A New BC Rail Cover-Up?

When the B.C. Liberal government announced it was privatizing B.C. Rail in 2004, it put a large chunk of the proceeds into a trust that was promised to make life better for citizens in the hard-hit northern interior of the province.

Times are still tough there, but the $185 million of taxpayers' monies placed in the Northern Development Initiative Trust has almost certainly taken a big hit thanks to some risky decisions about how to invest it.

How big a hit? The Tyee estimates at least $25 million (calculations shared later in this piece).

If that sounds like the making of a political bombshell, given the already highly controversial and scandal-plagued B.C. Rail deal, one thing stands in the way of voters knowing all the facts. The 13 directors of the trust, five of them hand-picked by the B.C. Liberals, apparently are in no hurry to release their financial statements, even though they've already missed their legal deadline.

No release date promised

On Thursday, April 30, the directors of the Northern Development Initiative Trust were required by law to publish the trust's latest audited financial statements.

Those 2008 financial statements would have revealed the amount of monies lost by the trust in last year's stock-market meltdown.

The directors, however, have not met their statutory obligations.

When queried about the missing annual report, Janine North, the trust's chief executive officer, did not express concern about public accountability.

"The content for the annual report is currently being finalized," North wrote in an e-mail on May 1 -- a day after the report and the audited financial statements were required by law to have been released to the public. "I expect it will be posted on our website this month."

When then asked via e-mail if the annual report was being held until after the May 12 general election, North failed to reply.

North is key election battle zone

Prince George is ground zero in north-central B.C. during the campaign leading up to the May 12 provincial general election.

To the south are two Cariboo ridings the NDP won by 114 and 269 votes respectively in 2005, and to the west are three highly contentious electoral districts: Skeena, Stikine and Nechako Lakes.

The toughest battles may well be in the Spruce City itself, where two B.C. Liberal cabinet ministers, Shirley Bond and Pat Bell, are trying to win re-election in the face of a collapse in the region's forest sector and a sharp downturn in the local economy.

Prince George also is home to the headquarters of the Northern Development Initiative Trust. Established following the 2005 sale of publicly owned B.C. Rail, the trust was created to disburse $135 million of the privatization proceeds to initiatives promoting regional economic development.

With a board of directors recruited from the ranks of prominent business people and regional politicians, a staff of six with a yearly administrative budget of $900,000, and a mandate to annually dole out millions of dollars to worthwhile projects, it's fair to say the trust enjoys a high public-profile in B.C.'s Northern Interior.

And it's likely that confirmation of the NDIT's loss of tens of millions of dollars entrusted to it by the Campbell government would have an impact on local and regional election campaigns.

But with 10 days to go before voting day, the trust's board of directors is disregarding its legal requirements by failing to inform B.C. taxpayers about how well their money has been managed.

Trust was launched with fanfare

"The economic future of northern British Columbia is getting brighter and brighter," Kevin Falcon, B.C. Liberal Transportation Minister, gushed in the legislature when he introduced Bill 59, the Northern Development Initiative Trust Act, for second reading on Oct. 7, 2004. (See Hansard here.)

"A big reason for this is the billion-dollar B.C. Rail investment partnership, which is allowing our government to commit, out of the proceeds, $135 million to northern British Columbians."

Under the bill, the $135 million entrusted to NDIT was to be allocated between six accounts, from which monies subsequently would be disbursed to various projects and overhead expenses. Four accounts held $15 million apiece, with monies earmarked for initiatives in four sub-regions (Prince George; Cariboo-Chilcotin-Lillooet; the northwest; and the Peace).

Another $50 million was placed in a cross-regional account, from which funding would flow to projects anywhere in the northern interior. Finally, $25 million went to an operating endowment account to cover administrative overhead.

Later, in the fall of 2005, the government gave the trust an extra $30 million for a new, seventh account to fight the pine-beetle epidemic, and a further $20 million went equally to the four sub-regional accounts.

In total, $185 million of B.C. taxpayers' monies went to the trust courtesy of Gordon Campbell and his B.C. Liberal government.

At outset, a pledge of accountability

A 13-member board of directors assumed responsibility for overseeing the trust. Five of those directors were appointed by the Campbell government, with eight more coming from local governments (two apiece from each of the four sub-regions).

Not surprisingly, accountability was an important issue when MLAs debated the creation of the trust in the fall of 2004. Falcon, responding to a question by New Democrat Joy MacPhail during committee-stage debate on Oct. 21, referred to "requirements that there be an annual report issued by the trust and that there also be audited financial statements that must be made widely available, including by electronic means." (See Hansard here.)

He added: "Practically speaking too... the majority of the members on this trust are going to be elected municipal politicians, and clearly, their public will take interest in what they're up to. That is what the annual report and the audited financial statements will endeavour to provide."

Indeed, so important was public accountability to Falcon and the Campbell government that an entire chapter (Part 2.1) of the Northern Development Initiative Trust Act is devoted to the subject.

Section 2.2(1) of the act states: "Within four months after the end of each fiscal year of the Northern Development Initiative Trust, the directors must (a) prepare an annual report... and (b) prepare, in accordance with generally accepted accounting principles, financial statements for the Northern Development Trust for that fiscal year and have those financial statements audited...."

And Section 2.2(2) states: "The directors must... (c) publish each annual report in a manner that can reasonably be expected to bring the annual report to the attention of the public."

The NDIT's fiscal year is the same as the calendar year; that is, it runs from Jan. 1 to Dec. 31. Each year's annual report and audited financial statements, therefore, must be completed and made public -- by law -- no later than April 30, which is four months after the end of the fiscal period.

Shift to a riskier investment strategy

At the beginning of 2006, after its initial year of operation, NDIT's fund balance stood at $187.3 million. The gain was due to investment income of nearly $3.8 million, with disbursements limited to a few grants and loans for regional projects, and administrative overhead.

At this point, the board of directors decided to take its endowment out of a low-risk, money-market account managed by the provincial government's Municipal Finance Authority, and switch it into a variety of funds overseen by SEI Investments Canada Company, a Toronto-based investment firm.

(This decision, and the potential for investment losses in 2008, was reported in a superb piece by the Vancouver Sun's crack political columnist, Vaughn Palmer, on Jan. 29.)

According to the trust's 2006 annual report, most of the monies invested with SEI were expected to appreciate by seven per cent annually, even "while minimizing investment risk in order to support the sustainability of the trust." By the end of that year, SEI had beaten that target, with an overall return of nine per cent for the trust's investments.

Investment income for 2006 was $16.8 million, bringing the trust's balance -- after overhead and disbursements -- to $199.5 million.

Upping the gamble again, and losing big

The next year told a different story, however. In their 2007 annual report, the NDIT directors acknowledged that investment returns from SEI had collapsed to just 2 per cent for the year. That decline was attributed by the directors to "the overall market uncertainty created by the U.S. subprime mortgage issue."

Investment income had plunged to a mere $4 million, and the fund balance -- $200 million -- was little changed from the previous year.

Oddly -- and despite their acknowledgement of "overall market uncertainty" from the U.S. sub-prime meltdown -- the trust's directors then decided to adopt a much more aggressive approach to their investments. Whereas two-thirds of NDIT's SEI portfolio had been in conservative fixed-income funds, and the remaining third in riskier equities in 2006, a 56-44 per cent split between bonds and stocks was reported at the end of 2007.

It was a catastrophic decision. In the summer of 2008, stock markets around the world went into a free fall. SEI Investments Canada Company's equity funds, along with those run by other money managers, got hammered.

How Tyee calculates $25.1 million loss

Using the Globe & Mail's Globefund.com's simple annual returns for 2008, The Tyee calculates that the four SEI equity funds in which the NDIT's directors had put B.C. taxpayers' monies -- the Canadian Equity Fund, the U.S. Large Company Equity Fund, the International Equity Fund, and the U.S. Mid-Cap Synthetic Equity Fund -- fell by an average of 35.3 per cent over the year. (See SEI's annual returns here.)

From this data, The Tyee further estimates the loss of the NDIT's equity investments in 2008 at $29.4 million.

Fortunately, the trust's investments in SEI's bond, fixed income and money-market funds showed a gain of about $4.3 million over the year. The net loss for 2008, therefore, probably was in the neighbourhood of $25.1 million.

And the NDIT's year-end balance, once projected to be $203.6 million, may now sit as low as just $160 to $170 million.

Of course, British Columbians -- taxpayers and voters alike -- won't know the full extent of the loss until the trust's board of directors comply with their statutory obligation.

Directors breaking the law

Perhaps those NDIT directors -- and especially the five appointed by the Campbell government -- might take the time to consult the B.C. Board Resourcing and Development Office's website, and peruse a document entitled The Standards of Ethical Conduct for Directors of Public Sector Organizations.

"Directors should act at all times in full compliance with both the letter and the spirit of all applicable laws," states Section 1.1 of the aforementioned document. It seems as though it ought to be unnecessary to remind public officials of their legal, ethical and professional responsibilities.

Especially at so critical a moment as this, in the final days of a hard-fought provincial election.

Related Tyee stories:

• Pine Beetle, Mr. Opportunity?
  The bug brings floods, fires and talk of new economies.
• Gordon Campbell's $400 Million Power Line Bet
  Did BC's premier juice up his claims for the Northwest Transmission Line? A Tyee special report.
• Can B.C.'s North Be Saved?
  Northern towns grapple with a shifting economy, government cutbacks, and doubts about whether the rural way of life is worth saving.