Ontarians want excellent public services from their government. The Commission on the Reform of Ontario’s Public Services understands and supports this desire. We see no reason why Ontario cannot have the best public services in the world — with the proviso that they must come at a cost Ontarians can afford. With such a goal, we face three overarching tasks. First, we must understand Ontario’s economic challenges and address them directly. Second, we must firmly establish a balanced fiscal position that can be sustained over the long term. And third, we must sharpen the efficiency of literally everything the government does so Ontarians get the greatest value for money from the taxes they pay. This report addresses these issues and offers a road map to a day when Ontarians can count on public services that are both excellent and affordable — the public services Ontarians want and deserve.
Ontario faces more severe economic and fiscal challenges than most Ontarians realize. We can no longer assume a resumption of Ontario’s traditional strong economic growth and the continued prosperity on which the province has built its public services. Nor can we count on steady, dependable revenue growth to finance government programs. Unless policy-makers act swiftly and boldly to prevent such an outcome, Ontario faces a series of deficits that would undermine the province’s economic and social future. Much of this task can be accomplished through reforms to the delivery of public services that not only contribute to deficit elimination, but are also desirable in their own right. Affordability and excellence are not incompatible; they can be reconciled by greater efficiency, which serves both the fiscal imperative and Ontarians’ desire for better-run programs. Balancing the budget, however, will also require tough decisions that will entail reduced benefits for some. Given that many of these benefit programs are not sustainable in their current form, the government will need to decide how best to target benefits to those who need them most. The treatment may be difficult, but it is worth the effort.
Ontario’s $14 billion deficit in 2010–11 was equivalent to 2.3 per cent of gross domestic product (GDP), the largest deficit relative to GDP of any province. Net debt came to $214.5 billion, 35 per cent of GDP. The 2011 Ontario Budget set 2017–18 as the target year to balance the books — at least three years behind any other province. The government asked this Commission to help meet and, if possible, accelerate the deficit-elimination plan.
First, we assessed the 2011 Budget Scenario for the next seven years; while the government maintained that it was committed to balancing the budget by 2017–18, we concluded, as did the Auditor General, that the 2011 Budget measures alone would not likely lead to balance. If there are now plans under development within government to secure all of the fiscal restraint, they have not been provided to the Commission.
Next, we developed a Status Quo Scenario, our own view of how Ontario’s finances would unfold if no changes were made to government policies, programs or practices. We used assumptions for both economic and revenue growth that were more cautious than those in the 2011 Budget, largely because the economic outlook had deteriorated since March 2011. We also assumed that the growth of programs would continue to be driven by inflation, population growth, aging, school enrolments and so on.
The resulting projection indicated that the deficit would more than double to $30.2 billion in 2017–18 and net public debt would reach $411.4 billion, equivalent to just under 51 per cent of the province’s GDP. To avoid that outcome, we devised a Preferred Scenario for the budget path that would balance the budget in 2017–18. It incorporates a revenue projection that is substantially lower than that of the 2011 Budget and a much reduced track for program spending.
Meeting the target will be difficult, but we believe our recommendations will accomplish the job. Although our mandate expressly forbids us from proposing new or increased taxes, there are ways the government can raise some additional revenues. Still, most of the burden of eliminating the $30.2 billion shortfall in 2017–18 must fall on spending. To balance the budget, the province must target a spending level in 2017–18 that is 17 per cent lower than the sum found in the Status Quo Scenario — a wrenching reduction from the path that spending is now on. It is, however, necessary if Ontario is to escape its recent history of rising public debt that forces the government to spend more than it should in interest payments — money that could otherwise be used to finance programs. Our Preferred Scenario would hold down the growth of net public debt, leaving it at 37 per cent of GDP in 2017–18.
Slowing, and eventually halting, further growth of the debt burden is critical. In the past two decades, Ontario’s fiscal record has been one of large deficits that were only partially offset by sporadic episodes of small surpluses. Since the late 1980s, Ontario’s debt ratio has more than doubled to 35 per cent from 14 per cent as recessions quickly created more debt, but good economic times only reduced it slowly. Debt is costly, since interest must be paid on the province’s outstanding bonds and other obligations. Unusually low interest rates in recent years have allowed Ontario to borrow cheaply, but as interest rates rise to more normal levels, so will the cost of servicing the growing debt, and that will divert dollars away from public programs.
Until recently, Ontario’s debt record was similar to that of other Canadian provinces. In the past decade, however, a commodities boom has allowed provinces such as Alberta, British Columbia, Newfoundland and Labrador, and Saskatchewan to reduce their debt burden, leaving Ontario in the company of the three Maritime provinces, with their roughly 35 per cent debt ratios. Canada’s highest provincial debt ratio, at about 50 per cent, belongs to Quebec; that is where Ontario is headed in our Status Quo Scenario.
By current international standards, Ontario’s debt is still relatively small. We are a very long way from the dreadful fiscal condition of countries that have dominated the news in the past two years. So, however, were many of the headline countries at one time — in some cases, surprisingly recently. Still, among bond investors, Ontario is seen as a well-governed province in a well-governed country. We do not mean to be alarmist, only to point out that government debt can rise quickly if not headed off early. Should the global economy turn nasty once again, any deterioration in investor confidence could be remarkably swift. The recent decision by Moody’s Investors Service to revise its outlook on Ontario’s bonds from stable to negative is a danger sign. With the global recession hitting Ontario particularly hard, Ontario’s recent deficit record is poor; relative to GDP, it ran the biggest provincial deficits in the country for three consecutive years beginning in 2008–09; the current 2011–12 fiscal year is likely to add a fourth.
Our message will strike many as profoundly gloomy. It is one that Ontarians have not heard, certainly not in the recent election campaign, but one this Commission believes it must deliver. If Ontarians and their government are going to come to grips with the fiscal challenges that lie ahead, they must understand the depth of the problem and its causes. Ontario must act soon to put its finances on a sustainable path and must be prepared for tough action — not just for a few years, but at least until 2018. We believe Ontarians can make — and implement — the kind of thoughtful decisions needed to resolve the province’s fiscal dilemma while protecting, to the greatest degree possible, the public programs on which Ontarians rely, many of which are a source of justifiable pride.
The rewards of such action will be considerable and tangible. High-debt governments are always vulnerable to the whims and demands of the financial markets from which they have borrowed; governments in this position can be forced to take draconian measures to keep their lenders happy (Greece and Italy are recent vivid examples). Low-debt governments have much more flexibility to set their own priorities — ones that meet the needs of their citizens and the good of their jurisdictions as a whole.
How did we get to this point? For most of the past decade, Ontario’s economic growth has lagged that of the rest of Canada, as changing economic conditions hit Ontario harder than other provinces. A strong dollar made Ontario’s exports more expensive for foreigners to buy while making imports cheaper; as a result, foreign trade, once a net contributor to GDP growth, is now a net drag. In the recent recession, Ontario lost 5.0 per cent of its GDP from peak to trough, while the rest of the country lost only 3.7 per cent. The human cost of this lacklustre performance is apparent in jobs and incomes: Ontario’s unemployment rate has been above the national rate for over five years now; average personal income in Ontario, more than 20 per cent higher than the average in the rest of Canada in the second half of the 1980s, was 0.5 per cent lower than this average in the third quarter of 2011.
Ontario’s future growth will almost certainly be slower than it was in the past. Not only will the global recovery be slower than normal, but Ontario also faces further structural changes. As in most of the developed world, manufacturing has been dwindling as a share of the province’s output and employment base. This trend will continue. Moreover, the growth in Ontario’s working-age population and labour force will come mostly from immigration, but the incomes of recent immigrants have been well below those of workers who were born in Canada or arrived earlier.
In short, we cannot count on robust economic growth to resolve our fiscal challenge. Out to 2014, we accept the projection in the government’s 2011 Ontario Economic Outlook and Fiscal Review that real GDP will grow by an average of 2.2 per cent per year. Beyond that, we take a cautious approach, based on our view that labour-force growth will slow and productivity growth will remain modest. From 2015 through 2018, we expect average real GDP growth of only two per cent per year. Growth in nominal GDP, which includes the impact of inflation, is even more critical for fiscal planning because it constitutes the tax base — the economic activity on which the provincial government levies its taxes on income, sales and corporate profits. We assume nominal GDP growth of 4.2 per cent to 2014 and 3.9 per cent from 2015 through 2018.
Our growth assumption directly affects our projections of the government’s revenue growth. We continue to be more cautious on the revenue projections to 2013–14 than those contained in the 2011 Ontario Economic Outlook and Fiscal Review. We see some room for additional revenue growth without raising taxes (these would involve contraband tobacco, the underground economy, collections issues, tax expenditures and additional revenues from Crown agencies), but our projections for 2017–18 point to total revenues of $134.7 billion, $7.5 billion less than the Budget Scenario’s $142.2 billion. While we can hope for better, we cannot make firm budget plans on the basis of hope. Our caution also leads us to build in a larger reserve in case revenues fall short of the forecast.
The 2011 Budget set out a track to 2017–18 for spending on programs (everything, that is, except interest on the debt) that involved growth of 1.0 per cent annually from 2010–11 to 2013–14 and 1.7 per cent per year from then until 2017–18. But if we assume that government programs continue as they are now delivered, then spending is actually on course to grow much faster — 3.5 per cent per year on average over the seven-year period. This is about half the pace of the past decade, so significant action has been taken. Our Status Quo Scenario for program spending incorporates increases that are likely to occur if current programs retain their present form, if no new programs are introduced and if nothing further is done to restrain spending. It is based on drivers of spending growth such as inflation, population growth, aging, new drugs, enrolment growth and welfare caseloads.
Yet spending is neither out of control nor wildly excessive. Ontario runs one of the lowest-cost provincial governments in Canada relative to its GDP and has done so for decades. And we must recognize that some important steps have been taken in the past few years to help manage costs, improve our prospects for future economic growth and enhance services to the public.
To prevent the $30.2 billion deficit that we project in our Status Quo Scenario for 2017–18, the government can raise taxes, cut the rate of spending growth, or do some of both. While our mandate precludes us from recommending new or increased taxes, we believe that the revenue measures mentioned earlier could raise almost $2 billion by then; the government should proceed with these measures. Steadily reducing the deficit to zero in 2017–18 would save $4.3 billion in interest costs. To balance the budget, we need to shave about $23.9 billion off our projection for program spending in that year.
Such an outcome allows for an increase in total spending on programs of only 5.6 per cent over seven years, or 0.8 per cent per year. If we factor in both population growth and inflation, we find that real program spending for every man, woman and child in Ontario must fall by 16.2 per cent, an average annual decline of 2.5 per cent from 2010–11 through 2017–18, a drop that is almost certainly unprecedented.
|2010–11||2017–18||2010–11 to 2017–18||2010–11||2017–18||2010–11 to 2017–18||2010–11||2017–18||2010–11 to 2017–18|
|Billions ($)||Billions ($)||Per Cent Change||CAGR* (Per Cent)||Per Capita in current dollars||Per Capita in current dollars||Per Cent Change||CAGR* (Per Cent)||Per Capita in 2010 dollars
|Per Capita in 2010 dollars
|Per Cent Change||CAGR** (Per Cent)|
|Interest on Debt||9.5||16.3||70.7||7.9||720||1,132||57.2||6.7||720||975||35.4||4.4|
|Net Debt/ GDP||35.5%||39.7%||–||–||–||–||–||–||–||–||–||–|
|Interest on Debt||9.5||19.7||107.5||11.0||717||1,369||91.1||9.7||717||1,180||64.6||7.4|
|Net Debt/ GDP||35.0%||50.7%||–||–||–||–||–||–||–||–||–||–|
|Interest on Debt||9.5||15.3||61.8||7.1||717||1,068||49||5.9||717||920||28.4||3.6|
|Net Debt/ GDP||35.0%||37.0%||–||–||–||–||–||–||–||–||–||–|
|* Certain figures may not add due to rounding.|
|** CAGR = Compound Annual Growth Rate.|
|*** Deflated by the CPI.|
Not every program should grow at the 0.8 per cent rate that is our limit. But if some programs grow faster, other programs will have to grow more slowly or even shrink. For example, if health care continues to grow by 6.3 per cent per year — its track record over the previous five years — then all programs other than health would have to contract by 4.1 per cent annually to meet our target. Health care would run roughshod over every other priority; it would gut every other government service that Ontarians rely on for their education, social welfare, justice system, infrastructure needs and a host of other programs that matter to the people of this province. This cannot be our future.
Another choice Ontarians must face in the months ahead involves labour compensation. Since the total bill for wages, salaries and benefits accounts for about half of all Ontario government program spending, it is difficult to believe that program spending can be held to annual growth of 0.8 per cent if labour costs rise appreciably.
Having developed a number of scenarios for program spending, we have opted to recommend one that counts on very restrained growth in health care outlays to leave room for spending growth in some other programs. We believe there is ample scope in the health care system for efficiencies that will allow health care providers to deliver the services Ontarians need without getting annual increases of the kind seen in recent years.
Accordingly, we recommend the following annual changes in program spending out to 2017–18:
This permits post-secondary education grants to almost keep pace with enrolment and provides a realistic path for non-health, non-education, non-social services spending. For the latter programs, it represents a very significant degree of restraint: a cumulative decline in the level of spending of 15.6 per cent over seven years. But a significant portion of this “everything else” category is either fully committed by historical arrangements such as amortization and pension contributions, or simply unwise to cut, such as existing shared-cost agreements, where the province would be giving up federal dollars. For everything other than these fixed items, the cumulative decline would come to about 27 per cent. If we attach dollar signs to these changes, we find that in 2017–18, total program spending will be up $6.3 billion from 2010–11. Health will have $8.4 billion more; education (elementary and secondary), $1.6 billion more; post-secondary education, $0.7 billion more; and social services, $0.5 billion more. All other programs will have $4.0 billion less, while changes to reserves and year-end savings will make up the difference.
Ontario’s finances do not yet constitute a crisis, and with early strong action a crisis can be averted. Crises almost inevitably bring forth bad public policy decisions born of desperation. The lessons of history and of what is happening elsewhere today are clear: the government must take daring fiscal action early, before today’s challenges are transformed into tomorrow’s crisis. Unlike a crisis, a challenge can be met with well-considered, firm, steady and even imaginative action that deals with the problems methodically and phases in the needed changes over a period of years, giving people a chance to adjust. The government's decision to create the Commission and give it a broad mandate to address near- and long-term fiscal issues signals its intent to address these challenges and head off any crisis. Our goal in this report is to set out the kind of measures that will meet the task.
Closing the budget gap by 2017–18 will not be easy. However, many Canadian governments have successfully faced deep fiscal problems in the past two decades and in the process have strengthened their capacity to deal with fresh challenges as they came along. Most of those episodes occurred in the 1990s, when a sharp recession was followed by a recovery that was halting at first before gathering enough momentum to generate a solid expansion. Economic growth helped governments back to fiscal health, but many restrained spending significantly and some raised taxes. This time, economic growth may not even be strong enough to lend much of a hand.
The federal government’s elimination of the deficit between 1995 and 1998 is the best-known example. Departmental operating budgets, as well as grants and contributions, were reduced by 15 per cent to 25 per cent, while transfers to the provinces were cut by more than 21 per cent over two years. Seven of every eight dollars needed to eliminate the deficit came from spending restraint rather than revenue-generating measures. Program spending fell by almost 10 per cent in the first two years of the restraint period and remained below the
pre-restraint peak for five years.
Four provinces that carried out vigorous and successful deficit-cutting exercises — Alberta, Saskatchewan, New Brunswick and Ontario — all relied on spending restraint or outright cuts to a much greater extent than tax increases. In Alberta, total spending on programs fell by almost 22 per cent in three years and remained below its peak for six years. Saskatchewan, which had come close to defaulting on its debt, used a mix of spending cuts and tax increases. Program spending was cut by 10 per cent from the peak, but the restraint period lasted a full seven years. New Brunswick’s two episodes of restraint in the 1980s and 1990s produced a mixed record. The first relied mainly on revenue increases. The second was tackled with a combination of tight expenditure curbs and revenue-raising measures, but government spending fell in only one of the restraint years.
In Ontario, a deep recession and five years of deficits raised the debt ratio from 12.7 per cent in 1989–90 to 29.2 per cent in 1994–95. After the 1995 election, the Harris government substantially reined in spending, with the exception of health care; the two most dramatic moves were a 22 per cent cut in social assistance rates and a downloading of program responsibilities to municipal governments, with a partial fiscal offset from other changes in Ontario–municipal relations and the induced reductions in overall welfare expenditures. Strong economic and revenue growth after 1995 helped the province balance its budget by 1999–2000, by which time spending had begun to rise again.
Despite the lasting reputation of the Harris government, program spending fell by only 3.9 per cent from its 1995–96 peak and stayed below the peak for only three years, a period of restraint that was both milder and much shorter in comparison with Alberta and Saskatchewan. Even Quebec cut program spending by more than Ontario during this period — 4.6 per cent over two years.
How does our scenario for the period from 2010–11 through 2017–18 compare with the 1990s?1 Our Preferred Scenario projects that revenue will grow by 3.4 per cent annually from 2010–11 to 2017–18. Between 1993–94 and 1999–2000, the recovery period from deficit in the 1990s, revenue grew by a robust 4.7 per cent per year, even though taxes were cut after 1995. The 2011 Budget clearly signalled the government’s intention to restrain spending in the seven years to 2017–18. Remarkably, the implications of the spending goal went almost entirely unremarked by the public in the months since the Budget was released. In setting out a target for program spending in 2017–18, the government’s Budget Scenario was pointing to a steady decline in real program spending per capita, averaging 1.9 per cent per year. Startlingly, this compares with a real per capita decline in program spending averaging 2.0 per cent per year between 1993–94 and 1999–2000. Ontarians did not notice that the 2011 Budget was projecting seven years of real per capita spending cuts that looked very much like the 1990s.
Unfortunately, the Commission believes that will not be enough. Given our greater caution in projecting revenue growth, our Preferred Scenario suggested that program spending — again on a real per capita basis — will have to fall by 2.5 per cent per year.
The 1990s cuts probably appear smaller than the figures many Ontarians remember. But in 1999–2000, as the budget approached balance, program spending increased by 3.0 per cent as the government loosened the purse strings to deal with the pressures that had accumulated; health spending alone increased by 11.4 per cent.
The lesson here is that governments can hold the lid on spending for a while by taking extraordinary measures to contain compensation costs, postpone capital projects and scrimp on infrastructure maintenance. But unless fundamental spending reforms are implemented, the old pressures reassert themselves and governments with newly balanced budgets have a hard time resisting them.
Ontario is neither a high-tax nor high-spend province. It does not enjoy the easy pickings of natural resource revenue, nor is it a major recipient of federal transfers in comparison with the rest of Canada. To meet its own goal of a balanced budget in seven years, the government will have to cut program spending more deeply on a real per capita basis, and over a much longer period of time, than the Harris government did in the 1990s. Moreover, it does not have the option of an immediate deep cut in social assistance rates, which have not greatly recovered from a 22 per cent cut in 1995. It will have to maintain restraint for as long as Alberta’s Klein government and Saskatchewan’s Romanow government in the 1990s, recognizing that Alberta also made deep cuts to social assistance payments, while Saskatchewan raised taxes to help meet its goal.
The ultimate challenge in the years ahead will be to find ways to make government work better and preserve as much as possible the programs Ontarians cherish most.
There are five parts to our mandate:
The “don’ts” are proposals that sound useful, but are often harmful:
The “dos” apply across the entire public sector:
We can perhaps shoot for a grander goal — a province that provides the best public services, delivered in the most efficient manner, in the world. If this sounds impossibly ambitious, put the question another way: Why not? We goad our business sector to win new customers globally in the face of stiff competition. Why not apply the same standards to our government? Why not give our public servants an objective that can turn the task of transformation — which will at times be a very tough slog — into a project that becomes a source of real pride?
What does being the best at public policy and services look like?
Public service would be an honourable calling that would draw the province’s best and brightest people into government. The best public service would set clear objectives, use proper metrics to measure progress and provide clear accountability for those expected to meet the objectives. It would benchmark itself against the best in the world. It would constantly evaluate priorities; if a new priority is identified, others would move down a spot and some, now outdated, would be discarded. It would drive relentlessly towards effectiveness and efficiency. It would focus on outcomes, not inputs, and give managers the flexibility to do the job best within their budget. It would approach risk from a scientific basis.
The task ahead need not be dreary. Many will scoff that the very idea of creating an organization that delivers the world’s best public services is hopelessly naive, and that we should not even think of such lofty goals. But high ambition should never be sneered at. Such an objective could instil in our politicians, our public servants and all Ontarians a sense of purpose that would help see us all through this monumental mission.
Ontarians are not prepared for the severity of the restraint needed to balance the budget by 2017–18. Raising public awareness of the challenge must be done early, clearly and consistently. The 2012 Budget should set out as much detail of the restraint as feasible.
In any organization, a major transformation can succeed only if it is clearly led from the top. Once the Budget is crafted, the task of ensuring that the spending targets turn into firm action falls to the Premier’s Office and the Cabinet Office. It must be clear to all that the Premier’s Office is giving full moral and organizational support to the effort.
The budget process itself needs some reforms. The annual budget can be a powerful educational tool both for Ontarians in general and for public-sector officials. Transparency, clarity, the use of reserves and a long-term perspective are all virtues in budget-making; there is now too little of all four.
Several measures would strengthen the fiscal planning process. For example, the 2012 Budget should contain a “clean status quo” fiscal projection out to 2017–18 that reflects only decisions and actions already taken. From this base, any savings from firm new actions should be shown. Without tax increases, it will be difficult for Ontario to return to a balanced budget earlier than 2017–18, so this date should remain the target. In the full report, we set out 12 steps that would increase the probability of securing the 2017–18 target, including the use of prudent economic growth forecasts, an adequate contingency reserve that grows over time and spending limits for the seven years to 2017–18 for each ministry and agency.
There are three critical ingredients to successful reforms:
Ministers and their officials should be given a great deal of discretion in deciding how to implement reforms. However, there are several government-wide issues that many ministries will face in common. These include labour issues; duplication of programs and services; the possibility that services can be delivered in more efficient ways; and managing the province’s considerable assets, where a common approach is desirable. Ministers and officials can learn from each other by coming together on such questions.
Latitude for discretionary action notwithstanding, a vigilant watch must be maintained on how the individual reforms are coming together. A Steering Committee, with representation from the Premier’s Office, Cabinet Office and Ministry of Finance, should be the focal point for the work necessary to implement all reforms and monitor the reform exercise.
Prior to formal Cabinet consideration, proposals should be vetted by a Premier’s results table on strategic reform, which would be the main forum for both championing and contesting reform proposals. The results table would be chaired by the Premier and comprise senior Cabinet ministers and independent experts with relevant experience in cost-cutting and transformational change. This group would be supported by the steering committee, ensuring the involvement of senior staff from the Premier’s Office and Cabinet Office, and senior officials from the Ministry of Finance.
This structure should stay in place for at least several years and some parts of it should become permanent to deal with issues such as overlap and duplication.
Health care is at once the biggest item in the Ontario government’s budget, the issue of most concern to Ontarians, the source of the most intense and emotional public policy debate, and the centre of the most complex delivery system of any set of programs financed by the provincial government. For at least two decades now, Ontarians — along with other Canadians — have worried about the quality and accessibility of their health care. As health has consumed a rising share of the provincial budget, the debate has increasingly focused on the very sustainability of the health care system in a form that gives Ontarians what they want.
There are only hard answers and difficult solutions. We must reform the health care system to make it operate more efficiently and give us greater value for the money we now spend on it. This is not easy. The public debate has been poisoned in recent decades by a widespread failure to comprehend the trade-offs that must be made; by knee-jerk reactions to worthy but complex ideas for change; by politicians (and media outlets) who have been too willing to pander to fear-mongering; by stakeholders in the health care system who, wishing to cling to the status quo, resist change; and generally by a lack of open-minded acceptance of the reality that change is needed now and that money alone will solve nothing.
The parts should work better together, so that the whole is greater than — or at the very least equal to — the sum of the parts. Such change is already underway in bits and pieces. Health care providers in every corner of the system recognize far better than the politicians or the public what needs to be done and — perhaps more importantly — what no longer needs to be done. They are moving the system incrementally towards the greater integration that is utterly necessary. What they need is more encouragement from government plus financial incentives that will change behaviour in ways that will produce a health care system that better serves us all.
The vital first step is a long-term view. The government must set out a 20-year plan with a vision that all Ontarians can understand and accept as both necessary and desirable — a plan that will, though it involves tough decisions in the short term, deliver a superior health care system down the road.
Reform must shift the system from one built mainly for acute care to one built mainly for chronic care. Quality of care and efficiency are essential. Better care delivered smoothly and briskly will benefit patients and providers alike; it will also save money. Quality and efficiency go hand in hand. Too often, treatment delayed is treatment diminished.
We will recommend a number of ways in which this can be done. Before we get to those proposals, however, we will sketch out what we regard as the most salient facts about health care and the perspectives we bring to the issue.
Health care is the Ontario government’s single biggest spending program. In 2010–11, the province spent $44.8 billion on health — 40.3 per cent of its total spending on programs. The cost of health care is driven by inflation, population growth, aging, new technology and the increasing use of new procedures. Rising costs have been a subject of intense public attention and discussion for at least two decades. The trajectory of ever-more-costly health care will moderate only modestly if left to operate as it does now.
In 2010–11, operation of hospitals accounted for about 35 per cent of provincial health care spending, and doctors and practitioners, about 27 per cent; almost eight per cent each went to prescription drugs and long-term care, and another six per cent to community care. The remaining 17 per cent financed everything else.
In our Status Quo Scenario, the one that relies heavily on existing drivers to project the overall cost of government programs, Ontario’s health care budget rises to $62.5 billion by 2017–18, for an average annual increase of 4.9 per cent from 2010–11. In our Preferred Scenario, we have set out a much more modest path for health care spending: an increase of 2.5 per cent per year.
Polls reveal large gaps between how we run health care in Canada and what Canadians say they want. Most Canadians, for example, want medicare to cover home care, long-term care, mental health care and drug benefits. Ontarians are wedded to the single, public payer model of health care and will not tolerate any deterioration in access and quality of care. There also seems to be less concern that all services be delivered under public administration, as long as the bill can be paid with an OHIP card. Ontarians want their health care system not only sustained, but also improved.
It is easy to be smug when we compare ourselves with the United States, which spends far more than Canada relative to both its population and its GDP, yet in 2010 left over 16 per cent of its population uncovered by health insurance. If we compare ourselves to countries other than the United States, however, we often come up short. We need to do more and we need to do better; and we need to do both on a tight budget.
Some context — a series of hard truths, measures and comparisons about health care in Ontario — will help frame the discussion.
The health care system is not really a system: What we have is a series of disjointed services in many silos. Ontario needs to integrate these silos and reduce administrative red tape that impedes efficient and effective service.
The health care system is costly: Canada has one of the costliest health care systems in the world, which may surprise people who are too accustomed to comparing our record only to that of the United States. But among 34 countries in the Organization for Economic
Co-operation and Development (OECD), Canada had the sixth most expensive system in 2009 and was not far behind the second most expensive one.
The system is not as public as most people think: The public component of health care accounted for over 70 per cent of all health care spending in 2009. Of 27 OECD countries reporting such data for that year, Canada ranked 19th. Medicare does not cover out-of-hospital drugs, nursing, psychology and other counselling, community mental health services, nutrition advice, ambulance services, addiction treatment, long-term care, eye care or dental care.
The health care system is only part of the picture: Only 25 per cent of the population’s health outcomes can be attributed to the health care system. Yet amazingly, the three-quarters of environmental factors that account for health outcomes, such as education and income, barely register in the health care debate.
The system does not produce superior results: Despite its high cost, our system does not produce superior results on a value-for-money basis relative to other countries.
We have fewer physicians than other jurisdictions: At 19 physicians per 10,000 people, Canada is well below continental European G7 countries, where most are well into the 30s.
Canada falls short on many measures: One study ranked Canada 17th in the percentage of total life expectancy that will be lived in full health, 24th in infant mortality and second in the incidence of mortality from colon cancer.
But Ontario’s is the best system within Canada: There is some evidence that, on important matters, Ontario has one of the best or even the best system within Canada.
Drug costs are growing faster than other health spending: Pharmaceuticals have been the fastest-growing component of health care costs in recent decades. The OECD reports that Canadian generic drug prices are the highest among member countries.
There are inefficiencies in the health care system: The use of some surgical procedures far exceeds clinical guidelines. Too many hospital patients could get better-quality care at a lower overall cost elsewhere in the system. Researchers at OECD estimated that if Canada became as efficient as the best-performing countries, efficiency gains could amount to almost 30 per cent of public-sector spending.
Complex cases drive costs: About one per cent of Ontario’s population accounts for 34 per cent of health care costs, and 10 per cent of the population accounts for 79 per cent, according to a 2011 study. The people in the one per cent group are frequently in and out of our health care system, constantly being admitted and readmitted into hospitals.
Mental health and addiction issues are also cost drivers: The economic costs of mental health and addiction have been estimated at $39 billion annually, three-quarters of those from productivity losses. Ripple effects are felt in the justice, educational and social services sectors.
Our health system developed to deal with acute care and largely remains in that mode. Today, the key health issues are increasingly shifting to chronic care questions, in good part because the population is aging, but also because some lifestyle problems such as obesity are creating particular health conditions. The OECD projects that the total public and private cost of long-term care will more than double from an estimated 1.4 per cent of GDP in 2006 to 3.3 per cent by 2050.
The ideal health system would emphasize the prevention of poor health. It would be patient-centric and would feature co-ordination along the complete continuum of care that a patient might need. Primary care would be the main point of contact, but there would be much less emphasis on treating patients in hospitals. All professionals would exercise the full scope of their skills in their work; nurses, for example, would administer vaccines, and nurse practitioners would manage chronic illnesses such as diabetes and high blood pressure. Payment schemes and information gathering would support the patient-centric notion. Compensation for hospitals and physicians would be tied to outcomes of health rather than to the inputs or services.
The old system and an ideal reformed system are laid out in the accompanying charts.
|Current System||Reformed System|
Long-Term Care, Community Care and Home Care
Physicians and Other Professionals
|Current System||Reformed System|
Coverage of Public Payer Model
Here is a summary of the kind of changes we seek: a shift towards health promotion rather than after-the-problem treatment; a system centred on patients rather than hospitals; more attention to chronic care; co-ordination across a broad continuum of care rather than independent silos that allow too many people to fall between the cracks; and new ways of dealing with the small minority of patients who require intensive care.
Rather than draw patients to hospitals, we should direct them to the most appropriate care setting for their problem — whether it is a doctor’s office, family care centre or clinic, rehabilitation centre, long-term care centre or back home. Physicians and other professionals tend to work alone or in small groups where they are not integrated with other sectors of the health care system. Family Health Teams (FHTs) go some way to meeting this goal, but tend to be too small, with too few physicians, and cover too narrow a range of services.
Regional health authorities should establish what expectations professionals should meet and accountability should be strengthened by electronic records.
Medical schools should add at least one course introducing their students to the broader system in which they will spend their careers, and where physicians fit. The government should do more to direct physicians to areas of need.
The government should exercise greater cost control over pharmaceuticals; the recent move to reduce the cost of generic drugs was a fine first step. Private-sector employers should also exercise greater control over the cost of drug plans they offer their employees.
Long-term care, community care and home care are underfunded, with too much emphasis on long-term care facilities and too little integration of services.
As long as government pays for all covered services, it should allow both the public and private sectors to play a role in service delivery. Most family physicians are private-sector operators paid by OHIP, and private companies now provide publicly funded laboratory work.
Information technology (IT) is used too little across the system in a way that allows the integration of different activities. Extensive use of IT is key to pushing the health care system to operate in a co-ordinated fashion. Better to build from the bottom up.
The public payer model covers most primary care but less than half of drugs and relatively few mental health services. Extending medicare to more services would be controversial, but an open dialogue will at some point become necessary; the government should at least launch such a dialogue.
We must stress two things. First, the health care landscape is not nearly as black and white as the previous chart implies. Many segments of the old system are already moving towards the reformed system. Second, none of what we have said will surprise anyone who manages part of the health care system today. Many are already pushing the system towards needed reforms.
These ideas are in no way radical; but too many of them have been stifled in public debate by politicians, interest groups and stakeholders who regard even the most sensible reform proposals as threats to medicare rather than solutions to medicare’s problems. No one who manages a part of the system argues that more money alone is the solution to the problems of the health care system. Some argue that too much money would simply impede needed reforms. To date, more money has not bought change; only more of the same, at higher cost.
Ontario created 14 Local Health Integration Networks (LHINs) to co-ordinate care on a regional basis. In theory, the LHINs have the authority to allocate budgets across the various components of care; in practice, they do not.
There is an abundance of opportunities for reform that will create a system that can deliver better-quality care more efficiently. The challenge is to realize those opportunities.
Our recommendations are intended to further strengthen the existing system, in part by pushing ahead with the original plans for integrated regional health delivery.
Our first recommendation is that the government should develop and publish a comprehensive plan to address health care challenges over the next 20 years. The plan should set out clear principles and deal plainly with the issues we raise and our proposals for reform.
All patients not requiring acute care should be diverted from hospitals to more appropriate care that will be less expensive, improve the patient experience and reduce the patient’s exposure to new health risks. Upon presentation of a health card, the government will pay for the services rendered. Home-based care should be used more extensively.
All health services in a region must be integrated, including primary care physicians, acute care hospitals, long-term care, Community Care Access Centres (CCACs), home care, public health, walk-in clinics, FHTs, Community Health Centres (CHCs) and Nurse Practitioner-Led Clinics (NPLCs). Exceptions to the regional system are specialized health facilities that have provincewide responsibilities, such as the Hospital for Sick Children, the Princess Margaret Hospital and the Centre for Addiction and Mental Health.
The government’s health budget should be capped at 2.5 per cent or less annual growth through 2017–18. After that, annual health cost increases must be restrained to no more than five per cent. Some areas — including community health care and mental health — will need to grow more rapidly than the average, and the province should address the historic gap in funding and services for mental health and addiction.
The government should set the overall principles, but deliver health care on a regional basis. A regional health authority should integrate services and institutions across the full continuum of care for a geographic area. The co-ordinating entity must have the authority, accountabilities and resources necessary to oversee health within the region; it must further have the power to allocate budgets, hold stakeholders accountable and set incentive systems.
We considered four possible co-ordinators: The regional offices of the Ministry of Health and Long-Term Care (MOHLTC), a reversion to the old system; the CCACs; the large, mostly academic, hospitals; and reconstituted LHINs. We favour LHINs, which will need to execute three key roles: planning and integrating the system, funding and case management.
Planning and Integrating the System: Reconstituted LHINs first need to work with other stakeholders to streamline the more than 2,500 funded health agencies in Ontario. This would involve further amalgamating hospitals and reducing the number of boards, consolidating health service agencies where appropriate and establishing advisory panels with representation of stakeholders. Second, LHINs should integrate care by sharing information on patients among health care providers, co-ordinating decisions and allocating funds to best reflect regional needs. Information from funding models such as the Health-Based Allocation Model (HBAM) should be used to identify service gaps and evaluate progress in managing high-use populations.
The LHINs should optimize human resources capacity by shifting services to lower-cost caregivers where feasible and encouraging full scope of practice — a net shift in responsibilities from physicians to nurses and others in health teams, including physician assistants. The LHINs should use funding as a lever to ensure that nurses, nurse practitioners, personal support workers and other staff members can apply their full range of skills.
Out-of-hospital services — for outpatients as an example — should fall to others, such as the CCACs and private health care operators, which have demonstrated that they can do this sort of work for much less than hospitals. The LHINs should also resist the temptation to build many more long-term care facilities until the government can assess if more can be done for an aging population by further emphasizing the use of home-based care, supported by community services. Home-based care is less expensive and should generate greater population satisfaction.
Funding: The government should give LHINs the authority, accountabilities and resources necessary to oversee health within their regions, including allocating budgets, holding stakeholders accountable and setting incentive systems. The LHINs should deal with all aspects of the health system’s performance, including primary care (physicians), acute care (hospitals), community care and long-term care. This would include setting budgets and compensation for all players. Compensation for senior executives should be tied to health outcomes, not the number of interventions performed.
Case Management: There is a lack of smooth and consistent patient case management. “Clerical system navigators” who co-ordinate appointments and help patients with forms and paperwork, a role developed in some parts of Ontario, should be used across the entire system. “Quarterbacks” can help FHTs and specialized clinics track patients as they move through the integrated health system. Complex care patients should be managed through interprofessional, team-based approaches to maximize co-ordination with FHTs and other community care providers. Chronic issues should be handled by community and home-based care to the fullest extent possible.
Revamped LHINs would need solid governance and structures. A key element of governance, if they are to co-ordinate the system, is appropriate representation. Their need for more resources would entail a significant transfer of employees from the MOHLTC. Government needs to stand by the LHINs’ decisions, even if they close a facility.
Decisions regarding medical procedures covered under OHIP are now part of the compensation package negotiated by the government and the Ontario Medical Association (OMA). Doctors should be consulted, but no more.
Evidence should drive policy. Medicine is ever-changing and it is difficult for doctors to keep up with the latest research and best practices. They need research-based clinical guidelines to help them stay current. In Ontario, these can come from the Institute for Clinical Evaluative Sciences (ICES) and Health Quality Ontario (HQO). These agencies could also help the government decide which procedures might be removed from public coverage. Health Quality Ontario should become a regulatory body that would enforce evidence-based directives to guide treatment decisions and OHIP coverage.
Hospitals are paid on the basis of average costs across the province so there is no incentive to increase efficiency. The MOHLTC and LHINs should use HBAM data to set hospital compensation for procedures. A blend of activity-based funding (i.e., funding related to interventions or outcomes) and base funding would work best. Hospitals should be encouraged to specialize. Hospitals should also make greater use of hospitalists — physicians who co-ordinate inpatient care from admission to discharge. This role is crucial when dealing with patients with complex cases where multiple specialists may be involved in their care.
Primary care, the domain of physicians, should be a focal point in a new, integrated health model. Physicians’ primary goal should be prevention and keeping people out of hospitals. The system should move away from the sole proprietorship nature of many doctors’ offices and encourage more interdisciplinary integration. Physicians should be compensated through a blend of salary/capitation and fee-for-service; the right balance is probably in the area of 70 per cent for the former and 30 per cent for the latter.
The government should firmly negotiate its next agreement with the OMA. Ontario’s doctors are the best paid in the country, so it is reasonable to set a goal of allowing no increase in the total compensation envelope. The negotiations must also address the integration of physicians into the rest of the health care system.
Family Health Teams should become the norm for primary care. They need to be big enough to support a wide range of care providers and the number of other staff needed to track people through the system. They should offer better after-hours care and add more specialists to their teams. The FHTs should also initiate discussions with their middle-aged patients about end-of-life health care and “living wills,” so that patients and their families do not have to make such critical decisions under duress. The MOHLTC should seek input from seniors’ advocacy organizations to engage the public in an open dialogue on end-of-life care.
The government should remove perverse incentives that undermine care: physicians are penalized when one of their patients goes to another walk-in clinic but not when the patient goes to the emergency department of a hospital.
The aging of Ontario’s population underlines the need for reforms to community care, home care and long-term care. We need to match seniors to the services they need from the earliest available care provider, reduce the number of days people spend in hospitals when another form of care is more appropriate, and improve the management of referrals for long-term care, home care and community services. The government should implement the recommendations made by Dr. David Walker, in his 2011 report, “Caring for Our Aging Population and Addressing Alternate Level of Care.” There is also a need for more — and more varied — palliative care.
The province should do more in the area of disease prevention and health promotion. Much public health work is done outside the primary health care sector. Funding for public health is strongly linked to municipal budgets. Municipalities now put up 25 cents of every public health dollar; many are now considering spending cuts that put public health units at risk of losing provincial support. The province should consider fully uploading public health to the provincial level. Better co-ordination of the public health system is needed to include hospitals, community care providers and primary care physicians. Ontario should copy British Columbia’s Act Now initiative, which has been cited as a best-practice example for health promotion and chronic disease prevention. Doctors could do their part by addressing diet and exercise before reaching for the prescription pad. Patients should heed their doctor’s advice and make lifestyle changes when requested. The province should do more to reverse the trend in childhood obesity and explore regulatory options for the food industry.
Medical schools should educate students on “system issues” so that they better understand where physicians fit in the whole health care system. The schools should also flag current or potential shortages and carry out the task of labour supply planning.
Pharmaceuticals are a major issue. Ontario needs an open, honest discussion of whether there should be more public coverage of pharmaceutical costs. At the same time, we should ask if payments under the Ontario Drug Benefit (ODB) program, which covers almost all of the cost of prescription drugs for seniors and recipients of social assistance, should be linked more directly to income. One option is to make the portion of pharmaceutical costs paid for by seniors rise more sharply as income increases. A better option is to link the benefit not to age, but to income only. This option would greatly strengthen the equity of the program and remove a large brick in the “welfare wall” by covering low-income non-seniors who do not receive social assistance. Savings would obviously be greater under the first option. The Commission regrets that there was no modelling of these options that would have clarified the net fiscal impact; it should be done. In 2003, British Columbia changed its age-dependent program into one that links solely to income.
One potential way to reduce overall drug costs is to pursue with other provinces the possibility of setting a common price for pharmaceuticals. Provinces could also reduce overlapping regulations that add costs and present barriers to new drugs entering the market efficiently. The ICES and HQO should also conduct drug comparisons to determine which is the most efficient at treating a given ailment; current tests by Health Canada do not do this. The government should ensure that all new drugs add value that exceeds their cost. As mentioned elsewhere, Ontario should work with the federal government to ensure that Ontario’s interests in expanding use of generic drugs are not undermined by a Canada–EU Free Trade Agreement. The province should also use pharmacists to their full scope of practice, allowing them to substitute a less expensive alternative to the physician’s prescription. They should also be allowed to administer injectables and inhalant medications and prescribe for minor ailments, as is done in Saskatchewan.
A number of other cost efficiencies are possible for the health care system:
Above all, the government should involve all stakeholders in a mature conversation on the future of health care and the 20-year plan. Anything done in the health field can be politically dangerous, especially if cost restraint is involved. It will be critical to explain the objectives carefully and stress that this is not just another round of cost restraint.
The stars are aligning for just such a discussion. The stakeholders themselves are reaching out with proposals for reform, many of which are consistent with our recommendations here. All stakeholders must speak out — ordinary citizens and health care providers of all stripes, drug companies whose products are one of the fastest-growing costs, employers who cover their employees’ drug and other health costs, and academics who study these issues.
The scale of reform we propose is vast, dealing with organizational, clinical and business issues. In the late 1990s, the Health Services Restructuring Commission was given power to expedite hospital restructuring and advise the Minister of Health. Given that the scale of reform being proposed in this report extends well beyond hospitals, a new commission should be established to guide the reforms, drawing from a broad range of stakeholder communities, including providers and citizens/patients.
We believe these recommendations can guide the health care system over the period to 2017–18 in a way that meets our target of a 2.5 per cent annual increase in health care funding by the province. This is a tough goal; it implies that real inflation-adjusted spending per person on health care will have to fall by a total of 5.7 per cent in the seven years from 2010–11, or 0.8 per cent per year. But we can reform the system to bring better care to more people at less cost.
It is the reforms that matter most. Major spending cuts solve little, as we saw in the 1990s. The health budget was cut for several years, but because thorough reforms were not undertaken, pressures built and spending took off again, beginning in 1999.
Beyond 2017–18, spending will probably accelerate as a consequence of population aging. This is why our recommendation for a 20-year plan and full public debate is crucial. The government should describe the challenges ahead, highlight the potential for more efficiency, discuss financial issues squarely and present the fundamental choices clearly. If we do not seize the opportunity now to begin creating a system that delivers more value for the money we spend, Ontarians a decade or two hence will face options far less attractive than the ones we face today. Unless we act now, they will be confronted with steadily escalating costs that force them to choose either to forgo many other government services that they treasure, pay higher taxes to cover a relentlessly growing health care bill, or privatize parts of the health care system, something that is anathema to most Ontarians.
We can and should avoid such an outcome by making the right decisions today, however tough they appear at the moment. Our decisions will not be perfect, but almost certainly, they will ensure that we bequeath a more equitable, more cost-efficient and higher-quality system to future generations.
A strong education system is critical to Ontario’s prosperity and global competitiveness. We believe that this era of restraint presents an opportunity to deliver education as efficiently and effectively as possible.
The province funds nearly 98 per cent of education sector expenses. Over the past decade, provincial spending on elementary and secondary education has grown significantly despite declining student enrolment; one result has been a 56 per cent increase in per-pupil funding. This is not sustainable. The Commission believes the sector growth rate must be constrained to one per cent per year.
The government’s challenge is to restrain education spending while protecting the scholastic progress achieved. The education sector should stay the course on its agenda of three key goals: improving student achievement; closing student achievement gaps; and increasing confidence in the publicly funded education system.
Because sound and transparent fiscal planning will enhance co-operation and stability, the province should set funding allocations to school boards out to 2017–18. Not only will this give boards time to find efficiencies, but also full knowledge of the budgetary future will support constructive collective bargaining later this year when the sector’s collective agreements will be renegotiated.
First Nations Education: On-reserve First Nations education urgently needs improvement. Although this is a federal responsibility, the province is affected because most Aboriginal students are educated in provincially funded schools. Most on-reserve secondary students are educated off-reserve and the underfunding of on-reserve elementary schools often means that students arrive at the secondary level with acute remedial needs. Federal funding per student falls well short of parity with provincial education spending. The province should put strong pressure on the federal government to adequately fund on-reserve education at least at parity with per-student provincial funding. Failing an agreement with the federal government, the Commission recommends that the province provide the required funding. Agreements would include the facilitation of forming education entities among participating First Nations with powers similar to provincially funded district school boards, and negotiation of multi-year targets for the proportion of supervisory officers, principals and teachers who will be deemed qualified by the Ontario College of Teachers.
Full-Day Kindergarten (FDK): In 2010, FDK began in nearly 600 schools; another 200 schools were added in 2011 and some 900 more announced for the 2012–13 school year. There is substantial evidence that investments in early childhood education produce significant long-term socio-economic benefits. But costs associated with new staff, classroom supplies, transportation, other school operations, capital and stabilization for the child care sector will eventually amount to over $1.5 billion per year. In the current fiscal climate, the Commission is concerned that the timing is inappropriate. The Commission is aware that the costs of FDK were incorporated into the March 2011 Budget and 2011 Ontario Economic Outlook and Fiscal Review in November. However, not enough offsetting restraint was secured in other spending to ensure that these fiscal plans would achieve the overall deficit objective.
We recommend cancellation of the FDK program with appropriate phase-out provisions. If the government decides to continue implementation, it should do two things. First, it should delay full implementation from 2014–15 to 2017–18 and reduce FDK program costs by adopting a more affordable staffing model of one teacher for about 20 students, rather than a teacher and an early childhood educator for 26 students. Second, before confirming full implementation of FDK, it should get assurances from school boards, teacher federations and support staff unions that negotiated annual wage increases by 2017–18 will be no higher than current trends in the broader public sector (BPS), and that class-size increases and reductions in non-teaching staff contemplated by the Commission by 2017–18 will be achieved.
Class Sizes: One of Ontario’s fundamental strategies to improve student achievement has been to reduce class sizes in primary schools (junior kindergarten to Grade 3). Some 90 per cent of classes now have 20 students or fewer, and none has more than 23. The government has committed significant resources to class-size reductions at the primary and other levels. While the government has emphasized that smaller classes promote better education outcomes, empirical evidence presents a more complicated picture. Ontario’s recent improvements on provincial assessments and quality indicators have coincided with reduced class sizes, but there is no evidence of causality. Even if smaller classes had some impact on outcomes, the evidence suggests that investments in smaller classes do not offer the most efficient means for improving results. Given this lack of convincing empirical support, the Commission believes that scarce resources should not be applied to reducing class sizes. We recommend increasing the class-size cap for primary schools from 20 to 23, and increasing the class-size averages in junior/intermediate schools from 24.5 to 26 and in secondary schools from 22 to 24. The Commission supports continued emphasis on programs that have proven critical to increasing graduation rates. Class sizes should be increased in a manner that does not jeopardize programs that have helped increase graduation rates and benefited Ontario students.
Non-Teaching Staff: Since 2002–03, staffing has increased by more than 13,800 for non-teaching positions. To meet our target growth rate in education spending of one per cent per year to 2017–18, the Commission projects that about 70 per cent of these positions will need to be phased out by that year. Boards will have to minimize the impact of this reduction on school operations.
Limits to Funded Secondary School Credits: To get a secondary school diploma, Ontario students must complete 30 secondary school credits. Many students, however, are completing more than 30 credits; 14 per cent of Grade 12 students return for a fifth year. This is costly. The Commission recommends that public funding be capped at 32 successful credits per student. School boards should be allowed to charge a fee for additional credits.
Encouraging Efficient Student Transportation: Transporting students to school poses a challenge to school boards, with costs difficult to contain. The Ministry of Education recently placed a moratorium on new competitive procurement. This should immediately be lifted, since it delays getting efficient, effective student transportation service through competitive bidding. Users may have to bear a portion of the cost through a student transportation fee, with provisions to ensure that lower-income, special needs and rural students are not restricted in their access to learning.
A Comprehensive Plan to Live With One Per Cent Annual Growth: Our one per cent limit on annual growth in the education budget means the sector will have $1.6 billion more to spend in 2017–18 than in 2010–11. In our Status Quo Scenario, existing cost pressures point to increases that will add $4.4 billion to the bill, leaving a shortfall of $2.8 billion. We believe the recommendations already set out will eliminate this shortfall.
We assume that school boards would seek further efficiencies or other revenues to offset cost pressures such as benefits, utilities, fuel and so on. The following recommendations, while not costed explicitly, have been developed in that spirit.
Promoting Evidence-Based Solutions in Special Education: Special education grants account for a significant portion of education spending at $2.5 billion in 2011–12, a 55 per cent increase since 2002–03 despite declining enrolment. The link between increased funding and outcomes for students is not obvious. The Commission commends the province’s focus on supporting students with special needs, but we must direct every dollar to where it will have the most impact. We recommend a full review of the province’s special education programs and the results achieved, including programs for students in care, custody or treatment, and hospital boards, with a view to ensuring that funding is being used effectively to improve student outcomes. For clarity, we do not believe there is a “problem” with the overall special education funding envelope. Our concern is the lack of measurable outcomes for the significant investments made since 2002–03.
Reform of Provincial Schools: The ministry directly manages a number of schools for the deaf, demonstration schools for students with learning disabilities and schools for the blind and deaf blind, serving about 800 students in eight schools. School staff members are provincial employees; this is not the best governance arrangement. The government should close the demonstration schools and use the savings to expand alternative secondary school programs in school boards. The Schools for the Deaf should be consolidated into one site to achieve a greater critical mass of students from junior kindergarten to Grade 12. Savings from this consolidation should be reinvested in the School for the Deaf and in enhanced opportunities for deaf learners in school boards, colleges and universities.
Appropriate Incentives for Teachers: Because public education promotes child development and future prosperity, Ontario needs the best possible teachers. Research supports the link between quality teachers and student achievement. Ontario teachers are provided salary increases as incentives to engage in continued learning and development through the Qualification and Experience (Q&E) grant. It recognizes the experience they gain and allows them to move to the high end of salary ranges relatively early in their careers. Such compensation systems help school boards retain excellent teachers. However, the Q&E grant should reward teachers who are most likely to help their students achieve better results. Training programs leading to Additional Qualifications (AQ) should be reviewed and Q&E grants should be administered by a body independent from teacher federations or school boards. Many teachers take AQ courses for duties they have no intention of fulfilling and their absence disrupts classroom continuity. The province should require a minimum number of years of full-time teaching experience before a teacher can try for AQ, and such courses should be more rigorous and evidence-based. Other areas of school staff compensation must strike a better balance between fair conditions of work and fiscal responsibility. For example, the total provincial liability for retirement gratuities is nearly $1.7 billion; the province should remove school boards’ power to offer such gratuities.
Delivering Services More Efficiently: The Ministry of Education should be a leader in promoting efficiency and reducing duplication. School board facilities and information technology may offer effective platforms for co-operation with other ministries, especially those supporting children. Boards should also continue to seek out opportunities to foster procurement efficiencies through their expanded buying power. Important steps have already been taken through the Ontario Education Collaborative Marketplace (OECM), a not-for-profit procurement organization. Boards can work together to consolidate back-office functions. The government should work with school boards, teacher federations and support staff unions towards shared ownership and administration of benefit programs. Efficiency can also be found by maximizing the value of school board capital assets. Where schools have been closed or consolidated because of declining enrolment, school boards have surplus properties. The minister should have the power to order the sale of unused properties, especially when such dispositions could meet other needs in the BPS. An increasingly widespread solution to the problem of underutilized schools is the consolidation of Grades 7 through 12 in one secondary school. The province should encourage such consolidations by eliminating top-up funding to underutilized secondary schools if they can instead accommodate Grade 7 and 8 students in their catchment areas.
Containing Costs of Retirement Benefits: The province and Ontario Teachers’ Federation co-sponsor the Ontario Teachers’ Pension Plan; the province matches members’ contributions even though teachers are employed by school boards, not the province directly. In 2005, the plan revealed its first shortfall since 1990, and contributions have increased since 2007. In 2011, the contribution rate was raised and some future indexation benefits reduced. The province should reject further employer rate increases and instead aim to reduce benefits. The province should also consider raising the retirement age; the typical teacher retires at 59, having worked for 26 years, and then collects a pension for 30 years. A higher average retirement age would reduce the need for lower benefits in the future.
Promoting an Efficient Labour Market for Teachers: In the late 1990s, fears of a looming teacher shortage prompted the government and universities to increase teacher education. The province funded more spaces in faculties of education, and new programs were accredited at several Ontario universities, as well as universities in the United States and Australia. Since then, the number of certified teachers in Ontario has increased, but the retirement rate has declined. The number of new teachers now exceeds the number of new retirees by 7,600 a year. The proposal to convert B.Ed. programs to two years from one, with enrolment in each cohort halved, will help to reduce the oversupply. Still, the government should discuss the overproduction of teachers with Ontario’s 13 universities offering teacher education.
Post-secondary education (PSE) must meet five critical objectives: it must educate a growing share of the population; help equalize economic and social outcomes; provide an important component of lifelong learning; be an engine of innovation; and deliver quality education efficiently.
Enrolment is expected to grow by an average of 1.7 per cent per year through 2017–18. Already, such rapid expansion, combined with the lowest funding levels in Canada, has undermined quality — more sessional instructors, larger classes and less contact with professors. Ontario provides the lowest per-student provincial operating grant funding in Canada to its universities and colleges, and it is falling at a time when the cost of continuing to do the same thing has been rising by three to five per cent annually.
Clear objectives are needed. Post-secondary enrolment in universities and colleges has grown dramatically in recent years, but there is no coherent plan that addresses the whole system. Higher enrolment is inevitable when the government’s funding formula ties grants to enrolment growth, as it does now. A better formula would encourage PSE institutions to improve quality, with varying mandates — a research focus for some; excellent undergraduate teaching for others; and regional economic development for still others.
We must first address two very topical PSE issues — whether tuition freezes are in students’ best interests and the balance between research and teaching excellence.
Simply maintaining the status quo requires annual cost increases of three to five per cent at PSE institutions, so greater efficiency is clearly needed. The current system is unsustainable from both a financial and a quality perspective.
The Commission recommends the following:
Contain Government Funding and Institutional Expenses: We recommend that government funding be constrained to increases of 1.5 per cent per year to 2017–18. This will not keep pace with projected enrolment growth of 1.7 per cent, nor with the general rate of inflation, never mind the institutions’ historical internal rates of inflation, so Ontario’s PSE institutions will need to find efficiencies to preserve, if not enhance, quality. The government should work with the institutions to align bargained compensation increases with more recent settlement trends in the BPS.
Increase Differentiation through Establishing Mandate Agreements: Ontario’s public university and college system was largely established by the late 1960s. Since then, the colleges’ mandate has evolved to include some degree-granting powers, blurring the original rationale for the college system. The government should, by 2012–13, establish mandate agreements with universities and colleges that provide more differentiation and minimize duplication; these should be implemented beginning in 2013–14. By minimizing duplication of programs, differentiation can reduce inefficiencies and realize cost savings. The government should seek advice from either a blue-ribbon panel or the Higher Education Quality Council of Ontario to help choose the highest-quality programs for expansion.
The division of roles between the college and university systems should include the following features:
Encourage and Reward Quality: Students are dissatisfied with large class sizes and inadequate library facilities, among other things. Five specific areas should be addressed:
Re-evaluate Student Financial Assistance: An enhanced system of student loans must accompany the current tuition framework. However, all forms of federal and provincial assistance — student loans, loan remissions, grants and bursaries, tax credits, savings incentives and summer employment subsidies — provide little more for students from the lowest-income families than those from the best-off. They should be better targeted to low-income students. Further, there is ample evidence that family income is not the most serious access problem; the lack of a family history of college or university is the most significant obstacle. Addressing the most acute access issues then becomes very much an issue for the elementary and secondary school system, in conjunction with post-secondary institutions, community organizations and businesses. The province should maintain the Ontario Student Access Guarantee, under which a portion of tuition revenue is set aside to fund bursaries and other student assistance programs. We also suggest that provincial tuition and education tax credits be phased out and replaced with upfront grants. We also make several recommendations to reduce costly defaults under the Ontario Student Assistance Program.
Generate Cost Efficiencies by Integrating Administrative and Back-Office Functions: We make a variety of recommendations that we think could save money for PSE institutions. One involves co-ordinated purchasing. Another deals with pensions. Ontario hospitals, colleges, municipalities and teachers have multiple employers, but only one pension plan each. But there are 29 pension plans for 23 universities, a very fragmented arrangement; they should be consolidated. Other recommendations involve the use of space.
Taken together, these reforms present a holistic approach for the PSE sector. If these measures are not enough to allow the ministry to live within our cap of 1.5 per cent annual growth, the government should eliminate the 30% Off Ontario Tuition grant. The government’s highest priority should be to fully fund the operating grants for colleges and universities, followed by current capital commitments. This will allow PSE institutions to focus on delivering quality education, which will benefit students.
Social programs help the province’s most vulnerable citizens. From 2000 to 2010, social spending grew by an average of 6.0 per cent per year, mainly because of increases in the two main programs of social assistance — Ontario Disability Support Program (ODSP) and Ontario Works (OW). To return the budget to balance by 2017–18, we recommend limiting social programs to growth of 0.5 per cent per year. Bold policy prescriptions, new partnerships and a continuing commitment to transformation will be needed to meet this challenge.
There are two types of social programs. Two-thirds of social spending in 2010–11 was carried out through mandated and entitlement-based programs, in which benefits or service levels are set by law. These include social assistance and the Ontario Child Benefit. Other programs are discretionary, so clients are not guaranteed to receive them right away. These include support for mental health programs for children and youth, developmental services, child care subsidies and childhood development programs. When caseloads increase for social assistance, an entitlement-based program, so too does funding; clients are entitled to benefits. When demand outstrips supply for discretionary programs, the result is a waiting list.
More programs should be integrated across different ministries and different levels of government, with the client’s perspective put first. Vulnerable people and their families do not care which level of government or which ministry is responsible for providing support; they just want help.
Benefit programs are delivered through various service providers under different funding arrangements. Social assistance is delivered by the province, municipalities and First Nations, but mainly funded by the province. And the Ontario Child Benefit (OCB) is funded by the province, but administered by the Canada Revenue Agency. A lack of co-ordination has created gaps, duplication and higher delivery costs, so those in need must navigate a complex array of access points. Program eligibility criteria also vary. Many programs are income-tested; others are universal; still others determine eligibility based on a client’s specific needs. This can create unintended inequities and barriers to employment.
There is scope to do better: income testing can be centralized and income verification can be automated; processing applications, eligibility assessment and payment can also be automated; and eligibility criteria can be standardized across similar programs to reduce barriers to employment.
Some positive steps have been taken to simplify access to income-tested programs. The Ontario Benefits Directory now provides one-stop information on over 40 programs and tax credits. Similarly, there is a new single-window access to developmental services and supports. These must be just the beginning.
More effective programs and lower costs can flow from a fully integrated system that improves both delivery and administration; this should ensure strong support for clients most in need. Pursuing such a model means that data collection (with full protection of personal information and privacy) must improve. Measuring client outcomes is needed to evaluate program effectiveness and to understand how programs interact.
Social Assistance: We approached social assistance differently than other programs because the Commission for the Review of Social Assistance (SAR Commission) under Frances Lankin and Munir Sheikh is already studying these programs. The SAR Commission will report later this year, well after our work is done. Yet because social assistance affects the province’s finances, we too must propose recommendations. We have focused on applying the themes that run through our report, such as achieving administrative efficiency, rationalizing jurisdictional oversight and shifting from measuring inputs to outcomes. By no means do our recommendations address all aspects of social assistance that warrant reform; on that, we defer to our colleagues on the SAR Commission.
Social assistance consists of the provincially delivered ODSP and the locally delivered OW. Maintaining two separate programs delivered by two levels of government is less efficient than a single program and it perpetuates the antiquated idea that individuals who are eligible for disability supports are unemployable. We urge the SAR Commission to examine alternatives, including a consolidated model of a single, provincially funded social assistance program delivered at the local level.
Employment and Training: Our workforce focus means that the employment and training component of social assistance becomes even more crucial. Chapter 9, Employment and Training Services, highlights recent efforts to integrate these services through Employment Ontario (EO). Further integration of OW and ODSP’s employment services with EO would address program overlap and likely produce other benefits — better client service and outcomes and perhaps even lower-cost employment services and reduced demand for social assistance.
Many people with disabilities can and want to work. Yet we are only now beginning to understand how to accommodate people with physical disabilities in the workplace; we are even further away from doing so for those with mental disabilities. The government should work to help employers and employees alike to understand and accommodate the specific needs of these individuals in the workplace.
Among those with severe disabilities, many are unemployable; they would be better served by a national basic income program instead of social assistance. The province should advocate for such a program with the federal government and other provinces.
The federal Employment Insurance (EI) program does not meet the needs of the modern labour market. Unemployed Ontarians do not receive equitable income support and appropriate training opportunities to help them return to the workforce. Also, the increasing proportion of people who are either new workers (often new immigrants) or young people in non-standard employment (such as part-time or temporary employment) do not quality for EI. The recommendations of the Mowat Centre EI Task Force, if implemented, would be a considerable improvement.
Should social spending growth fall below the 0.5 per cent target, any savings should be used to remove barriers to moving back to the workplace. Three areas command attention. First, potential social assistance recipients must divest all liquid assets above a threshold — $1,645 for a single parent of one child receiving OW. This deprives social assistance recipients of the most basic means of climbing the “welfare wall” and is counterproductive. Second, anyone getting social assistance is covered by the ODB program, but loses coverage on finding a job. This is a strong disincentive to work. Third, in the unlikely event that funds do remain after doing the first two, the basic needs and shelter amounts of social assistance should be raised to fill any gap.
Child Welfare: In this case, as with social assistance, we deferred to the ongoing work of another commission, the Commission to Promote Sustainable Child Welfare, now two years into its three-year mandate. Its reports to date are consistent with our themes, but dealing with our 0.5 per cent growth cap per year will nonetheless be difficult. The government should continue to implement reforms proposed by the Commission to Promote Sustainable Child Welfare.
Ontario Child Benefit: The OCB provides up to $1,100 annually per child; about one million children in almost 530,000 families benefit from it. The OCB is a non-taxable, income-tested monthly benefit. The OCB has transformed children’s benefits by providing support to all low- to moderate-income families with children under 18, making it easier for parents to move from social assistance to employment. This is commendable in terms of helping to remove the “welfare wall,” but we note that the 2011 Ontario Budget committed the government to raising the maximum OCB to $1,310, at a cost of $245 million per year. This runs counter to our recommendation that any savings from reducing spending below the 0.5 per cent growth rate, if achieved, should be directed to specific social assistance measures; the current OCB maximum should be retained.
Other Social Programs: Discretionary social programs are overseen by many ministries and BPSpartners with varying levels of capacity. There are common trends: the province funds most services; the province has recently taken on more funding responsibility from municipalities (e.g., social assistance) and the federal government (e.g., stepping in when child care funding was cancelled); co-operation across sectors is improving, but much more needs to be done; and wait-lists still exist for most services in most programs. Since the province provides most of the funding, it must lead change in these programs.
Children’s Mental Health Services: The legislature’s Select Committee on Mental Health and Addictions has noted that services are delivered across several ministries and offered in many care settings. The government has taken steps to reduce this fragmentation. It should further integrate child and youth mental health services.
Children’s Services Integration: Greater integration of services for children and youth should be expanded beyond mental health. As with the alignment of other services, co-operation across ministries and with other levels of government (particularly at the municipal level) will be key.
Developmental Services: Recent legislation recognizes both that individuals with a developmental disability can, with appropriate supports, live independently and that they and their families want more choice and flexibility in choosing those supports. Shifting funding to clients could promote a more competitive approach to providing supports based on individual demand. The government should consolidate its funding for community-based support programs into a single direct funding program.
Youth Justice: Where excess capacity in youth justice facilities can be demonstrated and a more efficient option exists, strategic closures should occur.
Contributions of the Non-Profit Sector: The non-profit sector accounts for 2.5 per cent of GDP, employs 600,000 people and has over five million volunteers. Most Ontario non-profit organizations are run entirely by volunteers. These organizations should continue to get funding, but the system should be more flexible and work to reduce administrative costs by measuring outcomes rather than inputs. The government should also become more responsive to the non-profit sector; a single window through which non-profits could engage all government ministries would help.
Social Impact Bonds (SIBs): The government should use pilot projects to assess the usefulness of SIBs, which help reduce fiscal pressures on government. While SIBs have challenges, they also offer opportunities for better and more cost-effective social outcomes.
Employment and training programs can be an important tool to help equip workers with the skills they need for the available jobs. Some groups in particular struggle in the job market — youth, recent immigrants, Aboriginals, laid-off older workers, single mothers with young children and persons with disabilities. Existing programs need significant improvement to maximize the participation of all working-age Ontarians.
Ontario offers a range of employment and training services. The Ministry of Training, Colleges and Universities (MTCU) administers most of these through EO, which serves employers, laid-off workers, apprentices, older workers, newcomers and youth. The Ministry of Community and Social Services (MCSS) supports social assistance clients through the ODSP and OW. The Ministry of Citizenship and Immigration (MCI) offers employment programs to immigrants. There is also indirect support for training through tax credits.
With so many services provided by so many ministries, clear opportunities exist to improve efficiency and quality. The new Employment Service (ES), a “one-stop shop” offering a full range of employment support services, is a step in this direction. The EO should further streamline its services for clients who need little intervention, so it can focus on the more intensive interventions needed by others. Other ministries also offer employment and training services that should be integrated with EO.
The federal government provides significant annual funding to Ontario through federal-provincial labour-market agreements, each with its own requirements for client eligibility, program design, reporting and accountability. The patchwork of such agreements leads to fragmented and distorted policy-making. There are also federally funded and delivered employment and training programs for youth, persons with disabilities and Aboriginals that are not part of existing bilateral agreements. This creates administrative inefficiencies and confusion for potential clients. Since many of these agreements are about to expire, the opportunity is ripe for a single new arrangement that should devolve all remaining training responsibility, specifically for youth and persons with disabilities, to the province. This would provide Ontario with sufficient flexibility to fully integrate these services under the EO banner, respond to its fluid labour-market needs and innovate using small-scale pilot projects.
Despite the many programs, there is no coherent strategy based on clear targets and performance measures linked to outcomes. Labour-market information needs improvement. Rather than just count the clients it serves, the government should track outcomes — did clients get jobs, and for how long and at what wages? Also, the province needs better data so it can better target labour-market programs.
In 1994, 25 Workforce Planning Boards were established to improve labour-market conditions at the community level, but control remained at the MTCU head office. Their oversight is now being transferred to regional offices — a positive first step that will promote stronger local links. The boards should encourage employers in their regions to invest more in workplace-based training, an area in which most now fall short compared to international competitors.
Various ministries run economic development programs that include a training component. These programs largely function separately from EO, which renders them less effective. Stronger links are needed, especially for such initiatives as the Ring of Fire.
Ontario’s apprenticeship system offers programs for more than 150 trades and occupations. In 2010, Ontario established the College of Trades to modernize the apprenticeship and skilled trades system. The government should shift responsibility for all apprenticeship administration to other players in the sector. Functions related to the administration of apprenticeship classroom training should be given to colleges and union training centres. All other administrative responsibilities for apprenticeships should be transferred to the College of Trades.
Because Ontario’s population is aging and fertility rates are low, immigrants account for a rising proportion of population growth; within this decade, all net growth in the working-age population will come from immigration. This matters because successful immigrants can contribute substantially towards strong labour-force growth, which in turn enhances Ontario’s potential economic growth rate. If immigrants cannot use their skills and education, however, their contribution to the economy cannot be fully tapped. This is happening; economic outcomes for recent immigrants have deteriorated over the past two decades.
Any profile of immigrants to Ontario presents negatives and positives. Recent immigrants have fared less well than earlier cohorts in the labour market. Immigrants are better educated than people born in Canada, but recent immigrants’ earnings are well below those of Canadian-born citizens and the earnings gap has been growing. Recent immigrants are also more likely to live in poverty. The number of visible minority immigrants in Ontario is growing and they are more likely to live in poverty for longer than one year.
A key problem for policy is that many of the critical levers of immigration lie with the federal government, whose recent policies have worked to Ontario’s disadvantage. It is true that faster economic growth in other provinces has played a role in luring more immigrants to other parts of Canada, but changes to federal immigration policy have also reduced the number of Economic Class immigrants, especially those in the Federal Skilled Worker (FSW) group. Historically, Ontario has relied on such highly educated immigrants with solid language skills, who tend to be the most successful, but federal policy has encouraged a shift in Ontario’s mix towards a higher proportion of Family Class and Refugee immigrants.
It is vital that the provincial government develop — and present to the federal government — a stronger position based on the province’s best economic and social interests, which would include a greater provincial say in immigrant selection. Ontario should persist in its efforts to increase the number of FSW immigrants, as their earnings grow faster than those entering under the Provincial Nominee Program (PNP). Barring progress on this front, Ontario should advocate for expansion of its PNP.
Refugees require special attention. They experience much higher rates of unemployment, part-time employment and temporary employment than do people born here. Refugees and refugee claimants have complex needs and many need social assistance, a sizable cost for society and the provincial treasury. Ontario should press the federal government to compensate the province for these costs.
Over the past decade, the Ontario government has made significant investments in programs and services across Ontario to help newcomers settle, get language training, and become job-ready and licensed in their field. These should be integrated with complementary services already offered through EO, and carried out carefully, to ensure no drop in service quality during the transition.
The first federal–Ontario immigration agreement in 2005 provided new funds to help newcomers settle and improve their language skills. But the federal government has not kept its commitment to spend all the funding allocated to Ontario; to date, the federal government has underspent its commitment by over $220 million. Ontario should push for greater policy control and full funding support for immigrant settlement and integration through the next Canada–Ontario Immigration Agreement. Ontario should build a business case for devolving federal immigrant settlement and training programs to the province with an appropriate funding mechanism, similar to those established in British Columbia, Manitoba and Quebec.
The government should rethink and reset its business support programs. At a time when the economy faces significant challenges, Ontario has two critically important assets that support economic growth: one of the most highly skilled workforces in the world and an internationally competitive tax regime. Recent tax reforms alone have saved business more than $8 billion in annual taxes.
Ontario has myriad programs to support business investment. In the latest year, the government spent just over $1.3 billion directly to help businesses through 44 programs across nine ministries and provided another $2.3 billion of indirect support through tax expenditures, including tax credits that were introduced when corporate income tax (CIT) rates were high, but retained even after CIT rates fell significantly. Empirical evidence suggests that business subsidies have done little to raise living standards and can distort business decisions to the point where they are no longer based on sound economic criteria or require a reasonable degree of private risk.
Ontario’s hodgepodge of direct and indirect programs is fragmented and lacks clear and coherent objectives. As data on outcomes are often poor and inconsistent, it is unclear whether the programs are achieving any economic benefits for Ontario. If we were to design business support programs from scratch, they would not look like what we have now. We can either restructure the existing programs or start over. The second option is the better way forward.
A new business support framework should be built on five policy pillars:
Such changes should result in stronger, more productive firms producing higher-value products and services, while creating more higher-paying, skilled jobs for Ontarians.
Public infrastructure, while costly, creates assets that can improve productivity (through schools, for example) and either create returns (through greater tax revenue) or offset future costs (such as traffic congestion). A recent study suggests that every dollar invested in Ontario’s public infrastructure generates $1.11 in economic output. Ontario’s fiscal problems mean that it will become harder to finance new infrastructure investment, so a civilized dialogue on alternative methods to finance infrastructure is needed.
More should be done to keep infrastructure in good condition. The equivalent of about half of the $72 billion of municipally owned water and wastewater infrastructure needs renewal. Full-cost pricing would encourage both stable investment — which is more efficient and fairer on an intergenerational basis — and conservation.
Urban transportation is a particular concern. Over the next 25 years, the Greater Toronto and Hamilton Area (GTHA) is expected to grow from six million people to nine million, equivalent to adding the population of Greater Montreal to the GTHA. Much of the region’s public infrastructure is nearing full capacity and gridlock is already a problem. Public transit, surely part of any solution, will be costly. There has been little discussion of either the action needed to meet this challenge or the consequences of failing to act. We cannot review long-term public transit funding, but there are more immediate opportunities; for example, GO Transit should charge patrons for parking, which is more costly than many realize.
We need honest discussions on other revenue solutions. The province should pursue a national transit strategy with the federal government, other provinces and municipalities. General tax revenues will surely be part of any revenue solution — whether federal or provincial — but there are alternatives such as congestion charges, comprehensive road tolls, high-occupancy/toll (HOT) lanes, regional gas taxes and parking surcharges.
Real Estate Is Another Issue: The government of Ontario is the largest owner of realty in the province, with a portfolio worth about $14 billion, much of it in office buildings, jails, courts and hospitals. Most buildings are old and expensive to maintain. Yet ministries are charged less than market rates for their use of government buildings; they would probably use less space if they had to pay market prices, as they should. The government should also consolidate its real estate and accommodation functions in the Ministry of Infrastructure. In reducing its realty footprint the government will increase its potential to monetize its real estate portfolio; it should develop a strategic plan to do so.
The performance of Ontario’s electricity sector has considerable implications for the province. The government owns Ontario Power Generation (OPG) and Hydro One; its programs include the Ontario Clean Energy Benefit (OCEB); electricity prices influence industrial competitiveness; the feed-in tariff (FIT) policy is designed to attract investment; and electricity policies directly affect the environment. Significant private-sector investment has been driven by Ontario Power Authority (OPA) contracts, necessary because wholesale electricity prices were too low to cover the private generators’ costs. In addition, the government’s job-creation and environmental policy objectives have resulted in the replacement of coal-fired generation with cleaner power sources, domestic-content requirements under the FIT program, and increased conservation efforts. These policies, along with the cost of replacing and maintaining aging infrastructure, have raised electricity rates for consumers.
There are several areas in which the electricity sector and Ontario’s fiscal position interact.
Direct Program and Tax Expenditures: The OCEB provides a 10 per cent rebate on electricity bills for residential, farm and small business customers, even though the government acknowledges that electricity prices will continue to rise. This program distorts the true cost of electricity and discourages conservation. As troubling as this is, the Commission foresees that the scheduled demise of this generous incentive in 2015 will create a large price shock for ratepayers. We worry that an extension of the OCEB would risk Ontario’s ability to return to a balanced budget in 2017–18. Also, removal of the Debt Retirement Charge (DRC) may be delayed until 2018. Ending the DRC and the offsetting OCEB at the same time would provide a “soft landing” for ratepayers, but this would evaporate if such a delay occurred. Finally, because the Commission strongly believes the OCEB’s $1.1 billion could be used more effectively, the OCEB should be eliminated as quickly as possible. All other electricity subsidies should be reviewed as well.
Electricity Stranded Debt: When the electricity system was restructured in 1999, only part of Ontario Hydro’s debt was supported by the assets of its successor companies. The result was $20.9 billion in stranded debt. The Ontario Electricity Financial Corporation (OEFC) was set up to manage this debt and certain revenue streams were dedicated to pay it down. Also, the DRC levied on consumers was part of this solution. The fiscal impact of the OEFC revenue streams is significant; OEFC revenues, expenses and debt are part of the province’s budget. The financial performance of OPG and Hydro One matters because their payments in lieu of taxes and some of their combined net income go to service the OEFC debt. It is imperative that OPG and Hydro One be run efficiently to maximize their contribution to deal with this legacy of the old Ontario Hydro.
Options to Reduce Long-Term Electricity Costs: This report’s principles, set out in Chapter 3, Our Mandate and Approach, can be transferred to the electricity rate base. In the face of electricity prices that are projected to rise by 46 per cent between 2010 and 2015, the province should seek efficiencies in the sector that would help slow electricity rate increases. At the same time, the Commission recognizes that after so much change since 1999, a period of normalcy may be helpful. Consequently, the Commission’s recommendations are meant to balance the need for stability with the need to curb costs. The government should produce a detailed, 20-year blueprint for the energy sector. It should also consolidate Ontario’s 80 Local Distribution Companies (LDCs) along regional lines to create economies of scale; this would result in direct savings on the delivery portion of the electricity bill. Further, the government should mitigate the impact of the FIT program on electricity prices, first by reducing the initial prices offered in FIT contracts and reducing the tariff over time, and second by making better use of “off-ramps” built into existing contracts. Among other measures, the government should seek administrative efficiencies in various electricity sector agencies and restructure the wholesale electricity market so consumers located closer to generation stations can benefit from lower electricity prices.
Responsibility for protecting the province’s environmental and natural heritage falls to the Ministries of the Environment (MOE) and of Natural Resources (MNR). At a time when fiscal restraint will further restrict their supply of funds, it seems certain that demand for oversight of environmental approvals, compliance and natural resource stewardship will rise. Our recommendations are aimed at more effective and efficient operations.
Full Cost Recovery and User Pay: Full cost recovery is not in effect for all of the government’s environmental programs, and existing fees do not keep pace with the rising costs of program delivery; where possible, the costs of those services should be shifted to the beneficiary. The Water Charges initiative should be expanded beyond high users to medium- and low-consumption industries and put on a full user-pay basis. The Renewable Energy Approval, which consolidates the range of approvals needed for renewable energy projects while recovering about 90 per cent of its direct operating costs, is a good example of a modern approval. The Drive Clean program fully recovers its costs.
Jurisdictional Crowding: Federal, provincial and municipal governments all set environmental rules, with some overlap. Even within the Ontario government, regulations are set by several ministries. This results in inefficient use of government resources and creates uncertainty and confusion for industry, developers and citizens. The government should work to rationalize roles and responsibilities that are shared by different governments.
The Approvals Process: Growth in natural resource extraction and energy will put pressure on provincial environmental approvals and compliance systems. The MOE recently launched a significant transformation of the environmental approvals process; it enhances environmental protection with a greater focus on risk, responds to the needs of business, takes advantage of current technology and addresses the increasing complexity of current approvals. Further work should be done, especially in natural resource extraction.
The Environmental Assessment (EA) Process: Many projects require both provincial and federal EA requirements. The 2004 Canada–Ontario Agreement on Environmental Assessment Co-operation is under review, but removing duplication may require new legislation and both governments are reluctant to give up decision-making authority. Some projects need environmental and land use approvals in addition to an EA, though proponents are often unaware of this when an EA process begins. The government should further streamline the process.
Prevention and Polluter Pay: The Environmental Protection Act gives the province the “right to compensation” for loss or damage incurred as a direct result of a spill, and for all reasonable costs and expenses incurred for a cleanup. This is a problem when the owner of a contaminated site cannot be found or cannot pay for the cleanup. The province should put more emphasis on prevention and should use the principle of “polluter pay” for contaminated sites; the use of appropriate financial tools, such as financial assurance, should be part of this.
Ontario Clean Water Agency (OCWA): The OCWA, which operates drinking water and wastewater systems for over 170 clients, is the only agency that competes in the marketplace for its business and receives no funding from government. Its current business model is not sustainable or competitive. It cannot offer its skilled operators appropriate compensation, so many are leaving. And it cannot act quickly enough to pursue lucrative business opportunities. It would work better as a for-profit, wholly owned government entity.
Land Use Planning and Resource Management: The many agencies doing this work in southern Ontario should be rationalized and consolidated.
Ring of Fire: This development of major mineral deposits in northern Ontario offers the prospect of substantial socio-economic opportunities for all northern residents, particularly Aboriginal Peoples. The government should collaborate with Aboriginals, industry and the federal government to maximize these opportunities.
The government’s justice ministries — the Attorney General (MAG) and Community Safety and Correctional Services (MCSCS) — provide policing, correctional services, legal aid funding, administration of the court systems and victim services. Three levels of government are involved in the entire justice system: the federal government has jurisdiction over criminal law; the province runs the courts and police services; and municipalities handle municipal policing and prosecutions under the Provincial Offences Act. This means changes by one government often drive program changes and costs for other governments.
The justice sector faces numerous fiscal challenges:
The justice sector will need to transform its service delivery and find efficiencies while ensuring public confidence. Our recommendations are designed to help.
Evidence-based decision-making is a persistent theme of the Commission. The justice sector should improve its collection of data to evaluate whether policies and programs are meeting their intended objectives, and how efficiently. The Justice On Target (JOT) program is an example of how to use data to achieve better outcomes. Our full report identifies a number of areas in which better data collection would assist the evaluation and analysis of policy.
Custody remand in Ontario is increasing and so are the costs. The two ministries should work to reverse this trend. The JOT program, which has begun to reduce the time needed to complete a criminal case, can also reduce the number of inmates on remand.
Family breakdown often results in multiple civil legal problems for low-income people; this puts greater demands on both the justice system and social welfare services such as housing, legal aid, social assistance, and physical and mental health programs. The MAG should use JOT principles to develop an early intervention program that would divert less contentious family disputes to non-court alternatives such as mediation. The government should also expand diversion programs for low-risk, non-violent offenders with mental illness rather than send them to jail.
Policing is one of the fastest-growing areas of public expenditures in Canada. After reviewing and defining the core responsibilities for policing, which would include an examination of alternative models of service delivery, the government should eliminate the use of police officers for non-core policing duties, replacing them with special constables or private security services. Similar measures could reduce costs in correctional facilities. Examples of non-core services include inmate transportation and community escorts; inmate health care, food services and laundry services.
In 2010, the government strengthened efficiency and oversight by creating two new agency clusters of adjudicative tribunals — Environment and Land Tribunals Ontario (which includes the Assessment Review Board, Ontario Municipal Board and Environmental Review Board) and Social Justice Tribunals Ontario (which includes the Landlord and Tenant Board, Human Rights Tribunal of Ontario and Social Benefits Tribunal). Tribunals within each cluster share common administrative functions, so each can focus on case management. Environment and Land Tribunals Ontario now occupies a single building, where hearing and mediation rooms can be shared. Procedural improvements are expected as these cluster organizations evolve. Other ministries should follow this example; clustering has the potential to achieve cost efficiencies in health, community and consumer safety, agriculture, commerce and labour adjudicative tribunals.
The government should also examine opportunities to consolidate training in policing, fire services and correctional services; these are now delivered individually through their respective colleges.
To deal with aging infrastructure, the justice sector should continue to work with Infrastructure Ontario to use alternative financing and procurement for capital projects. Completed projects should be evaluated to learn if they did indeed deliver value for money as intended.
More federal-provincial co-ordination would be desirable in areas such as policy and legislation, law enforcement and correctional services. Special attention should be paid to the impact of federal legislation. Accommodating recent federal crime legislation will place further demands on Ontario’s court and corrections systems, adding to the province’s fiscal burden since the federal government has not yet addressed the cost issue. Ontario’s prisons are now filled to 95 per cent of capacity; the new federal legislation could raise this to over 100 per cent, with rates as high as 150 per cent in some institutions. In the worst-case scenario, the province would need a new 1,000-bed facility, costing $900 million to build and $60 million per year to run.
Currently, offenders sentenced to less than two years go to provincial prisons while offenders sentenced to two years or more serve in federal penitentiaries. Since effective rehabilitation programs can be provided for inmates serving longer than six months, we recommend uploading to the federal government the responsibility for inmates serving six months and more. This would better align fiscal incentives for corrections and would give inmates access to federal rehabilitation services.
There are over one million BPSemployees in Ontario, about 70 per cent of whom are unionized, compared with about 15 per cent in the private sector. This makes effective union-management relationships important. Any government wanting to change the delivery of services must work with the people who deliver those services and with the unions that represent those people.
Labour costs account for about half of all Ontario government program spending. As such, the target of 0.8 per cent program spending growth cannot be attained without moderation in the growth of public-sector total compensation, whether through base wages; premium payments such as overtime, shift premiums, merit pay or movement through “grids”; or pension costs.
Public-sector wage growth has moderated since the government introduced a restraint policy in March 2010. However, many major agreements, including those covering Ontario’s almost 25,000 physicians and over 200,000 teachers, have not been renegotiated since then.
Labour compensation is but one consideration of labour relations. Ultimately, the goal is to have a highly competent public service working at a high level of productivity, delivering excellent public services. Tactics geared towards short-term fiscal gains such as wage freezes and limits on the number of civil servants should be avoided. Wage freezes damage labour relations and are often followed by wage catch-ups. A focus on program outcomes and budgets will naturally and more efficiently result in a smaller civil service than arbitrary rules. There should be no ideological or other bias towards or away from public- or private-sector delivery of services, only a consideration of practical logic: what produces the best result for the people of Ontario at an affordable cost?
The principles below are intended to support the transformation in labour relations that will best allow management and labour to work together to deliver excellent public services.
These principles should be applied to a number of key issues that recur in labour-management relations in the public sector.
The goal of balance means the government should settle the issue of essential services and change the interest arbitration system. An independent working group should determine which services are essential and how disputes should be resolved. The interest arbitration system has come under increasing scrutiny and attack. We do not find the system to be broken, though it can be improved. Arbitrators are likely to follow the lead of public-sector employers adopting tough, but fair, stances in negotiations. Among changes that would help: an independent tribunal or commission should manage a panel or roster of independent arbitrators, set time limits for each arbitration and require arbitrators to provide clear reasons for their decisions.
Ensuring that public services are delivered more effectively and efficiently is primarily a management problem. Most BPSworkers are well educated, highly competent and dedicated, but the system does not measure productivity well, nor does it encourage active steps to improve it. This can and must change. The government should provide a zero budget increase for wage costs; ministries and agencies will then have to drive out inefficiencies to absorb any wage increase. Bumping provisions unduly impede the move towards a progressive and efficient public service; these should be modified. Concerns about successor rights should not stop privatizations or amalgamations; inherited agreements do not live forever. The Ontario Labour Relations Board should be given expanded authority to encourage bargaining structures that support the delivery of quality and effective public services. The government should also encourage further rationalization of BPSbargaining. The province should move to a smaller number of bargaining units and more centralized bargaining. The government should set up a labour relations information bureau to collect data relevant to employers and unions, especially measures of productivity.
Leaders in the OPS and BPSshould be held to account, adequately compensated and offered incentives to excel. The Ontario government needs highly competent employees, including managers. Those who exceed their job requirements should receive bonuses. To help managers, job descriptions and collective agreements should be flexible enough to put the best people in the right places. The government needs greater flexibility both to move people around and to address underperforming individuals and areas that are no longer priorities or where the service could be better provided by another entity.
Many public-sector workers have recently agreed to, or had imposed on them, more moderate compensation increases. Large employee groups in health and education that are now entering into bargaining rounds should do their part. The government must work collaboratively with BPSemployers and bargaining agents to reach compromises that recognize the fiscal reality. Employers may have to take and maintain hard positions in the face of disagreement and disruption, but all parties should share a focus on results.
The government and its BPSpartners must realize that moderation in compensation will be difficult to maintain over the long term. A broad vision for labour relations must recognize this and plan for the future. Transformation and productivity gains will ultimately allow the government to provide sustainable services.
The government’s operating and back-office expenditures include employee compensation, IT, human resource management, financial services, procurement, communications and other services. In many cases, these can be made more efficient without compromising service delivery — in most cases, these changes will improve it. Many such reforms should be extended to the BPS— schools, hospitals, agencies, boards and commissions.
The mandate of ServiceOntario should be expanded. ServiceOntario is the province’s public-facing delivery organizations with responsibility to deliver information and high-volume routine transactions to individuals and businesses. A broader mandate for ServiceOntario would reduce costs, increase productivity and improve service delivery to the public. The one-stop approach — which can work across the Ontario government and in conjunction with the federal and municipal governments — is better for clients and government alike. It should further expand its service-delivery methods to new or alternate platforms, all the way to partnerships with the private sector. ServiceOntario’s capital budget is now $2 million per year, which limits its ability to secure efficiency gains; to carry out a broader mandate, it will need more money, especially for updated IT.
Private-sector partnerships should be used to move ServiceOntario further towards a full-cost recovery model. Such partnerships can provide better value for taxpayer money, as long as they meet the standards expected of public service delivery; Teranet is an example of a public-private partnership that works.
“Agencies” is the generic term for a wide variety of entities to which the government makes at least one appointment. They have diverse and complex mandates and perform a variety of roles. The agencies’ governance framework and accountability mechanisms were reviewed in 2010. But a broader review is needed to determine if their mandates continue to be relevant and if efficiencies could be achieved.
Delegated Administrative Authorities (DAA) have delivered regulatory services since the mid-1990s; DAAs are private, not-for-profit corporations that administer legislation on behalf of the government under accountability and governance agreements with the government. Delegated Administrative Authorities have been found to reduce costs to taxpayers, improve regulatory outcomes and efficiency, retain government oversight and increase industry engagement. At a time of fiscal restraint, there is a risk of service erosion as regulatory ministries seek to reduce costs. The government should set up more DAAs.
In the late 1990s, the government combined a hodgepodge of information and information technology (I&IT) solutions into clusters. I&IT is the technological backbone of government operations. Further efficiency and better value for money will be found by eliminating redundant services and centralizing common functions. The government now uses both in-house and external service delivery; in a constrained fiscal environment, outsourced contracts may make the difference between the continuation and the end of some services.
Accountability is essential, but we often treat that goal as an absolute good. Taxpayers expect excellent management and transparent procurement, but an exclusive focus on rigorous financial reporting and compliance requires a significant investment of time, energy and resources that is subject to diminishing returns. The added cost to government, to the general public, and to the private and non-profit sectors in ensuring compliance should be balanced against the risk of waste or fraud. The Auditor General should be asked to help find a new and appropriate balance. At a minimum, the government should switch from individually tracked expenses to a per diem system for civil servants and consultants.
In a number of areas, efficiencies already introduced in the OPS should be extended to the BPS. Among these:
Transfer payment and grant programs in the OPS are ripe to deliver centralized efficiencies. Because many organizations are funded by several ministries, the government has trouble assessing the overall picture and recipient organizations are frustrated at dealing with multiple requirements. A new enterprise grants management system, developed by two ministries to overcome these problems, is set to launch shortly; expanding it to the entire OPS would spread its costs across more ministries.
The government of Ontario owns four government business enterprises (GBEs): the Liquor Control Board of Ontario (LCBO), Ontario Lottery and Gaming Corporation (OLG), Ontario Power Generation (OPG) and Hydro One. They contribute substantial sums to the provincial treasury — $4.6 billion in 2010–11 alone. Together, their net assets amounted to $17.6 billion at the end of last fiscal year.
We looked at two distinct approaches to generating further value from them: the government could sell all or part of each business; or it could improve business efficiencies while retaining full government ownership.
Sales of GBEs: Because these assets contribute substantial ongoing and growing revenues to the province, a full divestiture of any or all of the GBEs would result in a lump-sum payment to the province at the expense of future revenue streams. If sale proceeds were directed to pay down provincial debt, Ontario could save on interest costs of up to four per cent, based on recent bond yields. By comparison, GBEs provide a return on assets (ROA) of at least eight per cent. Any full divestiture would have to overcome this spread to provide a fiscal benefit to Ontario. Current circumstances do not appear to offer a convincing value proposition for the province. Even so, Ontario should not close the door on new approaches that generate better value out of the GBEs. Action, however, must not be driven by ideology. Any sale must rest on overwhelming evidence that Ontario would benefit in the long run.
Improving GBE Operations: The GBEs may not be achieving their full potential because of operational inefficiencies and because they are sometimes ordered to act counter to their direct commercial interest.
There may be opportunities to improve LCBO returns through increased efficiencies and new business opportunities. The Auditor General noted in his 2011 Annual Report that the LCBO could more effectively use its purchasing power and improve the current mark-up structure used to determine retail prices. The LCBO also has obligations that reduce profitability, such as promoting Ontario producers. The policy merits of these measures should be balanced against any reduced profitability. The LCBO may also be able to increase profits by opening more stores.
The OLG provides significant net income to the province while maintaining social responsibility, but efficiencies and other measures could improve the company’s margins. The OLG currently operates two head offices in separate locations; it should close one. It operates two casinos in the Niagara area; it should close one. Slot machines are directed to racetracks, where subsidies are provided to the horse racing and breeding industry and municipalities, rather than locations that would be more convenient and profitable; OLG would make much more money if slots were permitted elsewhere, as they should be. The OLG gives lottery terminals to merchants who sell tickets, an implicit subsidy. This practice too should cease.
The OPG and Hydro One occasionally endure government intervention that lacks a clear and legitimate policy objective, to the potential fiscal detriment of the province. They should both be encouraged to seek operational efficiencies in line with their industry’s best practices. In an effort to reduce costs to consumers, the government occasionally intervenes in regulatory rate filings for both OPG and Hydro One. As a result, electricity rates may become decoupled from costs, providing a de facto subsidy to electricity consumers, and reducing both companies’ net income and their contribution to provincial revenues.
Across a range of revenue issues, better administration and enforcement could improve the integrity of the tax system and build Ontario's fiscal capacity.
The business tax base needs strengthening. Globalization has offered companies more opportunities to reduce the provincial corporate income tax they pay. Ontario should work closely with the federal government and other provinces to reduce aggressive tax avoidance. Such steps could generate over $200 million per year in revenue.
The underground economy creates an unfair tax burden for taxpayers and makes it hard for legitimate businesses to stay competitive with those that evade many business taxes. More should be done. Quebec has made progress through tougher penalties for non-compliance, intensified tax audits and a tighter focus on high-risk industries and products, along with other initiatives. Ontario should take similar steps and work with the federal government to co-ordinate and strengthen compliance. These and other measures could yield the province over $500 million per year.
Fines valued at $1 billion under the Provincial Offences Act (POA) remain uncollected. The province should take more aggressive action to collect this money; for example, it could suspend licences and registrations, add POA fines to the offender’s property tax bill and offset tax refunds against unpaid POA fines.
The Auditor General has highlighted the government’s collections activities for accounts receivable and overdue accounts. The 2011 Budget proposed a more centralized system to be lodged in the Ministry of Finance that would reduce costs, improve the monitoring of overdue accounts and reduce accounts receivable. Other jurisdictions have already moved in this direction. Early estimates indicate that this would eventually generate over $250 million per year.
The Ministry of Finance has developed a sophisticated, automated audit assessment tool to identify areas of greatest financial risk, which helps auditors and inspectors determine where they should focus their attention. By co-ordinating government-wide audits of companies, a valuable resource for ministries, the Ministry of Finance will be better able to recover funds on behalf of the province. The revenue potential here is over $50 million annually.
The government receives about $1.8 billion every year from over 400 types of user fees (e.g., driver’s licences). Most are set at a specific rate, but there is no regular process for reviewing these fees so, over time, they do not reflect the rising costs of providing the related service. Many of these have seen little change since 2003. The government could set fees to recover all costs associated with the service provided, as recommended by the Auditor General in 2009; this would raise over $500 million per year in additional revenue. Or it could index all user fees each year by the rate of inflation. The government should update its user fees using a blend of full cost recovery and indexation, with the change phased in over the next two years.
The Commission has no mandate to recommend tax increases. However, we have noted throughout the report that revenues tend to grow more slowly than nominal GDP. As such, our Status Quo Scenario features a decline in the tax burden, defined as the revenue-to-GDP ratio. Allowing the overall tax burden to decline magnifies the severity of program spending restraint required if we are to return to a balanced budget. This severity could be alleviated somewhat if the taxes that do not keep pace with economic activity were reformed to do so. Consistent with our mandate, we have not incorporated any such revenue increases into our Preferred Scenario. We simply note the reforms that could prevent a decline in the overall tax burden.
The main source of this downward bias in the tax burden is education property taxes, including business education taxes (BETs), and a number of excise taxes that are levied on the volumes rather than the values of the products.
Since 2000, property assessments have more than doubled, but municipal property taxes have increased by only 70 per cent and education tax revenues, by only one per cent per year. This is because the provincial government fully offsets the impact of reassessment when resetting education tax rates. This reduces revenues available to support education and requires increased transfers to school boards. The province should stop fully offsetting reassessments so that revenues increase with inflation.
An additional concern is the wide range of BET rates across the province. Under a 2007 plan to address these distortions and inequities, high BET rates are being reduced to a target rate by 2014, eventually saving businesses $540 million annually. Since the plan was introduced, high BET rates have decreased and the variance among BET rates has narrowed, but a considerable gap remains. The province should continue to implement the BET reduction plan while considering options to avoid revenue losses; raising low BET rates would help to offset reductions in high BET rates. This would make the business tax system more equitable, while providing a significant increase in revenues for education — up to just over $1 billion by 2017–18.
Contraband tobacco is another issue. In recent years, tobacco consumption has flatlined after more than a decade of decline in smoking rates, partly because cheap illegal tobacco — which reduces provincial revenues — is available. Better enforcement has generated results. The government has taken steps to deter illegal tobacco but needs to go further. Measures we recommend could result in increased annual revenue of up to $225 million.
Excise taxes — on beer, wine, tobacco and gasoline, for example — are levied on the volume sold, not the value (that is, they are specific, not ad valorem, taxes). So if prices rise, but not volumes, revenue from the taxes does not respond. The government should switch to ad valorem taxes, or otherwise capture changes in values, so revenue will reflect inflation.
No fiscal projection is static; once released, it is subject to risks that can have a positive or negative impact on the province’s actual fiscal results. Ontario’s fiscal plan includes a reserve to protect against adverse changes in the revenue and expense outlook, but it is too inflexible. General risks should be handled through the contingency reserve, which should be set higher than in recent budgets and grow over time. Modest internal risks should be addressed through an operating reserve.
There are risks the government cannot predict — like SARS, H1N1 or support of the auto sector. Other risks — like the need for forest firefighting — are known in advance, but the scope of the need is not. Finally, there are risks that are unknown both in their probability and their cost. The government should have an explicit strategy for dealing with risk. We have identified a number of liability risks for which the province should develop management plans. These are known risks that are subject to mitigation strategies. More will undoubtedly surface, so the liability management strategy must be very fluid.
Pension Benefits Guarantee Fund (PBGF): Created in 1980, the PBGF was designed to assist pensioners and plan members when occupational pension plans are wound up with too few funds to cover promised benefits and the employer cannot make the required payments. It is administered by the Superintendent of Financial Services and generally covers single-employer defined benefit pension plans in the private sector and BPS. Ontario is the only sub-national jurisdiction in the world to provide such coverage. A 2010 study concluded that the PBGF was not sustainable in its current form. As such, it presents a large fiscal risk for the province in the event of another economic downturn. The province should either terminate the fund or see if it can be transferred to a private insurer.
Liability from Pension Funds in the BPS: Ontario’s public-sector pension plans — to which the province provides direct and indirect funding — include some of the largest in the country. More transparency and strategic planning would help manage this risk. The government should develop plans to contain fiscal risks. Five plans are consolidated in the province’s financial statements. The province is wholly or partly responsible for any shortfalls in three of those: the Public Service Pension Plan (PSPP); OPSEU Pension Plan (OPSEUPP); and Ontario Teachers’ Pension Plan (TPP). The employers bear this joint responsibility for the Healthcare of Ontario Pension Plan (HOOPP) and Colleges of Applied Arts and Technology (CAAT) Pension Plan. The Commission encountered considerable confusion on the question of who bears the ultimate financial responsibility for funding deficits. The government should clarify who ultimately holds financial liability.
The three pension plans sponsored or co-sponsored by the province now have funding shortfalls; HOOPP was fully funded as of its latest valuation, while CAAT had a small surplus. Many of these have increased employer and employee contribution rates and some have reduced or eliminated the guarantee of inflation protection. A sensitivity analysis of the health of these plans would be useful since views differ on how their liabilities should be valued. The government has few levers to make significant short-term adjustments to its pension costs, but long-term savings are possible.
When faced with future shortfalls, pension plan sponsors should reduce prospective benefits to limit the need for further contribution rate increases. For its part, the government should make benefit cost containment part of its compensation negotiating strategy for the BPS. The government should seek opportunities to save money and obtain better investment returns by consolidating administrative functions and pooling the investments of pension plans across the BPS. Transparency is also important. The cost of the public-sector pension plans should be made much clearer in the Public Accounts and the Budget.
The Taxpayer Protection Act fetters the government’s capacity to make decisions regarding revenues due to its restrictions on increasing tax rates or introducing a new tax. Ultimately, the government is accountable to taxpayers if it decides to modify tax rates or introduce a new tax. Modifying or eliminating this act will allow spending and taxes to be used as required to address the threats of fiscal sustainability.
Environmental Risks: To better protect the province from the costs of environmental cleanup, the legislation should be changed to put more focus on the principle of “polluter pays.” Other options include a program like Superfund in the United States, which has the authority to clean up hazardous waste sites.
Risks Posed by the Federal Government: Ontario is always subject to the risk of federal government policy changes, which can disrupt the province’s fiscal planning and public services. Among the known risks:
Risks Posed by the Municipal Sector: There are potential risks for the province in the event of default by a municipality. The province should work with municipalities to ensure that commitments are met. Known risks include potential overruns in municipal infrastructure and the Pan Am Games. Although municipalities are responsible for maintaining their infrastructure, there are continual calls on senior governments to finance new projects. What is needed is a comprehensive plan that points the province, municipalities and the federal government in the same direction. This is an opportune time to take stock of the current approach to municipal infrastructure. Toronto and the Golden Horseshoe region will host the 2015 Pan Am Games. The province is contributing $500 million and is responsible for any spending beyond the approved $1.4 billion budget. As the deficit guarantor, the province must be vigilant in ensuring that the parties involved do not allow any overrun in expenditures.
Unknown Risks: Risks that we cannot foresee are inevitable. The fiscal plan must also be prepared for the unexpected and provide for unknown risks as well.
Federal, provincial and municipal governments all deliver services to Ontarians, often with inconsistent objectives and unco-ordinated activities. Better co-ordination would help in some areas, but in others, a whole new delineation of responsibilities is needed. The province’s relations with the federal government and with Ontario municipalities have major consequences for the provincial budget. We will deal with each in order.
In 2009–10, Ontario’s 39 per cent of Canada’s population contributed about 39 per cent of federal revenues, but benefited from only 34 per cent of federal spending — a gap worth about $12.3 billion or 2.1 per cent of Ontario’s 2009 GDP. The spending gap is a clear demonstration of the perverse structure of Canadian fiscal federalism.
Under the Constitution, the provincial and federal governments explicitly share some responsibilities, while issues unknown in the 19th century have forced governments to work together. This collaboration has resulted in accomplishments such as medicare, social services and tax reform, but federal actions can sometimes disrupt provincial fiscal planning and public services. Ontario needs federal co-operation to address the fiscal, economic and demographic challenges it faces, as do other provinces. More than ever, all governments must work together to reform public services. The time for a new federal-provincial paradigm is now.
The Ontario government should establish an understanding with the federal government that federal actions pose fiscal risks to Ontario. There are now four major risks:
Aside from the major transfers (CHT, Canada Social Transfer [CST] and Equalization), the federal government has made no commitment to renewing other expiring transfers. Ontario needs a reliable and predictable federal partner.
Some federal programs that directly serve Ontarians or fiscal arrangements that support provincial services should be modernized and reformed. The province should advocate strongly to change federal programs that do not work effectively in Ontario’s interests. (Full recommendations on these points can be found in the individual chapters.)
Equalization: A ceiling on Equalization limits the size of the program to the nominal growth rate of national GDP despite rising disparities among the provinces. The program fails to fully capture and share the wealth generated by high commodity prices in other parts of Canada. Nor does the program account for Ontario’s higher cost pressures, which affect the cost of public services. Equalization should fully capture resource revenues and accommodate differing price levels among provinces.
Canada Social Transfer: The federal government generates revenues from Ontario on a nearly equal per capita basis; the CST then returns money to the province on an equal per capita basis. This unnecessary step is inefficient and reduces accountability and transparency. The CST should be transferred to the provinces in the form of tax points; in other words, the federal government should reduce its taxes so provinces could increase theirs by an equivalent, revenue-neutral amount.
Employment Insurance: Employment Insurance does not meet the needs of the modern labour market. In 2010, Ontarians contributed about 40 per cent of EI premiums, yet received only 32 per cent of benefits. And despite having an unemployment rate above the national average, only 32 per cent of unemployed Ontarians get EI, which also restricts their eligibility for training. The changes recommended by the Mowat Centre for Policy Innovation would improve outcomes for Ontario workers and employers.
Income assistance for persons with disabilities: Individuals with severe disabilities face significant barriers to gaining employment and earning a decent wage. These vulnerable individuals are now served by a “tangled safety net” of federal and provincial programs. They would be better served by a national income support program.
Immigration policy: Immigration will increasingly be a source of Ontario’s population and economic growth. We noted above that the federal government has underinvested in Ontario and plans further cuts in immigration settlement spending. Moreover, Ontario is allowed to nominate only 1,000 individuals through its PNP, compared to 5,000 for Alberta. The province should have more influence in determining immigration policy. The federal government should also devolve immigration services, with funding, to Ontario.
Education for First Nations on-reserve: Better education on reserves is crucial to improving the social and economic outcomes of First Nations peoples, but federal funding per student falls short of the provincial average. The province should put strong pressure on the federal government for adequate funding. Failing such action, which is clearly justified and desperately needed, the province should plug this gap.
Green energy: The federal government has provided little support for Ontario’s green energy initiatives, but $1.4 billion in annual subsidies to the oil and gas sectors. Ontario needs fair and equitable support for its clean energy initiatives.
Working together to rationalize public services: The provincial and federal governments should reduce overlap and duplication of services. This discussion could start by examining inefficiencies in overlapping employment and labour-market training services; the effectiveness of federal immigration settlement programs; the potential gains from each government specializing in corrections or parole services; collaboration in direct citizen transactional services; the benefit of a national transit strategy; and rationalization of environmental protection activities and regulations.
Employment and training services: The fragmented nature of various federal-Ontario labour-market agreements limits the province’s ability to benefit from fully integrated services. Several of these agreements expire after 2013–14, so there is an opportunity for reform. Greater flexibility for Ontario would allow the province to adapt the full suite of labour-market programs to meet changing labour-force needs.
Immigration settlement and integration services: Both the federal and Ontario governments provide immigration settlement services, with significant overlap that creates inefficiencies and reduces co-ordination. Responsibility for integrating newcomers should lie with local authorities, which can respond to regional needs. Settlement programs have been devolved to provincial governments in British Columbia, Manitoba and Quebec, but the federal government has not agreed to do the same for Ontario. The federal government should devolve these services to Ontario with funding.
Corrections services: Effective rehabilitation keeps communities safe and controls correctional expenses, but the current arrangement prevents the maximization of these benefits. Offenders sentenced to less than two years go to provincial prisons, while the rest serve their time in federal penitentiaries. There are too few inmates serving sentences of between six months and two years for the province to provide rehabilitation services. The government should explore uploading the responsibility for inmates serving six months and more to the federal government; this would give these inmates access to federal rehabilitation services.
Citizen transactional services: ServiceOntario, which integrates the services delivered by various ministries into one easy-to-access location, has reduced wait times, improved accessibility and achieved efficiencies. The federal, provincial and municipal governments should continue to explore other opportunities to collaborate.
National transit strategy: Traffic congestion is a systemic issue from coast to coast, justifying a national approach. Canada is the sole nation in the OECD that lacks a national transit strategy.
Environmental protection and regulation: Environmental management is shared by the provincial and federal governments. Although the two co-operate on environmental assessments, more remains to be done. The federal government is reviewing its legislation in this area and has shown interest in removing duplication between approvals processes. The two governments should continue to pursue the creation of a “one project–one environmental assessment” solution.
Municipalities provide many services — such as social housing, social assistance, drinking water quality, public transportation, land use planning and waste management — that are governed by provincial legislation and standards. Most municipal revenue comes from local sources, mainly property taxes. Yet provincial transfers account for nearly one-fifth of their revenue, including contributions to cost-shared programs and unconditional funding through the Ontario Municipal Partnership Fund (OMPF).
Provincial support to municipalities has increased substantially since 2003, mainly to reverse the downloading of responsibilities of the previous decade. After the 2008 Provincial-Municipal Fiscal and Service Delivery Review, the province agreed to upload various municipal costs over a 10-year period. The province also funds municipal infrastructure. Recommendations on provincial-municipal issues are found in many chapters of this report.
Support to municipalities is on track to rise by an average of 5.2 per cent per year to 2018. Much of the growth comes from the remaining $500 million of uploading. Excluding that, transfers would still grow significantly faster than the 0.8 per cent annual pace we recommend for overall program spending growth. The Commission supports the upload and we realize that any change in the upload merely shifts, not solves, the fiscal problem. Most municipalities also struggle with their budgets. Still, we believe that overall spending restraint means that total transfers should not increase as rapidly. We recommend first that the upload period be extended by two years to 2020 and second that the OMPF should decline to the planned $500 million by 2016.
The province and municipalities should also track how municipalities invest the benefits realized from the uploads. This accountability framework should focus on new municipal capital spending.
The province and municipalities share the property tax base — a stable revenue source that funds local services and a portion of elementary and secondary education. However, the practice of cutting education tax rates to offset reassessment increases has reduced revenues for education, which is supported by property taxes. The province should maintain stable education tax revenues in real terms. (There is more on this in Chapter 18, Revenue Integrity.)
Different levels of government must work together to find the most efficient ways to service those most in need. To maintain service levels while limiting spending growth to 0.8 per cent per year, all players, including municipalities, must commit to greater efficiency and transformation.
1. Accounting changes have forced us to use a six-year period in the 1990s.