Uncounted Costs
Posted December 12, 2014
Finance Minister Whalen’s fiscal update on Thursday is a reminder that strong medicine is needed to bring the province’s finances back to health.
In spring she called for half the vacant civil service positions to be filled. This is like the NDP’s pledge to reduce the civil service by 10% through retirements and attrition. That never happened because they never came to grips with what functions they were prepared to decrease or discontinue.
Likewise, Ms. Whalen has not told us if she is willing to see fewer prosecutors, social workers, environmental inspectors, and so on. There may be small savings possible through greater efficiencies but to balance the budget will take big policy choices. That was made clear by Laurel Broten’s report released in November.
Governments often make important policy decisions without having any real idea of the costs. Sometimes it is not clear whether that ignorance is intentional.
For example, the NDP decision to require 40% of our electricity to come from renewable sources by 2020 was never accompanied by an estimate of cost. The resulting $1.5 billion contract for Muskrat Falls power is perhaps twice as expensive as buying the power would have been without the 40% by 2020 requirement.
Earlier this year an online development program for teachers was found to be defective. Completion of this program will earn teachers substantial raises, and it was so popular that the ultimate cost could exceed $60 million. Yet Education Minister Casey did not rescind the approvals that had been granted, even for teachers who had not begun the program. Nor has she proposed to reform a system that pays for unused credentials. Has she ever counted the cost?
Likewise, governments past and present embarked on contracts to rebuild the Bluenose and re-establish the Yarmouth Ferry without having any real grip on the ultimate cost. It is not evident that the Liberal government has put any limit on future subsidies.
In June, Finance Minister Whalen missed a golden opportunity to bring some sanity to the Teachers Pension Plan, a problem that previous governments failed to address.
A 2005 agreement with the union required the jointly appointed trustee to make a recommendation to bring the funding level to 95% by the end of 2015, an improvement of $1.2 billion. This was to be accomplished by some combination of benefit reductions and funding increases with teachers and taxpayers sharing equally in the cost.
At present teachers who retired prior to Aug 1, 2006 (“early retirees”) receive indexing equal to inflation less 1%. Those who retired since (“later retirees”) only receive indexing if the plan is healthy. In other words none so far, and unlikely in future.
The recommended teachers’ contribution to the solution would undoubtedly have included a suspension of unconditional inflation indexing for early retirees. Instead indexing would only be granted when the plan could afford it. That alone would be worth $350 million.
The trustee’s recommendation would have been automatically adopted unless both parties agreed otherwise. Together they chose a much weaker program, announced in June, which calls for increased annual contributions from taxpayers and active teachers. These are barely adequate to cover the interest on the deficit. Meanwhile the early retirees, whose inadequate contributions are the dominant source of the problem, will contribute nothing to the solution.
Taxpayers may find it surprising that Minister Whalen forecast the funding level to improve to 90% by 2025, an improvement of about $700 million over the next 10 years. Some of this improvement will come from additional cash injections by taxpayers, which are required under the agreement every year that the later retirees do not receive indexing.
These extra taxpayer contributions will grow every year as the number of retirees since 2006 grows. When making her decision in June the Minister understood that this would be a consequence. Government has refused to indicate how much extra taxpayers will contribute in the next ten years. But based on the recent history (averaging $9 million over the last three years) the future amounts are unlikely to put much of a dent in the $1.52 billion deficit.
At that rate the forecasted improvement of $700 million over ten years is highly improbable.Few of the later retirees are likely to ever receive full indexing. The problem is not being solved, it is being pushed into the future.
The Teachers plan is governed by a badly designed joint arrangement put in place by previous governments. Changing the early retirees to conditional indexing would have required a matching contribution from government.
Minister Whalen should have done so, putting all teachers in the same position for future indexing. Secondly she should have revised the 2005 agreement to restrict future taxpayer costs to a match of employee contributions, which would not have needed to increase by as much as 3%. This would have provided cost certainty for taxpayers and hastened the day that later retirees receive indexing.
This would not be an easy decision to make, nor to explain. But it reflects the kind of courage that is needed to put the province`s books on a sound long term footing.
It will take courage to resist pressure to keep the Cape Breton Railway operating for a few hundred cars per year. It will take courage to identify functions that can be discontinued so the civil service can shrink. It will take courage to put a reasonable limit on subsidies to the Yarmouth Ferry. It will take courage to stop rewarding teachers for completing development programs that are not relevant to their jobs.
There is not much evidence of that courage in the decisions we have seen so far.
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