TAXES AND SPENDING

The City budget and tax rates have always been a major concern for me. I believe, for example, that our very high tax rates on retail businesses and offices (which much exceed our residential tax rates) work against downtown vitality.  This comment speaks to how I think we could improve the effectiveness of one modest area of spending.  For comments on a couple of major capital projects, see the pages on sewage treatment and the Johnson Street Bridge. 

 

Spending on the Arts 

A professional arts group recently posed three questions to candidates.  The second was :

“Will you support increased investment in the Arts? And if so, how?” 

I resisted the temptation to promise higher levels of spending and instead focused on how I think some of our current level of spending could be made more effective.  

 

City taxpayers make a substantial contribution to the arts through various performance grants and funding, through CRD Arts Development Funding, and through property tax exemptions to individual groups.Some of our assistance is indirect – for example, the City owns the Fernwood Community Association building at 1923 Fernwood, which in turn is the landlord for Theatre Inconnu.
City taxpayers are also a contributors through the city’s partial ownership of the Royal Theatre and full ownership of the McPherson. The contribution of city taxpayers to the McPherson is $750,000 per year (not including the property tax exemption), almost equal to our contribution to Arts Development funding of $831,000 (2013).Thus it represents a substantial proportion of our total funding to the arts sector. Some are not aware of this because the funding flows through CRD taxation and is approved at the CRD – thus it has received less attention from City council than items that appear in the City’s budget (I even notice that some of the respondents to this questionnaire from other municipalities were under the impression that their taxpayers contribute to the McPherson). Unfortunately, despite the substantial contribution by taxpayers, costs charged to groups using the theatre are so high that they have discouraged usage, and many nights are dark, at the same time that some groups have developed other performance space.As usage falls the fixed costs of the facility must be borne by a smaller number of remaining users. At some point the burden on the City will become disproportionate to the benefit to the arts community.
I would like to see an active discussion among the users, including the professional arts groups, non-professional groups, and occasional users, to determine whether the current system is the best way for the city to provide this assistance.

 

Public Sector Pensions 

The piece below is a summary for a newspaper of a longer paper on redistribution within public sector pension plans that I wrote for the C.D.Howe Institute (there is a reference to the full paper at the end of the section).  I believe the impact of public sector pension plans on retirement ages is a serious issue for governments in Canada.  I also dislike inequity. Full disclosure –  I used to work for the Province and earned a small government pension myself.  

 

Time to Reform Public-Sector Pension Plans for the Sake of Their Own Members

By Geoffrey Young

Two budgets – in Ottawa and Ontario –last week announced reforms to rich defined-benefit pension plans enjoyed by government employees. The federal government will raise employee contributions and the normal age of retirement to 65 for new employees, while Ontario will consider reducing benefits to future pensioners to help fund potential pension plan deficits. Governments are scrambling to keep employee pension plans sustainable because their employees love them – yet many government employees would be better off the plans were redesigned. Pensions are paid from the plans based on formulas, not the employee’s contributions, meaning that some employees enjoy pensions far above the value of their contributions, at the expense of other plan contributors.

Canadian government employee pension plans defy the common sense idea that saving more and working later in life will increase one’s retirement income. Instead, “defined benefit” plans tie pensions of government employees to their length of service and to their highest five years of earnings. It does not matter whether the employee made large or small contributions before the five years that count toward the average.

Why five years? Perhaps the designers of the plans considered that is the time it takes to get used to living in a good neighbourhood, having a golf club membership and a cleaning lady, and spending two weeks in Europe every year. It sounds ridiculous, but there seems to be no other explanation why pensions are tied to only a few years of earnings.

Whatever the reason, the effect is that an employee who has zoomed up the ranks of the bureaucracy near the end of her career is a winner – she enjoys a far higher pension, compared to what she has contributed over the years, than her secretary or her colleague who has had mostly a similar career but has failed to reach the top ranks.

Most taxpayers don’t care if government career clerks, secretaries and bus drivers are prepared to contribute to support the pensions of their bosses, but the taxpayers do have reason to be concerned that pensions mean that bureaucrats simply don’t work very long. Under government plans it makes no sense for civil servants who have entered the government fairly young to work to 65 – employees know that continuing past 55 or 60 often means effectively working for a fraction of their salary because it produces little increase in their annual pension. Any who do work until they are approaching 65, because they like their jobs, because they have low incomes, or because they came late to the pension plan, are likely to be losers, probably paying more in to the plan than they will draw from it. Thus government employees continue to give up the productive years from 55 to 67 while the rest of us will be working.

My recent study published by the C.D. Howe Institute suggests it is time to start looking at changes in government plans. Plans should stop rewarding people who can retire early at the expense of those who need to continue to work, they should allow people to move without penalty between the government and private sectors, and they should give a fair return to the contributions paid in early in their careers by those whose later careers have not been rewarded with high earnings.

Most Government pension plans have told employees that their payroll pension deductions and the percentage contributions put in by the employer are enough to finance the pension. If this were true, it would mean that every plan would have winners and losers in about equal numbers, and half of plan members would logically welcome change. In fact, though, most plans have fallen short of their investment targets and have steadily raised contribution rates. Today’s senior employees will resist change because they can hope that most of the cost of their pensions will be borne by the new plan entrants who will spend their careers paying higher contributions.

Perhaps it is understandable, too, that pension plan members, even those in dead-end jobs, should believe that they too will achieve a high salary near the end of their careers and become winners in the pension lottery, drawing a pension tied to those last few high-earning years.

Recent steps to raise contribution rates and retirement ages for future employees are a start, but if government pension plans are not to become a drag on the economy and the taxpayers, bolder changes will be needed.

Geoffrey Young is a principal at Discovery Economic Consulting in Victoria, B.C., where he is also a city council member and chair of the regional board. He is the author of a recent C.D. Howe Institute study “Winner and Losers: the Inequities within Government-Sector Defined Benefit Pension Plans,” available at www.cdhowe.org.