Borrowing to build

In July of 2013, I wrote a blog that outlined why smart borrowing can be employed to help in our city building efforts. Much of what I wrote then remains true, but as we enter into budget deliberations I think the subject deserves further discussion.

Under previous councils (specifically from 1990 to 2002), our City did not use any borrowing to fund investments in our city’s infrastructure. Because of this, we missed a window to build important interchanges and expand our LRT, a window that Calgary took full advantage of. Those Councils also cut back on basic maintenance, and before too long our roads began to crumble, and we fell behind building important quality-of-life and wellness assets like recreation centres.

More recent Councils, including this one, are working to make up for this past underinvestment, with a special emphasis on drainage system upgrades and road repair. While we don’t borrow for roads (this is paid for ‘on demand’), I believe borrowing has a very specific and important purpose.

We’ve been taught our whole lives that debt is something to be avoided, and most of the time that’s good advice. But in the context of building a city, borrowing is an absolute necessity.

For starters, the provincial Municipal Government Act (MGA) dictates we are not allowed to borrow for operating expenses. That means we can’t borrow money to pay to hire police officers, for example. We can, however, borrow to pay for significant infrastructure that, using only property tax dollars, might take a generation to save for. For example, borrowing is our only option to ensure projects the scale of the Valley LRT line actually get rolling. If we had to pay for LRT expansion through property taxes only, our grandchildren would be the ones to enjoy the LRT that you and I paid for. It also doesn’t do anything to help manage the incredible growth we’re seeing today, keeping us ahead of the kind of crippling congestion hitting other Canadian cities.

Building projects today through borrowing has other advantages too. It can allow the City to take advantage of lower construction prices during recessions, as we did with the four recreation centres built in recent years. In addition, if we wait to build significant infrastructure, the price of this infrastructure generally rises as the cost of materials and labour continue to climb. In a heated economy like Alberta, building a bridge today costs significantly more than it did 15 years ago.

Make no mistake, none of this is an argument to use debt recklessly. The City’s debt limits are set by the Province through legislation, and only 35% of Edmonton’s eligible revenue can be allocated to debt servicing. This is similar to the formula banks use when determining the maximum amount a family can spend on its mortgage payments each month. However, the City has imposed more conservative restrictions on ourselves that sets this limit even lower at 22% of our revenue. We remain well below these limits and I believe Council will be cautious about even approaching them.

One factor that may come as a surprise is that the City can borrow at rates far better than you or I will ever see from a bank, and we lock in that low rate for its full duration – there’s no renewal every five years. When we secure a 25-year loan at 3% for a new bridge (as an example), that’s the rate for the whole term. There’s no interest rate risk whatsoever.

While recognizing there is still a much bigger argument for why we need a new deal with our provincial partners to help pay for major growth infrastructure like LRT and major roads, I do believe debt remains an important part of a well-balanced approach to city building.

NOTE: The City has also built an easy-to-navigate website to help explain the City budget. It’s worth a visit.