Gabriel Yiu: B.C. Liberals' contractual obligations hide magnitude of provincial debt

I still remember that in the 1990s, the business community, the Fraser Institute, the taxpayers' federation, the media, and the pundits often raised a hue and cry about the increase in debt incurred by the NDP regime. And they spared no effort in slamming the government for it.

They said such debts condemned our children and grandchildren to bearing the responsibility to pay for reckless spending.

Today, we can see that compared to the B.C. Liberals, the NDP's increase to the public debt was merely child's play.

B.C.'s finance minister, Colin Hansen, recently released his budget. Although the spending figures are just temporary and transitional, the large increase in debt is here to stay.

When the NDP won the election in 1991, the provincial debt was $20 billion. When the NDP stepped down in 2001, it was $33.8 billion—i.e., an increase of $13.8 billion during the decade of NDP governance.

The infrastructural capital construction under the NDP included new schools, health-care facilities, social housing, community facilities, the Island Highway, the Skytrain Millennium Line, SFU’s Surrey campus, and the fast ferries.

This year, B.C.'s provincial debt is at $47.3 billion. On the surface, the debt increase under a decade of B.C. Liberal governance is $13.5 billion.

Nevertheless, that is merely a faí§ade because the debt does not cover many of the B.C. Liberals' public-private-partnership projects, like the upgrading of the Sea-to-Sky Highway, the construction of the Canada Line, or the Abbotsford Hospital.

Actually, the B.C. Liberals have another ledger called “contractual obligation” to record these “debts".

The B.C. Liberals have been building infrastructure projects with the P3 model. Compared to the traditional approach of government borrowing and holding a public tender, the P3 model costs more.

These P3 projects are considered "contractual obligations” instead of debts.

Thus, they are not stated in the government budget and the government does not provide detailed information about them because they are deemed to be private business secrets.

In the 2009 B.C. election, I was an NDP candidate. At the first election forum organized by the Chinese media, the B.C. Liberals sent Hansen to debate me.

At the forum, I asked the finance minister three times: "What is the total amount of the government’s contractual obligation?"

Hansen did not reply to my question. He simply beat about the bush, and led people up the garden path. After this event, I have not met Hansen in other Chinese media election forums.

So what is the total amount of B.C.’s contractual obligations?

According to the recently released Public Accounts 2009/10, on page 75, it was stated they amount to $53 billion!

I am not kidding. The rounded-up figure is $53,041,000,000. The obligation this year is $7.3 billion; next year is $4.4 billion; the following year is $3.6 billion.

So after a decade of B.C. Liberal governance, if we add the debt and “contractual obligation” together, the total “debt” increase is $66.5 billion.

This amount is almost five times that of the NDP decade!

Even if we put aside the “contractual obligation” and concentrate on the “traditional debt”, Hansen’s latest budget has revealed a disturbing surge in our provincial debt.

According to page 108 of the latest B.C. budget, after the BC Liberal party won the 2009 election, the province’s “traditional debt” will have increased drastically from $38 billion in 2008-09 to $60.4 billion by 2013-14.

Another term of the B.C. Liberal government will bring in an additional $22.4 billion in additional debt. Keep in mind that this excludes contractual obligations.

Why is there such a huge jump? The explanation would seem to be that the financial tsunami has caused difficulties for big businesses to raise funds, thus making the “public-private partnership” model impractical.

So the B.C. Liberal government has to return to the traditional model, with government borrowing the capital, thus resulting in a big jump of “traditional debt".

Ordinary citizens might have difficulty relating to these astronomical figures. Let me try to provide some reference points.

The B.C. Liberals have repeatedly said that the financial consequence of cancelling the HST would be severe because the provincial government would have to reimburse the federal government for the $1.6 billion signing bonus.

To our provincial government, $1.6 billion is indeed not a small amount; our spending on the “protection of persons and property” this year is $1.5 billion.

If we add the B.C. Liberals’ “traditional debt” of $26.6 billion by 2013-14 and its “contractual obligation” of $53 billion (2009/10), we get $79.6 billion. Let's then divide this sum by 4.5 million that make up the population. The Liberal debt load per person comes to $17,688. A family of four would have to bear $70,755.

The most amazing thing is this: those who yelled at and slammed the NDP for building up a debt that will burden future generations are now curiously silent.

Gabriel Yiu is a small businessperson and was the B.C. NDP candidate in Vancouver-Fraserview in the 2009 election.

Comments (16) Add New Comment
ds
Why don't they put a toll on the sea to sky highway to pay for the thing just like they want everyone south of the river to pay for the bridges and now translink is talking about putting tolls on all of them to pay for their pet projects?
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RonS
ds there already is a toll. It's a hidden toll. Visit Laila Yuile's http://lailayuile.com/ site to see how it works for roads, bridges and hospitals. We are in debt up to our eyeballs under this government. Wow, talk about incompetence!
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Laila Yuile
Excellent article Gabriel. Yes, I have written and revealed much about many P3's in British Columbia, and Gabriel is absolutely correct. Just visist my site, look through the 'Best Of', and search P3 in the search box at the top - you will find details of the William R. Bennett Bridge, the Sea to Sky, the Port Mann, SFPR, gateway, Abbotsford hospital, and more.

There is a very, very good reason many countries and goverments are moving away from P3's, and it is because these contractual payments over the long term, on multiple projects can and has nearly bankrupted some countries, Portugal as an example. It is insane that the government does not include these figures in the real debt of our Province, which has effectively mortgaged our future on too many projects at one time.
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Hugh
I want to make sure I understand this.

The "traditional debt" is now at $47 billion. If you add the contractual obligation of $53 billion, that makes $100 billion total owed?

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Concerned Group 2
Thanks for all the comments. Here is my calculation of my BC Liberals debt:

$60.4B (2013/14) - $33.8B (2001) + $53B (P3) = $79.6B

Please note that on my calculation of the Liberals' first 10 years debt, it includes debt (2009-2011) incurred on their 3rd term.

On the question of no toll for the Sea to Sky Highway, perhaps the question should be asked, who bought and owned the prime and waterfront land there?
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Gloria
Did not Campbell and Hansen say when the recession hit, our provincial deficit was only $495 million tops? I don't remember the exact figure. But, the debt is now, horrifyingly massive. I am no political nor financial guru. I would appreciate if someone could explain, how such a horrendous debt came about. No wonder why, hospitals are crumbling into disrepair, and schools are being closed. The BC people are taxed to death now. Why did Campbell give our HST to Harper? Why was it not kept in BC, to pay our debt down? The $1.6 billion Harper gave Campbell, is a drop in the bucket. We need to get the HST away from Harper, that was a stupid move, right from day one. Campbell and the Liberals, have made a hell of a mess of BC. Any new party will have an awful job, trying to sort this financial mess out. The Olympics was a costly event too. Has anyone been able to get the truth, of that debt?
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Matt T
I will start by making two things crystal clear;

1 - Generally speaking, I don’t support P3's for delivery of public services

2 - This comment is NOT a defence of the BC Liberals. It’s a strong criticism of lack of technical knowledge on the part of the writer undercutting his argument, which is otherwise valid.

Contractual obligations are not included in debt because they are fundamentally different financial instruments. The only real similarity is that both represent future drains on future provincial revenues, but it pretty much ends there, as debt is a guaranteed outflow, while CO's are contingent outflows.

The fact that something can cause a possible future drain on revenues does not automatically classify it as debt. Should we start throwing long term public sector pension obligations into debt as well? The principle being argued is similar, that we should account for all possible potential future outflows as debt, in the present, even if we don’t know with certainty that we actually owe the amount in question in the future.

Reporting CO's as debt would not make the financial picture of the Province of BC clearer or more transparent; it would only inflate the debt of the province by adding the total amount we "might" owe over the term of CO's in present, assuming that they will all be executed, increase borrowing costs, and reduce financial flexibility in the present.

There is nothing "insane" about not counting CO's as debt, Laila; if anything qualifies for that comment, it’s trying to construct a legitimate financial argument incorrectly and expecting to be taken seriously, which is why I find this article so painful.

Gabriel Yiu’s insinuation or allegation that the BC Liberals have another “ledger” for the CO’s is not only false, it also illustrates a complete lack of understanding of financial reporting procedures in the public sector, is somewhat of an insult to the Office of the Auditor General and its staff (which would have to be complicit or incompetent for Mr. Yiu’s assertion to be true), and brings into question his ability to interpret or analyze the Public Sector Accounts on a professional level.

I will not now, and would never defend the BC Liberals transparency in financial management over the past 10 years, but this false accusation/accusation by ignorance approach is better left to the Glenn Beck’s and Sarah Palin’s of this world an does nothing to raise the level of serious debate around this province’s finances.

As a public sector accountant, I have trouble supporting or validating poorly constructed financial arguments being used in support of a valid point. What is even worse is how this information is being taken as gospel by commentators that don’t actually know that Mr. Yiu is incorrect without actually verifying his claims. An error simply compounds another error, and the level of public debate falls again, and instead of hammering the BC Liberals for the mismanagement that has occurred, critics end up defending their incorrect arguments.

This is especially so when the underlying criticism is actually correct.

In the fully audited Public Sector Accounts of BC, the BC Liberals are not hiding anything; on the contrary, to a person with the basic knowledge to analyze financial statements, their inability to manage finances responsibly is as obvious as a blue sky on a sunny Vancouver day.
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Concerned Group 2
Re: Matt T's comment

If a hospital or highway is built using the traditional government borrowing model, it's recognized as debt. But if the same hospital or highway is built using P3 model, then it's not debt but merely a Contractual Obligation. You're free to buy the Liberal line, but I'm sticking to my belief.

I was told by a MLA that the Auditor General did ask the government to include CO into the budget. Also, the CO is listed in the Public Accounts and it was audited and signed by the Auditor General.

The CO does include the private power purchase contracts signed by the Liberal government, one could argue that these are not debt too. But the fact is, even if BC Hydro doesn't need or use these expensive power, they still have to pay it. (These private electricity cost is as high as $124/MWh, versus public export market average price this year is merely $38/MWh. BC Hydro charges big industrial user @$40/MWh and residential user @$72/MWh.)
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Matt T
Concerned Group 2 wrote;

"If a hospital or highway is built using the traditional government borrowing model, it's recognized as debt. But if the same hospital or highway is built using P3 model, then it's not debt but merely a Contractual Obligation. You're free to buy the Liberal line, but I'm sticking to my belief."

Govt builds = they borrow = they own = they know when and how much they will have to pay as they cant walk away from the debt

P3 = govt leases = they dont own = they only owe if one party exercises contract = a ten year contract ended after two years means you dont pay years 3-10

First of all, it isnt the bloody BC LIberal "line", its recognized national PSAB Handbook policy towards the reporting of CO's for governments.

Second of all, what part in my original post where I criticized the BC Liberals financial management did you ignore out of convenience so you could rant away ? The second paragraph of my original post, or the final one, or everything in between ?

I am on your side, but I have no use for ranting, incoherent, and fundamentally incorrect financial analysis.

Is that clear enough for you ?

In any event, you can believe whatever you want, but its doesnt make you correct. If your doctor tells you you have cancer, not believing it does not make it not true.

CO's arent borrowed money, and they arent debt. PSAB Handbook regulations are clear, have been developed by various governments and stakeholders over time.

Perhaps you should make a submission to the standard setting agencies, which have nothing to do with the BC Liberals. If we had a NDP government, or a Green government, or a Raving Monster Loony Party government, the reporting would be the same. Period.

"I was told by a MLA that the Auditor General did ask the government to include CO into the budget."

First, CO's are currently recorded in the operating budget. Full reporting and disclosure are in the PSA. Two different statements.

The AG would never reply to an MLA in such a manner if he or she wanted to keep their job or accounting certificaiton. An AG that allows differential reporting not sanctioned by PSAB would be breaching his fiduciary duty to the public. There is no qualification in the public sector accounts from the AG regarding the reporting of CO's, which there would be if the AG asked the government to do as you say and they did not, there would be a qualified audit report. I see no such qualification.

" Also, the CO is listed in the Public Accounts and it was audited and signed by the Auditor General"

I made that point originally. Of course the AG has included the CO's in the audited Public Sector Accounts; that is what he or she is supposed to do. So other than agreeing with me, what was your point ?

"But the fact is, even if BC Hydro doesn't need or use these expensive power, they still have to pay it."

I am aware of then nature of the BC Hydro contracts, and it doesnt change anything regarding reporting.

BC Hydro is only obligated should they choose to exercise the contract over time, as I have explained in detail earlier earlier. If they walk away, they dont pay, or they pay a fine, which is recorded in the period of breach. Otherwise, Hydro only incurs those costs in the period in which they are executed.

As I pointed out, there is more than enough data in the properly constitued and reported Public Accounts to make the BC Liberals look bad.

If critics want to make things up as they go along, ignore the facts which actually support their arguments, then dont expect to either be taken seriously.

This is especailly so when it is clear that they dont have a sophisticated understanding of an issue, and couldnt hold their tongue for more than a paragraph without suggesting that those that dont agree with their lay quasi-analysis "buying the BC Liberal line" even when they clearly arent.
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seth
Yup Matt's right government's got a great scam going.

BCHydro contracts for power for forty years at a certain rate but because they may choose not to pay choosing to get sued for the twice the amount why that's not debt. Because it's not known whether the lawsuit payment is merely double or ten times the amount of the contract.

Meanwhile if BCHydro sells a bond using the money to build the same size facility, its considered debt. The fact that BCHydro may renege on that debt is irrelevant.

SLICK!!!. They musta handed out a lotta favors to their buds over at CACA to get away with that one.

Tell you what Matt - I call it off the books debt based on slick accounting procedures. We all know how the sleazes at CACA use every trick in the book so big business doesn't have to pay taxes. Now we see them adding their considerable skills to covering up government hanky panky as well.

Revenue Canada is not so lenient.

If I sign a must pay contract to lease a car for ten years it is considered a capital lease whether I choose to renege and get sued or not. If I try to expense it on my tax return I go to jail.

But no jail for government cheats. What else is new!!!

Of course the MSM could refer to the entire lot as "effective" debt but because it is in the pocket of fascist governments we never hear of it.
seth
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Matt T
seth wrote
"Tell you what Matt - I call it off the books debt based on slick accounting procedures"

Again, you and other can call it what you want, even call it oatmeal, it doesnt make it so.

It isnt debt.

It isnt off the books. In fact, you didnt even use the term "off the books" correctly. Off the book financing is an entirely different beast.

It isnt an accounting trick (which, just like "getting off on a technicality", is what those that dont have a sophsiticated understanding of what they are talking about use to cover their technical and factual ignorance)

It right there in the Operating Budget and the fully audited Public Sector Accounts for any person who is not functionally blind or ideologically blind, to see in black and white.

Since you claim that "slick accounting procedures" are involved, please explain. How is this being done ?

If you know that as fact, or claim that as true, you must have the skills to explain to another accountant why that is, on a professional and technical level.

I am waiting for something coherent other than a bunch of accusations of impropriety from those that cant identify or even explain how and why there is impropriety.



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Matt T
Seth wrote

"Meanwhile if BCHydro sells a bond using the money to build the same size facility, its considered debt. The fact that BCHydro may renege on that debt is irrelevant."

You are confusing issues. BC Hydro were to cancel, they would still have control over the asset. Then the debt would be written off in the period of cancellation.

"SLICK!!!. They musta handed out a lotta favors to their buds over at CACA to get away with that one."

If, by CACA, you mean the CICA, then please grow up. I am trying to have a knowledgable discussion - which is almost like clapping with one hand today.

Then again, you got that wrong to, the public sector is governmend by PSAB and the PSAB Handbook, not the CICA Handbook.

"We all know how the sleazes at CACA use every trick in the book so big business doesn't have to pay taxes"

Really ? You mean the same people that work for the CRA and the AG, chasing down tax fraud and recovering unpaid taxes, enforcing the same standards on business ? Then again, I dont doubt that you think that "deferred taxes" are taxes that dont have to be paid.......

You really should read the CBC Act (not the public broadcaster) and find out who determines taxes, rates, and what is owed and when it is paid. That is the government.

"If I sign a must pay contract to lease a car for ten years it is considered a capital lease whether I choose to renege and get sued or not. If I try to expense it on my tax return I go to jail."

No. Depends on whether it is a capital or operating lease (I wont explain the difference of treatments, I am sure that you know based on what I have read already....).

Second, if you try to expense a lease, you should get fined, not jail. Only a business can expense costs.

"Of course the MSM could refer to the entire lot as "effective" debt but because it is in the pocket of fascist governments we never hear of it."

The MSM is just as guilty as you are when it comes to dumbing down knowledgable debate about finances.

In any event, though, your comment is irrelevant, as there is no such thing as "effective" debt.



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seth
Matt's spew consists of a few legal details, with the vast majority of the rest rather silly opinions and ad hom attacks clearly violating the Str8's standards. Still they allowed it?

Good so be it.

A reality check for oh so naive Matt.

Revenue Canada is run by politicians (most of them attorneys) for politicians who are dependent on big business for campaign donations and post political retirement benefits like corporate directorships. The tax act is written by tax attorneys under the direction of said politicians who inject all kinds of loopholes into the act so Big Money with the full cooperation of CICA members can stuff their pockets with filtered off taxpayer lolly. Can you say Enron.

This use of contractual obligations in previous governments was rare but the Oh so very slick fascists at Canwest/Gordo and their pals at the media outlet by the same name realized this was a very effective scheme to confuse the taxpayer, funnel $tens of billions of taxpayer lolly to their pals and get away with what amounts to a colossal fraud.

The problem here is Matt is using legalese as opposed to common sense. He uses legal accounting definitions developed by government lawyers over the years using the law they write to flexibly hide what they are up to. After all pretty well all politicians are lawyers. In that they have the full cooperation of the CICA, going alone to get along.

We the people use the English language and dictionaries when we want to call a spade a spade and sleaze what it is.

From Webster a debt.

"an amount of money that you owe to a person, bank, company, etc. "

To illustrate lets look at three cases all debts under the taxpayer/voters and webster's definition.

A: BC builds a hospital expected to last 40 years and mortgages it with a bank the to cover the cost.

Per Webster BC owes money to the bank and in this case the government agrees and books it as such.

If the government defaults the bank goes to court which then orders assets seized and sold to satisfy the default. BC loses use of the asset.

B: BC gets a friend of the premier to build the hospital for various contracted payment schemes for 40 years at the end of which the asset returns to the government. Gordo's Pal floats a loan with the bank against the asset.

Per Webster BC owes money to Gordo's pal and is thus a debt but for the government this is a contractual obligation not a debt.

BC government defaults. Gordo's pal goes broke. The court awards the companies assets to the bank. The bank sues the the government for the outstanding payments.

BC loses use of the asset.

C: Ajax corp gets a friend of the premier to build the hospital for a monthly payment for 40 years at the end of which the asset returns to Ajax.

This is a capital lease. If Ajax tries to expense its payments on a tax return the Revenue Canada could ask for jail time.

Gordo's Pal floats a loan with the bank who mortgages against the asset. Ajax stops paying. Gordo's pal goes broke. The court awards the companies assets to the bank. The bank sues the the government for the outstanding payments.

Contrary to Matts spew, both in A and B the government loses use of the asset and has to pay out substantial penalities.

In case C the private sector the lease is viewed as capital and shows up on the company books as such as opposed to case B where the slick government accounting rules approved by the slicks at the CICA call it a contractual obligation.

To the taxpayer and voter who goes by a man's word and the English language the government ownership, the government contractual obligation, and the private capital lease are one and the same.

Matt uses the usual tax attorney legalese to cover up what is obvious to all.

I earlier called it effective debt. In plain English and according to Webster it is just debt sleazy legalese excepted.

seth
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Concerned Group 2
Matt, thanks for all the professional jargon and the accounting justification for the Liberal “hidden debt”. For a hospital or a bridge that is being built under P3, you could call it a lease, contractual obligation, or whatever technobabble financial expert could make up (we’ve seen enough “creative accounting” in Wall Street or in Greece already), the bottom line, the public is still going to pay for it!

On page 74 of the Public Accounts 2009/10, this is how the CO are described:-

“The government has entered into a number of multiple-year contracts for the delivery of services and the construction of assets. These contractual obligation will become liabilities in the future when the terms of the contracts are met.”

On page 75, it stated that the CO amounts listed are “minimum amounts required to satisfy the contractual obligations”, that means even if we’re not using those hospital, highway or electricity, we have to pay the amounts”¦

The International Monetary Fund has strongly criticized governments for this accounting trick, demanding government should begin treating yearly P3 payments as debt and not operating costs.
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seth
Matt is playing the role of the PAB tax attorney that the Good/Baldrey/Palmer team would be using to spin the government message.

According to:

http://www.investopedia.com/articles/stocks/04/102004.asp

The CO technique is routinely used by shysters to cover up liabilities. Enron was the most famous user of the Canwest Gordo technique and we'll let Matt tell us who the prominent firm and CICA member's were that did that accounting.
seth
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LostMyGlasses
Matt,


BC's Auditor General did indeed rule that debt amassed via contractual obligations in P3 agreements were indeed public debt.

The Liberals have not

I understand your personal definition, and many other neoLiberal economists understanding of debt. It doesn't mean your definition is correct. The supreme authority on the matter in this Province certainly disagrees with you and the BC Liberals.

But I'm sure the Liberals thank you for enabling their BS economics.
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