Kathleen in Wonderland

There are good, sound reasons to borrow to pay for firehalls, highways and airports. These are long-lasting assets that will endure a generation or more. Spreading the cost over 20 years or longer is reasonable. Prudent, in some circumstances. Future generations will use these assets, so why shouldn’t they bear some of the burden of paying for them?

It is reasonable to anticipate that improvements in roads might lead to greater economic activity. But pay-as-you-go financing risks losing some or all of that opportunity. It can, and will, be argued that prudent management of local government demands that investments be made to capture current economic benefit, rather than watching from the sidelines as more assertive communities seize our opportunities.

Pay-as-you-go financing also means doing less in the face of a public that wants more— particularly troublesome in an election year.

Yet these very same arguments were made in 1928. We were busy building roads and highways to enable us to go farther and faster in the automobile. We were constructing railways, courthouses, schools and libraries. The race to erect lasting prosperity was on. But even then, there were plenty of warning signs.

“If experience is any guide we know that the usual tendency is to borrow too much and for too long periods of time, rather than too little and for too short terms,” wrote Albert W. Atwood in the Saturday Evening Post in April of 1928.

The party ended seventeen months later. The stock market crashed and the Great Depression took hold. For many the misery would not let up for a decade.

Seven years after Atwood wrote those cautionary words, 11 per cent of Canada’s municipal debt was in default—a much higher rate than in the U.S.

As credit expert Marc Joffe reported in Maclean’s last year, the market crash triggered the wave of defaults, but the true cause was the over-issuance of debt. We had borrowed far more than we could pay back. Governments had come to count on a steady stream of tax revenue— but that stream dried up as the Depression took hold and families couldn’t pay their taxes.

Now, to be absolutely clear, the County’s debt, on its own, is manageable. And well within provincial limits. The direct parallels, on the municipal level, to 1928 are thin.

This municipality can easily borrow and service another $1.3 million in debt to fund the construction of a firehall in Consecon (see story,page 3)—particularly if it is able to lock in interest rates below four per cent.

The municipality currently owes about $39 million in long term debt; the largest chunk (about $26 million) was incurred on waterworks projects. The municipality pays about $3.7 million a year to service its debt—much of it funded by users of the waterworks system.

The County generates nearly $30 million in property taxes each year, and another $6 million in user fees. It generates $5.7 million in revenue from users of the waterworks system. This means we spend almost nine per cent of our resident-based revenue stream making debt payments. We could double our debt and still be within provincial limits.

My worry isn’t with this municipality and its debt management. By any measure it appears solid and prudent. Rather, my anxiety is focused squarely on the province, whose reported debt will crest $300 billion in a matter of weeks or months. We have just elected a government that is eager to spend and borrow much more.

Twenty years, ago Ontario’s debt was equal to about 14 per cent of the GDP (a measure of the earning power of this economy). Today, it is nearly 40 per cent. At its current trajectory—and nothing at all suggests a change in this vector— Ontario’s debt will rise to more than 66 per cent of GDP by the end of this decade.

Just as worrisome are the obligations the province is racking up that don’t appear on its balance sheet. The new courthouse in Belleville has been financed by the developer in a public-private partnership. When the 30-year lease agreement is complete, Ontario taxpayers will have spent more than $270 million for the use of this building. Yet this debt-in-another-form doesn’t appear in Ontario’s debt tally. As it turns out, about $42 billion of capital projects have been financed this way in recent years. Ontario’s debt is likely closer to $350 billion than $300 billion.

When the County finances its new firehall in Consecon next spring, it will borrow from Infrastructure Ontario—a provincial agency. This debt will be shown on IO’s balance sheet as an asset, when, in reality, it is merely an extension of its own debt.

When reality becomes twisted and shaped so that liabilities become assets, we may already be lost in the rabbit hole of 1928.

But as Atwood observed on the eve of the Great Depression, this experience demonstrates amply our tendency to ignore the warning signs until it is much too late.

rick@wellingtontimes.ca