"Reality Check" reality check on Equalization and the Family Feud

The crew that put together's CBC's usually fine "Reality Check" can be forgiven if they missed a few points by a country mile in a summary of the Family Feud.

Forgiveness is easy since the issues involved are complex and  - at least on the provincial side since 2003 - there has never been a clear statement of what was going on.  Regular Bond Papers readers will be familiar with that.  For others, just flip back to the archives for 2005 and the story is laid out there.

Let's see if we can sort through some of the high points here.

With its fragile economy, Newfoundland and Labrador has always depended on money from the federal government. When they struck oil off the coast, the federal government concluded it would not have to continue shelling out as much money to the provincial treasury. N.L.'s oil would save Ottawa money.

Not really.

Newfoundland and Labrador is no different from most provinces in the country, at least as far as Equalization goes.  Since 1957 - when the current Equalization program started - the provincial government has received that particular form of federal transfer.  So have all the others, at various times, except Ontario.  Quebec remains one of the biggest recipients of Equalization cash, if not on a per capita basis than on a total basis. Economic "fragility" has nothing to do with receiving Equalization.

In the dispute over jurisdiction over the offshore, there was never much of a dispute as far as Equalization fundamentally works.

Had Brian Peckford's view prevailed in 1983/1984, Equalization would have worked just as it always has.  As soon as the province's own source revenues went beyond the national average, the Equalization transfers would have stopped.

Period.

That didn't work out.  Both the Supreme Court of Newfoundland (as it then was called) and in the Supreme Court of Canada, both courts found that jurisdiction over the offshore rested solely with the Government of Canada.  All the royalties went with it.

In the 1985 Atlantic Accord, the Brian Mulroney and Brian Peckford governments worked out a joint management deal.  Under that agreement - the one that is most important for Newfoundland and Labrador - the provincial government sets and collects royalties as if the oil and gas were on land.

And here's the big thing:  the provincial government keeps every single penny.  It always has and always will, as long as the 1985 Accord is in force.

As far as Equalization is concerned, both governments agreed that Equalization would work as it always had.  When a provincial government makes more money on its own than the national average, the Equalization cash stops.

But...they agreed that for a limited period of time, the provincial government would get a special transfer, based on Equalization that would offset the drop in Equalization that came as oil revenues grew.  Not only was the extra cash limited in time, it would also decline such that 12 years after the first oil, there'd be no extra payment.

If the province didn't qualify for Equalization at that point, then that's all there was.  If it still fell under the average, then it would get whatever Equalization it was entitled to under the program at the time.

The CBC reality check leaves a huge gap as far as that goes, making it seem as though the whole thing came down to an argument between Danny Williams and Paul Martin and then Danny and Stephen Harper.

Nothing could be further from the truth, to use an overworked phrase.

During negotiations on the Hibernia project, the provincial government realized the formula wouldn't work out as intended. Rather than leave the provincial government with some extra cash, the 1985 deal would actually function just like there was no offset clause. For every dollar of new cash in from oil, the Equalization system would drop Newfoundland's entitlement by 97 cents, net.

The first efforts to raise this issue - by Clyde Wells and energy minister Rex Gibbons in 1990 - were rebuffed by the Mulroney Conservatives.  They didn't pussy foot around. John Crosbie accused the provincial government of biting the hand that fed it and of wanting to eat its cake and "vomit it up" as well.

It wasn't until the Liberal victory in 1993 that the first efforts were made to address the problem.  Prime Jean Chretien and finance minister Paul Martin amended the Equalization formula to give the provincial government an option of shielding up to 30% of its oil revenue from Equalization calculations.  That option wasn't time limited and for the 12 years in which the 1985 deal allowed for offsets the provincial government could always have the chance to pick the option that gave the most cash.  It only picked the wrong option once.

The Equalization issue remained a cause celebre, especially for those who had been involved in the original negotiations.  It resurfaced in the a 2003 provincial government royal commission study which introduced the idea of a clawback into the vocabulary.  The presentation in the commission reported grossly distorted the reality and the history involved. Some charts that purported to show the financial issues bordered on fraud.

Danny Williams took up the issue in 2004 with the Martin administration and fought a pitched battle - largely in public - over the issue.  He gave a taste of his anti-Ottawa rhetoric in a 2001 speech to Nova Scotia Tories. Little in the way of formal correspondence appears to have been exchanged throughout the early part of 2004.  Up to the fall of 2004 - when detailed discussions started -  the provincial government offered three different versions of what it was looking for.  None matched the final agreement.

The CBC "Reality Check" describes the 2005 agreement this way:

The agreement was that the calculation of equalization payments to Newfoundland and Labrador would not include oil revenue. As the saying goes, oil revenues would not be clawed back. Martin agreed and then-opposition leader Harper also agreed.

Simply put, that's dead wrong.

The 2005 deal provided for another type of transfer to Newfoundland and Labrador from Ottawa on top of the 1985 offset payment.  The Equalization program was not changed in any way. Until the substantive changes to Equalization under Stephen Harper 100% of oil revenues was included to calculate Equalization entitlements.  That's exactly what Danny Williams stated as provincial government policy in January 2006, incidentally.  The Harper changes hid 50% of all non-renewable resource revenues from Equalization (oil and mining) and imposed a cap on total transfers.

As for the revenues being "clawed back", one of the key terms of the 2005 deal is that the whole thing operates based on the Equalization formula that is in place at any given time. Oil revenues are treated like gas taxes, income tax, sales tax, motor vehicle registration and any other type of provincial own-source revenue, just like they have been as long as Equalization has been around.

What the federal Conservatives proposed in 2004 and 2006 as a part of their campaign platform - not just in a letter to Danny Williams - was to let all provinces hide their revenues from oil, gas and other non-renewable resources from the Equalization calculations.  The offer didn't apply just to one province.  Had it been implemented, it would have applied to all. 

That was clear enough until the Harper government produced its budget 18 months ago. What was clear on budget day became a bit murky a few days later when Wade Locke of Memorial University of Newfoundland began to take a hard look at the numbers.

Again, that's pretty much dead wrong.

It became clear shortly after Harper took office in 2006 that the 100% exclusion idea from the 2004 and 2006 campaigns would be abandoned in favour of something else.  There was nothing murky about it at all. So plain was the problem that at least one local newspaper reported on a fracas at the Provincial Conservative convention in October 2006 supposedly involving the Premier's brother and the Conservative party's national president. That's when the Family Feud started.

As for the 2007 budget bills which amended both the 1985 and 2005 agreements between Ottawa and St. John's, there's a serious question as to whether the provincial government actually consented to the amendments as required under the 1985 Atlantic Accord.

The story about Equalization is a long one and the Family Feud - a.k.a the ABC campaign - has a complex history.  There's no shame in missing some points.  It's just so unusual that CBC's "Reality Check" was so widely off base.

-srbp-

Which is to be Master? Part 1

Originally written in mid 2004, Which is to be master? was an attempt to dissect the Williams' administration's efforts to change the Atlantic Accord (1985).

The issue of offshore revenues and Equalization hasn't disappeared in the past three years. Since this paper contains some useful background information, Bond Papers offers it in sections.

__________________________________

Which is to be master?

An assessment of the Williams administration proposal to amend the Atlantic Accord

"When I use a word," Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean - neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master - that's all."

- Charles Ludwig Dodgson, (Lewis Carrol), Through the Looking Glass

A. Introduction

It is now commonplace for people to believe that neither Newfoundland and Labrador nor Nova Scotia is being treated fairly by the federal government with respect to revenues from offshore oil and gas resources. As the story goes, the federal government claws back upwards of 85% of revenues to the two east coast provinces under the Equalization program, contrary to the two Accords that govern development of the oil and gas fields. Both Premier Danny Williams of Newfoundland and Labrador and Premier John Hamm of Nova Scotia contend that this clawback hampers their provinces from developing fully and from realizing the full benefits of the oil and gas resources off their coastlines.

This paper examines the Williams administration’s proposal to amend the Atlantic Accord. The findings are based on publicly available documents including the Atlantic Accord, the implementation legislation, the Williams government’s overhead slide presentation released to news media as well as papers and public comments offered by supporters of the provincial government’s approach.


B. The Williams Administration and the offshore

There is no single, concise, public statement of the Williams government’s proposal to amend the Atlantic Accord. To date the provincial government has released only a copy of an overhead slide presentation, apparently made to federal officials on 04 March 2004. In addition, the Premier has made public statements and issued at least three news releases on the subject. No other correspondence between the Government of Canada and the Government of Newfoundland and Labrador is in the public domain.

The Blue Print, the Progressive Conservative election platform, contains several references to resources and revenues from the offshore. Since they are the party’s platform they must be taken as statements of policy for the new government, or at least a statement of intentions to guide the government’s overall policy. This assessment is based on these documents, statements by senior officials of the Williams administration published before October 2003 as well as comments by John Crosbie.

The Blue Print commits the Williams government to “seek jurisdictional control and ownership over petroleum and other economic resources in the offshore as a means to achieve greater prosperity for our Province and more opportunity for our people.”

With respect to oil and gas revenues and revenue sharing, the Blue Print commits the Progressive Conservative party to “press the federal government to remove all non-renewable resource revenues from the calculation of equalization payments. In exchange, we will commit, in a formal federal-provincial agreement if necessary, to spend non-renewable revenues to modernize economic infrastructure in the Province and to bring down the provincial debt, so that future generations of Canadians living in this Province will continue to benefit long after the resources are used up.”

The only specific reference to the Atlantic Accord is a commitment to use its industrial offset provisions to the fullest extent possible. The Blue print also commits the provincial government to seeking transfer to the provincial government of the 8.5% share of the Hibernia project held by the Government of Canada.

In early 2004, Premier Danny Williams began discussions with the province’s federal cabinet representative John Efford to ensure that the province received what Premier Williams described prior to a February meeting between the two as “100% of our offshore revenues.” According to Williams, Ottawa gave a bad deal to Newfoundland and Labrador in the Atlantic Accord. The proposal would change the Equalization offset provisions of the Atlantic Accord to “provide a payment equal to 100% of the net direct provincial offshore revenue”. Net direct revenue is defined as “Royalties and Corporate Income Tax which is generated in the NL offshore area, less the equalization clawback (currently at 70%)”.

The objective was described in similar terms by a March news release: “Premier Williams has been actively pursuing the federal government to allow Newfoundland and Labrador to receive 100 per cent of the provincial revenues from offshore oil and gas.” A similar statement was made in April: “Premier Danny Williams today reiterated his government’s position on the Atlantic Accord and reaffirmed the province will continue to aggressively pursue the federal government to allow Newfoundland and Labrador to receive 100 per cent of the provincial revenues from offshore oil and gas.”

Changes to the offset formula would end what both the Blue Print and Premier Williams have repeatedly described as a “clawback” of resource revenues by the federal government through reductions in the province’s Equalization entitlement. The notion of an Equalization clawback is clearly described in the Blue Print:

A Better Deal on Oil and Gas Revenues

The Government of Newfoundland and Labrador will collect billions of dollars in revenues over the next 20 to 30 years from oil, natural gas, and other minerals. Less than a quarter of the revenues will stay in the Province. Ottawa will simply deduct most of the increased revenues from equalization payments. This deduction is known as "the equalization clawback".

The clawback denies us the opportunity to build a better future for our children and grandchildren. We should not have to consume our non-renewable resources for current expenses and leave none of the inheritance for our children and grandchildren.

Of particular interest, both Premier Williams and other Conservative party commentators have linked provincial government offshore revenues with the concept of the province being the principal beneficiary of offshore development under the Atlantic Accord. In his news release of 12 March 2004, Premier Williams said:

"Essentially, we are asking the federal government to live up to the spirit and intent of the "principal beneficiary" component of the Atlantic Accord. Currently, the federal government receives 86 per cent of the revenues of our offshore petroleum resources, while the province receives a meager 14 per cent," added the Premier. "This revenue sharing is completely contrary to the spirit and intent of the accord and must be addressed now before these non-renewable resources are gone forever. Our province is facing a very serious fiscal situation which must be addressed. We are making tough choices to manage our expenditures and to grow our revenues at the provincial level. We, as a province, are putting into place a long-term plan to grow our economy; however, Ottawa must also be a part of the solution."

The overhead slide presentation describes the Atlantic Accord as being a ‘“Memorandum of Agreement between the Government of Canada and the Government of Newfoundland and Labrador on offshore oil and gas resource management and revenue sharing.”’ The paper includes several slides purporting to confirm that “[a]nalysis shows that Newfoundland and Labrador will not be the principal beneficiary of the revenues generated from oil and gas developments.”

Similar arguments have been advanced by John Crosbie, who served as co-chair of the federal Conservative Party’s 2004 election campaign in Newfoundland and Labrador.

9. Mr. Martin’s commitment is worth nothing unless he puts in writing that “principal beneficiary” means that Newfoundland and Labrador is to receive 100 per cent of all offshore revenues, including royalties, provincial corporation income taxes, all fees and bonuses etc. on a net basis with no clawback effect and to be received until we become a “have” province with agreed benchmarks as to when “have” status is achieved. [Run-on sentence in the original. ]

Flowing from these statements of the provincial government position, four issues must be addressed. These are ownership of offshore resources, the origins of the Atlantic Accord and federal government intentions, the existence of a “clawback” in the Equalization program, and definition of the term “principal beneficiary”.

Continued in Part 2

-30-