Municipal debt load – the quiet election issue

  • Council   Friday, May 13, 2022   Matthew Harris

Depending on your point of view, municipal borrowing is both a necessary evil and a high-wire balancing act that you’re a bad choice away from seeing end … well, badly.

Cities use their borrowing for any number of reasons – financing roads, sewers and other infrastructure. How they choose to use this tool can have impacts down the road, given how the debt is managed.

Livio Di Matteo is a professor of economics at Lakehead University and a senior fellow for the Frasier Institute, for which he has published works on the subject of municipal debt. A 2016 article by Di Matteo talked about where you live and how debt load can affect you. Generally speaking, the public will not likely notice what their municipality’s debt load is until it starts eating into operating expenses.

“Municipalities in Ontario generally have a positive overall net asset balance because along with any debt they also have substantial reserves,” Di Matteo said. “Indeed, most municipalities in Ontario have positive variances on their municipal budget (surpluses), and these are generally allocated into reserves. Municipalities can really only acquire substantial debt for capital projects if the province signs off.”

Stratford and Area Chamber of Commerce general manager Eddie Matthews is hopeful that no cuts to programs would be coming to can affect the day-to-day life of local residents.

“You would have to look at what is important to balance things like necessary infrastructure projects while keeping taxes at a reasonable level, which was a difficult task for council,” he said. “I think it’s a balance of maintaining Stratford’s debt, paying it off while still doing much-needed infrastructure work.”

At the current time, Stratford is carrying approximately $80.6 million in debt. Di Matteo said the comfort level in carrying an amount like that would depend on what the city’s reserves were and what its net position is.

“Most cities have assets that exceed their liabilities, which allows them to maintain a good credit rating and fund capital projects at the lowest possible rate,” he said. “Even with reserves, given the low interest rate environment, many cities find it more financially advantageous to borrow and spread payments out over 20, 30 years rather than pay up front and completely deplete reserves.”

Matthews looks at Stratford’s tax increase for 2022 – an increase of 7.6 per cent – and believes there is reason for concern if taken out of context.

“I do believe that looking at that one number all by itself doesn’t tell the entire story,” he said. “Is the debt being serviced, and hopefully there is little waste. I don’t know a great deal about the behind-the-scenes in municipal politics but I don’t think cities are not allowed to run deficits – they can borrow to spend on infrastructure and other projects. So with that, I do look at the long-term projects and ask, ‘are they really in the best interest for the residents of Stratford?’. At the same time, it’s a difficult pill to swallow, seeing our tax rate.”

Spending borrowed money on the needs – the sewers, roads, bridges and the like – is money spend wisely in Di Matteo’s eyes. Red flags come up for him when other types of projects hit the books.

“Recreational projects such as arenas or entertainment complexes tend to have lower returns than more traditional basic infrastructure and also can sometimes saddle you with additional operating costs,” he said.

With that in mind and an election on the not-too-distant horizon, Matthews said it will be interesting to see how this particular issue plays out in both the campaigning and the result of the voting.

“It will be up to the new mayor and council to decide how they want to handle the city’s debt load management, and it will be interesting to see what they want to start with,” he said. “Also, if there was some relief from the federal and provincial government that would be very helpful to the future councils and how they spend our tax dollars.”

This is the third part of the Stratford Times’ ‘Need To Know’ story series – a collection of stories defining and detailing issues, giving voters in Stratford a basis to form or refine their opinions ahead of the 2022 provincial and municipal elections. These stories are a-political in the sense that they do not endorse any particular candidate(s). They have been written only to help provide you the necessary data to come to an informed opinion.