Recently, economist Erik Andersen circulated a paper discussing government liabilities and the games played by politicians to disguise unconscionable growth of debt during non-recessionary times. I’ve expanded Erik’s words and we hope the following discussion will be understandable and helpful.
After Gordon Campbell became Premier, British Columbia began to favour the use of contracts as a way of conducting government business. Because these have provisions that relate to performance by contractors, payment commitments that follow are not reported as debt in government accounting. Instead, the obligations are hidden in annual financial statement footnotes and ignored in other reports.
Crown corporations follow the same approach. BC Hydro signed deals with private producers to construct facilities that will deliver more than three times the power of Site C. Even though BC Hydro takes the entire output at prices that escalate with inflation, with no reference to market value, the province and its utility claim the obligations to pay, for as long as 60 years, are not debt. The contractors owe the debts to financial agencies and BC Hydro owes the contractors but, for political reasons, they pretend there is no debt.
Because this debt-hiding technique has grown more popular recently, professional accounting bodies are changing reporting requirements. Even so, British Columbia’s Liberal Government regularly decides which accounting rules (GAAP) are followed or not followed when public bodies prepare financial statements. Ignoring the amounts owed by contractual obligations – most of these are debts by any application of common sense – is part of the accounting trickery that British Columbia’s arrogant political machine employs regularly.
If government builds a hospital and finances it with 20-year bonds, the borrowed sum is debt. If government asks a private company to finance the same hospital and agrees to pays the capital cost (plus interest and contractor’s profit) over 20 years, the obligation is not debt, at least according to the politicians.
Consider an individual buying a car with bank financing or, alternatively, taking delivery of the car through a lease agreement. Check with your bank manager; in the real world, both obligations are debt.
Government argues that formal debt only includes agreements calling for the payment of interest and principal that are driven by time passage, not by performance of services or delivery of products.
Contractual obligations typically have long terms. Because the BC Government made secret contracts with Independent Power Producers (IPPs), public-private partnerships and others, we only have the aggregate of these contracts, which was $101 billion when last reported as of March 31, 2016. The IPP share of that total was $58 billion.
Why the use of contracts instead of conventional financing? Bonds must be disclosed plainly as debt in the province’s annual report whereas contracts get buried in Auditor’s notes to the financial statements. This has political advantages for government leaders who wish to pretend they are not “leaving the kids with debt.”
Contracts are an indirect way of financing. The private contractors arrange and carry financing but to do so, they show lenders that taxpayers stand behind the contractors’ financial commitments.
Because government carefully avoids talk of these contracted amounts, so does friendly corporate media. Government MLAs use the term “debt” but never talk about contracts that require payments as surely as bonds.
To escape this misinformation trap, some only use the term “financial liabilities.” If you think about it, nobody is fooling anyone when BC says it has only $67 billion of debt and stops short of saying what other contractual liabilities must be paid off. It is like saying I only have a mortgage; those pesky car leases and credit card liabilities are meaningless.
In the preparation of annual financial statements, there are several moving parts. For BC, the per person amount of government revenues has not materially increased in the past 10 or 15 years while at the same time the amount of total provincial liabilities per person has almost doubled.
If you did this in your personal budget, you would be headed into insolvency or at least forced to sell assets you might own. Either way, you are poorer.
On Twitter recently, one Liberal hack said, “Operating debt bad; capital debt good.” Live by that rule in private life and your bankruptcy trustee will soon be selling off your fancy toys and other capital assets. A government is little different.