Wednesday, February 27, 2013

London's Budget Woes

It will come as no surprise to my readers and twitter followers, that I support Council's goal of maintaining a 0% tax increase for the third straight year. Although keeping taxes low is a worthwhile goal, it is only part of the equation.

A lose-lose decision: Whether council raises taxes the suggested 2.5%, or cuts spending to reach 0%, it won't produce a balanced budget.
Budget 2013 as proposed by staff, started out $11.5M in operational spending above the 0% goal. However, even if council nips and tucks enough to close this gap, this won't balance the budget. If council accepts the full 2.5% tax increase as suggested, Budget 2013 still adds $72M in new debt, which is a 20% increase in our city's total debt from 2012 levels. That's not a revenue problem; that's a spending problem!

Why is council having such difficulty balancing our budget?

Let's look at some trends over the past 10-12 years to see how we've created today's problems.

Operational spending up 40% over the past 12 years

Adjusted for inflation, the City's operational spending has increased 40% since 2000, despite the city's population growing only 11%. As John Casselman demonstrated in his presentation to council, operational costs are growing at an unsustainable rate. Watch John's full presentation below, which includes a number of realistic suggesting for curbing spending.

Staff compensation costs up 67% over 9 years

The largest component of operational spending is employee compensation. Research done by shows that from 2002 to 2011, London's compensation spending has increased 67%, or 7.5% per year, far outpacing inflation. If staff compensation had remained fixed with inflation since 2002, we'd be saving over $105M a year (since 2011) and over $750M in total since 2002. Read more in FPFA's presentation to council.

City employees deserve a fair wage, with cost of living increases and opportunity for advancement. Not all city employees are overpaid, but here are a few examples from London's Sunshine List which discloses salary costs of city employees earning over $100,000.

  1. There are over 280 employees earning over $100,000 a year; in 2005 that number was 49.
  2. There are 17 employees on track to earn pensions in excess of $100,000 their first year of retirement.
  3. The top 10 earners at city hall will take home over $40 M in pensions when they retire.
  4. There were 17 employees earning over $100,000 in 2011 who received a salary increase of $10,000 or more in 2012.

This level of compensation cost growth is unsustainable. It's leeching funding from the city's core services and creating lasting budget problems which will only get worse in coming years.

Growing debt burden is costing $60M a year

Debt is a tax on future taxpayers. The proposed 2013 budget will add $72M of new debt and forecasts another $58M of debt in 2014. This growing debt burden has a heavy cost. The city already pays $60M a year just to service our existing debt. As we keep piling on more debt and as interest rates rise, which they inevitably will, our debt servicing costs will further compound our budget problems.

What steps can be taken to solve the problems?

Do taxpayers really want to pay more?: In 2012, the City of Toronto gave taxpayers the option to pay voluntary taxes on top of their regular property taxes. Out of 2.5M residents, only 174 chose to donate extra money to the city.
Suppose we increased taxes the proposed 2.5% to get us through the next year. Then what? This wouldn't address rapidly growing operational and compensation costs. Or our growing debt servicing costs. Or the $72M budget deficit. What would we do next year? And the year after?

City staff forecast tax levy increases of between 3.2 and 4.0% each year in 2014-2017. These increases are well above inflation and do nothing to resolve the underlying problems.

In the second half of John's video above, he provides several suggestions. Mary Lou Ambrogio of the Forest City Institute also offered several options council could follow to reach 0% and create long-term budget savings.

Gambling with tax dollars

Betting against the odds: City Council needs to get out of the business of being in business.
In poker, you should never stay in a hand just because you have money in the pot. What you've put in the pot isn't yours anymore and if the odds of winning the pot aren't in your favour, you need to get out. The same is true for many city-owned assets.

When the city spends money on business ventures, it's gambling with other people's money -- with our money. Sometimes the city wins, such as with the John Labatt Centre. But more often taxpayers lose, such as with the London Convention Centre, which only recently has started to turn a very modest profit after millions were spent.

When the city's business gambles go well, we can expect a reasonable return on investment. But when things don't turn out as rosy as expected, taxpayers are left saddled with debt and a floundering investment to be sold off at a loss.

Council will be discussing Budget 2013 on Thursday, February 28th, starting at 4:00pm.

I'll be detailing my own ideas for reducing spending in a series of blog posts over the coming weeks. Make sure to check back or follow me on Twitter (@eh_c) to catch those updates.