $3.3 billion liability on the province's books.

Newfoundland and Labrador's total net debt in 2009 was a shade under $8 billion.

"These two unfunded liabilities are something that obviously we look at," Marshall said. [Emphasis added]

They be looking at it alright.

Count on it.