8How I Unbecame Finance Minister (2010)

The opposition occupies the benches in front of you, but the enemy sits behind you.

—Winston Churchill

The issues recounted in the preceding chapter were all important. They had both short- and long-term consequences for Alberta. But a finance minister’s number one priority is the government’s annual budget. For me, that meant reining in our ballooning deficits and debt and returning to a balanced budget by 2012.

Accordingly, after delivering the 2010 budget in February (and then sneaking off to British Columbia for three days of backcountry snowcat skiing with my son), I spent the next five months immersed in meetings with my new deputy minister, Tim Wiles, and his executive team.

For those first six months, I felt like a bear that couldn’t come out of its den. In addition to all the budget information I had to understand and absorb, there were the policy issues described in the preceding chapter—the Northwest Upgrader plus planning how to stop Ottawa’s proposed national securities regulator and expansion of the Canada Pension Plan. Then there was the third session of the 27th Legislature from February through April. This meant preparing for question period four days a week and then the media afterward. The latter, of course, are only interested in reporting bad news. Good news is not news. So don’t say anything stupid in question period. Oh yes, I also came down with shingles in May, which kept me in bed for a week and at low energy levels for another month after that. At times I began to ask myself: Why did I ever ask for this job?

Delivering Budget 2010 was unpleasant but easy. It was preparing for Budgets 2011 and 2012 that was hard. And it began the day after my budget speech. We spent the next month working with President of Treasury Board Lloyd Snelgrove reviewing revenue and expenditure projections for the coming years. The scenario was bleak. In March, together we sent a memo to all cabinet ministers and Caucus Policy Committee (CPC) chairs that we were adopting a new policy for dealing with anticipated revenue shortfalls:

You will now be required to identify options and provide a recommendation on how any new costs will be accommodated within your ministry’s existing Budget 2010 spending targets.

Instead of me having to meet one-on-one with twenty different ministers to say “NO” to their requests for increased funding, this was a way of saying “NO” to all of them at once.

Recession

It was not until September 20, at our first full caucus meeting following the August break, that I had to start breaking the bad news to caucus. I used a PowerPoint presentation to explain the seriousness of our fiscal situation. Our first quarter update (Q1) showed that declining revenues now put us into a deficit situation for Budget 2012. But that was minor, compared to the longer-term forecasts for both the Sustainability Fund and the Heritage Fund. I reminded everyone that it was the $18 billion surplus in the Sustainability Fund that had allowed us to declare that we had “balanced the budgets” in 2009 and 2010, as we could cover those deficits with a transfer from our “short-term” savings. But what if the Sustainability Fund is drawn down to zero? That was what our projections showed was going to happen by 2014.

This was a difficult message to get across, as our projections also showed us returning to a modest ($600 million) budget surplus by 2013. This apparent contradiction is explained by the fact that our accrual accounting rules for capital construction only allow us to record annual depreciation as an in-year expenditure, but the cost of the new building, road, etc. must be paid in full. That dollar difference is drawn out of the Sustainability Fund. This is something that every first-year accounting student knows—CapEx is greater than Depreciation—but that neither I nor most of caucus had ever been told or understood. This hadn’t made much difference for the years we were running multi-billion-dollar surpluses, and most of those surpluses were being deposited in the Sustainability Fund. But given the “new normal,” those days were long gone. The bottom line was that just to keep the legally required minimum balance of $3 billion in the Sustainability Fund, we had to achieve budget surpluses of at least $2.5 billion a year—not $600 million—starting in 2013.

The forecasts for the Heritage Fund were equally bleak. In the wake of the Great Recession, the Heritage Fund had lost $2.6 billion in 2008–9—its largest loss ever. In 2009–10, the fund rebounded and earned $2 billion. But because of our long-standing policy of transferring all the Heritage Fund’s annual earnings to general revenues, these 2009–10 earnings did not offset the losses of the prior year. Going forward, this meant that during periods of economic growth, the real value of the fund stays the same, but one bad year of losses meant a permanent and non-recoverable drop in the fund’s value.

The takeaway for caucus was, in my mind, simple: faced with lower than earlier projected revenues for 2011–13, and the need for larger than projected surplus to keep the Sustainability Fund afloat, we had some serious budget cutting ahead of us. As for the Heritage Fund, in the short term we were too cash-strapped to stop taking out all the annual earnings. But it was imperative we commit to start taking less by mid-decade. As that fall evolved, both of these became principal planks of my proposed “Renewed Fiscal Framework.”

The New Normal

Two weeks later I was back before caucus as part of a marathon two-day budget session. I basically had two objectives. The first was to rally caucus support for major cuts to ministry budgets by illustrating the financial train wreck that would happen if we didn’t. Klein had made across-the-board 5 percent cuts to government expenditures during the 1990s. Why couldn’t we do it now?

The second objective was to give the caucus an understanding of the fiscal constraints now facing Alberta—what I dubbed the “New Normal.” I hoped that to the extent that caucus would buy into the “New Normal,” it would help us to achieve our first objective and could then be used by our MLAs to explain to Albertans the difficult cuts that would appear in Budget 2011.

As part of the annual budget process, Finance sends each ministry a target budget number in August. Each department is asked if they can meet this target, and, if not, what are their “pressures” and “asks”—i.e., “Why not?” and “How much more do they need?” We now had received and aggregated all the departments’ responses, and, predictably, the “Pressures/Asks” exceeded the budget targets by huge amounts: $1.4 billion for 2011; $2.2 billion for 2012; and $2.8 billion for 2013. Lesson learned: no civil servants are going to voluntarily cut their own budgets.

We had run these numbers through our budget models, and the results were shocking. Under a budget scenario in which 50 percent of the pressures/asks were met, we would run deficits every year until 2014. If 100 percent of the pressures/asks were met, we would run deficits every year until 2016. Under both scenarios, the Sustainability Fund would be depleted in 2013, and we would need to borrow just to cover operating expenses starting in 2013.

Hoping that caucus was duly alarmed by such numbers, we then spent the better part of two days slogging through the pressures and asks of each ministry. The main culprits were Health and Education, but one by one, every minister had to stand and present. As each MLA had a right to speak his or her mind, it was a chaotic process, lurching from one issue to another, often with little connection. The most charitable thing I could say about the whole process was that it may have served as a sort of “group therapy” for backbenchers, as they had ample opportunity to unburden themselves. This assessment sounds cynical, but its accuracy is borne out by the fact that the premier and Ron Glen, his chief of staff, were absent for most of it. They knew that final budget decisions would be made by a much smaller group, which they would hand-pick.

Wedged into this two-day process was my presentation on the “New Normal”—a short and simple summary of six new economic and political realities that were squeezing—and would continue to squeeze—public finance in Alberta.

THE NEW NORMAL

1. Sharp decline in royalties because of Shale Gas Revolution

In less than four years, the combined effect of directional drilling and multi-stage fracking has almost doubled North American natural gas production and cut its price from over $10/mcf to less than $3. The knock-on effect on GOA revenues has been staggering. As illustrated in the graphic below, the GOA’s non-renewable resource revenues (NRRR) dropped from an average of $12 billion/year (2004–2008) to $8 billion/year (2009–11). The collapse of natural gas royalties accounted for almost all of the drop. The $4 billion difference is—not by coincidence—almost exactly the size of the Government’s projected deficit for 2010. Nor is this going to change anytime soon. Abundant and therefore cheap natural gas is here to stay for North American consumers. But its impact on GOA revenues is devastating.

Description

The area chart is divided into four sources of revenue stacked on top of each other; “Other”, “Natural gas/by-products”, “Crude oil”, and “Synthetic crude oil/bitumen”. Over time, especially since 2009-10, “synthetic crude oil/bitumen” is taking up an increasingly bigger share over the chart. By 2013-2014, it covers more 50% of the total revenues (all four sources).

The chart is preceded by three bullet points at the top that read:

2004/05 to 2008/09 – averaged $12 billion

2009/10 to 2012/13 – forecast to average $8 billion

U.S. has 250 year reserve of Shale Gas

Between the first and second bullets, there is a line indicating “$4 billion shortfall.”

2. “Loonie”/Currency parity with the US dollar

Over the past decade, the exchange rate for the Canadian dollar against the US dollar has risen from less than 70 cents to virtual parity. This has negative consequences for GOA revenues. For every 1 cent increase in the value of the “Loonie,” the GOA’s NRRR declines by $215 million. This is because all oil and gas exported from Alberta to the US is paid for in US dollars. A weak Loonie means higher revenues for Alberta oil and gas exporters, which means higher royalties for the GAO. A strong Loonie—such as we are currently experiencing—means lower revenues.

3. Canadian Exports to US reduced by recession

The 2008 Recession has damaged the US economy more than Canada’s, but this is reducing demand for Canadian exports to the US. Currently the US economy is characterized by high unemployment, high consumer debt, high government debt, and a housing market foreclosure glut. There is no certainty regarding how soon the US economy will recover. Reduced US demand translates into weaker economic growth in Canada and reduced revenues for Canadian governments from both corporate and personal income taxes.

4. Demographic time bomb in Alberta means sharp increases in costs for government-provided health care and senior services

The first wave of Baby Boomers (born in 1945) will turn 65 in 2011. The ranks of Baby Boomers becoming seniors will grow by 2,000 a month for the following decade. Today, there are 400,000 seniors in Alberta. By 2020, there will be 610,000; and by 2030, 800,000—more grandparents than grandchildren.

5. Underfunding of public sector pensions

There is a systematic understatement of the accrued liabilities of public sector pension funds in Canada. Using private sector “fair value” accounting rules, the C.D. Howe Institute reports that that while the “official” liability for Alberta is $49 billion, the “fair value” liability is $61 billion. For the Government of Canada, the official liability is $143 billion, while the “fair value” is $208 billion. This underfunding reflects the changing composition of our workforce. During the 1960s, the ratio of workers to retirees was 7:1. By 2025 it will be 3:1. This underfunding is aggravated by recent stock market losses and historically low interest rates. Governments are liable for covering the shortfalls of public sector pensions.

6. Increased environmental scrutiny—especially on CO₂ emissions

Prior to 2000, Alberta’s environmental policies were mostly an inside-Alberta issue. Today, Alberta is the focus of national and international scrutiny because of global warming concerns. Stopping or slowing the growth of oil sands production is the objective of well-financed campaigns by ENGOs such as Greenpeace, Forest Ethics, Sierra Club, Tides USA and Tides Canada. Today and going forward, Alberta’s “social license” and “market access” are at risk.

Taken together, these six economic and political realities constituted the “New Normal” for Alberta. They explained in part the budget deficits we were now running. I emphasized that none of these were going to disappear anytime soon, and there was little to nothing we could do about any of them. What we could do—and what we had to do starting in 2011—was to control our spending. The details of how we were going to do that would be the focus of a future presentation—the new “Fiscal Framework.”

A New Fiscal Framework

From the outset, I viewed my challenge at Finance as not just to get us to “Back in Black by 2012,” but to put in place a new set of budgeting and accounting rules that would prevent a repeat of what had happened since 2005, which in turn was almost a carbon copy of what had happened in the 1980s under the Getty government. By November, with a great deal of assistance from Deputy Minister Tim Wiles and his staff, I had put together a package of fourteen rules I wanted to see put into legislation as part of Budget 2011. Collectively, we called these “A New Fiscal Framework for Alberta.”

The Fiscal Framework would achieve three much-needed reforms to the annual budget process: mandatory minimum contributions to both our short-term and long-term savings accounts, the Sustainability Fund (rules 1 to 4) and the Heritage Fund (rules 5 and 9); new restraints on spending (rules 6, 7, 8, 11, and 13); and a procedural barrier to tax increases (rule 10). It also increased the GOA’s annual reporting requirements (rules 12 and 14). The Fiscal Framework did not include the most-needed reform—the mandatory retention of a fixed percentage of NRRR in the Heritage Fund each year, such as the 30 percent rule that Lougheed had originally established in 1976. In the context of the “New Normal” and our desire to balance the budget by 2012, this was deemed too steep, and so was deferred.

While I had consulted with both Snelgrove (Treasury Board) and the premier’s office on the concept of a new Fiscal Framework during the course of the year, to actually turn it into legislation meant running it through the internal policy approval process of the government caucus. This meant taking it to the Agenda and Priorities Committee (A&P) on November 16; Caucus Policy Committee (CPC) on December 6; and to caucus on December 13.

The purpose of the A&P Committee was to provide political advice and guidance to the premier. Its responsibilities included not just vetting proposed new legislation and budget issues, but anything else “politically relevant.” Our agenda for November 16 was unusually busy. Since the Legislative Assembly had begun its weekly sittings again on October 25, we—especially the premier—were getting badly beaten up in question period and in the media on health care issues. In November, Edmonton MLA Raj Sherman, an emergency room surgeon, had been suspended from our caucus after making inflammatory accusations about mismanagement in Alberta Health Services (AHS). These were given credibility by the chaos surrounding the firing of AHS CEO Stephen Duckett that same month.

Sorting out these issues took up most of our allotted time. Ominously for me, it was also at this meeting that several other cabinet ministers first began to make the case for new accounting rules for capital expenditures, changes that would allow us to redefine “balanced budget” as “operationally balanced.” I made a brief—ten-minute—introduction to the Fiscal Framework. With little discussion, it was approved to go to the next stage—the December 6th CPC meeting—for a more substantive analysis.

Sensing growing headwinds for my budget, I asked for and was given a meeting with the premier and Ron Glen on November 23. I knew that their active support would be critical to success. My message was simple: A budget by itself is not enough. We need a plan—a multi-year strategy—that will guide Alberta back to balanced budgets and fiscal stability. The Fiscal Framework is such a plan. It would serve as a sword in dealing with ministers’ budget requests. It would also provide a shield—”We can’t fix it overnight”—against the inevitable Wildrose attack alleging that the budget is “too little, too late.” I said, immodestly, that I represented a significant portion of our party—the business/fiscal conservative wing—that we were at risk of losing to Wildrose. They were looking to me to bring in both a balanced budget (in 2012) and a savings strategy. This Fiscal Framework did this. If you abandon me on this, if you cut me loose, you cut them loose too, at real risk to yourself and to our party.

The very next day my sense of foreboding was validated. At our Treasury Board meeting, the new proposed budget numbers were sharply criticized. One minister called it “an accountant’s budget, not a political budget.” My quick response was that after four consecutive budget deficits, a balanced budget IS political. Sensing that the majority of Treasury Board members were favourable toward my arguments, a second. minister chimed in: “We need a Cabinet meeting to discuss this … to give Dave and Doug an opportunity to present their case.” A third tried to please both sides, reminding us of our repeated “back-in-the-black” promises but then digressing and ending by saying that a “positive trend” was our goal. I was not reassured.

Losing the Fight

Caucus Policy Committee met as scheduled on Monday, December 6, and the attacks on the Fiscal Framework escalated. Again, Horner led the charge, arguing for his now well-known preference for dividing the budget into operational and capital spending, and borrowing for the latter. He was supported by Thomas Lukaszuk, an Edmonton MLA, who said our Deficit Reduction Act was “not worth the paper it is written on.” I had some support for the Fiscal Framework—Doug Griffiths, Janice Sarich, Broyce Jacobs—but nowhere near what I wanted or needed. Especially disappointing was President of Treasury Board Lloyd Snelgrove, someone whose support was essential if I were to succeed. Speaking at length, Lloyd barely mentioned the Fiscal Framework, instead musing on what we needed to do when we returned to fiscal surplus, and ended by saying that he “trusted caucus to set priorities.” This was hardly reassuring, as Snelgrove had alerted me earlier that he was going to be out of town when caucus was scheduled to meet the following week.

Following CPC, I called an emergency huddle with my two key staffers, Eric Taylor and Tom Kmiec, and we identified three “go forward” options:

• Drop the Fiscal Framework and just concentrate on Budget 2011.
• Take the Fiscal Framework to caucus and fight it out there.
• Take the Fiscal Framework to caucus but downgrade its rules from statutory requirements to “policy guidelines.”

This last option was clearly a step-down position, but we mused that if we were to get it adopted by caucus, we could take it to the next PC Party AGM, and try to get it adopted there as statutory or even constitutional rules.

Things went from bad to worse the next day at Treasury Board, where I reported that our fiscal situation had further deteriorated. Our internal third quarter (Q3) update showed that the deficit for Budget 2010 had now ballooned to $5.3 billion (from $4.7 billion); and that our projected deficit for Budget 2011 was now $3 billion, up from the $1.1 billion we had projected.

The following day, Wednesday, I had a private budget meeting with the premier, Ron Glen, and Lloyd Snelgrove. Glen floated the idea of postponing Budget 2011 until March, to allow us to “consult” with Albertans before tabling a budget. At first I liked the idea, as it would give us an opportunity to take the “New Normal” message public. But I became suspicious when I realized that Glen (and probably the premier) saw it as an opportunity to wiggle out of our “back in the black” commitment. And once again, the idea of separating operational spending from capital spending as a way to “balance the budget” was vetted, forcing me to explain that all our prior “back in the black” commitments had assumed existing accounting practices—revenue less total expenses, not just operating expenses. I warned that any deviation from this would mark a departure from twenty years of practice and attract negative attention from economists and the media.

In retrospect, I can see it was not by accident that when I returned home to Calgary that Friday, I composed the first version of my “Waves” document—a list of MLAs who might come with me if I were to resign, leave caucus, and sit as an Independent.

If the week of December 6 was bad, the next week was worse, but by now I was no longer surprised. Monday was the long-awaited showdown over the Fiscal Framework with the entire caucus. My office had provided each member with two documents the preceding week. The first was a six-page document, “A Renewed Fiscal Framework for Alberta,” which summarized and then explained each of the fourteen recommended new rules. The second was a ten-page “background” document that explained why we needed to adopt these new rules to cope with the “New Normal,” and then laid out the three options we were to vote on: Option 1, status quo; Option 2, adopt Fiscal Framework; or Option 3, adopt Fiscal Framework and include “Emergencies and Disasters” as a $500 million budgeted expense (rather than paying for them after the fact through the Sustainability Fund). We then recommended Option 2 and provided a brief explanation of how it could be implemented.

I had worked out an informal agreement with the Whip and the premier’s office that we would discuss each of the fourteen proposed rules one by one; then take a non-binding vote on each; and then conclude with a non-binding vote to include all those rules that had been approved as part of Budget 2011—basically Option 2. That was the theory.

What happened was far different. Led by Ministers Horner and Hancock, there was a sustained attack on the entire document as unnecessary, too restrictive, and politically damaging. Jack Hayden, Iris Evans, Frank Oberle, and Luke Ouellette, all close allies of the premier, joined the choir. Many MLAs spoke in favour—we had lined up a dozen or so supporters beforehand—but fence sitters saw where the premier’s team wanted to go, and joined in. In the end, the nays clearly outnumbered the ayes. The president of Treasury Board was, as expected, absent. At the end of almost two hours of heated argument, Robin Campbell, the Whip, who sits next to the premier at caucus meetings, announced that there would be “no vote,” as the issue was “too politically sensitive.” Instead, he suggested, we could “get it out quietly,” whatever that meant.

Interestingly, the caucus debate was as much about the political value of the Fiscal Framework as it was about its actual contents. As before, I stressed that a longer-term fiscal strategy was necessary to win back the fiscal conservative wing of the PC voter coalition that was drifting off to the Wildrose Party. The critics vigorously rejected this and argued that whatever voters we might lose to Wildrose we would pick up from Liberals and NDP supporters. I replied that this was ridiculous. In the rural ridings, there were no Liberal or NDP voters to pick up.

Critics could say that I was subsequently proven wrong by the next provincial election, when Premier Alison Redford’s “spend now, pay later” 2012 budget paved the way for the election of another strong PC majority government. But, as I explain in Chapter 9, the 2012 election also gave the then-fledgling Wildrose Party the rural base they needed to take down first Redford and then Jim Prentice and end the PC dynasty in the 2015 election.

If the Fiscal Framework died at Monday’s caucus meeting, my version of Budget 2011 died at Wednesday’s cabinet meeting. I had been warned by my officials in Finance that opponents of our proposed budget cuts were planning to use this cabinet meeting as a showdown, and they were certainly right.

I presented the budget numbers that would be needed to keep on track for a balanced budget in 2012. As soon as I finished, the attacks began.

“Forget about back in the black,” said one minister, “and just say we made a mistake.” He was congratulated by a second minister, who added: “The average Albertan doesn’t care.” A third said it was “time to be bold… to show confidence in the future” (i.e., spend more money that we don’t have). A fourth said that the proposed budget for Health would mean cutting seniors’ and children’s services, which he could not support. A fifth expanded on this: “Mulroney didn’t lose because of his deficits. He lost because of new taxes” (i.e., the GST).

I tried to counter. I said all these arguments were the same ones used by the Getty cabinet in the 1980s and look where that got us: $23 billion of real debt. What was being proposed was not “bold and confident” but “naïve and reckless.” But I could see now that it was a lost cause. Once again, the ministers leading the attack were almost all close to the premier and Ron Glen and wouldn’t be doing what they were doing without at least tacit support, if not outright encouragement.

In closing, I repeated what I had been saying since I became finance minister: that we must earn the next election, not buy it; that our political risk is on our right flank with Wildrose; and that failure to keep our “back in the black” commitment would hurt us in southern Alberta and Calgary. But I was clearly in a minority.

In retrospect, my failure to win over cabinet was in part a political lesson that I had once known but had since forgotten: when it comes to caucus and cabinet decision making, it is as much about relationships as it is about policy. Over the preceding eleven months, I had picked policy fights with almost every other minister: Liepert and Horner over the North West Upgrader; Hancock over the Education Act; Knight over the Micrex project and Bill 50; Zwozdesky over cuts to the Health budget. I still think I was on the right side of policy in each of these battles, but when it came to garnering support for my budget, I had few friends.

Stay or Leave?

Returning to Calgary for the weekend, I pondered my options. It was clear that the spending numbers for Budget 2011 were going to be much higher than I wanted, and, more importantly, would make it impossible—barring some sort of miracle—to deliver a balanced budget in 2012. The latter was non-negotiable for me. My principles and my reputation for fiscal responsibility had already taken a huge hit for delivering the record deficit in Budget 2010. Unless a personal plea—or threat—to the premier could change the situation, resignation appeared to be about the only card left on the table.

My choice was made for me on Monday. In an end-of-year interview, the premier told Sun Media that a balanced budget in 2012 was still the “goal,” but that if extenuating factors increased, then there might be a delay: “There’s a number of issues, obviously some challenges [in meeting the target],” he said. “These are external factors, nothing we can do anything about. We’re going to trend toward a balanced [budget].”¹ Trend toward a balanced budget? Now there’s a beauty! Others were more blunt: “Dec. 20, 2010: Budget backtrack.”² I had been given no prior notice of this policy reversal, nor for that matter did Stelmach ever contact me afterward to explain or discuss it. I just learned about it from a phone call from my staff.

Notwithstanding our many differences and disagreements, I had stuck with Stelmach for the past four years. My loyalty up to now was based on my experiences in 2001 when I was working as the director of policy and research for the newly created Canadian Alliance Party. I was upset with the MPs in our caucus who were Manning loyalists and who took down the party’s newly elected leader, Stockwell Day, before he had been given a fair chance to prove (or not) his leadership abilities. As noted in chapter 1, I made a promise to myself then that going forward I would never put personal disappointment ahead of maintaining caucus unity. I still think this is an honourable principle. But even good principles can be abandoned when and if circumstances warrant. And Stelmach’s public reversal on a balanced budget by 2012—with no advance notice to me—was the final straw. The question was no longer if to resign, but when and how.

A week later, Stelmach told the Globe and Mail: “I watch both sides of the political spectrum … and there’s a saying in rural Alberta: It’s the quiet dog that will come and bite you, not the barking dog. … That quiet dog? Generally, the Left. … Let’s not just focus on one political party to the far right and lose the direction that Albertans want us to go in.”³

Once again, Ed Stelmach was wrong.