Special Committee on Cooperatives Committee on July 10th, 2012

[Frank Lowery]

Okay, sure.

The last comment I was addressing, and I'll just throw this in for the record, is that there's a thing in the U.K. called the Butterfills amendment, which allowed cooperative and mutual organizations to come together without compelling demutualization. I think this is something the committee should consider.

Thank you.

[The Chair, Conservative, Blake Richards]

Thank you very much, and I appreciate your being short with your wrap-up.

Now we do have joining us by video conference as well Mr. John Taylor, the president of the Ontario Mutual Insurance Association.

Mr. Taylor, can you hear us all right?

[John Taylor, President, Ontario Mutual Insurance Association]

Yes, I can hear you very well. I hope you can hear me.

[The Chair, Conservative, Blake Richards]

Absolutely. We certainly can. The floor is now yours for 10 minutes for your opening remarks.

[John Taylor]

My opening remarks won't take 10 minutes, but I would like to thank the committee for the invitation to speak.

I am the president of the Ontario Mutual Insurance Association. We are composed of 44 property and casualty mutual insurers incorporated in Ontario. Each of our companies is in excess of 100 years old, the oldest being over 150 years old. The genesis of mutual companies in Ontario, and for the most part in other parts of Canada as well, was the lack of availability of insurance in rural areas of Ontario during the 1830s, 1840s, and 1850s, up until well into the 19th century. Groups of farmers came together and pledged to support each other in the event of a loss, and basically the mutual insurance industry was born out of that.

We're very proud to continue that tradition today. In contrast to some of the mutuals that Mr. Lowery referred to, each of our member companies is a 100% participating company. By that I mean that if you purchase a policy from a mutual insurer in our association, you are a voting member of the mutual and you exercise the full democratic rights of any other policyholder. We do not have a split ownership structure.

Overall we believe that mutual ownership as a structure is extremely important to a diverse financial services sector. We recognize that there need to be different forms of ownership, and we do have concerns about potential demutualizations basically pushing the insurance sector into being either fully publicly traded, and in many cases foreign controlled, or held as private equity. We believe that companies that provide an alternative form of ownership are important.

Right now in Canada, there really aren't any issues concerning the availability of insurance to policyholders. That being said, things have a habit of changing, and it may well be that down the road, due to global conditions, you could see a lack of availability of coverage. In that case, locally owned and controlled mutuals certainly would provide a very viable alternative.

I think that some of the greater threats to smaller companies like our own.... Here I guess I should be clear that we are a fairly small part of the overall P and C sector—although in Ontario, overall, we do rank more or less in the top ten in direct written premium. The largest member of our association writes about $80 million in premium and our smallest member writes only half a million dollars in premium. By being part of an association we're able to support a wide range or scope of these 44 different companies.

We work closely with our provincial regulator. We do have issues concerning the prevalence of regulatory initiatives springing from global circumstances, which can have an adverse effect on smaller entities. We believe there needs to be strong regulation, but we also believe that all regulation, including the need for capital requirements for insurers, needs to take into account special circumstances that may go with smaller-scale entities such as our own.

Overall we support the idea of mutual and cooperative types of ownership, and we think it's an important part of the Canadian economy. We think where we are today is in large part due to the people who were willing to take on the burdens of ownership when others weren't willing to come forward.

That concludes my opening remarks.

Thank you.

[The Chair, Conservative, Blake Richards]

Thank you very much, Mr. Taylor.

We'll now move to our opening round of questioning.

Mr. Harris, for five minutes.

[Dan Harris, NDP, Scarborough Southwest, ON]

Thank you, and thank you to all of you for coming down today.

Mr. Gazzard, in your presentation you spoke about a lot of different things. After reading your pamphlet, Co-operative Housing in Canada, I'm just going to repeat part of one paragraph:

Nearly all housing co-ops receive assistance for low-income members through government housing programs. Low-income households pay reduced charges for their housing, according to their income. Other households pay housing charges based on the actual costs of operating the co-op.

I'll let members continue to read that if they like.

So there are government programs that have been in existence for a number of years. Are those coming to an end? What kind of funding do you guys see continuing down the road?

[Nicholas Gazzard]

Yes, they are coming to an end. Most of these programs were commitments of 35 to 50 years. The 50-year commitments are the older ones.

The concern we have is that there was no plan in sight, no clear thinking at the public policy level on what's to be done, if anything, to continue to make sure these housing providers can offer reduced occupancy charges, reduced housing charges, to low-income households. The problem is exacerbated by the fact that so many of the low-income households and housing cooperatives are not households that are capable of readily improving their income situations, because they're typically fixed income. They might be seniors, frail elderly, disabled.

Unfortunately, the silence that's coming from government right now on a policy around succession planning for this is introducing an enormous amount of anxiety into these households, where previously security of tenure was a paramount principle of this form of housing.

We are strongly urging government—the federal government but also the provincial governments—to join together with us to see if we can formulate a policy that makes sense financially for the government but also makes sense financially for low-income families.

What's likely to happen, if nothing is forthcoming, is that obviously the affordability will disappear. Low-income households will be forced to spend a great deal of their income, probably the majority of it, on shelter before anything else. That's going to result either in economic eviction or people who are simply unable to pay and co-ops that are unwilling to be cold-hearted enough to put these people out on the streets.

What we're looking at is a real threat to the viability not just of the units that are occupied by low-income people but also the cooperative corporations themselves. So we're very concerned.

[Dan Harris, NDP, Scarborough Southwest, ON]

In essence, without those government funds, co-ops don't have the funds themselves to absorb those additional costs.

[Nicholas Gazzard]

There's not a single answer to that, although a single answer is continuously provided by CMHC. CMHC basically says.... It makes the blanket statement that it thinks cooperatives will be okay. What it's not taking into consideration is the fact that although co-ops will no longer be paying a first mortgage, in all likelihood they will have to refinance. Their buildings are old. They were built modestly to begin with. They'll need rejuvenation for them to house a new generation of cooperative members.

That's going to require financing. It's not money that the co-ops have been able to save. They saved some money for capital injection, but not enough.

That's the big tension, if you like, between, on the one hand, allowing your income to go down because you're housing low-income members affordably without subsidies and, on the other hand, still trying to make sure you reserve the capital asset. It's an uncertain business at best, and it's no way to run a housing policy.

[Dan Harris, NDP, Scarborough Southwest, ON]

You actually segued into my next question, which was about CMHC. There are some pilot projects right now where the cooperatives are working with the credit unions to try to lend and extend. From what I understand, they're facing huge penalties to break those pre-existing mortgages. Whereas most other mortgages might face penalties of 1%, 2%, or 3%, from what I understand, co-ops are looking at potentially 8% or 9% to break those mortgages. Could you comment on that?

[Nicholas Gazzard]

Yes, I can. You're right. We are looking already at the idea of refinancing before the actual government programs and mortgages come to an end, but we are facing a hurdle. Most of the co-ops we're looking at are actually financed through the direct lending program of the Government of Canada, through CMHC. Those are for fixed terms. They're closed terms. Any mortgage holder in the room will know what a closed mortgage term is. That's what applies to these housing co-ops.

The problem is that when they want to get out of these loans to refinance them and rebundle them with additional debt, what they're being told is that all of the interest that will be due to the remainder of the term—even if there are four years left on the term—is due and payable, which is, of course, completely unsustainable and completely unreasonable.

We're not saying that CMHC shouldn't be entitled to some penalty for its pains, but if you're telling me that CMHC can't take.... It talks about obligations on the other side, to bond holders through the crown borrowing facility. If you're telling me that CMHC can't find a way to get the return it needs to get—which is below 2% right now—for the remainder of that term through reinvesting, then I'm going to say you're not being serious.

There are ways CMHC could manage its money, manage its financing, and manage the program where it would not need to lose that kind of.... It's saying it will have to keep paying the bond holders, therefore it has to keep charging the full interest. We're saying find another way to pay the bond holders. If you get $1 million back on a prepayment, fantastic.

[The Chair, Conservative, Blake Richards]

Mr. Gazzard, we're well over time. Are you done with your response? Thank you.

We'll now move to Mr. Butt for five minutes.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Thank you very much, Mr. Chair, and thank you, witnesses, for being here.

The first question I will ask is to Mr. Taylor and Mr. Lowery, just for some clarification around what is the difference between the way The Co-operators insurance operates and mutual insurance.... Are there just name differences, or are there actually different structural ways that your two entities operate within the confines of being considered cooperatives?

Mr. Taylor, do you want to start? Then Mr. Lowery can jump in, and I will be going to Mr. Gazzard after that.

[John Taylor]

Yes, mutuals are a differentiated form of cooperative. I think the simplest way to explain it is essentially that mutuals are owned directly by their purchasing policyholders, whereas cooperatives have a different structure to a certain degree. I think there are very many parallels in practice. Co-operators, however, as an insurer certainly have a different ownership structure than would a mutual company. For mutual companies, the incorporation articles derive out of provincial legislation in Ontario. Basically, mutuality is a very simple ownership structure. It's one policy, one vote, and ownership resides with the policyholders.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Okay.

Mr. Lowery.

[Frank Lowery]

I'll just add a little bit to that.

In terms of the even playing field, on a federal level, under the Insurance Companies Act, you cannot incorporate a cooperative insurance company. In 1992, when the acts were revised, I was on the joint committee on behalf of cooperatives, with the IBC, the Department of Finance, the Department of Justice, and OSFI, and at that time I raised the issue as to why cooperative incorporations were not allowed under the act. I was told you're just the same as mutuals. It goes back to your question. It's not true. They're two different forms of organization. In a cooperative, a cooperative organization basically rests on the fundamental principles that were established many years ago, and I referred to it earlier—you can Google it under ICA, the “Statement on the Co-operative Identity”. There are seven core principles, and there's a bunch of other stuff around it; there's a long statement around it, but basically that's the value foundation for cooperatives.

Cooperatives came out of the industrial revolution, really, and they were a method for working people to actually ensure that they could eat wholesome food that wasn't sold by the factory owners. That's how Rochdale started. Rochdale couldn't even get a place to have a store because the factory owners owned it. I'm not condemning all of us who have capital—I have capital—but there was a time and a place when working people basically couldn't get decent food, decent wages, decent anything, and the cooperative movement was instrumental in changing that.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Thank you for that clarification, gentlemen. I appreciate it.

My next questions will be for the Co-operative Housing Federation of Canada, given that housing was my professional background before I got elected to this place. I'm a fan of cooperative housing, even though I came from the private sector. I think there's an important role for cooperative housing.

I just want you to clarify something, Mr. Gazzard. You talk about 35- and 50-year agreements with some of these co-ops. Is it not true that the original idea around cooperative housing is that the subsidy that came from government more or less was the mortgage payment on the property, and that once the mortgage was paid off in 50 or 35 years, depending on what agreement it was signed under, really the cooperative, the members of the co-op, in essence, would get full title to the property mortgage free. They could then make a determination as to how they were going to operate the co-op in the future, including using the fact that they no longer had a mortgage payment and perhaps were in better financial shape as a co-op then when they had a mortgage payment, and therefore they were able to continue to provide some subsidy for people for their housing charges. Of course, in the co-op sector we don't refer to it as rent; we refer to it as a housing charge for the members. So you could have a mix of incomes continuing to live in those cooperatives.

Is it not correct that this was the original concept behind this program?

[Nicholas Gazzard]

That's a multi-part question. I'll do my best within my time.

First, the subsidies that were provided did not cover the full mortgage payment. In the first program, the section 61 program, the only break the co-ops got was an 8% mortgage, which in those days was a break, of course—this was 1973. They received no direct subsidy from the federal government. In some cases there was an overlaying of a provincial subsidy for low-income households but nothing from the federal government.

The second program was called the 2% program. That provided the subsidy, which was the difference between the actual mortgage payment at the market rate of interest and what it would be at 2%. So there was a significant subsidy divided into low-income subsidy and operating subsidy.

In the third program, there was no low-income subsidy from the federal government but an operating subsidy to assist paying the mortgage.

A lot of officials have said this is always the intention. I've gone back through the cabinet documents. I've gone back through every document I can find, every agreement, every section in the National Housing Act, and nothing explicitly says that the way these programs are supposed to work is that they will be on their own and they'll be okay. The answer as to whether they'll be on their own and okay is not, as I said before, even a universal answer. There are co-ops now that are out of their agreements that are continuing to provide reduced housing charges to low-income members. The problem with that is it's not universal. It's not sustainable, necessarily, either, because those are co-ops that have not run into significant reconstruction or redevelopment challenges yet.

An extreme example of where it definitely won't work is—

[The Chair, Conservative, Blake Richards]

Sorry to interrupt again. We've gone well over time. I'll give you a couple of quick seconds to wrap up your final thoughts on it.

[Nicholas Gazzard]

In the case of co-ops developed under the urban native programs, they absolutely will not work without government help.

[The Chair, Conservative, Blake Richards]

Thank you very much.

We now move to Mr. Bélanger for five minutes.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Thank you.

Thank you, gentlemen, for the information, but I'm going to be looking for more.

First, perhaps to our research analysts.... Mr. Gazzard has tried to explain rather briefly the history of cooperative housing in different sections and so forth. Would it be possible to have a short paper giving us a better sense, a more detailed sense, of what that is, so that the information we're getting fits into a framework? Not all of us have all of that background, so I'm asking if that would be possible from the analysts.

You mentioned something about a tax expenditure report in January. Do you know what amount is given?

[Nicholas Gazzard]

I was hoping to look before I came in, but I didn't. It came out on January 9, 2012. It details tax expenditures for the prior year. I don't have it.

[Mauril Bélanger, Liberal, Ottawa—Vanier, ON]

Do you have a sense of whether we're talking about millions or billions or hundreds of billions? I know it's billions. It used to be close to $100 billion, if I recall. I'm just wondering if it's gone up or down.