Borrowing is back after council, sitting as the finance and audit committee, decided Monday to end its six-year-old practice of viewing debt as the fiscal equivalent of the plague. Council adopted its no debt policy back in 2003, at a time when the city faced the prospect of borrowing for big-time projects like Servus Place and Ray Gibbon Drive. The policy did not actually prevent the city from borrowing, but was part of a culture that was “debt averse,” where borrowing was considered a last resort to grants, reserves and property tax increases.
The city’s view of debt as a financial management tool has softened in the last year, mostly by necessity. The roots of this reversal can be traced back to St. Albert’s annexation of 1,336 hectares of land from Sturgeon County in 2007. After years of limited growth opportunities in St. Albert’s former boundaries, the city faces expansion into untapped farmland. The cost of extending water, sewer and roads into the new lands will be in the order of hundreds of millions.
While the city traditionally takes the view that growth must pay for itself, the high cost of expansion has forced administration to explore other options. The city is now several years into a full review of levy rates charged to developers to bring new roads and services on stream. Debt had crept into the discussion at various times, mostly as a suggestion to help kick-start development.
The revised policy would limit borrowing to repair or upgrade existing underground utilities, where existing residents would provide a steady, predictable source of revenue to pay down the loan. If the city borrows for existing utilities, that in theory frees up grant money and tax dollars for other capital construction projects.
Borrowing is not considered an option for expanding St. Albert, which history has proved can be a risky venture. Long-time residents remember the early 1980s when St. Albert funnelled cash into the ground to service a new industrial park in Campbell. When the economy tanked, the city was left with acres of serviced land but no takers. It took years to recoup that investment. Established residents also remember the high interest rates in the 1980s that made borrowing expensive. Yet the practice was a financial necessity then when grants were less plentiful and reserves were not as deep. The city took on large amounts of high-interest debt to pay for projects like Boudreau Road, Perron Street Bridge and St. Albert Place. The latter two will finally be paid off this year.
There’s no question borrowing is a far more affordable option today, with interest rates in the low single digits. The city could take out a 20-year loan with an interest rate of 4.6 per cent. That’s why city administration is warming to the idea of debt as a financial management tool. St. Albert has its own unique reasons for considering debt, starting with notoriously high property taxes. If borrowing can help minimize a tax increase, the city is all for it. At the same time St. Albert saw its Municipal Sustainability Initiative grant drop $3.1 million from its expected take, as the provincial coffers were hit hard by declining resource revenues.
The funding cut comes at a time when the city is struggling to stay on top of its ever-widening infrastructure deficit, nearly $500 million over 10 years. Borrowing can help fill the gap, but it should not be viewed as a cure-all for what ails the city’s capital plan. The new debt policy places stringent controls over how much the city can borrow; however council must be extremely cautious when considering new debt. Thanks to projects like Servus Place and Ray Gibbon Drive our per capita debt is at $1,220, and many have called for reining in spending. Debt should only be an option if it will help complete projects that are essential to taxpayers. Otherwise we’ll be paying for financial mistakes for the next 20 years, or longer.
