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The City's Skyrocketing Debt

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  • The City's Skyrocketing Debt

    According to financial information being provided to City Council on March 13, 2012, the City will have tax-supported debt of almost $2 Billion by the end of 2014 based on currently approved borrowing. See Appendix 7 of attachment to Agenda Item 6.4 for details here: http://sirepub.edmonton.ca/sirepub/m...doctype=AGENDA

    In only 11 years, this represents an almost 100 fold increase in the City's debt (from $24 million in tax supported debt at the end of 2003).

    Moreover, this $2 billion only includes currently approved borrowing. Not yet budgeted for are major expenditures like the DT Arena ($525m), SE LRT ($800m), a new transit garage ($128m - see Agenda Item 6.9), and the upfront development costs for the City Centre Airport redevelopment (cost unknown).

    Am I misunderstanding something? No one would be happier to be corrected on this debt tally than me.

    To use a topical metaphor, the City's borrowing binge is a bit like OxyContin. It alleviates some immediate pain, but in the long-term is highly addictive and expensive.

  • #2
    Originally posted by East McCauley View Post
    According to financial information being provided to City Council on March 13, 2012, the City will have tax-supported debt of almost $2 Billion by the end of 2014 based on currently approved borrowing. See Appendix 7 of attachment to Agenda Item 6.4 for details here: http://sirepub.edmonton.ca/sirepub/m...doctype=AGENDA

    In only 11 years, this represents an almost 100 fold increase in the City's debt (from $24 million in tax supported debt at the end of 2003).

    Moreover, this $2 billion only includes currently approved borrowing. Not yet budgeted for are major expenditures like the DT Arena ($525m), SE LRT ($800m), a new transit garage ($128m - see Agenda Item 6.9), and the upfront development costs for the City Centre Airport redevelopment (cost unknown).

    Am I misunderstanding something? No one would be happier to be corrected on this debt tally than me.

    To use a topical metaphor, the City's borrowing binge is a bit like OxyContin. It alleviates some immediate pain, but in the long-term is highly addictive and expensive.
    it's not nearly as simple as your topical but completely wrong metaphor represents. unless you identify where the borrowed money was spent, any subsequent "analysis" is worthless.

    if you want a better metaphor that illustrates that, take someone who didn't own a house last year but bought one this year. the money borrowed as a result could easily increase that individuals total debt load by that same factor of 100 or more. that on its own does not mean it is unwarranted debt.

    for the city, if that money primarily purchases hard assets and infrastructure that are necessary to or improve the quality of life of its citizens it's money well borrowed. this is even moreso when the question surrounding those expenditures is not even "if" but "when" in which case borrowing costs in the last decade have been substantially lower than the escations in pricing that would have been incurred without that borrowing.

    if only things were as simple as you represented...
    "If you did not want much, there was plenty." Harper Lee

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    • #3
      ^kcantor, the problem with your metaphor is that - unlike owning a house that appreciates in value over time- the City's borrowing is for assets that depreciate and will need to be replaced over time.

      It's not like the City didn't get anything built during the 20 years the pay as you go capital financing and debt retirement policy was in effect. For example, renovations to Commonwealth Stadium for the 2001 World Track and Field Championships, construction of Telus Field for Triple A baseball, extension of LRT to the University, renovations to Rexall Place, interchanges on the Yellowhead and the Whitemud, etc. All in a fiscal environment much more challenging than today's.

      Don't get me wrong. I'm not opposed to some prudent borrowing for capital projects. What concerns me is the unprecedented escalation in tax supported debt. Borrowing costs are low at the moment. However, since most of this borrowing is over a 25 to 30 year timeframe there is no guarantee that these costs will remain this low in the future.

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      • #4
        To be fair $24 million in debt was far to low for a city the size of Edmonton (which it sounds like you agree with, unless I misunderstand). It's tough to determine what the right amount of debt is.

        I believe Calgary is over $2.5 billion in debt - although that number might be a few years old. I wonder how Edmonton compares to Ottawa, Hamilton, etc?

        At the end of the day, I have no issue with using debt to fund capital projects - so long as we are ensuring that the city will have sufficient cash flows to cover the projected debt repayments without significant tax increases.

        edit: According to the Ottawa Citizen Ottawa will be at $1.78 billion by the end of 2012.
        Last edited by christopherj; 09-03-2012, 08:49 PM.

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        • #5
          ^^Your house does not appreciate in value over time it is the land that is appreciating.

          Another way at looking at the city borrowing is this: Why should I pay for all the infrastructure now for people who are going to be using it 25 years from now?

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          • #6
            The city didn't spend on infrastructure for close to 30 years... This is what happens when you don't do things and don't raise taxes to sustainable levels...

            Sigh..

            The debt isn't the issue it's the debt to income ratio that matters. We are fine... Our city is fine.. Things at fine.
            "Do you give people who already use transit a better service, or do you build it where they don't use it in the hopes they might start to use it?" Nenshi

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            • #7
              Many people take out loans to invest in their future - RSPs, investments and other retirement nest eggs. A municipal government borrows money to invest in its future. Also, interest rates have been dirt cheap for many years now, and will likely stay that way for a while. Now's the time to borrow, not 30 years ago when the prime interest rate was like 12% - 15%.
              “You have to dream big. If we want to be a little city, we dream small. If we want to be a big city, we dream big, and this is a big idea.” - Mayor Stephen Mandel, 02/22/2012

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              • #8
                Originally posted by edmonton daily photo View Post
                The city didn't spend on infrastructure for close to 30 years... This is what happens when you don't do things and don't raise taxes to sustainable levels...

                Sigh..

                The debt isn't the issue it's the debt to income ratio that matters. We are fine... Our city is fine.. Things at fine.
                Under the previous pay as you go financing policy, the city did invest in infrastructure. A number of examples were provided in my previous post. There is a virtuous circle whereby existing debt is paid down to free up monies for new infrastructure investment while keeping property tax increases low.

                Since 2004, the City has enmeshed itself in a vicious cycle. Keep piling new debt on top of old debt, paid for by locked in property tax increases for the next 20 to 35 years (depending on the project). Particularly concerning is the recent borrowing for projects that are not fully funded. For example, borrowing $56 million to buy land and design the proposed DT arena, and borrowing $102 million to buy land and design SE LRT.

                Again, I am not opposed to prudent borrowing for necessary infrastructure such as LRT. My concern is the rapid run up of tax supported debt, and borrowing for projects before there is even a reasonable assurance they will be fully funded.
                Last edited by East McCauley; 10-03-2012, 10:28 AM.

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                • #9
                  If city wants to slow down huge debts, property tax will have to stay high like 12 % for few yrs.
                  Edmonton Rocks Rocks Rocks

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                  • #10
                    according to the municipal government act, i believe cities can carry debt up to a maxiumum amount (which varies according city size, i think) i see the debt as a mortgage. the bank approves how much i can borrow and i pay it off over time. the city is paying off it's debt- a plan is in place. also, future generations of edmontonians will benefit, so they too should pay. businesses borrow to remain competitive. so, too, should cities (within the limits set out by the mga)

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                    • #11
                      Originally posted by East McCauley View Post
                      Originally posted by edmonton daily photo View Post
                      The city didn't spend on infrastructure for close to 30 years... This is what happens when you don't do things and don't raise taxes to sustainable levels...

                      Sigh..

                      The debt isn't the issue it's the debt to income ratio that matters. We are fine... Our city is fine.. Things at fine.
                      Under the previous pay as you go financing policy, the city did invest in infrastructure. A number of examples were provided in my previous post. There is a virtuous circle whereby existing debt is paid down to free up monies for new infrastructure investment while keeping property tax increases low.

                      Since 2004, the City has enmeshed itself in a vicious cycle. Keep piling new debt on top of old debt, paid for by locked in property tax increases for the next 20 to 35 years (depending on the project). Particularly concerning is the recent borrowing for projects that are not fully funded. For example, borrowing $56 million to buy land and design the proposed DT arena, and borrowing $102 million to buy land and design SE LRT.

                      Again, I am not opposed to prudent borrowing for necessary infrastructure such as LRT. My concern is the rapid run up of tax supported debt, and borrowing for projects before there is even a reasonable assurance they will be fully funded.
                      it's interesting that the two examples you note as concerning you because they relate to projects that are not yet fully funded involve the acquisition of raw land which has ongoing realizable/redeemable value in the market if the projects do not proceed and that will presumably have been acquired at less than it would take if the projects were fully committed and that requires site specific expenditures and commitments that can't take place without ownership and control...
                      "If you did not want much, there was plenty." Harper Lee

                      Comment


                      • #12
                        I had $0 of debt, then I bought a house. Now I have hundreds of thousands of $ of debt. I must also be in a vicious cycle of piling on debt. Oh wait, I can afford this debt, just like the City can afford the debt it's taking on to fund projects.
                        "Men never do evil so completely and cheerfully as when they do it from religious conviction" - Blaise Pascal

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                        • #13
                          ^^Ken, on the other side of the ledger, there are carrying costs associated with City owned land as well as foregone property tax revenue.

                          Look at the Station Pointe development along Fort Road. The City bought out several businesses on the south side of Fort Road 10 years ago and has yet to receive a dime from the re-development.

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                          • #14
                            Originally posted by East McCauley View Post
                            Look at the Station Pointe development along Fort Road. The City bought out several businesses on the south side of Fort Road 10 years ago and has yet to receive a dime from the re-development.
                            ergo, they never will?

                            It wouldn't be much of an investment if you bought something for $1000, then sold it for $1000 the next day.

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                            • #15
                              Originally posted by East McCauley View Post
                              ^^Ken, on the other side of the ledger, there are carrying costs associated with City owned land as well as foregone property tax revenue.

                              Look at the Station Pointe development along Fort Road. The City bought out several businesses on the south side of Fort Road 10 years ago and has yet to receive a dime from the re-development.
                              we've had much more land than that in our inventory for much longer than that. funny thing is, it's still worth more today than our total book cost. it's what you do, not necessarily how quickly you do it, that's important. in both cases we're talking about city building, not just making a quick buck on a long term investment.
                              "If you did not want much, there was plenty." Harper Lee

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