All they want is fairity #nlpoli

The people who run the province’s town and cites are looking to get a new financial arrangement from the provincial government.

Last week, the municipalities federation held an emergency meeting to discuss recent developments:

“What we’re asking government for today is very clear,” said Rogers. “Short-term help in this 2012 budget and a commitment to participation in the development of a long-term, strategic plan for the municipal sector.”

Sounds reasonable enough. 

Odds are they won’t get anything in the near term. Give a listen to what municipal affairs minister Kevin “Fairity” O’Brien said at the outset of an interview with On Point with David Cochrane this past weekend. O’Brien quickly started into a recitation of how much money the provincial government has spent since 2008 on municipal infrastructure and things like fire trucks. he finishes off with the warning that any new financial arrangement has to be sustainable for taxpayers.

Coming from a guy who has helped boost provincial government spending to irresponsible, unsustainable heights without a toss about such ideas, those words sound a bit like a lead bell.  

O’Brien is using coded language.

What he really was telling municipalities president Churence Rogers is a simple “f*ck off”.  No one should be surprised if Rogers has heard something along those lines over the past few weeks, perhaps even from O’Brien himself.  Maybe no one used the “f” word exactly, but language likely would have had the finger buried in it.

You see it all comes down to money, power and control.

Right now the provincial government has all of it.

And they will not give up any of it.

The provincial government isn’t interested in changing municipal funding at all.  Any change to funding would have to transfer some of the provincial cash or the ability to raise cash over to the towns and cities. 

If the province doesn’t have that cash, then it no longer has the power to control what goes on in the province.  Fairity O’Brien may not have deliberately mentioned infrastructure and fire trucks, but there’s no coincidence that he did.  That money and those items are part of the old pattern of politics in this province: patronage. 

And that’s the money, power and control we are talking about.

None of that has anything to do with the very serious problem in many towns and cities in the province but frankly provincial politicians like O’Brien don’t give a rat’s backside about that. 

Many parts of the province aren’t really doing all that well, despite the reports you may have heard.  They don’t have the municipal tax base to come up with the sort of cash of their own they need to put into road work, water and sewer projects and other infrastructure.

Problems in the fishery, the loss of paper mills have all taken their toll.  People may be working in Alberta and still living in Stephenville and Grand Falls-Windsor but it’s local companies that pay the taxes that help to keep the street lights on, quite literally.

What’s more, way too many of the towns on the island are full of retirees and not much else.  People on fixed incomes don’t have the ability to tax up the tax slack.  Those towns also have problems finding people to volunteer for municipal services like firefighting.

There’s a bit of a false impression of a boom in some places.  People in Grand Falls-Windsor thinks everything is smurfy.  Ditto Gander.  But in both these towns the major economic engine is the provincial government and a level of spending that we know is unsustainable. 

What’s more, the provincial government doesn’t pay taxes to municipalities.  They do – however – collect taxes on every municipal purchase through the harmonised sales tax (HST).  The effect is to claw back a portion of the money the province grants in the first place.  Until the fictitious oil royalty claw back, though, this one actually reduces the amount of money the towns and cities in the province have available to actually spend on services to residents.

And then when towns and cities go looking for cash, politicians like Kevin O’Brien start coming up with all sorts of excuses for why things must remain as they are.  The miserable, dark joke in all that shouldn’t be lost.  Towns and cities in the province are looking for a fair shake on provincial funding.  Kevin O’Brien is the guy who told us all that the province just wanted “fairity in the nation.”

David Cochrane exposed the fundamental bullshit of government’s position.  Cochrane asked why it was that O’Brien was talking about the impossibility of making commitments of funds for a few millions in the short term to towns and cities while government was prepared to forecast the price of oil for 55 years in order to justify Muskrat Falls.  All O’Brien had was talking points.

O’Brien also couldn’t explain or justify the four years that it has taken for O’Brien to start getting around to talking about a new financial arrangement for towns and cities.  Municipal leaders have asked for predictable funding.  All O’Brien has said is that he and his colleagues in government are willing to talk.

The real bottom line is that people like O’Brien who have politicized the purchase of bed pans and fire trucks simply want complete control over spending in the province for their own, pork-barrel, patronage reasons.

All municipal leaders want is fairity.

They aren’t going to get it from Kevin O’Brien.

- srbp -

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To Encourage the Others #nlpoli

Lots of people look to leaders in a crisis to see what lessons they can learn.

Well, Kathy Dunderdale is special.

She is an excellent  example for any leader – political or not – who wants to know how not to handle a major financial problem.

The Telegram editorial on Wednesday does an excellent job of summarising the convoluted, contradictory and confused way Kathy Dunderdale has talked about job losses and budget cuts in Newfoundland and Labrador.

Think about Kathy Dunderdale’s comments in a slightly different way and you can get a sense of the magnitude of her problems.  Instead of lay-offs, imagine she was announcing another life-altering decision. You can summarise her statements this way:  we will have to kill some people, maybe.  If we do kill them, there won’t be a lot of bodies, so they should all relax until we figure out how many. And even if we do wind up killing a few people they all knew they would only be here temporarily anyway so this is pretty much what they should have expected anyway.  It’s in their contract.

An exaggeration to be sure, but for the thousands of people in this province across the province, that’s not far off the chilling effect Dunderdale’s words have had. 

The provincial government budget covers about 20% or more of the provincial labour force.  That’s a heck of a lot more than 2100 people who Dunderdale has said are going to be randomly thrown out of work – possibly – in a few weeks time.

All those people have families, mortgages and other bills and all sorts of plans they’ve been making on the expectation they’ll have a job in a few weeks time.

All of them know that when any Premier starts talking about layoffs, program reviews and spending cuts, they aren’t likely to be just limited to this year and a couple of people.  Things must be bad. Lots of them have been through it before. 

And even if things don’t turn out as badly as those public servants might fear, prudence will likely dictate what experience might not.  They are going to change their plans for the next year or so.  New home?  New car?  Renovations?  Trip? Maybe not.  Those who get laid off will have to cut their spending, find a new job and start again.  And those who don’t will scale back just to be on the safe side.

That’s the practical economic impact Kathy Dunderdale will have on tens of thousands of people across the province.

Then there’s the impact on her bottom line.  Provincial sales tax is the second largest source of money for the provincial government, after oil royalties.  We already know oil royalties will drop this year.  Now factor in a drop in sales taxes due to the Dunderdale-induced chill. 

Drop sales tax revenue by 10%  - for argument’s sake - and you have about the same amount of money the Premier says she wants to save, that is, less than $100 million.  It would actually be around $82 million.

So the Premier and her colleagues cut $82 million from the budget – theoretically – with their job cuts.  And in addition they have induced another $82 million revenue loss as a result of the chill in the economy.  Dunderdale’s cocked-up communications have effectively She’s actually doubled the effect of her cut.

At this point, though, we don’t know how much the provincial government will chop.  Anything more than a small handful of jobs lost, coupled with reassurance that those few are all, and the Premier can guarantee the lost revenue and the economic contraction will be much larger. 

Now factor in cuts to federal spending and a loss of federal jobs that will come on March 29. Incidentally, that’s the real reason the provincial government is delayed until April.  All this talk of internal reviews and such is just fluff and nonsense. 

The provincial government will introduce its budget likely around the end of the first week of April.  They are waiting  - and the only thing they are waiting for – is to see what the feds do.  Provincial finance officials likely have some ideas of what will come.  They should have gotten them from their federal counterparts and their colleagues in other provinces. That’s what happens every year. 

The provincial officials have contingency budgets with adjustments here and there in the figures, based on what the feds do.  They can make any last minute adjustments and get the provincial budget out quite quickly afterward. For the most part, the whole thing is done.

The cuts Kathy Dunderdale is talking about may appear to be new to the Telegram editorialist’s reckoning but they aren’t. Dunderdale and her cabinet have apparently settled on them some time ago. How big the cuts will be may depend on the federal budget. 

What the telly-editorialist and others might wonder about more profitably, though, is how a government with billions in cash laying about is thinking about laying off a single solitary employee based on the size of the hand-outs the provincial government will get from Ottawa.

Now that is something to marvel at.

- srbp -

Dundernomics 101: Public Sector Employment Numbers #nlpoli

In an interview with CBC’s David Cochrane, Premier Kathy Dunderdale said that the public service has grown by more than 2,100 jobs in the past eight years and that total employment in the public service is about 9,000.

Well, not exactly.  That depends on what you consider to be public sector and “public service”.

As labradore noted last July, the entire public service sector in this province – federal, provincial, municipal and Crown corporations accounts for was more than that.

The growth in public sector employment alone 11,500 between 2006 and 2011.

If you look at figures for 2010, the totals are way more than what the Premier talked about:

In the first quarter of 2010, approximately 53,780 people in Newfoundland and Labrador worked in some portion of the provincial public sector: 11,550 in the provincial civil service, 20,400 in public health-care and social services establishments, 10,900 at Memorial University and the public colleges, and 10,930 employed by the various public school boards.*

Even if we allow that the Premier defined “public service” pretty narrowly in 2012,  you can see that in early 2010 there were 2,500 more people working in the public service,  that is, just working directly for the provincial government than the Premier currently claims work for government in total.

And yes, that is way more than the 2,100 jobs the Premier claims she and her colleagues added – in total – since 2003.

Confused?

Well, obviously the Premier is.

And if she doesn’t understand what is going on now and what has gone on in the recent past – stuff she actually lived through and decided already – then it is going to be very hard for her to understand whatever the current review comes up with.

Confusion about the basics also explains why the Premier could claim that 3% of what she herself has called almost $8.0 billion in public sector spending is about $100 million.

Three percent would be $240 million.

Two percent would be $160 million.

One point two five percent (that is 1.25%) comes out to $100 million.  And for anyone who is still unsure, 1.25% is closer to one percent than it is to two percent.

All those jobs come at a price.  Here’s another pretty chart from labradore to give you a sense of what those payroll costs are:

The figures are for early 2011 and the total bill hits about $2.65 billion.

None of that is about whether the jobs are needed or not, whether the people do good work, what the impact of any cuts would be or anything else related to it. 

This is just to establish so everyone can plainly see that what the Premier said everywhere last week on several occasions and what is actually going on are two completely different things.

To her credit, the Premier acknowledged in one interview that she had frigged up her explanations of things last week.

But that was before she told David Cochrane that temporary employees could be getting the heave-ho in order to meet her  targets.

That likely isn’t correct either, by the way.

So as we start the week, expect that the most common noise you will hear will be the gigantic garbage truck of government communications beep-beep-beeping as it backs up  - yet again - and tries to move forward  - yet again - again without turning the same information into road kill for the third or fourth time in the past seven days.

– srbp -

He said. She said. “Expenditure review” edition #nlpoli

Starve reporters for real news and you can apparently make them believe anything.

That seems to be the case with the idea that Kathy Dunderdale’s Tories plan to actually cut public spending in the province in the coming fiscal year.

Unprecedented surpluses sitting in the bank. 

Forecasts for continued high revenues.

And now we are supposed to believe that the same people who could not control their own spending addiction, the same gang that created the current financial mess in the provincial government are now going to cut spending.

Right.

Here’s what Monday’s throne speech said:

Each department will undertake a structured review of departmental functions to identify opportunities to do things better. These reviews will be complemented by cross-departmental studies and ongoing reviews of the province’s Regional Health Authorities. The objective is to ensure all the Government’s personnel and resources are focused first and foremost on delivering high-priority services and achieving high-priority goals. This process will identify not only the current best practices for service delivery but also innovative approaches to deliver services more effectively.

“Review”.

“Focused”.

“More effectively”.

And if you don’t see those as being vague words, try this:

The objective is to ensure all the Government’s personnel and resources are focused first and foremost on delivering high-priority services and achieving high-priority goals.

One of the hallmarks of effective communication is saying what you want to say in clear language:  “we will walk five feet and then sit down.”

So read those Dunderwords and then compare it to these words from another Premier’s speech and see which one you would believe:

One of my first decisions was to reduce the size of cabinet by more than twenty five per cent. What’s more, in time we will attempt to reduce the number of seats in the House of Assembly to better reflect a province the size of Newfoundland and Labrador.

Many perks have been either reduced or eliminated, starting with the Premier’s office where the two government owned vehicles previously assigned to the Premier have been eliminated. We have significantly curtailed discretionary expenditures and non-essential out of province travel for elected members and senior officials.

We also cut 44 political positions that existed under the previous administration and converted many other positions from political appointments to public service appointments.

These staffing decisions have saved taxpayers more than one and a half million dollars. We believe that a strengthened public service will ensure that individuals are being hired on their merits as opposed to who they know in government.

In addition to the decisions we have already taken, all departments have been asked to bring forward expenditure reduction proposals which can be implemented in the short term to make an early start towards our new fiscal goals. I can assure you that everything is under review, from cell phones to government vehicles.

As well, we have deferred all non-essential capital expenditure items.

Short term spending reductions, however, will not be sufficient to address the size of the deficit problem. On a go-forward basis, we will implement our election blueprint commitment to review every government program and eliminate any that are considered ineffective and inefficient. This commitment will be delivered through a comprehensive program review exercise.

We will use criteria to evaluate programs, similar to those now being employed by the federal government as they attempt to free up funds for their priority programs. These criteria will include the public interest, efficiency, affordability, value for money, and the role of government. The review will also look at overhead and capital costs in government.

This comprehensive review will use the expertise of the civil service, and we will also use external resources to consider the systems and structural issues from a purely independent perspective. We must ensure that the changes we make to government are the best and most efficient changes possible. The results of this review will be forwarded to cabinet for action.

No shortage of “do” words” there, words with plain meanings:

• cut
• reduce
• eliminate

That was Danny Williams in January 2004.

The cuts, such as they were, lasted until the first polls showed his crew were very unpopular.

Just like Brian Tobin in 1996, curiously enough.

Program review lasted until the polls started dropping.

By the end of 2006, Williams’ conservative finance minister was gone, replaced by a fellow who never met a buck he wouldn’t spend especially if it belonged to the public.

Then the spending spree started for real.

And that program review?

It quietly vanished never to be heard from again.

Rather than cuts to the public sector, the province witnessed unprecedented growth and unprecedented rates of growth in public spending, across the board everywhere. 

And rather than cut jobs, the current Tories are the government that brought you the world in which 25% of the labour force draws a public paycheque.

So if Danny Williams couldn’t cut anything even after saying it in plain language, what makes anyone think that Kathy Dunderdale and the rest of her crew are even saying “cuts” let alone thinking about doing them?

Give your head a shake if you do.

- srbp -

Cost over-runs and delays in Placentia #nlpoli

On Monday,  the provincial public works department put a limit on the size of trucks that can go over the left bridge at Placentia.

This came after someone inspected the bridge.

Interestingly enough,  the same department had a tender call out last May to replace the bridge they just put restrictions on.

A few months later - In August, 2011 to be exact - the department cancelled the tender because the only bidder came in almost $20 million above that they budgeted.  Here’s what the release said would happen:

With the bid for this tender coming in so high, the department will immediately begin a full review of the existing bridge to provide more details around the exact condition of the current structure, and costing and potential years of service life for a rehabilitated structure. The review will also help determine whether the scope of work for a replacement structure can be revised to make the project more cost-effective.

Now being off budget and behind schedule is not new for provincial public works.  In fact, since 2003, this sort of stuff is the norm.

- srbp -

The reality of her world #nlpoli

Some people are trying to make a controversy out of Premier Kathy Dunderdale’s recent comments that public sector unions should “expect a more modest increase” than the salary rises they’ve been used to from the Conservatives since 2003.

Look at “the reality of the world”, Dunderdale admonishes everyone.

Well, a look at the world she lives in  - as opposed to the one people imagine exists - reveals a great deal.

Revelation One:  As labradore has noted repeatedly, the provincial Conservatives are responsible for expanding the public service both in absolute numbers and as a share of the provincial labour force.

In his most recent version, labradore notes both the size of the public sector: 25% of the provincial labour force.  Then he adds Revelation 2: the growth in the total value of the pay packet.  Since 2006, the total public sector pay cost has gone from about $1.9 billion to about $2.65 billion by January 2011.

Revelation 3 really puts it in perspective. Scan down through David Campbell’s commentary in the Globe on December 28 and you’ll find plenty to knock your eyeballs out about the growth of the provincial economy. Take the bits rom labradore and put it together with this on the relative position od the public sector pay envelope compared to the national average:

In 1998, the average weekly wage in the public administration sector in Newfoundland and Labrador was more than 22 per cent below the national average. Now it is 3.3 per cent above. That is a monumental shift in wages over a short 11 year period. A similar, but less pronounced story is found in both the health care and education sectors.

Most of that increase came since 2006.

So for anyone who is still harbouring any misapprehensions, understand that the provincial public sector has been driving the provincial economy for the past decade.  Thousands of more employees making – collectively – hundreds of millions more year over year and you have the growth since 2006 focused on the northeast Avalon. 

Now add to that the sources of provincial government revenue, as laid out in the annual provincial budget Estimates. You start to see the role that taxes on individual incomes and consumption play in fuelling the explosion in government spending since 2006.

Mining taxes and royalties produced about $167.5 million in revenue in 2010.  Personal income taxes brought in $888 million and sales taxes brought in another $791 million. Even gasoline taxes brought in more than mining royalties ($168.45 million) in 2010.

The forecast for 2011 did include an increase in mining royalties and taxes to $343 million. But even with that, two of those three taxes will still produce well over double the amount for the treasury than will come from rent companies pay for the privilege of exploiting the province’s non-renewable mineral resources.

When you look at the reality of things, Kathy Dunderdale and the Conservatives can’t afford to chop into provincial spending without putting a gigantic chill in the local economy.  As much as Dunderdale likes to admit that she and her colleagues have been irresponsible in boosting public sector spending to unsustainable levels, they haven’t left themselves any real manoeuvring room politically.

Now this might seem a bit harsh to Kathy’s delicate sensibilities, but the reality is that Dunderdale can’t do anything but provide the public sector with some lovely increases in their coming contract negotiations. 

When Kathy Dunderdale says public sector unions should expect more modest increases, we should understand she is probably speaking relatively.  Compared to their last contract when they got an eight percent jump followed by three successive years of four percent, public sector employees should probably look for something like four years of four percent. or four percent followed by three over the subsequent years.

But any serious confrontation?

Don’t count on it.

The Tories don’t have the nuts for it, pea or otherwise.

- srbp -

The Truth Deficit #nlpoli

Tom Marshall made the rounds on Thursday talking up his latest financial update.

But after a call to Randy Simms on Open Line, Marshall likely felt likely he’d gone a few rounds in the ring.  Simms asked a few sharp questions rather than let Tom ramble on with his usual shite.  And in asking a few simple questions, Simms just had to sit there and listen as Tom tied himself in contradictory knots. Tom’s been in the state before – like on Muskrat Falls and Bay d’Espoir – but this time Randy wasn’t letting up on him.

Things started badly for Tom when he had to explain right off the bat that all his bullshit on Wednesday about applying the surplus to the net debt was, not to put a fine point on it, just bullshit. No surprise for regular readers of these e-scribbles as Tom explained that net debt is just a calculation of assets and liabilities.

When Randy pressed Tom on what the provincial government will actually do with the cash, Marshall said they’d be spending it on capital works rather than borrow, as planned.  Fair enough, but then he noted that the provincial government hasn’t borrowed for capital works in years.  Tom wound up going around and around before it became clear that his talk about using the cash to avoid borrowing was not what Tom was trying to make it out to be.

It was, in fact, far less.

To get a sense of what might have buggered up the finance minister, take a look at the Estimates. That’s the budget document that lays out the proposed spending on day-to-day operations and capital works for 2011.

And just so that everyone is on the same page with this, understand that Tom the Finance Minister reports the Estimates on what is called a cash basis while the budget speech and the financial update use accrual accounting.

One big difference in how the two different methods show the government’s financial performance comes right up in the front of the Estimates. 

In the budget speech, Tom Marshall talked about a $59 million surplus. What you can see in Statement 1 of the Estimates is a deficit of about $769 million.  In other words, when the finance department looked at the actual cash it would receive in 2011 and the bills it would pay, the government planned to spend $769 million more than it would actually take in.

The only way they’d make that up is to borrow cash.  Normally, governments would have to go to the bond markets or the banks and borrow the cash.

Over the past few years, the provincial government here has managed to pile up a couple of billions dollars or more in cash and short-term investments. Rather than borrow from the bank, they’ve covered off cash deficits by taking the money out of that pile of cash.

It’s still borrowing, of course, even though it would never get repaid.

And last spring, that’s what Tom Marshall planned to do:  borrow cash to cover a deficit.  He and his colleagues planned to overspend and they planned to borrow cash from every person in the province to pay for it.

When Marshall announced in May that the surplus would grow to $200 million, that was on the same accrual basis as the $59 million.

But on the cash basis, the deficit would have only dropped from the $769 million Marshall planned for down to a little over $500 million.

But it was still a deficit.

A real deficit.

And Marshall would have had to take a wad of cash from the piles hidden under his mattress to cover it off.

So now that Tom has boosted the accrual surplus to $755 million, some of you might be already leaping ahead.

Yes.

That’s right.

And for the rest of you who resisted jumping ahead, understand that if the new revenue projections hold, Tom Marshall will likely still have to borrow some cash to cover it off.  Another $755 million in cash would leave him short about $14 million on that $769 million deficit in the Estimates.

So that borrowing Tom talked about with Randy Simms likely wasn’t about capital works spending.  It was likely the borrowing in the Estimates.

When it comes to provincial finances since 2003, about the only surplus there’s been has been bullshit flowing from the provincial government’s spin machine.  The latest update is no different.

The provincial government’s financial truth deficit, on the other hand, continues to grow. 

- srbp -

One statement, three stories #nlpoli

Finance minister Tom Marshall delivered his fall financial update on Wednesday.  Thankfully they no longer wind up being called mid-year updates since they appear long after the middle part of the fiscal year.

Having successfully lowballed some of their numbers from the spring budget, Tom’s officials have produced a surplus – on an accrual basis – of what they figure will be more than $750 million.

The extra cash is due to higher than forecast oil prices coupled with higher than forecast offshore oil production.

“This surplus will be applied directly to debt, decreasing the province’s net debt to approximately $7.7 billion, which is a significant achievement,” said Minister Marshall. “There has never been a better time to live in Newfoundland and Labrador. A robust economy is producing record employment, income levels and consumer confidence. Having said that, we must remain prudent in our fiscal management as there are challenges on the horizon that we must face.”

In a media interview, Liberal finance critic Dwight Ball clapped the minister on the back for paying down debt and gave him a bollocking for not being able to forecast things more accurately.

New Democratic party leader Lorraine Michael gave Marshall a dressing down for not spending all the extra cash. it was so predictable a statement one wonders why Lorraine is still hogging the spokesperson job.

One statement.

Three stories.

Wonderful stuff, of course, except that everyone seems to have missed the one gigantic fib in the whole thing.

No one is reducing any public debt whatsoever.

Tom Marshall claims he will do it.  he claims in the media release that he and his friends have been doing it all along.

But it is complete nonsense.

You can tell it’s nonsense because both the news release and the financial update itself refer to net debt.

And as regular readers of this corner know, net debt is nothing more than an accountants statement of all that you owe less anything you have on hand you could sell off to pay the debts.

This extra bit of cash that’s just turned up won’t actually be used to reduce any debt at all.  Most likely it will be set aside to pay for – Lorraine will love this – to cover off an increase in spending next year or to help pay for some massive cost over-runs on this, that or another infrastructure project. SRBP went through the whole thing back in May when Marshall forecast that he would have a healthy surplus.  As it turned out, his forecast of a bigger surplus than originally forecast still lowballed the final result.

- srbp -

Disconnect in the Brain Housing Group #nlpoli

The provincial Conservatives are a weird bunch.  They want to fight the provincial debt by increasing it.

They are nominally Conservative but their spending of public money is anything but prudent.

Via labradore – who else? – come two posts and with them two pretty charts that show the change in government spending since 2003 (less debt-related spending).

That’s budgeted spending, above. 

The second chart gives the annual spending on programs plus the percentage change from the previous year.

Just keep those in mind whenever you hear a provincial politician talking about the Conservative’s great record on controlling public spending or, as labradore points out, Kathy Dunderdale’s whacked-out claims that the Tories have already reduced.

- srbp -

The Four Horsemen and government finances

Don’t be surprised if the provincial government issues a statement in the near future trumpeting an accrual surplus of several hundred millions.

Sure Tom Marshall isn’t ready to acknowledge what is going on, but it’s pretty hard to avoid making tons of money when those pre-Danny Williams oil royalty regimes meet Brent crude prices that are soaring to more than US$105 million based on Muammar Khaddafi’s willingness to slaughter thousands of Libyans in order to stay in power.

Oil prices and production levels are actually at the level where the Conservatives in Newfoundland and Labrador might produce a cash account surplus as well for the first time in a couple of years. That’s a good thing if only because it means the public debt won’t increase to record levels as it has under the Conservatives since 2003.

The question one must ask as we get closer to a provincial budget for the new fiscal year is how much longer the provincial Conservatives will continue to base public spending on windfalls due to war, famine, pestilence and death?

The Conservative banshees will likely start their usual screeching in the comments section at this point but the facts are plain in anyone’s face.  The Conservatives’ financial “miracle” has resulted not one teensy bit from anything they have done.  The enormous cash flow over the past five years resulted to one extent or another from political instability, economic crisis and all manner of calamities around the globe that drove oil prices to unprecedented heights.  Run those oil prices through the royalty regimes delivered before the Conservatives took power in 2003 and you have more money than the spendthrift Conservatives could actually spend.

Since 2003, the provincial Conservatives, led by first Danny Williams and now Kathy Dunderdale, have deliberately avoided sound fiscal policies.  Finance minister Tom Marshall and his colleagues have refused to create a sovereign wealth fund or to restrain public spending.  They have, in fact, willingly boosted spending to levels even they’ve acknowledged are unsustainable. 

Gross public debt remains at historic levels and, if Marshall is to be believed, there is little willingness around the cabinet table to take the sort of measures any prudent government would be doing in the face of dwindling oil production.  In other words, there’ll be no investment fund of the type found in other, responsibly run places, at least, not until Tom takes a hike to enjoy his fat pension on a Bermuda beach somewhere.

Now none of this actually comes as a surprise to the Conservatives.  Premier Kathy Dunderdale is aware enough of declining oil production – and hence revenue – but that seems to be only when she is faced with a reporter’s question about spending public on something  - like municipal bus services – that she obviously isn’t keen on.

But on things she wants, like Muskrat Falls, there is evidently no limit to Dunderdale’s willingness to spend other people’s money by increasing public debt and doubling electricity rates in the province.

In a few weeks’ time, Newfoundlanders and Labradorians will find out what Kathy Dunderdale and her colleagues plan to do with public money for the foreseeable future. Let’s see if Kathy Dunderdale defines her premiership by changing the pattern of financial imprudence she and her colleagues have maintained until now.

Odds are against any change to fiscal responsibility by the provincial government.  For starters we are in a pre-election period. And when that is done, we will still have the unresolved Conservative leadership.  No one will be willing to take any steps to turn off the money spigots when votes are at stake.

Just think of political expediency in a patronage-riddled political culture as the fifth horseman.

-srbp -

“Get fiscal house in order” first: analyst

An analyst with the Atlantic Provinces Economic Council told a conference in St. John’s that the provincial government  “has to get its fiscal house in order” before it makes an investment in any version of the Lower Churchill energy megaproject.

Fred Bergman said the province’s net debt to gross domestic product ratio remains among the highest in Canada at 41%.

Bergman is quoted by the Telegram [page four story, Wednesday November 3, not on line] as saying:

“Get your fiscal house in order, get your debt-to-GDP ratio down, get your budget balanced and then you can afford to tackle something like that.”

The Williams administration ran a half billion cash deficit in 2009 and budgeted for a $900 million cash shortfall in 2010.  Budget projections released in spring 2010 do not include any forecast for balanced budgets.

Finance minister Tom Marshall has previously consistently rejected balanced budget legislation.

In its various configurations, the Lower Churchill project could cost anywhere from $6.0 billion to $14 billion.

The following charts show the provincial government’s liabilities and net debt.  The vertical axis is in millions of Canadian dollars.

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Related:  “The Fragile Economy: staying the course”

Looking for a mid-year update at mid-year

September marks the middle of the provincial government’s financial year.

Makes sense, then, that the provincial government should issue a mid-year financial update update in September or maybe October. But these days, when the administration led by Danny Williams doesn’t like to spend any time in the House of Assembly, it’s not unusual to see the mid-year update delivered in December.

Strange then that the newspaper covering the electoral districts held by both the Premier and the finance minister is asking to see that mid-year update now, when it ought to be delivered, instead of December when the finance minister will deliver it.

The people of this province are used to red ink when it comes to provincial budgets of the past but balanced budgets have also become commonplace in recent years.

This province managed better than most jurisdictions during the worldwide recession but the time has come to clean up the books and get back to paying our bills when they are due.

Finance Minister Tom Marshall should get his figures in order and tell taxpayers where we stand at the halfway mark and where we can expect to end up when the year is done.

Maybe they suspect something is amiss in Marshall’s books.

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Williams to continue unsustainable spending

In his first public statement since coming back to the province after heart surgery, Premier Danny Williams confirmed the provincial government will continue spending public money at a level his finance minister has described as unsustainable.

According to Williams, a balanced budget is no longer a target for his administration.

Williams said it was important to keep “momentum” going in the province. 

Take-away:

1. We are in a pre-election - if not a pre-leadership -  period in which any sound fiscal management goes out the window.
2. Williams correctly identifies provincial government spending as the source of economic activity on the northeast Avalon.  As BP readers know, oil hasn’t been driving things in the metro area, contrary to public belief.

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Net debt and liabilities

In the next of this series of snapshots of the provincial government’s financial state, let’s take a look at few more charts.

First, there’s net debt.  That’s the sum of assets less liabilities.  This table was taken from data compiled by RBC economics from provincial budget documents going back to 1981. The scale on the left is measured in millions of Canadian dollars.

That big jump in 1993-1994 can be directly attributed to changes in federal transfers instituted to deal with the federal government’s financial problems and the recession which had begun three years earlier.

The jump in 2003 is one your humble e-scribbler can’t readily explain and there seems to be some discrepancy in the government’s financial statements.  RBC has used the second set of figures but there seems to have been a revision done in 2004 to the figures for the previous year.

The big drop over the two years between 2006 and 2007 is attributable to one thing and one thing only:  a doubling of the provincial government’s financial assets, basically represented by temporary investments. That’s all oil royalties flowing from  deals struck before 2003.

So when you see the provincial government crowing about debt reduction, they are really talking about the increase in cash they have, not the real reduction in liabilities. There is $1.8 billion in temporary investments held by the provincial government directly and another pile of cash and on-financial assets in various agencies and Crown corporations that brings the total assets up to $4.4 billion.  The $12.4 billion in liabilities minus the $4.4 in assets gives you the current net debt of $8.0 billion.

That’s clear from the second chart which shows only the liabilities as presented in the Public Accounts from 1998 to 2008.

The dip in liabilities in 2007 into 2008 comes from a drop in the unfunded liability in public sector pensions.  That number was cut in half by a combination of spending by the provincial government starting under Grimes and continuing under Williams.  But the biggest part of the drop is directly attributable to the $2.0 billion one time payment from the federal government in 2005.

Now some smarty-pants will notice that there hasn’t been a huge drop since 2005 that would equal the $2.0 billion plus a few more contributions that brought down the unfunded liability.   Well that’s because there have been some other liabilities incurred since 2005, like some new borrowing.  Overall, though, there has been a reduction in the total liabilities with the biggest reduction being the change in unfunded liabilities. 

Incidentally, that pension liability is still there but there is now cash to deal with it. 

Now as a last chart, let’s take a look at the net borrowings numbers.  We looked at the net borrowings per capita, but let’s look at the actual net borrowing figures for the past decade. Remember that  net borrowings are the total amount borrowed less any money set aside to pay the debt when it comes due.

Net borrowing is about a billion dollars higher than it was a decade ago.

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Net borrowings up since 2000

 

Net borrowing per person is higher now than it was in 2000, according to the province’s audited financial statements.

In Fiscal Year 2000, net borrowings  - accumulated borrowing less money set aside to pay off debt when it comes due (sinking funds) – stood at $10,684 per person in the province.

The number hit $13,074 in 2004 and has stayed in the same neighbourhood ever since.  Part of the reason for that is a drop in population since 2004.  The other reason is the increase in net borrowings since 2000.  Net borrowings increased in the period from $5.8 billion in 2000 to $6.6 billion last year.

 

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Indebted to Ottawa

The provincial government owes the Government of Canada more than a half a billion dollars in a combination of overpayments for federal transfers and a loan received in 2005.

That’s according to figures contained in the provinces audited financial statements known as the Public Accounts. The federal debt for 2008 was $535,150,000 down from $568,247,000 in 2004.

But in  Fiscal Year 2004, the total amount owed to the federal government stood at $191 million, made up entirely of accumulated overpayments for Equalization and health and social transfers.

In the way the transfers are made, overpayments occur for every provincial government and every provincial government has some level of debt from this source. The overpayments result from the difference in using estimates of taxation and population to make calculations in advance and then comparing those with actual performance calculations made after the payments are set and dispersed.

In Newfoundland and Labrador’s case, the provincial government  - and some other provinces – took advantage of a federal interest free loan in 2004.  Under a measure announced by then finance minister Ralph Goodale, provincial governments who had qualified for Equalization in the preceding the years could qualify for an interest-free loan from the federal government. 

Newfoundland and Labrador received a loan of $378.4 million.  About $100 million of that has been repaid.

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Dead companies still on government asset books

The provincial government is still carrying shares in two dead companies on its books as assets even though the companies are now out of business and the chances of recovering any cash from them is virtually non-existent.

A total of $1.0 million in shares in Consilient and SAC Manufacturing are still listed as investments in Volume II of the Public Accounts, the audited financial statements for the provincial government.

SAC Manufacturing went out of business less than six months after the provincial government injected a half million dollars into that company.

Consilient, a high technology company, went bankrupt last year. it was featured in a report by the province’s auditor general on investments that, among other things, lacked adequate documentation and security.

Unlike past years, the Public Accounts section that includes these companies doesn’t contain any notes on existing holdings and any new ones acquired during the year. There is only reference to $3.3 million being available to write-off bad investments. 

There is no indication any of the investments have been written off. 

That’s despite a note in the 2008 audited financial statements which said the half million dollars for SAC Manufacturing would be written off over a year ago:

During 2006-07, the Province acquired 500 Class “B”Common shares at a cost of $500,000. Commencing in June 2007,
these shares are conditionally redeemable based on after tax earnings. All shares must be redeemed no later than 19 December 2016.

During 2007-08, the company ceased operations and, as there is now no reasonable prospect for redemption of these shares, the full amount of the investment has been included in the provision for investment write-downs.

That’s not the only peculiarity in the recent work by the auditor general about one of these companies. 

An omnibus report on previous audits, released in November 2009, made up the recommendation related to original audit.  The report replaced the original list of five suggested changes and actions with one that wasn’t made originally.  The AG then reported that the innovation department was making progress on the phony recommendation.

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Oil royalties down 57% from 2008; 15% below budget so far for 2009

Forget the bubble, the imaginary protection Newfoundland and Labrador supposedly enjoyed from the global recession.

Forget any prospect of another windfall year in 2009 like the one in 2008.

The prospect of a balanced budget  - let alone a slashed deficit - could be dim if provincial oil royalty figures thus far in the fiscal year hold true to the end of March 2010.

According to figures released by the federal natural resources department (NRCAN), Newfoundland and Labrador averaged $89.6 million a month in oil royalties for the first five months of 2009. 

That’s about 57% below the average monthly 2008 oil royalties, based on $2.5 billion over 12 months.

It’s also 15% below the projected oil royalty figure contained in 2009 Estimates.  If that trend continues, the provincial oil royalties would come in at around $1.08 billion instead of  the $1.262 billion forecast in the Estimates. 

Budget 2009 projected a $1.3 billion cash shortfall on a cash basis (The Estimates) and a $750 million shortfall on an accrual basis (The Budget Speech).  In 2007, the current provincial government quietly reversed the practice established in 2003 and began to report the province’s budget using both accrual and modified cash accounting.

Without significant changes in other revenues, dramatic spending cuts or a combination of both, it’s going to be tough for the provincial government to avoid a deficit this year and it may well wind up with a larger deficit than forecast.

While other areas of the economy may be performing better than expected, it’s doubtful they be able to generate the added revenue for the provincial treasury  that came from oil within the past few years. 

Borrowing would seem to be inevitable, whether it was borrowing from banks or borrowing from the $1.8 billion in temporary investments the provincial government had on hand last spring.  Some of that $1.8 billion is committed to other projects, however.

The table below shows the monthly oil royalty figures for April to August 2009 as well as the offshore oil production from April to September and the average royalty per barrel for each month. 

Month	Royalty  ($)	Production (barrels)	Average royalty amount per barrel ($)
Apr	94, 344, 222. 11	9, 116, 213	10.34
May	77, 970, 776. 28	6, 915, 304	11.25
Jun	97, 572, 585. 54	7, 374, 739	13.23
Jul	89, 287, 050. 27	8, 629, 918	10.34
Aug	49, 851, 328. 75	6, 537, 149	7.62
Sep	N/A	6, 164, 839	N/A
Total	448, 461, 684. 47*	44, 738, 162**	N/A
Average	89, 692, 336. 89*	7, 456, 360**	N/A

* First five months

** Six months

The August royalty total is particularly low due to decreased production at White Rose for planned maintenance. The September figure may also be low due to scheduled maintenance. 

The production figures are taken from the Canada-Newfoundland and Labrador  Offshore Petroleum Board website.

Bond Papers tried unsuccessfully to get the information from the provincial finance department before contacting NRCAN.

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Verbal tics (5) and wandering into a math minefield

Two things stand out from this scrum by the Premier and finance minister a little over a week ago. [CBC video link: “Premier Danny Williams and Finance Minister Jerome Kennedy respond to the latest from the nurses union. The union said Friday that it would not return to negotiations until its strike vote is completed.”]

First, Danny Williams utters only 11 of his now famous “you know” verbal tics in the entire nine minute scrum.  He racks up a mere four in the first two and a half minutes and only hits 10 by the end of four minutes.

Either he’s much more comfortable with this subject – the nurses’ labour negotiation – than he was with other subjects or he’s been doing some anti-tic practice in the past couple of weeks.

Second, finance minister Jerome Kennedy gets himself into a bit of a pickle when he brings up the projected deficit.  He puts the shortfall at about $500 million based on assumed production levels and assuming CDN$50 per barrel for oil and then adds on the $400 million from loss of the Equalization option.  We’ll grant him that even though it’s a bit of a fiction.

Then Kennedy starts down the dangerous road, mentioning the need to allow for “growth”.

How much growth?

Six per cent.

6%.

Or put in other terms about six times the rate of inflation.

That’s pretty typical for an administration that has been known to ratchet up spending by about 14% annually in some years.

So even with oil prices down, mines in limbo and mineral revenues down drastically, a thousand people out of work in central Newfoundland who knows what else, the government is actually planning to increase overall spending in 2009 by six per cent.

That alone would whack $400 million or so onto the deficit all by itself.

Looks like all that the federal changes to Equalization did was take away the convenient federal transfer that would have covered some of that planned unsustainable increase in public spending. Now they just have to stick it on the provincial Amex card.

But still, if you look at where Kennedy headed as he wandered into that mathematics minefield, we are looking at government booking a $1.2 billion deficit this year, the largest in the history of Newfoundland and Labrador, before or since 1949. 

In fact, in one single budget, these guys sound like they are going to add more debt to the shoulders of Newfoundlanders and Labradorians than the entire debt millstone that sank the country in 1933-34.

If you go back and look at the assessment by PriceWaterhouseCoopers in 2004, the projected deficit for next year – based on the finance minister’s own numbers – will look worse than anything in that document.

That probably explains why Kennedy’s voice trails off at the end of his discussion of the coming deficit.  he realised what he’d said.

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Province takes shares for cash

The provincial government took shares rather than provide loans with eight of the companies identified by the provincial innovation department last year has having received cash under its commercialization program.

One of the share purchases – for Virtual Marine Technologies – was subsequently converted to a repayable loan.  VMT  received $450,000 of the half million it was originally supposed to received.

According to notes in the audited financial statements, "[t]he Province purchased 5,000 Class A common shares at a cost of $500,000. Of this total, $450,000 had been advanced as at 31 March 2008, with the balance held back pending delivery of certain financial information which remains outstanding. Subsequent to 31 March 2008, the equity investment was converted to a conditionally repayable loan. The 5,000 common shares were then cancelled and returned to the company."

According to a Telegram report in 2008, only three of the 10 cash injections was ever announced publicly. One – cash for MedicLink  - was announced in the House of Assembly while two others were featured in government news releases.

According to the audited public accounts for 2007, the provincial government took shares in:

• Jackman Brand Marketing ($125,000 for 1250 Class B shares),
• Pixecur Technologies a.k.a. DataSentinel ($400,000 for 4,000 preferred shares)
• Dockside Appetizers ($31,000 for 310 common shares)
• Mediclink ($352,000 for 3517 Class A shares),
• NewLab ($500,000 for 5,000 Class A shares),
• Northern Radar ($375,000 for 3479 Class A shares),
• Virtual Marine Technologies ($450,000 for 5,000 Class A shares), in addition to the $500,000 in shares in
• SAC Manufacturing.

With the exception of SAC,  all companies remain going concerns. NewLab merged with Newfound Genomics in 2008.The government did not take shares in a company manufacturing a pet restraint system for cars.

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