December 1, 2005

Correction: I used the wrong formula to calculate the compound effects to determine the average annual increase that is allowed under the government's new compensation formula. It should have been Y(X + X^2 + X^3 + X^4) = 4.7 + 4*Y where Y=17.2 and X is 1 plus the average annual percentage increase. That is a harder formula to solve but doing it iteratively yields an average increase of 2.7% for each of four years.

Notwithstanding that unfortunate error, it is correct that settlements beyond that will come out of the total pot so if physicians, for example, get a big settlement, the average for everyone else will be less than 2.7% per year.

Phony Bargaining Framework

Finance Minister Carole Taylor's announcement that a "$5.7-billion multi-year funding envelope will guide public sector compensation agreements through 2009/10" seemed destined to grab headlines, as it no doubt will.

According to Taylor's news release: "Over a five-year period, including the current year (2005/06 to 2009/10), the Ministry of Finance forecasts that $11.4 billion in unallocated fiscal room is available for budget decisions. Half of that amount, or $5.7 billion, is set aside for compensation agreements across the broad public sector." A backgrounder to the release explained that existing wage and benefit costs for public sector employees (258,000 union, 42,000 management and other non-union) are forecast at $17.2 billion for 2005-06. The release and the Second Quarter Financial Report explained that $1 billion of the money is for non-recurring costs for those who sign early, and an additional $300 million may be available for non-recurring costs for those who sign for four years or more.

{Correction: error deleted here and corrected above.}

Taylor's "generosity" stemmed from an embarrassingly rich Second Quarter Financial Report that showed stunning inaccuracies in previous forecasts. As expected when the budget update was tabled in the legislature in September, government revenue from natural gas is dramatically higher than the forecast previously assumed, and many would bet that when the Third Quarter report is tabled with the budget in February, we'll see another "unexpected" windfall.

The Report noted that "Revenue is up $1.3 billion mainly due to a $757 million increase in energy revenue resulting from continuing strength in natural gas prices". It went on to say: "natural gas prices are expected to fall to the $6.00/gigajoule level over the next three to four years - resulting is an estimated $864 million reduction from 2005/06 revenue levels." However, it acknowledged that: "The Ministry of Energy, Mines and Petroleum Resources estimates that the natural gas price reached $10.8 C/GJ in October, nearing the high of $13.3 C/GJ seen in 2001." In other words, if prices remain near their present levels the government will have a windfall of $2 billion per year or more. Those aren't certain revenues, but there aren't many who gamble in the energy market who are placing their bets with Taylor that prices will fall significantly. Cynics would say that the Finance Minister is following the traditional pattern of substantially under-estimating future revenue, very convenient in a year of public sector bargaining.