City to review debt strategy as interest rates fall

By Collin Gallant on October 29, 2024.

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The City of Medicine Hat cancelled borrowing to side step high interest rates over the last two years, but will now re-evaluate how it uses cash for capital spending now that lending rates are falling.

That caused city debt levels to fall this year as it makes payments to retire old debt and hasn’t added new debentures, but national lending rates have fallen since the spring and the province has promised to discount municipal lending next year.

“It was a deliberate decision based on the high interest rates that we were seeing,” finance manager Lola Barta told the Oct. 23 meeting of council’s audit committee.

“We will review that this year about when it’s appropriate.”

The city, which is regulated to only borrow money on fixed terms for the entire term, decided to use reserve cash in place of a December 2023 debenture tranche worth $16 million.

Treasurer Ryan Wright says borrowing the same amount today – at rates about 0.85 per cent lower than last year – would cost $2 million to $3 million less in total interest paid over typical 10- to 20-year terms.

But, with returns from the city’s investment holdings moving above the interest rate it pays on new debt, the equation could tip in the other direction.

“We’re prudently managing liquidity versus the cost of borrowing, and looking at a number of options,” said Wright, specifically including the possibility of private lending markets.

Corporate serves managing director Dennis Egert says the province has promised to remove a premium on new debt arranged by the Alberta Treasury Board in the 2024-25 time frame.

That could result in rates lower by 0.5 to 0.7 points than otherwise. The 20-year fixed rate from the province was 4.96 per cent on Oct. 15, compared to 5.82 per cent one year earlier.

The Bank of Canada lending rate has fallen 1 percentage point over three adjustments since June, which should flow through to lower rates.

Committee chair Coun. Darren Hirsch says one point, compounded over time, adds up to a lot, whether it involves millions for capital construction projects, or a household mortgage.

“A lot of people are sighing with relief at the (interest rate) decisions,” said Hirsch.

Currently $423 million in low-term debt is owed by the city charged at a weighted average of 3.48 per cent, though rates range from 1.79 to 6.25 per cent. Interest charges are stated at $13 million per year.

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