$30 Million in Borrowing Sought
The work has been approved and now the City needs to find the $30 million to finance it. And with such a hefty sum of cash involved, debate seemed to be in order.
Finance Director, Brian Acker, presented highlights from a report in which it was stated that the City may be able to borrow funds over 15 years, at 4 or 4.5 percent, while being able to earn more by investing through a new investment strategy with the current reserves. Or alternatively, self-finance through the use of reserves.
The $30 million is necessary to pay for the construction of 2018 waterworks capital projects, including the transmission line from the Buffalo Pound Treatment Plant as well as reservoir work. The main transmission line has a cost of $23 million and the reservoir project is $13.4 million. The work was approved during 2018-2019 Budget Committee discussions.
“Really, at the end of the day it’s a matter of do you borrow from yourself or do it external,” Acker stated.
Administration was asking for permission to authorize a Request For Proposal (RFP). An RFP is where the City asks potential suppliers to provide competitive bids on a required good or service.
“Council would have the opportunity to turn it down if it came back at five or five and a half percent,” Acker stated.
Councillor Scott McMann spoke in favour of the proposal.
“We should get out there and get a rate and see what we’re up against,” Coun McMann told Executive Committee.
“I believe the large chartered banks are suggesting the rates are going up. The earlier we can get in there and get a fixed rate the better,” he said, adding “we can borrow from ourselves in the future.”
Councillor Brian Swanson opposed the RFP because he saw the growing debt load as unsustainable based upon population trends.
Coun Swanson spoke about municipalities and others being encouraged to take on more debt because “population growth and inflation over time minimizes debt in relation to GDP (Gross Domestic Product)…however the population numbers aren’t in favour of that.”
The most recent Statistics Canada population numbers show Saskatchewan has a record population of 1,169,752 but at the same time in the last quarter population only grew 1,695 people indicating a slowing of population growth. Young talent is headed to Alberta for work and immigrants are no longer coming to the province in the numbers they once were.
Coun Swanson said he was in favor of the Buffalo Pound but desired the reservoir spending over time.
He favoured not borrowing from external sources but “direct spending in reserves and corresponding cuts" instead.
The report was overly optimistic and did not report on the down side of the equation enough Coun Swanson pointed out.
“I don’t think the full impact of the debt has been taken into account,” he said, claiming “I do not see the economic strength to finance that debt in the long term.”
At the beginning of 2018, the City had a total debt of $36,917,554. The debt is $25,217,554 plus $11,700,000 equalling 26 percent of the Buffalo Pound Water Treatment Corporation debt. Authorizing the borrowing will give the City a debt of $66,917,554.
Presently, Moose Jaw has a debt limit of $95 million set by the Saskatchewan Municipal Board. If Council were to approve the borrowing, the City would have approximately $28 million to reach the debt limit approved by the Province.
The report from administration took into consideration an earlier decision to look at diversifying the City’s investment to create greater returns. Historical data showed that over 30 years the average with a 60 percent stocks (30 percent Canadian stocks and 30 percent US stocks) and 30 percent bonds and 10 percent cash was 8.9 percent.
In the last 10 years on average the City’s investments in the bond market yielded 3.3 percent.
“However, if past history is any precursor of future returns, one could expect to earn a return significantly higher than the cost of external borrowing,” the report stated.
“Presently the interest is 2.8 percent on bonds, it’s as low as it has been in a significant amount of time,” Acker stated.
The $30,000,000 borrowed, at a rate of four to four-and-a-half percent. The interest paid over 15 years at 4 percent was estimated at $10,185,000. The total payout to the lender is an estimated $40,185,000 according to the report.
Self financing the 2018 waterworks capital expenditures could potentially eliminate greater investment returns the reserves could earn.
“If we do that we lose the opportunity to have extra money. And with that extra money we would be able to finance our capital projects,” Acker said.
The RFP is not a final decision and it may allow the City to get a locked in rate.
“This is not a final decision but a decision we (Council with Administration assistance) can weigh,” Acker said.
In the end, Executive Committee voted in favor of issuing the non-binding RFP in a 5-2 vote with Councillors Chris Warren and Swanson opposed