Thoughts and Opinions On Today's Important Issues

Thursday, October 09, 2008

Bank Of Windsor Taxpayers Going Broke


The Federal Finance Minister is praying that the Bank of Canada will not have to step in before the federal election to save the faltering Bank of Windsor Taxpayers. He is desperately afraid that if this Bank fails then other municipal Taxpayer Banks may also fail and there goes their majority government hopes.

The Windsor Taxpayer Bank it is almost tapped out given the unceasing demands by rapacious Governments. One knows when the situation is desperate when the Governor of the Windsor Bank said the following:
  • "It's going to be rough. We are in deep s**t. It will catch up to us and have a significant impact," said Francis...

    Financial markets are crumbling. And guess who's left on Main Street to deal with all these issues? The taxpayer," said Francis...

    The bottom line, said the mayor, is that this is no time to be hammering Windsor residents with property tax increases. "People can't handle any more. There is now more pressure to deliver a budget with no increase, so that it doesn't add to their woes. We can't be adding to the pressures they're already feeling at the kitchen table."
This BLOG is certainly educational if nothing else.

Today I'm going to teach you a lesson in municipal economics. We are going to learn how taxpayers are made sad while Bond Raters are made happy. We will learn how taxpayers give their hard-earned money to their City at no interest while they become impoverished. We will learn why increased taxes reduces economic activity.

According to Standard & Poor's our bond rating is still AA. According to them:
  • "Among the reasons cited for the rating are "declining debt burden, robust budgetary surpluses and improving financial flexibility."
Good for investors who hold the City Bonds. Unfortunately, the story might have been different if Standard & Poor's did an analysis or gave a rating for the Bank of the Windsor Taxpayers. Its rating would be just about at junk bond level I would think.

We will learn in this BLOG how our political leaders can say is things such as:
  • "This has been great news story for the community, for people who use the facility,"

even though the costs of the 400 Building have risen dramatically over the initial cost, and even as the audit of the 400 building has been kept from view from citizens for almost 1.5 years. It seems that the Mayor and certain Senior Administrators have seen all or at least parts of it. No one explained how the CAO could claim that it came in $1M under budget when clearly it did not as City Hall staff have now reported. It was over-budget.

You will learn that City Hall's "pay as you go" philosophy is great for Administrators. That can keep borrowings down and interest rates lower as the City supposedly becomes financially stronger and fiscally responsible. The problem is that the cash comes right out of the pocket of taxpayers.

We become the "banker" to the City except we are forced to "give" the politicians the money whether we want to or not. It is taken from us through increased taxes or through games playing like 86% increases in WUC charges and sewer levies. A debt reduction Levy is not really used for debt reduction but rather for "debt avoidance." That means, while we think that our money is being being taken to reduce the amount of our debt, it is not. It is being used on spending programs.

In some cases, pay as you go makes sense, say for small item purchases. So if you bought a TV set, you really should have the cash rather than pay the outrageous interest rate that stores and credit card companies charge for credit purchases.

But how many people would buy their house that way? Very few. Most people do not have the money to do so and would take out a mortgage. Even if a person had the money, it would be unlikely that it would all be paid out just for the home since who wants to be "house-poor." Life is more than a house eg travel, education, entertainment etc. Perhaps a bigger down-payment would be a compromise. After all, the purchase of a home is a big ticket item and one normally would amortize it over a long period of time as one lives in the home. No one gets too excited about it because it is the norm. As long as money is managed properly, then the individual can live quite well even if some money is paid out for borrowing.

So take the 400 building or the arena. Taxpayers are going to pay "cash" for it upfront even though the buildings will last for years. Taxpayers today are stuck paying for it all and in effect the taxpayers tomorrow get the benefit of it without paying a penny for it. Of course, if a "mortgage" or "bond" had been placed on it, sure interest would be paid out but all taxpayers over the life of the building would pay their fair share.

Look at what else Councillor Lewenza claimed. He said that we saved millions in interest payments. That is true for the City BUT not necessarily true for taxpayers. After all, we had to find the money to pay for our taxes.

However, here is what the Councillor ignored: the multiplier effect. That is defined as

  • "An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent."

Here it is explained in more detail and what the effect of taxes is on the economy:

  • "In the Keynesian multiplier story the initial consumer expenditure creates new income for the next person, who in turn creates income for another person and so on. However, to have income for consumption one must first produce something useful that can be exchanged in the market.

    Through the production of goods an individual can secure the produced goods of other individuals in an economy. His production backs up, so to speak, his demand for the goods he wants to secure. For instance Bob the farmer secures one loaf of bread from John the baker by paying for the loaf of bread with five tomatoes. Bob also secures a pair of shoes from Paul the shoemaker by paying for the shoes with ten tomatoes...

    Let us examine the effect of an increase in the government's demand on an economy's overall output. In an economy, which comprises of a baker, a shoemaker and a tomato grower, another individual enters the scene. This individual is an enforcer who is exercising his demand for goods by means of force.

    Can such demand give rise to more output? On the contrary, it will impoverish the producers. The baker, the shoemaker, and the farmer will be forced to part with their product in an exchange for nothing and this in turn will weaken the flow of production of final consumer goods. Again, as one can see, not only does the increase in government outlays not raise overall output by a positive multiple, but on the contrary this leads to the weakening in the process of wealth generation in general. According to Mises,

    "there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity."

Thus thanks to the increased taxes to pay for the 400 Building or the arena upfront our local economy suffers. Consumers are deprived of all of that money and so cannot spend. The 400 Building took $30M right out of the local economy at once rather than say $2M per year if it had been financed over 30 years at 6% interest per year. Consumers still could have spent $28M which amount would have been subject to the multiplier effect AND the 400 building still could have been built.

The other part that is so troublesome is that Government starts believing that the money is theirs to spend as they wish and never to give back to taxpayers in the form of a tax reduction. It just encourages more spending. Thus the justification for being able to pay for the Arena was paying off Huron Lodge and other pay-as-you go items. As Gord gushed:

  • "By turning its finances around and funding major projects out of revenues, Windsor is saving $81.7 million in interest payment over 20 years, more than $4 million annually, that would have been paid on debentures.

    TORRENTS OF MONEY

    By 2009, when major projects like the Norwich Block fiasco, the city hall welfare tower mistake and the new Huron Lodge at St. Clair College have been paid off, the city will find itself with torrents of money flowing in and no major funding obligations. In 2009 it will have an additional $23.5 million available, in 2010 $36.4 million and in 2011 another $36.4 million."

And the most ludicrous statement of all from the Mayor:

  • "But our financial prudence is paying off and giving us flexibility. We can pay for this (the arena complex) without going to debentures and without going to the taxpayers," explained Francis."

DUH, where does he think this money is coming from? Does it grow on the trees in our WOW-Factor gardens on Dougall, amongst the weeds that are growing back nicely.

Unfortunately with the Bank of Windsor Taxpayers, we are stuck. We cannot take out out money out and put it somewhere else. The only way we can salvage our situation is to move out of town. No one would do that, right. Think again:

  • "Windsor had the worst population decline of any major Canadian census metropolitan area in 2006-07, and observers and federal election candidates warn the troubling trend is going to continue..."