Update to the Budget Forecast
Posted January 17, 2014
New Finance Minister Whalen’s first official outing was sensible and constructive. It predicts a budget deficit of $482 million, compared to the wafer thin surplus projected in the NDP budget and its August update. Better transparency will lead to better decisions.
Voters can anticipate with considerable certainty that a new government will find things less rosy than their predecessors. This was even more true in 2013, given the shenanigans the NDP had created to reach their number.
Nevertheless Minister Whalen chose not to engage in partisan sniping, even when reporters threw up lob ball questions that begged her to do so. She simply laid out the facts and showed a good grasp of the relevant policy issues.
The biggest source of change was an increase of $280 million in the Pension Valuation Adjustment (PVA). Done at the request of the Auditor General, this was simply an acceleration of amounts that would otherwise appear in later years with respect to the Public Service Plan (PSSP). There is no impact on the actual obligation of taxpayers, and no cash is being disbursed because of this accounting change.
The second major source was prior year adjustments which reduced revenues in the 2012-2013 year by $125 million. Adjustments of this magnitude are not uncommon on a revenue base of $9.5 billion. On the other hand it strains credulity that none of these adjustments were visible to the prior government at the time of their August update.
Neither this nor the PVA are recurring items. Combined they amount to $405 million so leaving them aside the ongoing deficit is less than $100 million. Bringing that to a surplus position is not an insurmountable challenge, particularly with a generally improving North American economy.
Lowering taxes is important to the province’s attractiveness for both people and businesses. But the Minister was entirely correct to cancel the planned reduction in HST until the books are in fact balanced.
The Liberals made some costly election promises, particularly on education. It remains to be seen whether their tepid undertakings on fiscal matters was prudence or an indication that they are unwilling to make needed tough choices.
They made clearer commitments to improve transparency. The prime opportunity for that is the mysterious number called Pension Valuation Adjustment.
It tends to be a large and volatile number, and can be bigger than the total cost of many government ministries. It represents the change in value of what taxpayers will have to pay for future benefit promises, to the extent that they are underfunded. Notwithstanding its name it includes items that are not related to pensions, although they mostly post-retirement benefits.
The total cost of those benefits, illustrated below for the year ending March 31, 2013, is not visible in any of the published statements.
Even when separated into its pieces the PVA by itself is not a helpful number. But combined with the cash outlay it tells us a lot.
We learn that the annual cost of the MLA pension plan was $4.3 million. About half of that is for the 52 active MLA’s, an average of more than $40,000 each.
The Non-Pension Benefits are almost non-existent in the private sector.
They cost more than the combined departmental budgets of Agriculture, Environment, and Fisheries and Aquaculture. For the same money we could build between five and ten new schools, or eliminate the deficit.
A second problem with the PVA is that it does not provide a helpful disclosure. The accounting rules force funding deficiencies to be recognized very slowly, unless a change in the plan is made. That is why there was still so much left to be charged with respect to the PSSP.
It is bizarre that in a year when the previous government took the needed steps to fix the PSSP the result was a $280 million additional accounting charge. No good deed goes unpunished by the accountants. Fortunately there will be no future PVA’s for the PSSP.
Correspondingly the charge shown for the Teacher`s Pension Plan is a huge understatement. The total liability accrued so far on the province`s books is $348 million. But the Pension Plan`s own financial statements show an unfunded liability of $1,679 million. If nothing changes most of that will be shouldered by taxpayers.
Each year`s Budget documents and Public Accounts should include, in the name of transparency, a table of the form shown above. If so taxpayers should applaud the disclosure.
Most importantly, the Liberal government should address the Teachers’ Pension Plan crisis, following the precedent established by the Public Service Plan. When they do, taxpayers should provide a standing ovation. And they should expect another large extra accounting cost. As long as it is the last one we should be glad.