Sir Richard Bond Papers – Response

April 10, 2014
By

Francis_Bond_Head Pensions and the Debt of Newfoundland and Labrador

Ed Hollett, in a recent Sir Richard Bond Papers blog on debt, rebuked Sharon Horan, a successful business person and head of the Board of Trade for quoting information produced by the government itself.

Debt is a very important issue but unlike most economic issues that are black and white, the numbers have been twisted and skewed by the government. Had Ed recognized this he could have chosen to enter into a more important discussion about the implications of debt on the province’s future.

The debate should begin by focusing on pensions which are a significant part of the problem, soon to be 85% of the debt.

The federal finance department uses the net debt number, which is consistently used by governments across the country. It is important to understand the gross debt concept as well but that muddies the issue and diverts attention away from where the focus should be.

The number the Newfoundland and Labrador government uses in it’s net debt calculation includes it’s estimate of the pension debt.

Newfoundland should be credited for using this number in it’s accounts as many governments do not and pensions and retiree benefits remain off balance sheet liabilities. Despite the inclusion of pension debt, there is still a serious problem with the reporting of pensions in the province. The main reason the problem has gotten so big, in my opinion is the poor disclosure and lack of transparency on pensions.

Recommendation: The province must provide better and more transparent information on the it’s pensions funds. It must be in a presented in a way that is easy for taxpayers to understand. These reports need to be posted in an accessible way on a public website.

Let’s look at the province’s total debt and the numbers released in the last budget “After the 2014-2015 fiscal year, the province will be left with a $9.8-billion net debt… That’s over $18,000 of debt per resident of Newfoundland and Labrador.” [i]

There is some confusion with the total shortfall of unfunded retirement benefits offered to provincial retirees and here are the most recent numbers available on retiree benefits and pensions, from the Public Accounts, as of the end of March 31, 2013.[ii]

The total debt for these liabilities includes $2.86 B for the retirement health benefits. The pension plans have promises to retired employees of $13.5 billion with only $8.0 billion worth of assets, leaving a $5.58 B shortfall. Together, these total an $8.4 B shortfall. The last auditor’s report confirmed these numbers.

The province arbitrarily decided to use what we, at Fair Pensions, call voodoo accounting to hide the total implications of the pension shortfalls. These are special rules that were put into place to hide the shortfalls in what are called “solvency relief laws.” These laws were first implemented in 2009 but did not solve the problem so were re-introduced in 2013 and they assume that unlike a business, a government cannot go bankrupt, thus avoiding obligations[iii]. Taxpayers will always be around to fund the promises made. These accounting rules are evident in the “Unamortized Experience Losses”. These rules, rather than alleviating the shortfall problem have intensified them because the shortfall problem has not been dealt with they continue to rise annually, including by $400million last year.

The impact of pensions on the provincial debt is worse than the government indicates, when voodoo accounting is removed.

Recommendation:

The province needs to immediately shut down its defined benefit pensions to current employees, guaranteeing them what they have earned to date. All new employees need to be enrolled in defined contribution plans.

Pension Plan Membership

It is important to remember that the pension shortfalls we are talking about are the promises made to provincial employees. In the provincial plans this includes about 70,000 of the province’s 163,880 residents over the age of 55. So it is a very small portion of the province’s seniors who will benefit from the $8 B set aside in these plans along with the additional $8.4 B promised in the unfunded liabilities. This gives them a value from these programs of over $234,000 each.

There are a few groups of retirees who want to convince taxpayers that the issue around pensions somehow affects all seniors in the province. This is part of a Big Lie.

The median senior over age 65 in the province had an income of $19,800 in 2011.[iv] In reality, the retirement incomes of those members of provincial pension plans  substantially higher income than the median Newfoundlander and Labradorian, almost double.

In 2012, $549,644,000 was paid in pensions to 25,513 provincial government pensioners for an average pension of $21,543.

All seniors in the province will be getting Canada Pension Plan (CPP) and Old Age Security (OAS). We need to look at all of these programs combined to determine the fairness of the current program. Provincial retirees receive the federal government programs on top of their provincial pension

Typical Provincial Retiree Pension 

Average Pension                                       $ 21,543

Maximun CPP                                                12,500

 OAS                                                                6,500

Total Pension Income                          $ 40,543

So 50% of the province’s residents without provincial sponsored pensions will  collect under $20,000 a year and the average in these plans will get twice as much annually for the rest of their lives.

Ed is optimistic that the province’s debt is not a problem but there are many who disagree with that  premise. He says “Since we don’t plan on closing down the government any time soon, the very notion of net debt is a bit of nonsense. Anyone who lends money to government, especially a government in Canada, knows they will inevitably get all their money back with interest“. It was in times like this not so long ago, 1935 in fact, that Canada had a province default on its debts. Alberta suspended payments on it’s debt for almost a decade.

When we show the debt of Newfoundland and Labrador to be $18,000 per resident and compare it to the worst state in the US, a debt of $5,400 per person in Connecticut, this level of debt should be alarming. Considering what has happened with cities in the US, like Detroit and Chicago that are much larger than this province, debt cannot be underestimated.

Is it fair to expect the taxpayers of the province to fund a golden plated pension and retirement health benefits for provincial retirees? A retirement that provides a standard of living more than twice that of half the province’s seniors?

You decide

 

References

[i] Debt and unfunded pension liabilities threaten province’s finances, By Michael Sullivan – http://themuse.ca/2014/04/02/debt-and-unfunded-pension-liabilities-threaten-provinces-finances/

[ii] Public Accounts Volume I, Consolidated Summary Financial StatementsFOR THE YEAR ENDED MARCH 31, 2013http://www.fin.gov.nl.ca/fin/publications/volumeI_2012-13.pdf

[iii] Newfoundland and Labrador extends pension solvency relief

http://www.mcinnescooper.com/publications/newfoundland-and-labrador-extends-pension-solvency-relief/

[iv] Statscan, Table 202-0407Income of individuals, by sex, age group and income source