Considering Tax-Supported Debt
May 10, 2004
Presentation to City CouncilRoger Rosychuk
Corporate Services Department
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Debt Strategy 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?
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Debt Strategy May 10, 2004 3
Our Current Situation
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Our Infrastructure Today
7,855
5,624
1,008718 679 669 592
491221 156 95 85
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
$ m
illi
on
Total 2003 Asset Replacement Value - $18.2 billion
Drainage OtherTechnology Equipment
Waste Mgmt
Affordable Housing
Rec. Faciliites
Traffic ControlBuildings Fleet
Transit Fac. & Equip. Parks
Road Right-of-Way
Cities are infrastructure intensive
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Our Infrastructure Gap
Rehabilitation$1.3 billion 20%
SLRT $0.5 billion 8%
Growth$1.7 billion 27%
Unfunded capital$3.5 billion
Funded capital$2.9 billion
Rehabilitation$1.8 billion 28%
Growth$1.1 billion 17%
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Upcoming Rehabilitation Issues
$2.6$3.3
$1.6
$5.0$4.5 $8.2
$10.6 $10.4
$8.4
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
$20.0
Physical Condition Demand/ Capacity Functionality
$ b
illi
on
58%
27%
15%
57%
25%
18%
46%
45%
9%
Risk Assessment
Complete
Classification
Good & Very GoodFairPoor & Critical
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$11 0
mil
lion
/ yr
Average Current
Condition
$30
mi l
lio n
/yr
Risk Assessment on Infrastructure
Condition
($15 of 18 Billion)
Local Neighborhood Infrastructure
Recreational and Small Buildings
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Infrastructure Financing
External Funding (38%)
Internal Funding (62%)
Revenues are flat once Infrastructure program done
2004-2013 LRFP
($m
illio
ns)
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Infrastructure Financing
0
50
100
150
200
250
300
350
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
($ m
illions)
LRFP Population Inflation
2004-2013 LRFP Funding
Population
Inflation
Cumulative Impact
$151 M
$128 M
$279 M
$279 million loss in spending power over ten years if sources do not increase
2004-2013 LRFP (Inflation & Population)
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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
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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
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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
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Our Borrowing Situation Today
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Long-term Debt: A Misconception
• All government debt is the same
• But … federal and provincial debt has historically come from annual operating deficits
• Municipal debt can only be for an investment in capital infrastructure
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What Borrowing Includes
• Self liquidating (utility) debt
• Local improvements
• Other (external agencies, capital leases)
• Tax-supported debt
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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
• Two-year DMFP review
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Tax-Supported BorrowingDirection• Borrowing Guidelines
(from 2003 budget):– up to $50 million annually
approved by Council ($250 million over five years)
– funded by one per cent annual tax increase
• $100 million borrowed to date
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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
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Two-year DMFP Review
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Two-year DMFP Review
• Did the DMFP meet its objectives?Yes - additional tool generating $100M for infrastructure issues
• What issues have come up?Issues more procedural than policy-related
• What changes are we looking at?
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Three Borrowing
Scenarios
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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 benefit should also pay
• Large high impact (city-transforming) project (e.g. SLRT)
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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
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City’s Debt Position - Three Scenarios
Borrowing $50 million per year
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
($ millions)
Provincial Debt Limit
Scenario 1 - Limited Debt
Scenario 2 - Managed Debt
Scenario 3 - Aggressive Debt
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City’s Debt Servicing Costs - 3 Scenarios
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Maximum Provincial Service Debt Service Limit
DMFP Total Debt Service Limit
Scenario 1 - Limited Debt
Scenario 2 - Managed DebtScenario 3 - Aggressive Debt
35%
10%
Debt servicing
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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 (like 1% tax increase annually for three years)
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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
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Scenario 2, cont’d.
• Financial Impact:– Debt servicing below 10%
threshold – Debt servicing increase of
$5 million annually for 10 years (like 1% annual tax increase)
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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
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Scenario Three, cont’d.
• Financial Impact:– Debt servicing costs will
approach threshold in future– Debt servicing increase of $5
million annually; $34 million base increase phased in over construction period for SLRT borrowing
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Should we continue to use tax-supported
borrowing?
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Why Use Debt?
• Can address infrastructure gap more quickly
• Spreads cost over a longer period • Those who benefit in future will
also 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%
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Administration’s Recommendation
• That tax-supported debt continue to be used as a tool to address infrastructure issues
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How can we use tax-supported debt as a
strategic tool for urban sustainability?
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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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Funding the Gap
Scenario 214%
Funded$2.9 B 39%
Remaining Unfunded
47%
Unfunded $3.5 B 61%
Other Strategies:
-PAYG-P3s-Developer Levies-Federal & Provincial Contributions
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Background Material
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Project Selection Criteria Included 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
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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
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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