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Thursday, February 23, 2006

Newfoundland and Labrador Premier to Spend $2 Billion in Oil Revenues

Ever since Newfoundland and Labrador Premier Danny Williams won a 2 billion dollar test of wills with former Prime Minister Paul Martin over offshore oil revenues last year many in the Province and in the halls of Parliament Hill have been wondering exactly how the Province would use those revenues. Would the Province, as the Premier initially said, be used to pay down debt and balance the Provincial budget or would Province squander the proceeds as governments the world over have done in the past when faced with a large influx of cash?

When the revenue agreement was reached it was settled that the 2 billion dollars received by the Province was in fact an up front payment on revenues due to the Province over the next 8 years and with this in mind the disbursement of the funds has been a critical issue for the Province. Earlier this week news finally hit the streets that a decision on how to make use of those dollars was finally in the offing.

It appears Premier Williams has decided to pour the lion’s share of the 2 billion into paying off a portion of the unfunded public sector pension plans. These plans, which include the retirement funds for teachers (who appear to be the primary beneficiary’s of this move), public employees and police officers, were essentially raped and looted by former governments during leaner times. The result of this looting was a fund that is set to be completely bankrupt by 2014, at a time when many baby boomers will be retiring.

The Province is currently staggering under the highest per capita debt in the Country, approximately 12 billion, which includes billions in unfunded pension liabilities. According to Premier Williams applying the cash, perhaps as much as 1.5 billion, to the pension funds and this will allow the Province to reap about 100 million per year in interest income in perpetuity plus another 40 to 60 million per year in borrowing savings. Those additional savings are expected as a result of the improved bond rating that is expected to follow the move.

In addition to the immediate savings outlined the province will save another estimated 150 million a year in pension costs that would arise 8 years down the road when government would be forced to pay pensions to retirees as a result of the collapse of their pension funds.

According to the board of trade, banking officials, bond rating agencies and others, including Federal officials involved in developing and managing transfer payment calculations, this is a good move for the Province and will provide benefits far after the 8 year timeframe the 2 billion dollars was intended to span, however some in the Province have different thoughts on the issue.

The leader of the official opposition Liberal party does not agree with the approach taken by government and would rather have seen a more diverse approach to the disbursement of the funds. Opposition leader Jim Bennett would rather the funds were divided between debt repayment on high interest loans, pension funding, infrastructure improvement and health care as well as in the hiring and deployment of new teaching staff.

According to Bennett, there are pressing needs in the Province that must be met and it’s “typical” of the Conservative government to focus solely on debt. In Bennett’s opinion the public won’t be pleased with the decision of government.

Some in Newfoundland and Labrador have speculated that Premier Williams would invest a portion of the funds in a Provincial buy out plan aimed at purchasing the Federal government’s 8% stake in the Hibernia oil field while others thought the money might go toward a Provincial stake in development of the Lower Churchill hydro development project. As things stand today, neither of these appears to be in the offing.

Over the coming days and weeks there will no doubt be much conversation and debate over government’s decision both pro and con. The truth of the matter is that regardless of how the money was utilized the decision would have had its proponents and its detractors. Either way it goes, the deal finally appears to be done.

Are there better ways the money could have been used, perhaps, I guess that depends on where you stand and what your “issue of the day” might be at any given time, but regardless of whether or not there might be a better investment (and I believe some other options could have been assessed) I for one see this as a strong, decisive and sound move. It’s a decision that can only help the Province going forward and I’m not so sure the public reaction expected by Liberal leader Jim Bennett will come to pass.

When you consider the stability and security this move will provide to many in the public service sector, the improvement in our bond ratings (read lower borrowing rates) and the guarantee of an extra 100 to 160 million a year in revenues (not counting the savings of over 150 million a year beginning in 2014) the decision can’t be that bad. If the Province has any intention of investing in Hibernia or the Lower Churchill or Spaghetti Factories for that matter then they can no doubt work out a way to do that through borrowing (at lower cost than we can borrow now) or through some sort of time managed payment arrangement. These options still exist.

In addition to the financial benefits of the plan there are two very big benefits I see coming from this decision. The first is the fact that Newfoundlanders and Labradoreans no longer have to worry about the government simply frittering and wasting the money away as might have been done by other leaders. The second, and perhaps just as important benefit, is that this government did not put the Province in a position where anyone in Ottawa or anywhere else in the Country will have any reason to continue under the mis-conception that Newfoundlanders and Labradoreans must be, “led by the hand”, or, “managed”, because they, “don’t know how to take care of themselves”.

I’ve thrown verbal “bricks” and “bouquets” at Premier Williams over the course of his mandate, today I toss a very big bouquet. My Mom always said, “Watch the nickels and dimes and the dollars will take care of themselves”. I’ll even go so far as to say that it’s likely his Mother and mine would have gotten along just fine if they had ever met over a cup of Tetley tea.


Glenn in GP said...

I too think this is a very smart move. The overall savings as you alluded to shows the sound long-term advantages for all NL's on a going forward basis. I believe that once the initial reaction passes and the benefits are discussed openly for all to see, the vast majority will support this move. You are always going to have a segment of society that are instant gratificators, up here we call them socialists.

The other, bigger argument is yet to be made and you touched on it briefly, that being how the federal govt. views our money management skills. Currently, almost all of the current equalization transfers go to servicing the provincial debt ($800 million?). The federal Conservatives have shown a willingness to re-negotiate the way equalization is calculated. Suggestions have been made that increases in transfers would occur based on the willingness of provincial govt.'s to pay down long-term debt and eliminate deficits. There has also been discussions on removing certain federal tax points and letting the provinces collect them instead as a means of debt reduction.

The Premier is readying himself for the First Minister Meetings when he will get a chance to sit down with the Fed's. This move will only garner far more from the federal coffers as well in the long run. That I am sure of.

Patriot said...

Fiscal responsibility is always a good thing. If I come into a windfall I'm better off to pay down my mortgage in order to get rid of it early than to simply spend the money on basics that will satisfy the immediate need and leave me needing more for a longer period.

(As a side note, let's all cheer the Gushue rink today in Torino. The guys have already done us proud with the Silver medal but with even an ounce of luck we may be talking Gold today and they deserve it all)

NL-ExPatriate said...

I actually wrote the Premier more specifically the budget consuoltations suggesting that the best bang for our 2 billion retroactive wind fall was to try and double our money by partnering with the feds in infrastructure like the TLH, South Shore road or fixed link to Labradoretc.

But from my reading of all of the financial documents concerning our province the one thing that did get mentioned time and time again was this unfunded pension liability that our Prov government is burdened with.

Now the in and outs of this affair are way above my head but the principle of paying down debt for the future is by far the best possible option IMHO.
I think they should try and get some concessions from the teachers and public service though for this good will gesture. Lets say no pay raises for a few years.

This is by far the best and most obvious use for the Atlantic Accord money. It is much easier to budget a regular income than it is to budget wind falls not to mention the increased bond rating and lower interest rates.

Imagine if he held onto the money and went on a spending spree next election in order to guarantee his re-election what the talk would be no sir this is a unselfish move for the best interest of our people and provinces future.

WJM said...

Fixed link to Labrador?

Fixed link to Newfoundland, you mean!!!

Labrador is already "fixed".