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Hike in borrowing costs for municipalities could impact St. Albert: City

During a March 21 council meeting, Mayor Cathy Heron said the City will need to continue to keep an eye on impacts resulting from the rate increase.
3003 municipal rate hike file CC
When asked whether Alberta's government would roll back the hikes as oil prices climb, Finance Minister Travis Toews argued it's prudent to reduce financial and fiscal exposure for the province over time. FILE PHOTO/St. Albert Gazette

A hike in borrowing rates the province sets for municipalities could mean St. Albert will require more tax dollars as it pursues capital projects, the City says. 

In December, the province alerted Albertan municipalities that it will be adding a 0.5-per-cent to 0.75-per-cent premium to borrowing rates for local authorities. Borrowing and saving up are the two ways municipalities can fund capital projects such as new buildings and roads, though grants from the federal and provincial government can help supplement costs. 

The province can borrow money for capital projects at a better rate than cities can, because of its size and security. The province then transfers these low rates on to local authorities when it loans them money. 

Travis Toews, UCP Finance Minister, said during a March 2 post-budget conference the hikes are to help ensure the province is not taking on additional financial pressures during “difficult times.” 

“One thing that COVID-19 really exposed for the Government of Alberta was that we as a province have a lot of financial and fiscal exposure,” Toews said. “During the darkest days, capital markets were really frozen.”

Joe Ceci, NDP municipal affairs critic, criticized the hikes during a press conference earlier in March. 

“Increasing borrowing rates for municipalities will further download costs onto Albertans and make monthly bills even more punishing,” Ceci said. 

Impacts for St. Albert 

Mayor Cathy Heron said during a March 21 council meeting that St. Albert will need to continue to keep an eye on impacts resulting from the rate increase. 

“It’s going to cost us,” Heron said. “Especially for a municipality such as ours who has been so debt avoidant, and now we’re ready to take on debt right at the time when they raise interest rates.” 

When the City acquires debt, the interest rate is fixed over the repayment term, meaning the borrowing rate hikes would only effect new debt taken on by the City. 

“As debt principal and interest payments are generally funded through the operating budget, an increase in the interest rate may require more tax dollars,” City spokesperson Marci Ng relayed in an email. 

Ng gave a hypothetical example of interest on a $10-million debenture rising from five per cent to six per cent, increasing the payment by $70,000 annually over the life of the debt.  

In an interview, Heron said some of the City’s larger projects, such as work on north St. Albert Trail, are phased in their borrowing, meaning the rate increase will affect new stages as they are put on the books.  

When asked how much the City will need to borrow for future phases three and four of St. Albert Trail, City spokesperson Cory Sinclair said the project's funding requirement is in the process of being updated. 

“In April, administration will be bringing forward charters for phases three and four for council approval to be included in the 10-year capital growth plan which will include anticipated costs and timelines,” Sinclair said in an email. 

When asked how the municipal interest rate hike could impact new capital projects, such as the solar farm council will explore options for in July, Heron said the adjusted borrowing rate could alter the return on the solar farm’s investment, and that any impacts will be included in the report to council. 

“I don’t think it will be the only thing that will affect the decision, but it will be part of it,” Heron said. 

Impact on new development

Tanya Hynes, supervisor of long-term engineering for the City, said during the March 21 council meeting that the municipal borrowing rate increases will impact the City in front-ending servicing for new projects through its off-site levies program. 

The levies are collected by the City to build new infrastructure in areas undergoing development or expansion. A developer or the City will “front-end” the cost of these projects, and subsequent benefiting developers pay their share to the City, which then reimburses the front-ending parties. 

City spokesperson Cory Sinclair said in an email that this pay-back period can be lengthy. 

"In the long run there should be no impact on taxes, but cash flows are not entirely predictable and short-term deficits can occur," Sinclair said in the email, noting that the city models front-ending opportunities to get a glimpse into potential impacts on cash flow, such as deficits, before they happen.

Should a short-term deficit occur, tax revenues may occasionally be required, Sinclair said. 

The city did not grant The Gazette an interview on the potential impact of the municipal borrowing rate hike, including the impacts to off-site levies. 

Rollback on hikes unlikely: Toews

When asked by reporters during the March 2 conference whether the province would consider rolling back the interest rate as oil prices climb, Toews said a rollback wouldn’t be likely, arguing it is “prudent to reduce financial and fiscal exposure for the province over time.” 

“We will continue to provide very good financing options for municipalities going forward,” Toews said. 

Ultimately, Heron said she is “very disappointed” in the rate hikes, noting that she doesn’t feel Toews’s explanations holds water. 

“We’re hopefully going to keep pushing to get back to that better rate, especially with the economy,” Heron said. “Now they’re making money off municipalities instead of helping us.”

Mel McMillan, professor emeritus from the University of Alberta’s department of economics, said he personally does not believe the province should offer below-market interest rates to municipalities in the first place.  

“The interest rates are sending signals, so it’s probably best to let those signals get through to all borrowers,” McMillan said. 

McMillan said, in his view, it would be better for the province to maintain municipal infrastructure grants such as the Municipal Sustainability Initiative, which he noted the province is “cutting back substantially.” 

During the March 21 council meeting, Trevor Duley, St. Albert’s manager of government relations, told council the province's MSI cuts will amount to a loss of $4 million for the City annually. 

A new infrastructure grant, called the Local Government Fiscal Framework, will replace MSI funding in 2024, but McMillan noted this program is not anticipated to return funding levels to their previous rates.

Heron said the cumulative effect of provincial downloading will present challenges for municipalities going forward. 

“It’s another hit to the municipalities,” Heron said of the borrowing rate hike. “It’s a death by a thousand cuts.”