St. Albert city council is developing a long-term strategy to fund critical infrastructure projects in the face of a fast-approaching municipal debt limit.
Through a special committee of the whole meeting on May 16, the mayor and council met to discuss the city's long-term debt, which as of the end of last year had an outstanding balance of $91.2 million, or about 29 per cent of the city's nearly $300 million debt limit.
The debt limit is a fluid number determined through the provincial Municipal Government Act (MGA), which dictates that a municipality's debt limit is 50 per cent more than its most recent annually reported revenue.
The city's outstanding debt total, however, doesn't include the $5 million council approved last December for the city to borrow to renovate the local RCMP detachment, or the $17 million council approved to borrow last month to fund the ongoing work being completed on Villeneuve Road.
As such, assuming those two projects don't go over budget and move forward as planned, the city's outstanding debt is about $113.2 million.
Although the city's debit limit is nearly $300 million, St. Albert has a council-set policy that dictates the city must always remain below 85 per cent of the debt limit, which means the internal policy determined debt limit is about $255 million.
Many of the upcoming capital projects deemed a priority for council come with substantial price tags, and will require debt financing, according to a backgrounder prepared by Diane McMordie, the city's chief financial officer.
These priority projects, McMordie's backgrounder says, include the servicing of Lakeview Business District, which is currently estimated to cost $80 million; land servicing in the city's northeast which is currently estimated at $56 million, although the cost will be 100 per cent recoverable through off-site levies; and the third phase of roadwork on St. Albert Trail, which is estimated at $16.6 million. All three of the projects are scheduled to be before council for approval within the next 12 months.
“The main challenge we are facing today is that we review and approve capital projects (sometimes with debt financing) on an annual or ad-hoc basis without really analyzing the impact of those decisions on the future,” McMordie wrote. “Choosing to debt finance something today is a decision to not move forward with other projects in the future. To this end, we need to start taking a longer-term view as we make decisions.”
Since the city is limited in how much outstanding debt can be on the books at any given time, and with the steep costs attributed to many of the planned and critical projects waiting for funding, McMordie wrote that the city is seeing a “a bit of perfect storm” because each new debenture taken out by the city will necessitate a tax increase.
“We likely can't do half of what we would like to do.”
To address this situation, on May 16 McMordie and the city's director of financial and strategic services, Anne Victoor, presented a couple of strategies to council to for consideration moving forward.
One such strategy, council heard, is the concept of debt laddering.
As the name implies, debt laddering is the process of adding new debt around the same time old debt is retired.
“When a municipality issues debt with fixed term and fixed interest rate, it knows exactly how much it will pay each year to service its debt obligations,” Victoor said, adding, “by laddering its debt maturities a municipality can spread out its debt payments over time so that it can avoid having to pay a large amount of debt service in any one year.”
“This can help to smooth out the debt service burden and reduce the need for the municipality to raise property taxes to meet its debt obligations.”
However, one issue facing St. Albert, council heard, is that many of the current outstanding debts already on the city's books won't retire until after 2040.
“As we have significant needs in the community now it would be prudent to move forward with debt financing in a steady and planned fashion,” Victoor said. “If we do this well it will mean that after the 2040 time period, we will consistently have debts retiring allowing us to fund new projects within our debt limits and with a lesser impact to taxpayers.”
In the meantime until much of the city's current debt retires after 2040, Victoor said another option is for council to utilize various borrowing terms.
Council heard that while shorter borrowing terms would have a bigger impact on residential property tax increases, short-term debt generally comes with lower interest rates and lower project costs.
A third option moving forward, which council heard is more of a reality than an option, will be for the city to not move forward with many of the projects planned for the future, such as Millennium Park, the future community amenities site, and other projects that aren't critical to the operation of the city and safety of residents.
Council heard that if all of the projects requiring debt funding were to be approved when planned, not including the rough estimate of $100 million for the community amenities site, the city would reach 147 per cent of its municipal debt limit.
“What will become apparent shortly is that we can't do it all,” Victoor said. “In fact, we likely can't do half of what we would like to do.”
Administration's presentation to council on May 16 was an initial step in developing a long-term strategy, according to McMordie's backgrounder.
Moving forward, McMordie's report states, administration will be researching strategies and internal policies in place in other comparable municipalities, as well as a possible internal policy changes for council's consideration.
To see council's reaction to the high debt, see page 20.