Rhino's Ramblings: Moose Jaw Money Woes
What is with this $30 million in borrowing the City is considering?
See Related: City Seeks $30 Million
Simply put, it is the City looking to see what sort of interest rate they can get over a 15 year term. They want to do it now before the rates go up. We need these funds to finance capital works projects in the waterworks utility in 2018, with a lot more needed in subsequent years.
The reasoning behind it is simple, if the City can borrow $30 million at a lower rate than they can earn through investments, then the City is further ahead.
Of course, this is assuming the new investment policy regarding reserves turns a higher rate of return when some money is invested in the stock market. It’s something which scares Councillor Brian Swanson, who fears losses in such investments.
Whereas on the other side, Councillor Scott McMann points out that Canada’s charter banks are predicting interest rate increases, so the sooner we see what rate we can get the better. If it comes back too large or if the investment strategy doesn’t work out, then the City can always decline the loan and self finance.
There is something missing in all of the debate: Lets say the City borrows the money at four percent and stays with the existing blue chip bond investment strategy and interest rates hypothetically jump to five percent next year; by borrowing now we save that one percent.
A one percent saving on a $30 million loan is a $300,000 in year one. If locked in in this scenario it could potentially save us millions. Money we could re-invest in other waterworks capital projects. It also allows us to borrow from our own reserves at a later time if interest rates do start going as expected and provide additional savings. And whether we like it or not, there is a lot more which needs to be done.
Perhaps the retired banker, Councillor McMann, makes a very valid point and earned his salary.