City borrowing to build is ‘smart debt’

There are a number of misconceptions about the city’s budget that I would like to clarify.

First, the city is not legally allowed to run a deficit in our operating budget, meaning we cannot take on debt to run the city. In fact, we have built up a substantial reserve (approximately $85 million) to cover against any unforeseen shortfalls. All of this is done according to a strict reserve policy that identifies both a minimum and maximum.

The debt taken on over the past few years has been related to our capital budget only. It has allowed for the building or refurbishment of tangible infrastructure. Our previous unwillingness to borrow meant only that we transferred that debt into crumbling infrastructure. Renewed borrowing over the past few years has enabled us to make a serious dent in that infrastructure decline. Even with that borrowing, the city is still well within both the province’s debt limits and the city’s own, much more stringent, limits.

Borrowing at a rate that is fixed for the entire term, and at an interest rate that is below the rate of inflation, allows us to use the debt in a smart way to deal with our infrastructure deficit. Construction costs have been very low for the past few years so the time was right to build.

Essentially, the debt has been taken on for infrastructure that will be providing value to the city for many years; it has not exposed the city in any way to any structural shortfalls. In other words, the debt is well within limits, and all payments are budgeted and accounted for. Not borrowing for long-term infrastructure is equivalent to buying a house without a mortgage, and therefore, needing to save your entire life to only be able to enjoy it for a few twilight years. Borrowing allows the cost of the infrastructure to be borne by those who will be using the infrastructure, and to pay for it as they use it. What must be ensured is that the payments are paid off long before the infrastructure either needs a major reinvestment, or ceases to exist. The city’s debt policy is very careful not to break that rule.

As older debts mature, room will open up for us again to consider new borrowing, but that will be a few years down the road. The amount of debt we have now is at a healthy level that balances fiscal security with the advantage of using what is often referred to as smart debt’ to leverage infrastructure construction. The city has not done anything that is imprudent in the borrowing we have done to date. Doing so has not exposed us to risk and it has allowed us to catch up on many of the infrastructure projects that were seriously neglected over the past years.

I can be reached at 780-496-8146 or at ben.henderson@edmonton.ca

Ben

 

 

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