The City Has A Spending Problem: BENN

Mayor Mark Sutcliffe would have us believe that the city has a revenue problem. Perhaps.

On the other hand, the city does have a spending problem. When dealing with financial woes, it is best to focus on what you can control. Spending is more controllable than demanding that your benefactors get their cheque books out again.

Is the federal government short-changing Ottawa on its payments in lieu of taxes (PILTs)? Possibly.

Is it because the property tax (MIL) rate equivalent that the federal government sets is too low? Is it that the value of the property on which the equivalent of the MIL rate is applied is too low? Is the purported shortfall due to reductions in the space the federal government occupies? Is it some combination or permutation thereof?

So many questions. So few answers. All of which are beyond the control of the city.

Then there is the complaint that neither the federal nor provincial governments are covering the conventional one-third each of the capital costs of Ottawa’s major over-budget disasters. Except that both levels of government have lived up to their contractual obligations of one-third each of the initial budget. Again, there is not much the city can do in the short term.

So, where does that leave the city?

On the revenue side what they do control is the MIL rate. Each year council instructs staff to prepare a budget based on a pre-set increase in the MIL rate. How is that increase set? The major contributing factor is political expediency. Since 2021 the inflation rate in Canada has been considerably higher than it was during the decade before the pandemic. The inflation rate is moving in the right direction, but nothing can be done about the past.

However, political expediency set the MIL rate increase at 2.5 to three per cent. Well below the inflation rate. Did anyone on council consider, for just a moment or three, the accumulated impact of raising revenues at a rate below the increase in its costs? Or did everyone on council and in the mayor’s office catch up on their sleep during the first year economics course they never attended?

In short, when it comes to the revenue side of the equation, the main element that is truly under the control of the city is the MIL rate. After three years of significantly below inflation increases, Ottawa’s property owners are facing a catch up.

Reality caught up to Toronto last autumn. Reality being a 9.9-per-cent property tax rate increase. As for Ottawa, an old city hand has the MIL rate increase coming in at seven per cent. It would not be surprise if it came in more than eight per cent. Just two years before the next election. Here’s a question for Sutcliffe’s political advisors. How will that play out on the old political expediency monitor?

On to the spending side of the equation.

Those who have had to deal with corporate down-sizing will tell you that more money can be saved with a low percentage cut in the largest expense elements than a huge percentage cut in the smaller expense elements. By way of example, a one-per-cent cut on a billion dollars is $10 million. A 50-per-cent cut in a $1-million expense is but half a million dollars. In short, experienced executives focus on the top operating expense elements. The too-timid-to-justify-being-there managers want to prune the coffee bill. Those in the latter category are an easy add to the compensation cuts.

Two of the larger cost elements in the city’s operating budget are compensation and debt service.

Compensation covers the base salary, bonus, payroll taxes, group insurance and pension contributions. Based on the Tewin memorandum of understanding, non-salary components are about 26 per cent of base salary. Coming to the city in the next year or two is the renewal of its collective bargaining agreements. Any thoughts on how much the one-time catch-up is for the post-pandemic inflation? Recent precedents indicate a range of between 10 per cent and 12 per cent. On the largest cost element, and on which an additional 26 per cent is added. Ouch.

Staff is involved in nearly every city spending program. Bringing a program to an abrupt stop can help identify which staff members are now, to borrow the British term, redundant. However, cutting staff in a unionized environment can be a metaphorical mine field. This is not a shot at the unions. It is just a reality. Best to pay particular attention to the sections of the collective bargaining agreements before the cuts are made, rather than after.

Debt service is the combination of the interest charges on debt and the scheduled debt repayments. Recall that the city has racked up LRT-related debt since the mid 2010s, much of it at very favourable interest rates. A lot of that debt needs to be reset over the current and next couple of years. At not as favourable interest rates. Oh, and let’s toss in the debt on Lansdowne 1.0 and the new city library.  Again, ouch.

Reductions to debt service are particularly difficult for a municipality. Interest rates the city pays are based on bond ratings. The bond rating agencies will have factored in to the city’s ratings Sutcliffe’s public admission about the city’s precarious financial picture. Not much Ottawa can do in the short term on that.

The other element is the amount of debt that needs to be financed at the higher interest rates. Not much the city can do about reducing the quantity of existing debt. There is, however, a lot of control over issuing new debt. Especially on projects that have not yet been started. It might be too late to materially impact the Stage 2 LRT construction projects or the central library. Focus should be on future projects, such as Lansdown 2.0, at about half a billion dollars. Reconsideration of  the well over half a billion dollar  expansion of infrastructure to Tewin, that future community, that can not yet be seen on your way to Montreal, should be high on the agenda as well.

My overall advice to city residents and businesses? Fasten your seatbelts. There will be turbulence.

Ron Benn, a finance executive, has been a member of the Centrepointe Community Association for the better part of three decades.

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