Wednesday, November 23, 2005

Don't trust council with a "surplus"

[Public service announcement: Londoners should note that any reference to property tax cuts, reduction or relief, in the London Free Press should be qualified as cuts or reductions in the proposed 5% property tax increase.]

After two consecutive years of $12 million budget "surpluses," senior administrators at city hall are recommending to council that a miserly $600,000 of an expected $8.7-million budget surplus should be used to "reduce property taxes" — in effect, a few dollars per property owner. The newfound interest in property tax reduction, no matter how meagre, coincides with an upcoming election year, oddly enough. Nevertheless, the idea of representing the interests of constituents who have been hit with two years of 5.9 and 6.6 per cent increase in property taxes is apparently confounding the usual tax-and-spend groupthink at city hall. From the London Free Press:

A debate that wasn't supposed to begin yet exploded yesterday on the floor of London city council, with some demanding that a surplus be used for tax relief and others calling that a foolish grab at popularity.

[…] others argued residents would be better off in the long run if council reduces its debt — an approach favored by senior administration.

"You can be a hero for five minutes, you can be a hero for a year (by cutting taxes) … (but) in the long run we all know that's the wrong thing to do," Coun. Roger Caranci said.

"(Tax cuts) to me are dishonest," Deputy Mayor Tom Gosnell added, saying council can already deliver a reasonable tax increase of two or three per cent.
Cutting taxes is the wrong thing to do? dishonest? Caranci and Gosnell need to learn something about right and wrong and honesty…

The City of London press release of November 16 announcing the $8.7 million surplus is called Budget Surplus Result of Fiscal Restraint. City council has been voting for extravagant social welfare programs and colossal capital projects for years now with the result that, at the end of the 2004 fiscal year, London's debt stood at $335.4 million, roughly $1000 for every man, woman and child. "Surplus" may be the correct technical term to describe a condition in which revenue exceeds expenditure in a given year, but the short-term attention given to the circumstance exceeds the recognition of council's long-term financial mismanagement.

I have argued in the past that debt reduction is the only valid use of taxpayer money, given that debt is a contractual responsibility that — unfortunately — can only be honoured by taxpayers who are at least complicit in its incurrence, the "surplus" is not budgeted revenue that councillors can even pretend is legitimately municipal assets. Jim Chapman put it well the other day:
This supposedly "surplus" money isn't really surplus at all. It is tax money that we paid to the city beyond what it had to spend to meet its obligations. It may look like a bonus on the city's books, but every dollar of it represents money plucked from the pockets of hard-working Londoners.
Councillors who argue that it is irresponsible to give that money back to taxpayers are in effect saying that it's their money now. Gosnell and Caranci suggest that debt reduction is in the long-term interests of taxpayers — however, even if that were true, making that decision for those taxpayers against their stated preference is contemptuous and condescending.

Nor is it necessarily true that using the "surplus" to reduce debt will be in the best interests of taxpayers. Debt reduction is of course one of the city's obligations — as such, it ought to be a line item in each budget. If debt reduction proponents were as principled at budget time as they are now, debt reduction would receive much more attention at budget time. Unfortunately for them, planned debt reduction is regarded suspiciously by socialists and community activist groups as "discretionary" or, in other words, better spent on their pet welfare schemes. The airing these groups receive from the London Free Press ensures that the most important principle of councillors is avoidance of unpopular initiatives. But city council has learned from its federal Liberal counterparts that citizens can be overtaxed each year to produce a "surplus" that can then be marketed as the product of sound fiscal management and earmarked for debt reduction, a ruse to practice a financially necessary policy.

In the case of London, this ruse is practiced to even less effect than an actual reduction in overall debt. Council currently has a self-imposed $30 million debt cap in place for each year's budget — this means that they can add $30 million in debt each budget above and beyond any debt retirement made. Last year the city incurred $69 million in new debt after retiring $29.8 million. "Surplus" money used for debt reduction could then presumably be applied to this debt retirement, allowing an additional $8.7 million to be incurred as debt in the next budget, as long as total new debt does not exceed $30 million. "Debt reduction" then would not result, and has not in the past resulted, in reduced debt.

Despite the condescension and arrogance of Gosnell and Caranci,
[Coun. Paul] Van Meerbergen said there's a legitimate long-term gain to cutting taxes — it puts pressure on council and staff to cut spending.
The noblest sentiment expressed at city hall for many a year. The hopes and fears of all our years' budgets are with us in this article by Jim Chapman:
There are sound fiscal reasons to reduce our debt. Every dollar it decreases also reduces the interest we have to pay. In the long run, we are told, that will help keep taxes down.

Perhaps, if future councils are careful in their spending and don't overextend themselves again.

But there is absolutely no guarantee of that, and past experience suggests just the opposite.

And while paying down the debt with money earmarked for operational funds may be handy, it also helps obscure the fact that previous councils took on higher debt loads than was prudent. Do we really want to bail them out without holding them accountable?

The alternative is tax reduction now. If the city didn't need as much as it collected, give the excess back to the people whose money it actually is, the taxpayers.

Critics of this approach say it is only a short-term answer, but they offer little proof that reducing the debt will actually reduce future tax burdens.

Promises of future fiscal prudence on the part of council are just that — promises.

If you were to ask London taxpayers which they prefer, guaranteed lower taxes now or the possibility of lower taxes later if council gets its act together, I think the answer would be pretty clear.
Update: Better take the reduction in the property tax increase while you can get it, it might make up a little for this:
Board of control sits down today to wrestle with its 2006 budget, but Londoners have already been hit with the equivalent of a 2.5-per-cent property tax hike.

That's how much more Londoners will pay for sewer and water rates this year. […] Late Monday, council approved a 9.6-per-cent, or $34 hike in sewer rates and a five-per-cent, or $16 increase in water rates.

3 comments:

Paul said...

It's been a few years; remind me: didn't Gosnell make a few bucks re-paving downtown with paving stones? Doesn't he continue to benefit from government largesse?

BBS said...

One of the few things I've liked that Windsor's council has done, was to formulate a debt reduction plan, and dedicate $10 million a year to it as a line item in the budget. Prior to enacting this, we were forecasted to hit $275 million in debt next year, instead we are now looking at $203 million.

The other thing started last year was a "Modified" zero based budget process. They started with 4 departments last year, expanding to 13 more this year, with the final 9 in the last year. No more starting with last years budget and piling on. I like the concept and am eager to see what comes from it this year, with the majority of departments following this process.

Surplus? We wouldn't know what one is or what to do with one, it's been so long since we've even been close to seeing one.

The fiscally responsible councillors have only a slim 1 vote majority, so it will be important for Windsorites to support them in the next round of elections. Failure to do so will see the city slide back into it's unsustainable spending of the past.

MapMaster said...

At the risk of getting a drive-by paving stone thrown at my head, I can confirm that Gosnell's paving stone company did receive contracts from the city to repave sidewalks — an unnecessary and simply aesthetic policy. Gosnell is the kind of capitalist who gives capitalists a bad name. Whether he continues to benefit from government largesse — apart from drawing a salary — I'm not sure. Do any other readers know?

BBS, I appreciate your comments. Unlike Windsor, London's long-term debt commitment is only to have the overall amount of debt level off at some time in the future, an unambitious project but one that future councils may still have trouble meeting. I wish the people of Windsor well.