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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?
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Our Current Situation
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Our Infrastructure Today
8,000
7,855
7,000
6,000
Total 2003 Asset Replacement Value - $18.2 billion
5,624
$ million
5,000
Cities are infrastructure intensive
4,000
3,000
2,000
1,008
718
1,000
679
669
592
491
221
156
95
85
0
Drainage
Road Right- Transit Fac.
of-Way
& Equip.
Parks
Buildings
Fleet
Traffic
Control
Rec.
Faciliites
Affordable
Housing
Waste Technology
Mgmt Equipment
Other
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Our Infrastructure Gap
Unfunded capital
$3.5 billion
Rehabilitation
$1.3 billion 20%
Funded capital
$2.9 billion
Debt Strategy
Rehabilitation
$1.8 billion 28%
SLRT
$0.58 billion 8%
Growth
$1.7 billion 27%
Growth
$1.1 billion 17%
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Upcoming Rehabilitation Issues
$20.0
$18.0
$16.0
$14.0
$8.4
$10.6
$10.4
58%
46%
57%
$ billion
$12.0
$10.0
Good &
Very Good
Fair
Poor & Critical
$8.0
$6.0
$4.5
$5.0
27%
$2.6
15%
25%
$8.2
45%
$1.6
9%
$4.0
Risk
Assessment
Complete
$2.0
$3.3
18%
$0.0
Physical Condition
Demand/ Capacity
Classification
Classification
Functionality
Good and Very Good
Fair
Poor and Critical
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Risk Assessment on Infrastructure Condition
$15 of 18 Billion)
Recreational and Small
Buildings
Local Neighbourhood
Infrastructure
Average
Currant
Condition
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Infrastructure Financing
2004-2013 LRFP
Tax Supported Debt
400
Developer
(Partnership)
Grants/Fed. Infra.
Local Improvements
/ Other
350
($millions)
($ millions)
300
250
Fuel Tax Rebate
External
Funding
(38%)
200
150
Debentures
100
Reserves
50
0
2004
Internal
Funding
(62%)
General Financing
2005
2006
2007
2008
2009
2010
2011
2012
Revenues are flat once Infrastructure
program done
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2013
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Infrastructure Financing
2004-2013 LRFP (Inflation & Population)
350
2004-2013 LRFP Funding
($ millions)
300
Cumulative
Impact
$151 M
Population
$128 M
Inflation
$279 M
250
200
150
100
50
0
2004
2005
2006
LRFP
2007
2008
2009
Population
2010
2011
2012
2013
Inflation
$279 million loss in spending power over ten
years if sources do not increase
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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 not the
same
• Federal and provincial debt has
historically come from annual
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
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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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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
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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?
• What issues have come up?
• What changes are we looking
at?
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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 23
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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 use should also pay
• Large high impact (citytransforming) 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
( $ millions)
4,500
Provincial Debt Limit
4,000
3,500
3,000
2,500
Debt Capacity Available
2,000
1,500
Scenario 3 - Aggressive Debt
Scenario 2 - M anaged Debt
1,000
Scenario 1 - Limited Debt
500
0
2004 2005
2006 2007
2008 2009 2010
2011 2012
2013 2014 2015
2016 2017 2018
2019 2020
2021 2022
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City’s Debt Servicing Costs: Three
Scenarios
40.0%
35%
M aximum Provincial Service Debt
Service Limit
35.0%
30.0%
25.0%
20.0%
15.0%
10%
DM FP Total Debt Service Limit
10.0%
Scenario 3 - Aggressive Debt
Scenario 2 - M anaged Debt
5.0%
Scenario 1 - Limited Debt
0.0%
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
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2022
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
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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 for
each $50 million borrowed
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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 for each $50 million borrowed;
$34 million base increase phased in
over construction period for $460
million 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 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%
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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 taxsupported 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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