NL Auditor General notes poor fin mgt practice

From September 2002 until March 2009, Government had been preparing periodic financial statements to show the Province’s results of operations and financial position.  Officials of the Department of Finance indicated that these financial statements were only distributed to the Minister of Finance/President of Treasury Board, other Treasury Board Ministers, the Deputy Minister of Finance, the Comptroller General, various officials of the Department of  Finance, and the Auditor General.  Officials of the Department of Finance advised that for the year ended 31 March 2010, periodic financial statements
were only distributed to the Deputy Minister of Finance.

From the Auditor General’s report on Fiscal Year 2009.

Fin minister Tom Marshall talks debt reduction - audience pees in pants with stifled giggles

According to voice of the cabinet minister, provincial finance minister Tom Marshall is interested  - again – in talking about the provincial debt.

Here’s a excerpt from the VOCM online story, quoted here since it may have been disappeared by the time this gets posted:

Marshall proposes several measures in doing so. First, the government needs to balance sustainable and prudent spending with the implementation of steps to lower taxes and net debt. He says the province has to maximize the benefits from its non-renewable resources now so that it is prepared for when they are depleted. Finally, he argues that it is important to diversify the economy, such as focusing on the Lower Churchill Project.

Marshall’s talked about sustainable spending before but only to the extent of making clear he wasn’t the teensiest bit interested in actually doing it. In fact, Marshall’s record is of a profligate spender who never met a deficit he didn’t like.

And just to get the point across, note that current provincial gross debt is about $12 billion.  That’s roughly where it’s been for the past four years and it higher than it was in 2003 when Marshall and his crowd took office. 

Tom mentioned lowering the net debt.  Well in order to do that he’d have to stop overspending as he’s done the past two years.  According to the most recent financial statements, the province’s net debt went up in 2009 and it is set to go up again in 2010 (the current fiscal year) if current trends hold.

So while that whole “sustainable and prudent spending” thing is a great objective, Tom and his friends haven’t done it yet.  After seven years, Tom’s got to have cajones the size of watermelons to talk about debt reduction and fiscal responsibility with a straight face, expecting the people in the province to take him seriously.

Ditto the part where he talks about maximising benefits from oil and minerals.  Tom and his former boss specifically rejected any suggestions to set aside sovereign wealth funds, real debt reduction and any other ways to accomplish the goal of putting the money from oil and minerals to work for the future.

And double ditto for the bit about diversifying the economy.  The current fragile state of the provincial economy is a direct result of provincial government policy since 2003. 

That leaves the Lower Churchill.

Reducing net debt, right?

Okay, Tom Marshall’s current plan is to force taxpayers to borrow at least $3.0 billion and put a total of about $6.0 on the provincial government’s gross debt load.

Tom also wants ratepayers in the province to accept electricity rates roughly double what they are currently to pay for electricity.  Can you say “uncompetitive” boys and girls? 

And he’d like to ship power free to Nova Scotia for 35 years.

Surplus power would enter the market at uncompetitive rates so the chances of export are pretty much slim and none as it now appears.

Given all that’s going on in the province and what Tom Marshall and his pals have actually done since 2003, the finance minister’s audience on Thursday must have peed in their pants with stifled laughter as he rambled on.

Surely no one would take Tom seriously, not with all the evidence against him.

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The finance minister who loved deficits

Give finance minister Tom Marshall credit for one thing is nothing else. 

Tom told a CBC Radio Morning Show [audio file]audience in St. John’s on Wednesday the God’s honest truth about oil royalties and recent windfalls;  Danny didn’t do it.

Those royalties are a function of three things, according to Tom:

• price
• production, and
• the relative value of the dollar. 

And, sez, Tom, those are things the provincial government doesn’t control.  Regular readers of these e-scribbles will be familiar with the idea.

So there you have it, straight from an authoritative source:  Danny didn’t do it.

But the interview on Wednesday was also a chance for Tom to slip back into his regular routine of saying one thing that sounds sensible, all the while denying the insensible stuff he’s actually doing as finance minister.

He told CBC that:

"It would be a travesty if we don't use this windfall we have, this oil — which will be gone one day — if we don't use that to get rid of this massive debt that our people and our governments have accumulated," …

Only Tom Marshall could say that with a straight face. 

Don’t misunderstand:  not using the oil windfall to reduce the public debt burden in this province should be one of the provincial government’s main uses for the gigantic oil windfall.

The funny part is that the provincial government has been doing just the opposite of what Tom said.  He got the verb tense wrong and he ought to know it.  It is a travesty that the provincial government has not been using the oil windfall from the middle part of the decade to pay down the huge public debt. 

Not “would be”.

“Is”.

Tom Marshall, finance minister, has consistent refused throughout his entire term of office to accept any suggestion that would significantly reduce public indebtedness.  Marshall has been very clear about his desire to retain the right to overspend the public accounts free of any fetters:

I certainly would agree with fiscal responsibility legislation … but I'm not prepared to be locked in automatically to a balanced budget every year," he said [in April 2007].

The most he’d accept, apparently,  is a law that said balanced budgets might be an interesting idea.

Then Tom went right on jacking up spending whenever he could.  In fact, he boosted it up so high and so far that people have called the current financial state of the province as unsustainable.

Who said that?

Well, not just your humble e-scribbler.  There was – according to Marshall himself - an analyst for Moody’s bond raters who questioned the sustainability of public spending. Then there was a cabinet minister who muttered the word as he left cabinet.

And most recently, an analyst for the Atlantic Provinces Economic Council warned that the provincial government needed to tackle its massive debt before it started thinking about piling on even more debt for an energy megaproject.

That would, of course, be the massive increase in the public debt Tom Marshall and his colleague’s announced a week and a bit ago.

Tom Marshall:  debt fighter.

Or not.

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Why he’s heading south…

People are wondering why Danny Williams is heading south so quickly.

Well take a gander at finance minister Tom Marshall’s budget update and you can get a good idea of one possible cause.

Last spring’s budget forecast a cash deficit of slightly under $1.0 billion.  If you look at the forecast increase in net debt of close to $500 million, you can ballpark the cash shortfall to be at least that much. That’s about where things came in last year.

Marshall is claiming a surplus for his last budget, but people have to remember he isn’t talking about cash flow.  Under cash accounting, revenue and expenses are recorded when they are received or paid.  You can wind up showing an accrual surplus but have to head out and borrow money to cover the cash payments needed in a given period of time.

For those who keep track of these things, by the way, the provincial government now reports its finances on both a cash and an accrual basis. In 2007 they switched back to showing the annual estimates on a cash basis, but they left the budget speech projections under the accrual method of accounting.

Media reports are likely to focus on the rosier number coupled with Marshall’s claim that last year will look better than originally forecast.  But conventional media won’t wade into the deeper picture. For one thing, it’s much harder to understand. They are likely to stick with the same sort of bumpf they’ve been feeding people for the past week or so about a deal on the Lower Churchill.

There are some modest increases in revenue:

• provincial income tax is $31 million above estimate;
• corporate income tax is about $165 million above estimate;
• oil royalties are $65 million over estimate (they were a wee bit optimistic on price);

Spending is expected to increase by about $76.4 million although the news release pegs it closer to $100 million.

As for that diversified economy thing Marshall mentions in the news release, let’s just quote a famous politician and say that nothing could be further from the truth.

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The Dismal Science: Debunking the “federal presence” fairy tale

Far from being hard done-by when it comes to federal jobs in the province, Newfoundland and Labrador is pretty much on par, according to a recent study conducted by the Frontier Centre for Public Policy, and reported by the National Post.

You can find a news release summarising the report here, while the full report is available in pdf format.

Some provinces  - Prince Edward Island, New Brunswick, Nova Scotia and Manitoba – have significantly more than the national average number of federal jobs per 100,000 population.  Quebec, Saskatchewan, British Columbia and Alberta have less.

Newfoundland and Labrador and Ontario are only slightly higher than the national average.

The study effectively refutes claims that this province is receiving something less than its “entitlement’ to federal pork spending.  The comparative figures also demolish two reports released by Memorial University’s Harris Centre in 2005 and 2006.  The provincial government has used those studies repeatedly to bolster its claims for increased federal transfers to the province to offset what turn out to be imaginary grievances.

The Frontier Centre study refers to these federal jobs as a form of “stealth” Equalization.  That is, they contend that the federal jobs serve as a type of federal transfer to the local economy in each of the provinces. More importantly, though, the Frontier Centre contends that the transfer comes in addition to the formal Equalization program and is particularly heavy in the provinces it refers to as “major” have-provinces.

The study also notes that the have-not provinces with the highest ratio of federal government jobs also tend to have higher than average reliance on provincial public sector jobs generally. They compare provinces based on the number of public sector employers as a share of the total population.  Newfoundland and Labrador is third highest on that scale, with Prince Edward Island and Manitoba coming, respectively, first and second.

Looking at the same information but as a share of the provincial labour force, Newfoundland and Labrador is by far the province with the largest dependence on the public sector.  Almost 30% of the provincial labour force is employed by the federal, provincial or municipal government.

The Frontier Centre study puts the findings into a particular context, namely transfer payment reform:

The stealth equalization of unbalanced federal employment described in this paper is part of a much bigger problem —an approach to public policy in Canada that transfers money out of high-productivity regions into low-productivity regions.

Not only is this policy approach harmful to our productivity growth, it is also, quite simply, unsustainable. Historically, the taxpayers in three provinces—British Columbia, Alberta and Ontario, have paid most of the bill for high levels of public sector employment in the have-not provinces.

At the same time, the study does point to issues that are especially relevant to Newfoundland and Labrador, even if the report’s authors simply missed the poster child for their argument of unsustainable public spending and the dangers of reliance on what the author’s call “the state driven approach to economic development”.

Most residents of the recipient provinces are unaware of the extent to which their economies are state-driven and reliant on transfers. Beyond the official equalization money, massive amounts of revenue from elsewhere flow into these provinces from a number of different sources. Stealth equalization through federal employment is one important example—but there are others. Higher dependence on federal
government transfers to individuals and discrimination in ordinary  operating programs in favour of the have-nots are two more examples of ways Canadian public policy transfers wealth into the have-nots.

Most residents of Newfoundland and Labrador are unaware of the extent to which the provincial economy is state-driven and reliant on federal transfers in addition to overall public sector spending.

They aren’t alone, of course.  The current provincial administration operates as if going off Equalization was a tragedy of biblical proportions.

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Related: 

• Fragile Economy:  staying the course
• Fragile Economy:  reductio ad argentum
• Fragile Economy:  The public sector
• Fragile Economy: …and two steps back
• Fragile Economy: …now three steps back and loving it

NL population drops in Q2 #cdnpoli

Newfoundland and Labrador was the only province to experience a population loss in the second quarter of 2010, according to figures released Wednesday by Statistics Canada. The cause is primarily net interprovincial outflows, in other words outmigration. That’s also the first drop since 2008.

While the provincial government issued a news released last quarter trumpeting the gain of a mere 96 people, you are unlikely to see a release like it this month talking about a drop three times the size.

Here’s what the past five years looks like, by quarter.

Now it could be nothing at all but a blip.  Then again, it could be a sign of things to come.  Note that for the last three quarters the rate of growth has dropped dramatically.  That suggests the steam was going out of things and that the Q1 results were the peak of the curve.

You can see that more clearly if you look at this chart:

In less than a year, the province went from gaining 130 people in a quarter to losing 300.

And actually, this could also mean that the North American economy is on solid footing.  The change in migration patterns for Newfoundland and Labrador in Q3 2007 actually heralded the onset of the recession.  A long-term analysis of provincial population suggests that the population grows shortly before major recession.  Those are all people working elsewhere with relatively weak ties to the community who opt to come back to the province to weather the economic storm.  When things pick up, they head off again.

And as much as the province’s finance minister may like to believe otherwise, odds are that is what’s going on again.

Great news, wot?

Well, not really. The longer term demographic problems that come with that aren’t ones the current administration and its unsound financial and economic management are not ready to cope with.   Not by a long shot.

Don’t forget that in this pre-election and pre-leadership period, you can bet the government won’t be willing or able to do much to start adjusting to cope with the harsh reality of the economy and demographics.  In fact, the next 18 months are basically a write-off for serious government decisions to deal with the problem. 

On top of that you can forget the period between the election and whenever the new Premier arrives to replace the Old Man. And if that doesn’t wind up happening happen until a couple of years before the 2015 election you can almost write off dramatic policy shifts until that election is history as well.

Wow.

Not to worry sez you.  There’s oil.

Sure there is.

Unfortunately, production and royalties won’t be able to cope with the demand for added revenue.  There’s not much else going on to take up the slack and for good measure, the current administration plans to use oil money to fuel increases for education and health care and use exactly the same money to build the $14 billion Lower Churchill project.

Here’s lookin’ at you, kid…

…as you leave the province again.

At least we’ll always have Ottawa.

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The Fragile Economy: staying the course

“Obviously, I don't like to run deficits, but if I've got to fight a recession ... if we've got to get the economy booming again, then I'm not afraid to spend money and we're not afraid to lower taxes to stimulate the economy - that's good public policy.”

Finance minister Tom Marshall often speaks about one thing and does another.  He’s famous for trotting out a debt clock during one budget consultation farce only to deliver a budget that did nothing to reduce debt.

This year Marshall has been trying to pass off deficit spending as if it was something new for this administration.  It isn’t. They’ve run cash deficits in all but two years since 2004.  If their current forecast holds, they will be adding a considerable amount of debt for the foreseeable future.

Adding debt is just staying the course for the Williams administration.

Premier Danny Williams himself has dismissed balanced budgets as meaningless. Marshall explicitly rejected any action like balanced budget legislation or having a debt reduction policy.

Marshall’s predecessor as finance minister - Loyola Sullivan  - talked about balancing the books on a cash basis – he only did it once – and possibly not balancing the accrual books for a number of years.  That was back in the early days of the administration when it looked like they were actually going to deal with some of the provincial government’s financial woes. But even for all that notice debt got within the first couple of years after Williams and the Tories took office,  they were willing to rack up additional public debt.

Since we are discussing debt, let’s dispose of one of the finance minister’s more laughable claims from budget day:

“But we have cash to pay for that deficit. We will not increase our borrowing. Our debt will go up, but we don't have to borrow for that.”

On the face of it people may well wonder how you can increase public debt while not borrowing money.

The answer is pretty simple and it goes to the heart of the public debt charade Marshall and his colleagues have been foisting for the past few years.

Marshall covered the half billion shortfall in 2009 from temporary investments – extra cash – the provincial government had on hand.  He didn’t have to go to the banks and negotiate a loan but he sure as heck borrowed the money:  he borrowed it from taxpayers.

As for the debt, what he is referring to is net debt.  Now for those who may not know, net debt is a calculation of what is owed compared to assets – cash, property and so on – that could theoretically be sold off to pay down the money that is owed.

Those temporary investments that the provincial government racked up over the past couple of years helped to make it look like the public debt had been paid down. That’s because they are exactly the sort of assets that would have bee used to figure out the net debt:  liabilities less assets.

So when Tom took the cash and spent it, the net debt could only go back up.  The net debt will go up again next year and the year after and any other year Tom winds up having to cover off over-spending.

Just remember, though, that the total liabilities haven’t changed much in the past few years. You can see that from a post last December on net debt and liabilities and in another post on net borrowings.

This is not a subject the Fan Clubbers like to talk about but it is real. it also just happens to be one of the major financial problems facing the province that isn’t being addressed by the current administration.

Just to give you a sense of how much the past two budgets have followed what we could call the Williams administration debt addition policy, take a look at just the current account spending since 2003.  That’s the money that pays the heat and light and delivers the services and salaries every day of every year. 

And just to really keep it in perspective think of it this way.  You can have a great net debt because you have a nice house, an expensive car and some jewels that could possibly be sold off if the bank called all your loans. 

But since the house and the jewels don’t generate any cash each year they don’t help you pay the bills today.  If you can’t afford food without whipping out the credit card you could be in a situation of being cash poor. Lots of nouveau riche business types are leveraged to the max.  They drive flashy cars but they don’t really have a copper to their name. So without considering the cash deficit, the net debt could be a very misleading figure.

Anyway, take a gander at this table.  It shows the percentage increase in current account spending every year from 2003 to the current budget.

Fiscal Year	Percent increase from previous year
2004	Zero
2005	5.3
2006	4.6
2007	8
2008	7.8
2009	10
2010 (forecast)	7

That’s right.

Except for that first year, there’s never been a time when current account spending didn’t go up by at least twice the national rate of inflation.  In some years spending shot up three and four times the rate of inflation.

This sort of spending is unsustainable.

This sort of financial state – all that spending coupled with all that untended debt – is unsustainable.

There are other consequences to the Williams administration economic policy, consequences that will become more obvious as this new series – The Fragile Economy – rolls out in the days ahead.

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Great Moments in Sound Financial Management

Tom Marshall in 2008 on the need for balanced budget legislation:

“I would like to see us come forward with some fiscal responsibility legislation that would make it a commitment of every government to ensure that, as a principle, we budget for a balanced budget, recognizing it won’t be possible to always have a balanced budget,” said Marshall. “And, if we can’t balance the budget, there would be an obligation on the government to explain and disclose to the people of the province why it didn’t happen and to disclose a strategy to ensure we get back to a balanced budget over a certain period of time.”

Marshall prefers to have balanced budget legislation that doesn’t require balanced budgets.

At least Tom is consistent.  From 2007:

"I don't know if I agree with balanced budget legislation," Marshall said.

"I certainly would agree with fiscal responsibility legislation … but I'm not prepared to be locked in automatically to a balanced budget every year," he said.

Not surprising then that government spending up to know has been unsustainable and  - dare one say it? – not very sound or responsible.

We know because the current finance minister told us.

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Blooms and roses

News reports about a climb in the number of jobs across the country buried a key aspect of the story, as in this example from the Globe.

But there was a catch. Much of the private sector has yet to start hiring again. The job growth was due to 36,000 positions added in the public sector, while the private sector shed 17,100 jobs, in sectors such as transportation, professional services and accommodation. Private sector employment has dropped 3.9 per cent over the past year.

That was paragraph four, long after the stuff about huge gains and ones bigger than expected.

Now this is a rather interesting revelation in light of economic developments in Newfoundland and Labrador.

You see the boom on the northeast Avalon isn’t being fuelled by the offshore.  It’s coming entirely from massive increases in public sector hiring, public sector wage increases and a huge jump in public sector spending.

The most recent round of ‘stimulus’ spending for capital works is just more cash in on top of the gigantic increases in public spending over the past four years. That would be the “unsustainable” ones for those who missed the drama of the past few weeks.

Incidentally, the guy who revelled in boosting spending beyond the levels that the economy could support is back in charge of the cash box.  He proudly noted for listeners of one local call-in show that the province currently outspends Alberta on a per person basis just as it has done for most of the past decade and a half.

Yet for all that, the province just shed 4200 full-time jobs between August and September 2009 and there are 3100 fewer full-times jobs this September compared to last.

All this should lead people to be a bit cautious about predicting the end of the recession and the quick return to happier times. 

Here in this province, the current provincial economy is sustained by huge levels of public sector spending.  But that just isn’t going to work given the anticipated drop in oil production over the next four years.  Even if the global economy rebounds, crude oil prices aren’t likely to hit levels double and triple what they are today:  that’s the sort of prices the provincial government would need to keep up its current spending.

No one should be surprised, therefore, that the premier and his new health minister – the guy who used to be finance minister – just headed out to a by-election and pulled a fast one on the locals.

Come help us figure out cuts to the building cost, they said, so you can keep lab and x-ray services.  What they didn’t point out is that the savings needed are not the $200,000 in annual operating costs but the millions in construction costs.

In Lewisporte, for example, estimated costs for the new combination seniors home and acute care clinic skyrocketed from $22 million to $42 million before they even got to thinking about putting the first shovel in the ground.  In order to contain costs, government scrapped the acute care bit for a saving of $10 million.

But do the math. 

In order to restore the acute care centre and its anticipated cost of $10 million, the locals in Lewisporte will have to cut out one third of the beds – at least – in the new chronic care centre in order to get laboratory and x-ray service back.

So where are those old people supposed to go?

That’s a very good question.

Too bad the current administration doesn’t have an answer even though the problem and a viable solution have been available  - but ignored - for over a decade.

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