Sometimes knowing history is important so you don’t repeat mistakes of the past. When it comes to London 2012 budget a glimpse back a few short years ago is informative.
In 1999 and 2000 the city had a tax increase of 0%. This was achieved in part, by using a two year break in the OMERS – Ontario Municipal Employees Retirement Savings Plan contribution of $6M. Instead of putting the dollars in a Reserve fund in preparation for the next OMERS increase two years out; the money was given back to taxpayers by way of tax reduction. In turn, when the OMERS holiday ended, the municipality levied taxpayers for the additional $6M, which translated into 2% increase, plus any cost of living increase for that year.
Also occurring around this time was the move to debt finance life-cycle maintenance repairs coupled with massive spending of over $250 M on capital projects– all debt financed. A perfect financial storm was waiting to happen.
Debt financing is akin to maxing out the credit card. Payment in full is put off and the carrying costs escalate exponentially. It was no surprise when the tax increase steadily rose for the next few years. In 2004 the tax increase released was 11.2% and ultimately whittled down to 8.1%. In 2005 the increase at budget release was 8% which was reduced to 6.6%. In reviewing our triple A credit rating in the midst of this financial mess, Moody’s advised to get spending under control, or risk losing the triple A credit rating.
Financial staff, under a new City Manager, and a new General Manager of Finance, prepared a series of cost containment measures and policies which were adopted by council. They included: 1. Instituting a debt limit to curb new spending. 2. Instead of debt financing life-cycle maintenance for road repairs etc. incrementally move to levying for life-cycle maintenance. 3. Do not use “one-time” money, such as the OMERS example noted above, to pay for on-going annual costs as you are simply deferring a tax increase to artificially keep taxes low. 4. Pay down as much debt as possible. At present the city pays $60 M annually for principal and interest on the debt we are carrying (approx. $317M plus additional debt approved but not issued). Every $1 M in debt retired is $130,000 in permanent savings to the taxpayer. 5. Don’t use the reserve funds to lower taxes. The reserves are analogous to your bank account. It provides the city with working capital to carry out projects, repairs etc. Raiding the reserves for tax breaks means the cash flow is reduced requiring further borrowing of funds (issuing debt) which in turn costs taxpayers more. 6. Use a percentage of new assessment growth to pay down debt.
The institution of these fiscal policies has moved the city toward a solid financial foundation, but we are not there yet. We know our Reserve funds a substantially lower than the recommended threshold by multi-millions (we are awaiting a financial report on Reserve levels due by the end of the summer).
I have been very vocal about compromising the above principles to deliver a 0% tax increase. Let me be clear, we should always try to achieve the lowest possible tax increase. To get to a 0 % increase, it must come from permanent service cuts or increased revenue. To do otherwise means you have simply deferred a growing financial mess that someone else will have to clean up. I hope history will not repeat as we continue to dig London out of the fiscal hole created a little over a decade ago.