The Yukon government’s cash surplus has cracked the $100 million barrier. Unfortunately it is going the wrong way, down.
And the plunge seems to be accelerating.
If you happen to depend on the Yukon government budget for a job, social program or community service – that is, almost anyone reading this paper – this is worrisome news.
According to supplemental budget documents released in the legislature, at the end of this fiscal year the Yukon government’s cash fund is expected to be $93 million. This is down from $165 million as recently as March 2008, as reported in previous budget documents.
The cash “burn rate” this year is $43 million, meaning cash spent exceeded cash received by that amount during the year.
The phrase “burn rate” was popularized by the space program, which used it to calculate whether a rocket had enough fuel to sustain however many seconds of “burn” it needed to get from A to B. Financial analysts now use it to calculate how long a company can go on losing money. You take the cash on hand and divide it by how much cash the company is burning each month, and you know when something – more borrowing, a share issue, or the arrival of the bankruptcy lawyers – will happen.
Of course, you’ll likely still hear Premier Dennis Fentie and his remaining cabinet ministers talking about “sound financial management” and a “surplus.” This is because they prefer to refer to the government’s “accrual” method of bookkeeping, which is expected to report a small $222,000 surplus next March.
It’s a technical topic, but essentially the government gets to add the value of buildings and similar assets acquired back to its annual accounts. A rough illustration of the principle would be if you had $20,000 in the bank and withdrew the money to renovate the kitchen. Since your house (one hopes) goes up in value $20,000 because of the renovation, you can tell yourself that your net worth is still the same.
It’s true in theory, but you still have $20,000 less cash, an important point should you lose your job or need money for some reason. That’s why many analysts like to follow the cash.
In cash terms, the Yukon government expects to have $93 million in the bank in March 2010. With an annual burn rate of $43 million, that leaves 2.17 years of burn after this fiscal year. If this trajectory continues, the Yukon government will spend the territorial piggybank’s last loonie on June 1, 2012 (a bit after lunch to be precise, according to the burn-rate formula).
Of course, lots can change. The Yukon government could cut spending. Or it could get another windfall from Ottawa.
Unfortunately, however, there are two factors that will cut further into the $93 million. The first is that some of this money is tied up in the Yukon’s famously frozen Asset Backed Commercial Paper investments. The auditor general appears to have forced Fentie to admit (see Note 8 on page 66 of the Public Accounts for this important announcement) that the $36 million that is frozen has to be written down $11 million. And most of the remainder likely can’t be cashed in until 2017.
On top of that is the Yukon’s $71 million share of the Mayo B dam project. Unless First Nations, or some other investors (perhaps Fentie has phoned ATCO?) chip in tens of millions, the Yukon’s share of this project will eat into the remaining surplus.
There are now two big questions. The first is cynical and short-term: will the cabinet manage to juggle the finances sufficiently that they can keep spending on vote-winning projects until the next election, which has to happen by Fall 2011 at the latest?
The second question is a bigger one, and promises to give the next government – of whatever party – serious trouble.
Once the current cabinet spends the Yukon’s nest egg, will the next government cut spending or find some way to borrow?
Balancing the books on a cash basis would require cuts of $43 million, which would be painful. But issuing bonds causes interest payments to eat up tax revenues, and just passes the problem on to our children.
Previous Yukon leaders have helped the Yukon grow in status and take on more of the rights and responsibilities of a province, from responsible government in 1979 to the creation of Yukon Energy in 1987 to the finalization of the devolution transfer agreement in 2001.
This government may leave us with one more province-like milestone: a large debt.
Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels. His latest book Game On Yukon! was just launched.