February 21st, 2024

City debt scenario eased by spiked revenue

By COLLIN GALLANT on October 12, 2023.

Recently released figures show good news for city debt.--NEWS FILE PHOTO

cgallant@medicinehatnews.com@CollinGallant

City debt has dropped slightly, but its size in relation to a provincially mandated cap has shrunk dramatically.

That is the result of how the limit is calculated and booming revenue in the city’s power company.

The city’s own internal threshold for managing debt has been to stay below 65 to 70 per cent of the limit, which is set as twice annual revenue.

New analysis this week states the level will be just 38 per cent by year end, down from 44 per cent last year.

The recent high was 60 per cent in 2020, when the city’s actual debt was $20 million less.

The reason, explained staff and elected officials, is since the limit is elastic and set at twice annual revenue, which changes from year to year.

Therefore, major increases in power sales last year push the debt capacity much higher.

“Volatile revenues impact us double – any ebb or flow really has a multiplying effect,” audit committee chair Coun. Darren Hirsch said Tuesday when mid-year financial statements were presented.

They state that at Aug. 31 the city’s long-term debt totalled $403.7 million in actual borrowings. Another $50 million is tied up in undrawn letters of credit to energy regulators and a smaller amounts in loan guarantees and day-to-day operations.

The total number, $451 million, compares to a limit for 2023 of nearly $1.19 billion – a figure that grew by $150 million thanks to a $75-million increase in revenue last year (largely from power sales) compared to 2021.

The province sets a maximum debt limit of municipalities in the province as twice the annual revenue of the city, town or county.

The separate “debt-servicing” limit is no more than 35 per cent of bare revenue in a given year.

Medicine Hat paid $41.7 million to cover principal and interest payments in 2022, setting it at about 23 per cent of its limit that year.

This year, the finance department expects to remain at or below 20 per cent of the limit for the year.

About 90 per cent of the city’s current $400 million in long-term debt is related to municipal capital projects with the remainder utility related.

Amounts are attached to fixed interest rates ranging from 1.79 to 6.25 per cent, but averaging 3.48 per cent.

Investment returns

Medicine Hat’s reserve funds earned an overall rate of return of 5.57 per cent through the first eight months of the year, which could put it on track to beat inflation and meet a benchmark goal in 2023.

One of the best performing portions of the diversified portfolio is short-term cash managed internally by city finance officials, and which is buoyed by higher interest rates.

In some fortunate timing, the city had planned to redistribute much of its working capital pool into perceived higher-yield investments over the last year and had been stockpiling cash for that purpose.

That $223 million earned 3.6 per cent so far in 2023 in the mostly passively managed fund.

“It’s not a bad time to have cash on hand,” said Hirsch. “Which is just amazing compared to a few years ago.”

While the overall holdings returned 5.57 per cent, that doesn’t include a foreign exchange loss that could reduce earnings by 0.71 per cent. The global benchmark for the funds that lay in 11 investment classes is 6.71 per cent.

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