Debt Refinancing

A lot of work has gone into the 2019 budget. Through initiatives like Lean and Priority Based Budgeting, the City is spending money more efficiently and better allocating this spending. This has allowed Council to set a budget that has significant resets: it increases critical services like policing and road rehabilitation while delivering a tax decrease.

Overall, I am very happy with the proposed budget (click here for the highlights). However, I am very concerned about one element: the re-financing of debt. In principal, debt re-refinancing could be a wise financial strategy, but I have big hesitations about its current implementation.

Following is some background and my thoughts on what should be changed. Any mistakes or opinions belong to me and me alone, not to Council or City staff.

Why Refinance?

Often when municipalities borrow to build infrastructure or facilities, they take out long-term debt that matches the project’s lifespan. If debt has shorter terms than necessary, today’s taxpayers are paying more than they have to each year. After the debt is paid off but the project has usable life, future taxpayers get to use it for free. Some see this as inequitable.

In the past Grande Prairie has taken [relatively] shorter terms on its debt. To increase current cash flow and provide relief to today’s taxpayers, it has been proposed that we refinance some loans.

Council is currently embarking on a course that will restructure a number of loans that expire after 2026 and have interest rates of greater than 3.5%. These will be refinanced into a single loan with a 30 year term and a rate of ~3.5%.

These loans are associate with the following facilities:

Montrose Cultural Centre
Mother Teresa Community Gym
City Service Centre
Eastlink Centre
Third Fire Hall

Cost, Benefits, and Risk

This strategy will give the City an increased cash flow of $3,292,380 for the first five years then of $2,903,730/year for the following six years.

Having this extra money for over a decade presents a significant opportunity, but it is not without cost and risk.

To restructure our debt, the City will need to use reserves to make stop loss payments equaling $3,140,530. On top of this, the City will need to pay more in interest due to having longer term debt. These extra payments will total $18,730,134 over 30 years.

This strategy will also increase the City’s financial risks. The City has two major instruments to respond to changing circumstances and to move on opportunities: taking from reserves and drawing debt. Refinancing will decrease reserves. It will also cause the City to have more debt on its books for 30 years. This debt restructuring will decrease our capacity for future spending and borrowing.

Here is what happens to our debt in 5, 10 and 20 years without and with re-financing:

Refinancing brings a significant financial cost. It also increases the City’s exposure to risk.

This doesn’t mean that it should be ruled out. It is a more equitable way to handle debt and it presents significant opportunities. The question is: is the opportunity being pursued in such a way to make the cost and risk worth it?

The Current Plan

If it goes ahead with refinancing, Council needs to decide how to use the increased cash flow. Council has directed that half of it go into reserves and half of it be used to provide tax relief equal to ~1.5%.

Our reserves are low and our taxes are high compared to many other Alberta municipalities. I am very supportive of both these goals. However, I do not think they should be pursued through re-financing.

Having reserves adequate to replace aging assets and to navigate unforeseen costs is very important. But under this plan we will spend about two years putting money into reserve until we have made up for the upfront stop loss payment. And after that we will be increasing reserves by not paying down debt quickly. In other words, we will be increasing one tool to navigate risks and seize opportunities (reserves) by decreasing the other tool (debt capacity). This does not make sense to me.

I’m also very supportive of lowering our taxes. However, the way to achieve this is through disciplined spending and appropriate building of non-tax revenue sources. Working hard on our revenue and expenses will provide indefinite tax relief. Refinancing only provides it for 11 years. And I am concerned that the relief refinancing provides will decrease pressure on management and Council. It will give us less incentive to do the type of hard budgetary work that will provide more permanent fiscal health.

While I understand that the refinancing option is arguably more equitable to current taxpayers, I’m not convinced that temporary equity is worth the tens of millions of dollars in costs associated with it.

I’m not opposed to refinancing in principal. However, I am very opposed to the current strategies it will fund. They are not worth the price. If we are going to take on the cost and risk of refinancing, it should be used to pursue a strategy that will significantly improve our community for the long-term.

What should be done?

We are working hard to improve the financial health of the City. The proposed budget for 2019 increases critical services. At the same time, it can deliver a 2.6% decrease without refinancing. And we are still in the early phases of Lean and Priority Based Budgeting- I’m confident that we will continue to see significant results.

This close attention to spending combined with increasing revenue sources will allow us to build reserves and decrease the tax burden. We don’t need to refinance to achieve these goals.

If we are going to refinance, we should use the cash flow to achieve something we would be unlikely to undertake otherwise. With ~$3,000,000 per year for over a decade, we can make our community a significantly better place to live. Some ways we could do that:

Increase the tax base by providing roads and water in Hughes Lake and north of Westgate to attract development. Having a larger tax base is the best way to decrease our rates in the long term. And by creating development closer to our core, the cost of municipal services regionally can be decreased.
Tackle homelessness by investing in supportive housing and other needed programs. This would care for our vulnerable and make our community feel safer all while saving significant money for our local health and justice programs.
Train whistles and other enhancement programs. Whistles could likely be stopped with about 2 years worth of the increased cash flow. After this is accomplished, we could engage the community to select other one-time, mid-cost projects that would make Grande Prairie a better place to live for a long time to come.
The Leisure Centre. Something needs to be done with this site. Rather than taking out new debt, we could use the cashflow created by refinancing to fund this. It would allow us to bring a new facility online without increasing our total debt load and without paying interest rates which are likely to be higher in a couple of years.

These are just few ideas I have of how our community could be significantly enhanced with increased cash flow. I’m sure there are other great ideas out there (and I would love to hear them!).

If we were to pursue one of these strategies, I could potentially become supportive of refinancing. I am ok with the cost if it will bring long-term benefit to our community. However, I cannot support it just to bolster reserves and temporarily lower taxes.

Have a Say

Council will debate and vote at least two more times before refinancing happens.

It has been recommended by Committee of the Whole. The next step is for it to be approved at a regular City Council meeting. This is likely to happen Monday night.

Assuming Council approves this strategy, it will also need to pass a Borrowing Bylaw. This is likely to happen early in the New Year.

Before this goes through, I’d love to hear from you.

Should we go ahead with refinancing?

If we restructure our debt, what should we do with the increased cash flow? Do you support the current Council strategy of putting half to reserves and half into a tax decrease? Or is there something else we should be doing with it?

I’d love to hear from you. And I’d encourage you to reach out to the rest of Council too. Click here to find contact information.

Thanks for reading!

-Dylan

Guest UserDecember 1, 2018budget, debtComment