Saturday, 30 May 2020

Calgary Council’s inability to cut taxes.

Calgarians have received their 2020 tax bill, and this year it is accompanied by a letter from the Mayor to explain how the tax works. Some of his claims may not be called lies, but they are certainly an opportunity for Calgarians to draw the wrong conclusions.
The economic hit caused by Covid -19 has been more severe than the last recession. The last recession was caused by a financial disaster in the banking sector, the disruption was bad but not a severe as the one we are experiencing today. With Covid-19 it has been one that has disrupted the very fabric of society. People have lost their, jobs, businesses have closed, some for ever and governments have accumulated massive debts to finance the economic collapse. These debts will have to be repaid in the future and taxes will have to go up to pay for the excesses of governments who used the crisis to implement some of their political agendas. Sacrifices will have to be made, and some governments realize that, and will adjust, but that is not the case for Calgary.
In Calgary the current Council has been made aware of their excesses long before the pandemic. Yet they never listened and continued to spend without any regard for risk management. The latest property tax increase of 7.5% comes over and above many increases in fees and utility rates. There is also the re-alignment of the tax burden between residential and business tax. This shift also increased the residential tax rate. While there has been a deferral and elimination of the penalty for late payment of taxes nevertheless that does not mean that the tax is reduced, it is just delayed. What of the businesses that have been closed for months and who may be closed forever. There is no tax rebate there.
What are questionable in the Mayor’s letter are the claims of savings amounting to $740m in cuts, and that the budget was increased by 1.5%. The reality is that the budget was increased by a lesser percentage but was increased nevertheless – this is not a saving. A real cut means that you reduce the total amount of the previous year’s budget, not increase it by a smaller amount. Furthermore, the City does not use the Consumer Price Index, they use the in-house concocted Municipal Price Index, so when they say that the tax increase is less that the rate of inflation, it is based on their index not the real inflation rate.
The other claim that the average increase per household will be $11.25 monthly or $135 yearly is another obfuscation. The fact is that most household have seen increases closer to $20/month or even higher. Council will tell you that this small increase is justified – as it is the equivalent of less than the cost of a daily cup of coffee. What citizens must realize is that the cost of this cup of coffee never decreases over the years. The only way to see a reduction in your taxes is a cut in total expenditure, but that is never the case in Calgary, in fact Council keeps adding more expenditure to the already long existing list.
While we must acknowledge that the current Market Value Assessment system is a factor in the problems experience by municipalities in Alberta, we must also recognize that when there is a clear reduction in the revenue base, a difficult decision must be made to make the appropriate reduction in expenditure to balance the deficit. Unfortunately for Calgarians, this decision has never been made. When the Mayor claims that Calgarians are charged among s the lowest taxes in Canada they forget to tell you that for 2020 Edmonton was able to have only a 2.5% residential tax increase , and freeze of property taxes for non-residential ratepayers.
To reduce the Calgary 2020 tax burden, Council had some alternatives. Councillor Farkas proposed to use the Sustainability Fund, Public Arts Fund and Corporate Welfare Fund to be used to rebate the residential tax, and a property tax freeze instead of the 7.5% tax increase. The motion was reluctantly seconded by Councillor Chu. But more importantly it was vilified by his colleagues and the vote for the tax increase was 13 for and 2 against. More importantly to justify their votes some Councillors claim that they actually voted against the budget – a real canard. A vote against a budget means nothing if ultimately you vote for a  tax increase based on that same budget.
With Covid-19, there are going to be some drastic changes to the economy. How business operate and how and where people work, as well as how services are delivered will cause disruptions that we have never seen before. While the private sector will adapt, I fear that the public sector will not, at least not in Calgary. The past is a prognosticator for the future, and given the performance of the current Council it is very difficult to see how things will change, to use the words of Councillor Sutherland, in my opinion it is quite clear that Council ‘has a limited skill set’.

Tuesday, 26 May 2020

Municipal Finances are not what they seem to be

Ever since my interview with Danielle Smith on April 28th, I have received a number of kudos and requests to elaborate on the City of Calgary Finances. Many listeners have asked me to explain the differences between a Budget and the Annual report.  While I am going to use the City of Calgary as an example, the comments can be applied to any municipality in Canada, since they use the same methodology and accounting standards to report their finances.
         The budget is a mere wish list, it is a plan, expressed in quantitative, usually monetary terms, using a modified cash basis, and covers a specified period of time usually a year. The City of Calgary does a 4 year budget. Each program’s objectives are translated into terms that correspond to the spheres of responsibility of the managers charged with implementing them. It is a list of proposed expenditures and is the basis for raising revenues to cover the costs and establish the taxation rate for the period. The budget is not independently audited.
          The Annual report, on the other hand, is a picture of the financial position of the City at a specific point in time usually December 31st.  It is the net worth statement of the organization and all items shown are recorded at their historic cost. The report is prepared using accrual accounting  as prescribed under Public Sector Accounting Standards  which recognizes economic events and  more accurately reflects economic reality. The final report is audited by an Independent Auditor
The differences in methodology and accounting standards, not only cause confusion for the ordinary citizen, but also enable politicians to obfuscate the real financial status of an organization.  These days every municipality is claiming poverty and either are demanding more funding from other levels of government or are busily seeking to expand their tax base, and increasing taxes to cover their large expenditures. A study by the C.D. Howe Institute in 2019 showed that 31 municipalities in Canada had accumulated surpluses of $11 billion.
Let us focus on Calgary 2019 Annual Report. When the results are republished in the newspapers, the details that I am going to use are never showed, and these are the figures that citizens should really care about.
         Accumulated Surplus $21,025B (2019), $19, 695B (2018) an increase of $1,330 B
         The Accumulated surplus of $21,025 B is made up of the following:
         Equity in Non-Financial Assets including Enmax and other Capital Funds $18,532B
         Reserves of $2,494B, including $426m in the Fiscal Satiability(Rainy Day) Fund
         Expenses $3,914B of which $1,980B were salaries and benefits
         Long-Term Debt $2,889B
The problems and confusion exist for several reasons, one that the budget and annual reports are produced under different sets of accounting standards. Then the reporting of annual results is published in a manner as to portray a rosy picture instead of details that will show the true and transparent picture of the financial state of the organization. So much so that after the interview, I received a stern comment from Councillor Davison’s Special Project Contractor, who was paid $18,000 in 2018, which proves how confused things are at City Hall, he wrote: “All of which has nothing to do with the 2019 annual report or the accumulated surplus which is mostly capital works. The city owns $87.4 billion in assets. Some are bound to increase in value… if you want to file a complaint with the ethics commissioner against city council members go for it”.
I don’t know if it is only the contractor who is confused or is it that Councillors are too, because these are the facts, the City does not own $87.4B in assets, Tangible Capital assets as at December 31st 2019 were $18,48B. The bigger issue is that acquiring capital assets requires funds that are borrowed or received from other levels of government. Maintenance of these assets requires operating costs. Since a municipality does not really produce any product the funds must come from taxes, and there is only one taxpayer even if the money comes from higher levels of government. As for the increasing value of City Assets; has anybody seen the City sell an asset at a profit and return that money to the taxpayer? May be once but not on a regular basis. There is the recent proof; ‘the bill to tear down the Saddledome will mostly fall to the city at an estimated cost of $12.4 million (the Flames’ contribution to the demolition will not exceed $1.5 million).
I have covered and wrote about Calgary’s City finances for over 20 years and have taught Public Sector Finance, now with The Institute for Public Sector Accounting, I contribute to the Daniele Smith show on QR770, and other media to hold Council accountable for their actions. I am concerned Calgarians do not get the full story and that perhaps even Councillors do not understand the ramifications of their decisions on budgets and financial matters. Voting against a budget does not mean anything if you vote for a tax increase resulting from the budget.
 In conclusion I would ask Calgarians and for that matter citizens of other municipalities to demand more transparency and accountability from their elected officials. What they tell you may not be what is real.

Friday, 22 May 2020

The New Cold War is here.

After the fall of the Soviet Union, and the end of the Cold War, the world breathed a sigh of relief. Unfortunately while the West look forward to peace and economic growth, they ignored the rise of China as a world threat, and in fact helped them to this place of power. How did China do it?
Globalization and the expansion of trade created wealth in industrialised countries. To do so many industrialised countries used the enormous pool of cheap Chinese labor to produce goods. As a means to encourage Chinese participation the World Trade Organization (WTO) granted China the status of ‘developing country’ and with it came many privileges. Furthermore China manipulates its currency to obtain and maintain a competitive advantage.  Since the country is governed by an authoritative regime, there is complete control of the economy. Industries are managed and operated by the State, and production is dictated by the goals of the Chines Communist Party.
Given the complete control of the economy, most if not all, contracts between western corporations and Chinese producers must have the imprimatur of the government. Hence delegations from western governments often visit China to make deals, resulting in more concessions to get access to the closed Chinese market while giving more Chinese access to western markets.  These trade deals gave China greater access to western technology, and they also became one of the greatest infringers of copyrights. Chinese counterfeits flooded western markets and they also used the power of government control to increase ‘dumping’   of many products, mainly steel.
Furthermore, the obsession with climate change brought a new dimension to the reliance on Chinese production. In an attempt to reduce their ‘carbon footprint’ in their countries to placate the environmentalists, many countries increase their shift from home manufacturing to production in China. This shift did nothing to improve Carbon emissions, but in fact just transferred it to China, which at the same time received preferential treatment in new climate change treaties. They can pollute but the western world has to pay for their use of fossil fuels and increase in CO2 emissions. So what is the result of all these concessions?
First the trade deficits between China and the rest of the world grew. More significantly the trade deficit between the U.S and China got completely out of hand. The reliance on Chinese goods meant that China was exporting more than they were importing. They started to accumulate foreign currencies and in fact became the second largest holder of U.S debt. With that came monetary power and the authoritarian regime started to do something that was not contemplated, but in fact ignored by the West. China started to invest heavily in developing countries.  Africa and South America   became targets and their resources were acquired and exploited. These investments did not only provide monetary, but also political influence in these countries, and provided support for China’s influence on many global organizations like the WHO, UNESCO and the like. These expansion polices were ignored, as the west turned a blind eye and continued to focus on the war in the Middle East and the rise of terrorism.
All the while, China and its ally Russia were playing a different game. Russia under Putin and his new found wealth from oil and gas, and Xi entered into an alliance to engage in proxy wars. While using their ‘veto’ powers on the U.N Security Council, they covertly supported war in different parts of the world. As Obama, obsessed with appeasement took a back seat, the new Cold War allies extended their involvement in the Middle East, and supported Iran in the failed Nuclear deal. China used its proximity and long-time relationship with North Korea to support the regime, and in fact encouraged Kim Jung Un to become a thorn in Trump’s administration. In the meantime China started building islands in international waters in the South China Sea and built bases which extended its military reach in the region.
Another factor for the growing Chinese geopolitical power is the use of Chinese immigrants and students in many western countries. Many immigrants to countries like Canada still have ties with the communist regime. As they invested in the western world they also gained influence in political and corporate arenas. Many huge corporations are now either controlled or are partners with Chinese investors who still report to the government. Huawei is one example, and the continued relationships between large tech companies and China is a growing threat.
 In Canada, the increasingly worrisome Trudeau government and his relationship with China, is cause for concern.  Not only is the inability for this government to confront the Chinese government, but it is the constant acceptance of the acquisition of resource and technology companies by Chinese entities that should raise a red flag.  China has acquired many Canadian companies for example TMAC Resources, Continental Gold, Asia Pacific marine Container, Nexen etc.  It is not the investment that we should be worried about, it is the investor. With an obsession to gain a seat on the U.N Security Council, Trudeau has virtually given up any semblance of protecting Canadian sovereignty.
In the United States, it is apparent that China has not only got a foothold in many universities but also in many tech companies. Google and Apple are so reliant on business on mainland China that they are reluctant to support Trump’s policy of re-alignment with the belligerent and combative Chines regime.
Trump has been criticized for many things, one of which I did not support- the use of tariffs to bring China to the negotiating table, in retrospect he was right. However, it seems that the Covid-19 pandemic has given him the unfortunate opportunity to gloat. Or was the pandemic a means of Chinese retaliation?  On the other hand, China has been exposed and placed itself in a defensive position that nobody could have visualized some 18 months ago.  As more details are coming out about China’s role in the pandemic, western countries and many smaller developing countries are reconsidering their relationship   vis-à-vis the autocratic regime and leader for life Xi.
China with the blind complicity of the western world has been preparing itself to dominate the world as it builds itself into a supreme   military power. They have stolen and continue to steal technology; they have coerced global organizations through bribes and massive funding of smaller countries to get votes at the international levels. If there is one thing positive about Covid-19, it is that it was able to expose the Chinese duplicity. Is the world going to recognize the rise of China as a threat, or are we going to coalescence around a dislike for Trump and continue on our merry way and increase our dependency on trade with China?  The west should bring back their manufacturing home or expand into South Korea, India and other free Asian countries.
The new Cold War is here, make no mistake about it. Russia will align itself with China. To counteract this dangerous alliance, NATO countries should expand their membership or the world will face a greater problem, than terrorism or climate change – economic collapse.

Monday, 11 May 2020

The Upcoming Cold War

After World War II, military tensions escalated between the United Sates and the Western Bloc, and powers in the alliance of the Warsaw Pact led by the Soviet Union and later joined by China. This conflict brought the world close to a nuclear war, but fortunately ended with the collapse of the Soviet Union on December 26, 1991. However Covid-19 has open Pandora’s Box and we face a new cold war.
China has always aspired to be a world leader. After the Mao years the Chinese Communist Party (CCP) adopted a different strategy and opened its economy, while keeping a very strong hand on the political ideology and autocracy. The western world believed that opening trade with China would allow the regime to soften its stance and allow political freedom. Far from being the case China has now reached the point of being the next protagonist in a new Cold War.
In the late nineties China was still considered as ‘a developing country’ by the World Trade Organization (WTO). This status gave China several trade exemptions and also funding from western countries including Canada.  For years China has used these privileges to bolster its coffers. Western countries used China’s massive cheap workforce to produce many goods. To the extent that China became the major supplier of many manufacturing products, including pharmaceuticals. The rest of the industrialized world concerned themselves with climate change, and transferred many of their manufacturing activities to China to alleviate themselves of their so-called carbon foot print. These decisions caused unintended consequences, including massive trade deficits and large debts resulting in the U.S. owing $1.09 trillion to China. 
An autocratic Chinese government put this new found wealth to endear themselves in Africa and other developing countries. Gaining footholds in these countries and exploiting their natural resources. China also started funding international organizations and gained their confidence. In addition they build their military budget and have now the third if not second largest military force in the world. While the Obama administration was appeasing the Middle East and Iran, China was building artificial islands in the China Sea expanding its reach into international waters.
Covid-19 the virus which has gripped the entire world in a pandemic, whether it was manufactured or came from a wet market originated in Wuhan, China. There are conspiracy theories about the Chinese handling of the virus; Germany's Der Spiegel published the allegations, citing intelligence from the country's Federal Intelligence Service, known as the 'Bundesnachrichtendienst' (BND). According to the BND: 'On January 21, China's leader Xi Jinping asked WHO chief Tedros Adhanom Ghebreyesus to hold back information about a human-to-human transmission and to delay a pandemic warning. It is also reported that China cornered the market for surgical masks and personal protective equipment (PPE), while selling defective baldy needed equipment to the rest of the world .The devastating aftermath of the pandemic will still have to be measured in months to come. From and economic point of view the damage will be enormous. I believe that 20% of businesses will never again operate the same way. While up to 25% of the workforce may have to find employ in alternative and new jobs.
Hate or love President Donald Trump, in retrospect his stance against China has been correct. While I still do not like tariffs, Trump was able to get new trade deals through the imposition of tariffs against Chinese goods. I also believe, may be wrongly, that Covid-19 and its handling by the Chinese government may have been retaliation against Trump for winning concessions on trade. China has been waging a silent cold war against the Western world for quite some time, but politicians have been blind to this subterfuge. The handling of many of the world’s problems through organizations like the United Nations, where China has a veto has in fact made things worse. The Chinese philosophy is based on long term strategy and they have waited until now when their leader Xi Jinping, has been able to garner supreme leader status to flex their muscle.
The real problem is: what are Western Nations going to do about the rise of China? Unfortunately, despite the clear indication of China’s strategy to supplant the U.S as leader of the world, the hate for Trump is going to prevent a strong response. Take Canada for example; Trudeau who suffers from a huge inferiority complex vis-a-vis the U.S. more specifically Trump, is actually funding China and the WHO. His obsession with getting a seat on the U.N Security Council, where he believes he will have more power, blinds him from the geopolitical realities that face us.
The global economic damage caused by Covid-19 should not be used to promote socialist and environmental agendas, which in some form got us to where we are today. In fact it should be used to reform many of our global institutions and the way that we trade with each other. We can no longer rely on one major supplier in the supply chain. We must bring back certain industries from China, and use other friendlier sources like South Korea and India. The costs incurred could be easily recouped by Trump refusing to repay part of the debt owed to China. Is it legal for Trump to do so? I don’t know, but what is really important is for the U.S and its NATO allies, Australia, New Zealand, Japan as well as developing nations like India and South Korea to work together against China and its ally Russia, in a new Cold War that will not be restricted to earth but extend into space.