By Collin Gallant on March 21, 2017.
Medicine Hat could find itself under water if city debt continues to rise while oil and gas revenue slide, a city council member said following Monday’s council meeting.
Coun. Les Pearson has raised the issue often over several years that the city’s ability to borrow money for things like new buildings, road construction and utility projects is limited by provincial regulation.
That caps every city’s debt and carrying costs as a percentage of its revenue. While local officials said debt levels are manageable, Pearson says city revenue has drastically changed and has pushed the relative debt levels past his comfort level.
“It’s important to ask the question ‘when do we stop borrowing’,” said Pearson, noting the city is now at 47.9 per cent of its mandated debt limit.
“In my mind we’re there. We’re getting awfully close and I don’t want to see us go over (current levels) — 50 per cent is too much.”
On Monday, council approved $6.5 million in new financing that brings the city’s approved borrowing to just more than half of $1 billion, though only $306 million has actually been borrowed.
The council debate concluded with Pearson asking Mayor Ted Clugston about his take on debt.
Clugston said debt was mostly related to utility projects that recover costs, and $200 million in unused borrowing isn’t on the books.
“Most of the money is unlikely to be borrowed,” he said. “It’s a tale of two cities, I guess.”
“It’s still scary,” Pearson replied.
Provincial regulations state a city’s debt cannot exceed twice its annual revenue and annual debt-carrying costs cannot be greater than 35 per cent of that revenue.
Medicine Hat’s revenue however, is relatively high due to energy interests, but is much lower than it once was due to low energy prices
The current debt limit is $612 million with a servicing limit of $107 million.
For comparison, the debt limit last year (set against 2015 revenue) was $847 million, with a servicing limit of $148 million.
CAO Merete Heggelund said debt is being managed carefully, and as debt comes on, older debt is required.
“I understand … that we’re not in a terrible financial position,” said Pearson. “But oil and gas is bringing in less revenue to our city and our limits are based on revenue.
“If the new oil field doesn’t come in, or if there’s no change in oil and gas prices, does our number inflate even more?”
Over 12 months the city added about 10 per cent actual debt borrowed, which has grown from $271 million (or 32 per cent of the limit) in early 2016, to $304 million, or 49.7 per cent, today.
About 80 per cent relates to utility projects paid off through utility rates. The municipal portion, paid for via tax revenue and totalling $62.9 million at the end of 2016, is expected to drop to $51.6 million by the end of 2018.
The total debt servicing for the city (principal and interest) in 2017 will be $33.2 million, or 31 per cent of the servicing limit.
Commissioner Brian Mastel said debt levels are being monitored closely, and if needed, can be managed by timing projects.
Clugston said the city has been “strategic” about adding debt, especially in utility spending where a new policy aims to maximize capital during low interest rate period.
“We’re trying to mimic (private) industry, and industry borrows for major capital costs, like a new generator or power lines,” he said.
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