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This presentation discusses current infrastructure financing issues and borrowing strategies to promote urban sustainability for the City Council meeting on May 10, 2004.
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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 • 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?
Our Infrastructure Today Cities are infrastructure intensive
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
Upcoming Rehabilitation Issues Good & Very Good Fair Poor & Critical Risk Assessment Complete Classification
Recreational and Small Buildings $110 million/yr $30 million/yr Average Currant Condition Local Neighbourhood Infrastructure Risk Assessment on Infrastructure Condition $15 of 18 Billion)
Infrastructure Financing 2004-2013 LRFP ($millions) External Funding (38%) Internal Funding (62%) Revenues are flat once Infrastructure program done
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
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
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
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
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
What Borrowing Includes • Self liquidating (utility) debt • Local improvements • Other (external agencies, capital leases) • Tax-supported debt
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
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
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
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
Two-year DMFP Review • Did the DMFP meet its objectives? • What issues have come up? • What changes are we looking at?
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
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
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)
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
City’s Debt Position - Three Scenarios Debt Capacity Available
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
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
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
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
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
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%
Administration’s Recommendation • That tax-supported debt continue to be used as a tool to address infrastructure issues
How can we use tax-supported debt as a strategic tool for urban sustainability?
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