considering tax-supported debt may 10, 2004

Considering Tax-Supported Debt

May 10, 2004

Presentation to City CouncilRoger Rosychuk

Corporate Services Department

2

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?

3


Our Current Situation

4


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

5


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%

6


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

7


$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

8


Infrastructure Financing

External Funding (38%)

Internal Funding (62%)

Revenues are flat once Infrastructure program done

2004-2013 LRFP

($m

illio

ns)

9


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)

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 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

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

• Two-year DMFP review

17


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

18


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

19


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?

21


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)

23


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

24


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

25


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

26


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)

27


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

28


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)

29


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

30


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

31


Should we continue to use tax-supported

borrowing?

32


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%

33


Administration’s Recommendation

• That tax-supported debt continue to be used as a tool to address infrastructure issues

34


How can we use tax-supported debt as a

strategic tool for urban sustainability?

35


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

36


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

37


Background Material

38


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

39


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

40


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

considering tax-supported debt may 10, 2004

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