One person’s opinion – Part 3 of 3 An analysis of Wetaskiwin City Council
Another day older and deeper in debt..but is that bad? – Given the facts, you be the judge
Friday, August 31, 2012
Excerpt from Part I: The team that leans into the harness at the same time as a team and pulls together will be the winner. Not necessarily the best two horses, but the best two horses working together.
Talk to an old-timer and mention the word ‘debt’ and they will shutter. After all, they experienced hard times and their goal in life was to retire, debt free. But almost everyone has some kind of debt. Home mortgages, car loans and credit card balances. Added to that can be regular or annual debts like taxes, insurance (health, house, car) and utility bills. Added to that are the mandatory payments of federal, provincial and municipal taxes that must be paid each and every year.
The City of Wetaskiwin also has debt. In fact the debt is projected to be $30,680,000 by the end of 2012. Each year, $1,935,385 is spent on the Annual Debt Payment. Throwing these numbers out to the average citizen is scary as heck and provokes the question, ‘How much debt is the City going to acquire on my behalf and will the City be able to manage it without huge increases in taxes’. To assist with informed opinions and provide readers with accurate information the Pipestone Flyer went directly to City of Wetaskiwin Manger Ted Gillespie, Finance Manager Al Steckler and Communications Co-coordinator Dale Cory.
How much can the City borrow – are controls in place?
The City of Wetaskiwin has reached 87.6% of it’s of its borrowing limit. The limit is dictated by the Government of Alberta. As City Manager, Mr. Ted Gillespie explains, “The "Debt Limit" is an arbitrary value determined by a formula proposed by Alberta Municipal Affairs decades ago. It is based on 150% of municipal revenue, but does not account for current interest rates, or the services that municipalities need to provide”. But, City debt has increased. In 1998 the City debt was $10,557,451 compared to $30,680,000 in 2012. The percentage of debt limit (the total amount the province will permit the City to borrow relative to revenue) in 1998 was 59.9% compared to the 2012 percentage of debt limit of 87.6%.
This sounds high but City Manager; Gillespie further explained the debt load. “It is all a bit complicated, as you heard. One of the most important numbers, that no one seems to pay attention to, is the debt servicing cost (how much we pay annually to pay down our debt). Our debt servicing cost is low. If calculated in current dollars, it is lower than in the past decade.” Simply put, the City is borrowing more money than in previous years but because of low, fixed interest rates, the cost per dollar borrowed is much less.
He goes on to rationalize further, “Currently interest rates are the lowest in decades. The City can borrow for approximately 3.5% - and the interest rate is fixed for the term of the borrowing.”
Is the City debt good or bad debt – the facts, and you be the judge
Mr. Gillespie suggests that the City debt load is not necessarily a bad thing. In 1998 annual debt payment was $2,403,797 and the debt payment as a percentage of revenue was 20.3%. (20 cents of every dollar spend on reducing debt) In 2012 the annual debt payment $1,935,385 and the debt payment as a percentage of revenue was 8.3%. (8.3 cents of every dollar spent on debt). The debt in 1998 was acquired at much higher interest rates and each dollar borrowed was costing a higher percentage of revenue to pay down.
He continues to justify why the City is accumulating debt and why it is ‘good’ debt. “Would you work all your life to save up so you could buy a house before you die - or would you finance it so you can live in it while you pay for it? The projects that we finance are for the benefit of the community, will last a long time, and usually have additional capacity so they can accommodate future population growth. Who should pay for them? The people who lived in the community before they were constructed or the people who will use them? Obviously this doesn't work if interest rates are high - but when interest rates are running at very low levels - there is some value to this argument.”
What is bad debt and too much debt – you be the judge
In a recent edition of Alberta Venture, it was reported that, “Albertans hold an average of $157,000 in household debt and Canadians owe, on the average, more than $30,000 each, for their portion of provincial and federal obligations”. The article describes the increasing debt load as, “We’re throwing a party and damn the consequences”. The Bank of Canada governor, Mark Carney and Finance Minister, Jim Flaherty are constantly in the news warning Canadians about growing debt levels.
It isn’t having debt that is the problem, it’s having too much debt, and especially bad debt that is landing consumers, municipalities and even countries (Spain, Italy, Portugal, Ireland) into hot water. And it was the unmanageable ‘bad debt’ acquired in the United States as a result of the easy-to-get money during the subprime lending years that triggered the recession and stock market meltdown and sent a financial tsunami throughout the world. Easy access to credit, especially for mortgages landed households so far in debt that when housing prices dropped the debt (mortgage) exceeded the value of the property. Of course, the lending institutions that were
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