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Debt Strategy

Click to edit Master title style. Debt Strategy. Presentation to City Council May 10, 2004. Today’s Presentation. Our current infrastructure and infrastructure financing situation How does borrowing fit in today? Two-year DMFP review Impact of three scenarios

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Debt Strategy

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  1. Click to edit Master title style Debt Strategy Presentation to City Council May 10, 2004

  2. Today’s Presentation • Our current infrastructure and infrastructure financing situation • How does borrowing fit in today? • Two-year DMFP review • Impact of three scenarios • What changes do we want to make? • Do we continue to use borrowing? • How can we use tax-supported debt as a strategic tool for urban sustainability?

  3. Our Current Situation

  4. Our Infrastructure Today Cities are infrastructure intensive

  5. Our Infrastructure Gap Unfunded capital $3.5 billion SLRT $0.58 billion 8% Growth $1.7 billion 27% Rehabilitation $1.3 billion 20% Growth $1.1 billion 17% Rehabilitation $1.8 billion 28% Funded capital $2.9 billion

  6. Upcoming Rehabilitation Issues Good & Very Good Fair Poor & Critical Risk Assessment Complete Classification

  7. Recreational and Small Buildings $110 million/yr $30 million/yr Average Currant Condition Local Neighbourhood Infrastructure Risk Assessment on Infrastructure Condition $15 of 18 Billion)

  8. Infrastructure Financing 2004-2013 LRFP ($millions) External Funding (38%) Internal Funding (62%) Revenues are flat once Infrastructure program done

  9. Infrastructure Financing 2004-2013 LRFP (Inflation & Population) Cumulative Impact $151 M $128 M $279 M $279 million loss in spending power over ten years if sources do not increase

  10. Potential External Opportunities • Federal and provincial funding changes are on the horizon (GST, infrastructure program, federal fuel tax, new deal with the province) • Roadway assessment, discussions regarding developer levies • Partnerships, P3s

  11. Potential Internal Opportunities • Increase pay-as-you-go by inflation and population to fund rehabilitation needs in the long term • Use tax-supported debt strategically • Both opportunities require sustainable revenue increases

  12. Key Funding Observations • External Opportunities - Most opportunities will take time to negotiate • Internal Opportunities - Pay as you go and debt require ongoing sustainable revenue source • Each source alone is not enough to fix the infrastructure gap ... Multiple sources are needed

  13. Our Borrowing Situation Today

  14. Long-term Debt: A Misconception • All government debt is not the same • Federal and provincial debt has historically come from annual deficits • Municipal debt can only be for an investment in capital infrastructure

  15. What Borrowing Includes • Self liquidating (utility) debt • Local improvements • Other (external agencies, capital leases) • Tax-supported debt

  16. Debt Management Fiscal Policy Considerations • Council approved amendments in Oct. 2002 • Key changes: • Allows consideration of tax-supported debt • Establishes debt management thresholds • New debt servicing costs must be funded from new sustainable revenues • As debt servicing costs drop off, PAYG increases for capital projects. • Establishes general project guidelines

  17. Project Selection CriteriaIncluded in the DMFP • Total project cost of $10 million or greater • Expected asset life more than 15 years • A valid business case: • project in line with established priorities • project demonstrates benefits: minimized costs, risk management, community impact and leveraged partnership funding • project has economic development and quality of life benefits to the community

  18. Tax-Supported Borrowing • Borrowing Guidelines (from 2003 budget): • up to $50 million annually approved by Council ($250 million over five years) • funded by pne per cent annual tax increase • $100 million borrowed to date • Two-year DMFP review currently underway

  19. Borrowing Considerations • Maximum provincial limits: • Total debt - 2x annual revenues, less transfers • Debt servicing costs - no more than 1/3 of annual revenue • DMFP thresholds for debt servicing costs: • Total debt - less than 10% of revenues • Tax-supported debt - less than 6.5% of tax-supported revenues • Our willingness to pay the annual debt servicing costs - requires sustainable revenues

  20. Two-year DMFP Review

  21. Two-year DMFP Review • Did the DMFP meet its objectives? • What issues have come up? • What changes are we looking at?

  22. Did the DMFP meet objectives? • Objective - Give Council an additional tool to deal with infrastructure issues • Outcome - $100 million in projects approved: • Neighborhoods (roads and parks) - $20.4 m • Growth in arterial roads - $19.7 m • Interchanges including 23 Ave drainage - $32.8 m • Facilities (police & fire stations, Hall D) - $27.1 m

  23. Issues…what needs to be done? • When should Council be approving tax- supported debt projects? • Which projects should we select? • Projects over $50 M - how to accommodate? • Administrative issues - fix through process • Total project versus annual cash flow approvals - no change needed; decision made once

  24. Three Borrowing Scenarios

  25. Debt Use Strategies to Consider • For major hot spots until long term financing solution in place • Based on project merits (current approach) • Support strategic plans • Larger growth projects so that those who use should also pay • Large high impact (city-transforming) project (e.g. SLRT)

  26. Three Borrowing Scenarios • Scenario One, Limited Debt - $150 million of additional tax supported borrowing over three years (status quo); stop in 2007 • Scenario Two, Managed Debt - as above with tax-supported borrowing continuing at $50 million annually; no stop date subject to interest rates • Scenario Three, Aggressive Debt - Scenario Two, plus borrowing to fund LRT to Heritage

  27. City’s Debt Position - Three Scenarios Debt Capacity Available

  28. City’s Debt Servicing Costs: Three Scenarios

  29. Scenario 1, Limited Debt • Infrastructure Impact: • $150 million (4%) of $3.5 billion gap eliminated • Strategy - Deal with hot spots (growth and/or rehab) • Financial Impact: • debt servicing increase of $5 million annually for three years for each $50 million borrowed

  30. Scenario 2, Managed Debt - $50 million borrowed annually • Infrastructure Impact: • $.5 billion (14%) of $3.5 billion gap eliminated over 10 yrs. • Strategy: • Capacity to fund strategic plans (growth or rehab) • Can use debt to deal with hotspots until ongoing revenue source in place (bridging), or... • Implement high impact City building projects

  31. Scenario 2, cont’d. • Financial Impact: • Debt servicing below 10% threshold • Debt servicing increase of $5 million annually for 10 years for each $50 million borrowed

  32. Scenario Three, Aggressive Debt - $50 million annually plus LRT • Infrastructure Impact: • $1.0 billion (28%) of $3.5 billion gap eliminated over 10 years • Strategy: • Capacity to fund strategic plans (growth or rehab) • Can use debt to deal with hotspots until ongoing revenue source in place (bridging), and... • Implement high impact City building projects

  33. Scenario Three, cont’d. • Financial Impact: • Debt servicing costs will approach threshold in future • Debt servicing increase of $5 million annually for each $50 million borrowed; $34 million base increase phased in over construction period for $460 million SLRT borrowing

  34. Should we continue to use tax-supported borrowing?

  35. Why Use Debt? • Can address infrastructure gap more quickly • Spreads cost over a longer period • Those who benefit will pay • Borrowing works well for infrastructure expenditures, when debt tolerance is factored in • Today’s rates are attractive - ACFA 15-year term - 4.6%, 25 years - 5.1%

  36. Administration’s Recommendation • That tax-supported debt continue to be used as a tool to address infrastructure issues

  37. How can we use tax-supported debt as a strategic tool for urban sustainability?

  38. Administration’s Recommendations • That a recommended project plan for Scenario One, Limited Debt be brought forward for approval as part of the 2005 Budget • That a strategy to close the infrastructure gap using Scenario Two, Managed Debt in combination with other financing sources be developed and brought back for Council approval by June 2005

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