Should municipalities borrow money to pay for capital infrastructure, or should they save up?
If you ask a few municipal economics experts – it depends.
Mel McMillan, a professor emeritus from the University of Alberta’s department of economics, recently went to a City of Edmonton public hearing on debt policy to caution St. Albert’s neighbour about the cost of debt servicing and its potential impact on future tax bills.
He told the Gazette that current low interest rates are part of an unusual period of time when it comes to the cost of borrowing.
St. Albert’s recent councils have generally tried to avoid outside borrowing when it comes to building municipal and utility infrastructure, with exceptions for massive projects such as Ray Gibbon Drive and Servus Place.
City council policy enshrines that long-term debt is only to be considered for major initiatives under direction from council. Debt’s not supposed to be used to pay for operating costs, or to pay for utility projects related to the city’s growth.
McMillan said Edmonton used to have a policy that tried to limit the use of debt.
“I was basically arguing I thought that was a pretty good policy,” he said of his recent presentation.
“I’m not saying one should never borrow … because there are indeed circumstances where it’s perfectly logical to borrow, but we shouldn’t get carried away,” he said.
Often St. Albert’s debt avoidance strategy is criticized because it leaves residents of today paying for future infrastructure they might not get to use.
McMillan said that’s not the most legitimate of arguments, noting that when you’re born or move to a community there’s a stock of capital infrastructure that you benefit from.
“If I moved into St. Albert today, is somebody going to give me a bill for all that capital that’s there?” McMillan asked. You benefit from past generations and help set up the future generation, he said.
Another analogy used in favour of borrowing is comparing it to a mortgage – something McMillan said isn’t accurate, since an individual has a lifecycle with a beginning and end, while a city does not.
“The lifecycle (of a city) is a continuous thing … it’s just a nice even flow with some gradual growth over time,” McMillan said.
Enid Slack, a professor and the director of the University of Toronto-based Institute on Municipal Finance and Governance, said the advantage of borrowing for capital is “intergenerational equity” so those who benefit are those who pay.
Another reason to borrow, she said, is to smooth out the “lumpy” nature of capital costs. But like McMillan, she notes the cost of paying back that debt can be a disadvantage.
Paying as you go – the term used for paying for capital out of funds already in the municipality’s coffers – has the advantage of avoiding the cost of debt servicing, Slack said.
For smaller capital purchases – like computer upgrades – it makes sense to use the pay as you go method, she said.
But when it comes to major costs, like busilding a new recreation centre, “then it makes sense to borrow.”
Circumstances such as interest and inflation rates should be considered as well, Slack said.
Most municipalities have borrowing limits set by their provincial governments, Slack added.
St. Albert’s statistics, based on the financial information they submit to Municipal Affairs, show this city has used about 22 per cent of its provincially mandated debt limit.
City policy limits debt-servicing costs to 25 per cent of the city’s annual operating revenues.
Municipalities can also help offset capital costs incurred by growth via development levies, Slack noted.
