Borrowing Responsibly for City Building
[UPDATE, Sept. 12, 2013: Mayor Mandel requested a high level summary report that was discussed at this week’s Executive Committee. It’s worth a read and has the up-to-date numbers.]
Let’s be clear: Edmonton doesn’t have a ‘Detroit problem.’
There’s been a fair bit of discussion in the press (good Edmonton Journal story here) and on social media about the city’s debt level and I thought I would share some of my thoughts. The bottom line is that if we want to build a city, borrowing is a reality – it’s how you approach taking on that debt that makes all the difference.
Overall, I believe the City has borrowed responsibly to fund major infrastructure projects. We are a growing city, both in terms of aspiration and population, and growing cities need to build essential infrastructure to support that growth. I’ve disagreed with borrowing when it didn’t align with our Debt Management Fiscal Policy, but overall the last several Councils have used debt responsibly to fund projects that could not have been executed otherwise.
These projects range from LRT expansion to Quesnell Bridge upgrades, and from new Rec Centres, Police Stations and Libraries to major sewer upgrades to prevent flooding. We are also borrowing for downtown infrastructure upgrades, including the arena. These are all community assets that will last more than a generation – and it makes sense for users and taxpayers to pay for them over 20 or 30 years. (For example, here’s a copy of bylaw 15999, which authorized the borrowing for the Walterdale bridge replacement; it was amended this spring by bylaw 16442.)
If we had sufficient grants from the Province or Ottawa, or the cash on hand to build these projects, I’m sure we would, but local government has the challenge of being responsible for 60% of public infrastructure in Canada while only sharing in 8% of your average tax burden. On top of that, we still deliver all your core services day in and day out (seems unfair, doesn’t it?).
Thankfully, municipalities in Alberta are fortunate to be able to borrow through our provincial government, which has an extremely good credit rating. This allows us to benefit from very low interest rates.
Still, many people who ask me about the city’s debt are worried about interest rate risk. What if rates are higher in five years? I wonder about that all the time with my own mortgage. However, unlike a home mortgage, which comes up for renewal every few years, the City is able to lock in today’s rates for the full duration of the debenture. In other words, our City gets the same low interest rate for the entire 20 to 30 years of the payback period. So, there is no risk of the interest rate increasing on existing debt once the debt is locked in.
That’s all fine, but I also hear people concerned that we won’t be able to repay our debt. I can assure Edmontonians that every interest payment and every principal payment is set aside in our annual budget, and we balance that budget every year. In fact, this is a requirement of borrowing the money in the first place. So, our City is not racking up deficits to pay back debts the way Detroit was. Rather, Council sets aside sufficient money in the budget to cover all our obligations, and we never miss a payment.
Beyond that, provincial borrowing rules impose limits on the total amount of debt and the proportion of our City budget that be directed toward repaying interest and principle on debt. Edmonton remains well below these provincial limits.
Having said all this, future Councils will not be able to use borrowing as much as the last four Councils have. Nevertheless, this is an important civic conversation, and it deserves to be informed with facts about the borrowing rules that Council strictly adheres to. Certainly, as mayor, my commitment would be to adhere to our sound Debt Management Fiscal Policy, and to carefully weigh the merits of any proposal to use borrowing for infrastructure projects. I do think carrying on with key projects like LRT will continue to require careful use of borrowing.
It’s abundantly clear, despite massive spending & borrowing, the city’s infrastructure is not being properly maintained. Evidence, the state of it’s roadways, sidewalks and lamp posts, to mention just three. Probably the same is true about less visible things, such as sewers and bridges.
With reduced borrowing availability in the future, will the city have the resources needed to bring infrastructure up to acceptable levels?
Reread Paula Simons column of April 11. Money that should be fixing our roads and sewers etc. has been diverted to the arena project. I know this is a done deal and we need to move on but I don’t have to be happy about it and I won’t be swayed by smoke and mirrors.
Thanks for your comment, Kate. Paula’s analysis was correct for its time – as of April 11 there was a push to use unrestricted infrastructure funds to build the arena (actually, a push to try to borrow against a provincial infrastructure grant program with an uncertain medium-term future, which would have been irresponsible borrowing). That didn’t last, and by the final decision on May 15 that was out. In fact, one of the key reasons I felt able to support the arena funding model in the end was that there was no unrestricted infrastructure money diverted into it — I addressed that point in greater detail here.) The project is meant to be self-financing with revenues related to the arena (mainly rent, ticket tax, and community revitalization levy). Thanks for the opportunity to clarify.
Great read. The big question that most people should be asking is to their respective MP’s and MLA’s about their strategy for supporting our municipalities financially. Particularly our large urban centers that are the prime economic engines of the country.
But what are we borrowing for? Why are we borrowing money to subsidize an already profitable sports team?
P.S. the communiy revitalization levy assumes all future development downtown is directly connected to the arena and funnels this money to subsidize a sports team, rather than use it to pay for things the city needs. This is an assumption with no grounds in reality. Much of the development in the area has already begun without an arena, and would continue without one. The true catalysts of growth in the region, such as the proximity to a growing university campus, and the LRT connection, are ignored to allow for the direct subsidization of professional sports… at a time when the city, province, and feds face a mounting debt crises.
We are homeowners in the west end. I have now just grown to expect our taxes on our property to go up every year. Is there any reason for me to expect anything different? Experience has shown me there is little chance.
Cheers
We may not have a Detroit problem in Edmonton right now, but that is where we are headed as a city if the current ideology is to continue with the next edition of a city council that we have had the misfortune of electing . Legacy projects are the last thing a debt strapped city like Edmonton needs. Local news each year always cites stories about no money for police, no money for core services, no money for infrastructure up keep, but there is always money for a hockey arena we don’t need, and more art museums and facilities that does not provide essential services. There is no point in borrowing responsibly for legacy projects that we can’t afford when we can’t afford to fix the current infrastructure we currently have.