Gallant government's Saint John bailout represented 'excessive risk,' AG report says

A $22.8-million bailout package by the Brian Gallant government for the City of Saint John represented "excessive risk" to provincial taxpayers and did not go through the normal approval process, according to New Brunswick's auditor general.

Kim MacPherson says the bailout agreement did not include targets and, as of this April, had "failed to effectively address the city's challenge" or reduce the financial risk to the province.

And by tying the funding to the city's deficit, the Gallant Liberals actually created "an inappropriate incentive" for the city to run larger deficits so it could collect the maximum amount of $22.8 million from the province, she says.

Her audit, released Tuesday morning at the legislature, also says the government may have committed obstruction, a violation of the Auditor General Act, by not providing all the documents her office asked for.

3-year package announced in 2017

Then-premier Brian Gallant committed to a three-year assistance package in September 2017, following pleas by Saint John Mayor Don Darling for a "new deal" to address what he called a municipal budget crisis. The city was forecasting a $6-million deficit at the time.

That commitment came the same month Gallant appointed himself as his government's regional minister for the Saint John area, despite representing the southeastern riding of Shediac Bay-Dieppe.

The Liberals were targeting the region in the 2018 provincial election, hoping to pick up seats in and around the city. Darling publicly mused about running for the party before deciding to remain as mayor.

"This thing reeks of bad management and bad politics," Saint John East PC MLA Glen Savoie told the committee of MLAs where MacPherson was appearing.

MacPherson says the city was conscious of the timing of the provincial election and "leveraged" that timeline to push the province for the bailout.

But Darling said Tuesday afternoon that the timing of the deal had nothing to do with the election and the timing was based on Saint John's planning for its 2018 budget.

Still, the report highlights intense interest from the Liberal premier and his staff.

While the Regional Development Corp. was given responsibility to negotiate the agreement, the audit says top staffers in Gallant's office "were intricately involved" in the work.

In December 2017, Gallant sent Darling a letter offering him "my guarantee" that the province would provide a financial bailout and promised to "begin making investments today" to ease the pressure on the city's 2018 budget.

MacPherson says there was "no evidence of documented approval by cabinet"  for Gallant's promise until two months later. There was also no sign that the Department of Environment and Local Government — responsible for municipal funding — was consulted.

When documentation finally appeared in February 2018, it was "difficult to follow, lacked clarity and in our opinion did not include adequate analysis" to support cabinet approval for the funding.

Less stringent accounting standards

The city also pushed for — and Gallant agreed to — less stringent accounting standards for measuring Saint John's deficit, and for the removal of a clause requiring the legislature's approval for the payments.

MacPherson's audit also says there were repeated references to legal advice from the Office of the Attorney General on the bailout agreement, but when her staff asked for it, they were refused.

And it faults the premier's office for not making sure records were maintained during the transition from the Liberal to Progressive Conservative government for her review. That meant that after the PCs took office, they were not able to give her some documents she asked for.

"We realize this was during a period of government transition but our expectation was that records would be retained to facilitate transparency, knowledge transfer and effective review of significant, ongoing files," MacPherson writes.

"We believe this is fundamental to effective governance."

Saint John council approved the agreement on Feb. 12, 2018, three days after the province announced it. The province paid out the first $1.2 million on Feb. 22 as compensation for a provincial property tax freeze, despite Gallant not signing the agreement until March 15.

In comments incorporated into her report, the Higgs government says it will heed MacPherson's recommendations to ensure proper protocols are followed in funding agreements and that they comply with provincial laws.

Finance Minister Ernie Steeves told reporters that the PCs will honour the full three years of the agreement.

MacPherson's audit says tying provincial funding to the city's deficit encourages the city to continue running deficits and also creates a precedent for other municipalities looking for money.

"Providing funding to a municipality to address a projected, ongoing deficit could incite other communities to seek the same solution to financial issues," she writes.

"This precedent would represent additional increased risk for the province as it faces pressure to address municipal deficits with similar actions."

The funding also circumvents the Local Governance Act, which lays out how a municipality is supposed to deal with deficits, according to the auditor general.

Saint John balanced its budget and avoided major cuts this year thanks to $7.1 million from the province under the agreement. But city officials warned when it was approved that spending levels would not be sustainable after the three-year deal expired.

Darling and Saint John Harbour Liberal MLA Gerry Lowe both said they hope a promised working committee report on longer-term solutions for the city will be released soon.

The report is five months late, and Darling said the city would not need more funding from the Gallant deal if it were implemented.