Borrowing costs

Rising Borrowing Costs for Municipalities May Impact St. Albert: City

At a March 21 council meeting, Mayor Cathy Heron said the city will need to continue to monitor the impacts resulting from the rate increase.

According to the city, a hike in the borrowing rates the province sets for municipalities could mean St. Albert will need more taxpayer money to continue its capital projects.

In December, the province warned Alberta municipalities that it would add a premium of 0.5% to 0.75% to local authority borrowing rates. Borrowing and saving are the two ways municipalities can finance capital projects such as new buildings and roads, although grants from the federal and provincial governments can help supplement the costs.

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

Travis Toews, the UCP’s finance minister, told a post-budget conference March 2 that the hikes are meant to ensure the province doesn’t come under additional financial pressure during “difficult times.”

“One thing that COVID-19 has really revealed to the Government of Alberta is that we as a province have great financial and fiscal exposure,” Toews said. “During the darkest days, capital markets were truly frozen.”

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

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

Impacts for St. Albert

Mayor Cathy Heron said at a March 21 council meeting that St. Albert will need to continue to monitor the impacts resulting from the rate increase.

“It’s going to cost us,” Heron said. “Especially for a municipality like ours that has avoided going into debt so much, and now we’re ready to go into debt just as they raise interest rates.”

When the City acquires debt, the interest rate is fixed over the repayment term, meaning that increases in borrowing rates would only affect new debt incurred by the City.

“Because debt principal and interest payments are usually funded from the operating budget, an increase in the interest rate may require more taxpayers’ money,” city spokeswoman Marci Ng explained. , in an email.

Ng gave a hypothetical example of interest on a $10 million debenture going from 5% to 6%, increasing the payment by $70,000 per year over the term of the debt.

In an interview, Heron said that some of the city’s biggest projects, such as work on the northern St. Albert Trail, are staggered in their borrowing, meaning the rate increase will affect new stages at the as they register.

When asked how much the City will need to borrow for future phases three and four of the St. Albert Trail, City spokesperson Cory Sinclair said project funding requirements are being updated. day.

“In April, the administration will submit charters for phases three and four for board approval to be included in the 10-year capital growth plan, which will include expected costs and timelines,” Sinclair said in an e -mail.

When asked how rising municipal interest rates could impact new capital projects, such as the solar farm council will explore options for in July, Heron said the rate of Adjusted borrowing could alter the return on the solar farm investment, and that any impact will be included in the report to the board.

“I don’t think that 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, long-term engineering supervisor for the city, said at the March 21 council meeting that increases in municipal borrowing rates will impact the city with respect to initial maintenance of new projects through its off-site collection program.

Charges are collected by the City to build new infrastructure in areas under development or expansion. A developer or the City will bear the initial cost of these projects, and subsequent beneficiary developers pay their share to the City, which then reimburses the initiating parties.

City spokesman Cory Sinclair said in an email that this refund period can be lengthy.

“Long term, there should be no impact on taxes, but cash flows are not entirely predictable and short term deficits may occur,” Sinclair said in the email, noting that the city models initial opportunities to get a glimpse of the potential. cash flow impacts, such as deficits, before they occur.

In the event of a short-term deficit, sometimes tax revenue might be needed, Sinclair said.

The city did not grant The Gazette an interview on the potential impact of rising municipal borrowing rates, including impacts on offsite drawdowns.

Throwback to Unlikely Hikes: Toews

Asked by reporters at the March 2 conference if the province would consider cutting the interest rate as oil prices climb, Toews said a pullback would not be likely, arguing that it is “cautious to reduce the Province’s financial and fiscal exposure over time.”

“We will continue to provide great financing options for municipalities in the future,” Toews said.

Ultimately, Heron said she was “very disappointed” with the rate hikes, noting that she doesn’t think Toews’ explanations hold water.

“Hopefully we’ll keep pushing to get back to that better rate, especially with the economy,” Heron said. “Now they make money with the municipalities instead of helping us.”

Mel McMillan, professor emeritus in the University of Alberta’s economics department, said he personally doesn’t believe the province should offer municipalities below-market interest rates.

“Interest rates send signals, so it’s probably best to let those signals get through to all borrowers,” McMillan said.

McMillan said he thinks it would be better for the province to maintain municipal infrastructure grants such as the Municipal Sustainability Initiative, which he noted the province is “reducing significantly.”

At the March 21 council meeting, Trevor Duley, St. Albert’s director of government relations, told the council that the province’s MSI cuts would mean a $4 million loss to the city each year.

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

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

“It’s another blow to municipalities,” Heron said of the rising borrowing rates. “It’s a death by a thousand cuts.”