California and Ontario: Two approaches to managing their finances
Troy Media – by Bill Tufts and Mark Mullins
A fiscal crisis has recently erupted in both the State of California and the Province of Ontario. Each is facing a budget deficit of about $16 billion dollars. But the similarity ends there. California is moving to control spending and eliminate their deficit; Ontario is pretending that nothing is wrong.
Governor Gerry Brown of California is urgently looking at a variety of ways to control spending to bring the fiscal train back on track. He has called on the legislature to embrace significant cuts to spending. Brown is also reaching out to the public sector unions, which were instrumental in his election, and asking for a 5 per cent reduction in pay, in spite of the fact that the state’s two largest public-sector unions held the top two spots in spending on political lobbying, spending over $11.6 million in a non-election year.
Cuts in California – on such items as childcare for mothers trying to get off welfare, healthcare for the poor, and in-home support for the needy – would affect the most economically disadvantaged. Nonetheless, the Democratic governor is pressing ahead. Tax increases are also being considered, including an increase on those earning over $250,000 a year.
California had a 2011 GDP of approximately $1,958.900 trillion, and a population of 37.7 million.
Ontario, with a GDP of approximately $638 million, and a population of 13.5 million – both roughly one third of California’s – is also facing a $16 billion deficit. The difference is that the Ontario Government does not seem to be taking the predicament seriously.
Premier Dalton McGuinty received a comprehensive report on spending in Ontario – the Drummond Report – which is a blueprint for balancing the books in a reasonable period of time. It remains largely forgotten. The Government’s effort so far is confined to a surtax on incomes over $500,000 that is initially expected to raise an extra $470 million. Even this was not a Liberal initiative, only put forward as a trade-off to gain NDP support for the budget.
As for the rest, the Premier is still giving consideration to the changes required, six months after the Drummond Report was issued.
There is a huge disconnect between the two jurisdictions when the debt in California is cause for concern and urgent government action, but in Ontario it is ‘ho hum . . . time for thoughtful choices.’
California is rated as one of the least-friendly states for business and the investment spending that business growth brings. The key reason for this is their fiscal problems, which lead to big deficits and debt, high taxes and onerous government regulations. California had a debt of $10,463 per person at the end of 2011 and ranked number 45 in the U.S. for debt. Ontario’s number is $16,638 per person. Ontario would not beat one of the 50 states for fiscal responsibility.
The cause of the problem
The North American economy is in a new reality and there is concern that growth will be very modest for several years to come. Coincidental to the world financial crisis, which has put the brakes on growth, Ontario is starting to get swamped by its tsunami of aging baby boomers. The leading edge of this tsunami (the first started turning 65 last year) has already strained the pension system to the point of breaking.
Clearly, over-spending by government is a large factor. Up until now, it has been a public-sector free-for-all. Ontario boasts the highest paid teachers, police officers, university professors and doctors in the world. All of this was highlighted in the Drummond Report. Ontario needs a more realistic approach to its public sector.
It has been shown in several studies, most notably by the Canadian Federation for Independent Business (CFIB), that total compensation of the public sector is approximately 30 per cent above that of the private sector on a skill-for-skill basis. This compensation gap, shown in the CFIB Wage Watch, is based on 2006 census numbers, and has grown substantially since then as the private sector has seen wages and benefits stagnate while the public sector continues to rocket ahead.
Public-sector employees enjoy better wages, benefits and, of course, gold-plated pensions. In addition, there is a dazzling array of benefits paid out, including retirement gratuities, sick benefit payouts, vacation time lump sum, and free healthcare in retirement. None of these can be afforded in the private sector.
It is interesting to note that the deficit number in Ontario is about equal to the cost of the compensation premium for public-sector employees. For example, based on the $42 billion payroll at the provincial level, a 30 per cent compensation premium would equal $12.6 billion. By eliminating the premium paid to Ontario’s public-sector employees, the government could balance its budget quite easily.
How to turn it around
One way forward is to look at what is happening in the U.S., not in “red neck” states but in ones where the Democrats have solid control: Rhode Island, where comprehensive pension reform has put the State’s financing back on solid footing; San Diego, where taxpayers said “enough is enough,” and reformed public service pensions; or Wisconsin, which brought in right-to-work legislation and curtailed the deduction of compulsory union dues.
These changes are coming to Canada too. In Canada, 80 per cent of the public sector is unionized; in the U.S. it is only 35 per cent. The benefits will be proportionately greater in Canada, but so will the challenge.
The financial clout of the public-sector unions, fueled by compulsory union dues, is formidable. For example, the Canadian Union of Public Employees (CUPE), which has 600,000 members, generates a $650 million annual budget for marketing of employee demands and influencing politics. CUPE is only a portion of the 2.8 million unionized workers in Canada. In the year before the next election campaign begins, unions will spend more in public relations campaigns than the three major parties will combined.
The need for public-sector reform is obvious. It is time that the public sector participated in the revival of Canada’s economic health.
Bill Tufts is Founder of Fair Pensions For All (FPFA) an organization advocating for pension reform in Canada. Mark Mullins is a Director with FPFA.