Finance officials tell told city council this week that reserve funds could be depleted within a few years if something isn't done to offset withdrawals.--NEWS FILE PHOTO
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The City of Medicine Hat isn’t as rich as most people think, top administrators told council Monday, especially with the likelihood of depressed power profits on the horizon.
Finance director Lola Barta said without new dividends to replenish an operating reserve – which currently fills an operating shortfall – and a capital reserve that are being drawn down, the city’s two main reserves could be depleted in the early 2030s.
City financial forecasters now expect an average energy dividend of $13 million annually over the next seven years, compared to an average draw of $40 million per year in capital growth and repair work, along with $15 million in additional cash used to fill an operating budget deficit.
“If this continues, all the reserves would be depleted with the exception of the Medicine Hat Endowment Fund,” said Barta. “It would not be sustainable in the long term.”
The overview was part of a council committee of the whole session held Monday – one in a series of extra meetings this spring to update council on major issues as the end of the term approaches this fall.
Also on the agenda this week were a new land and real estate strategy and a report on the city’s economic development efforts.
No action arises out of the meetings, but council is considering using reserve cash to pay for both a partnership grant with the province and Medicine Hat Stampede to pay for a grandstand redevelopment between $20 million and $40 million.
It’s also made a priority to get work started on a south-side recreation centre that could cost $100 million when construction begins during the next council term.
Coun. Darren Hirsch said the stress on the city’s finances should be well known, but reserve accounts are approaching $700 million
“It’s illustrative and good for people out there and council to understand,” said Hirsch, agreeing staff’s assessment that reserves cushion year-to-year changes in business conditions without requesting larger tax increases.
“It’s like (using) a yo-yo while walking up steps,” he said. “We’re doing OK, but it’s up and down from year to year.”
Coun. Robert Dumanowski, said the long-term picture involves long-term projections, but uncertain commodity markets have changed how councils view the business units.
Elected officials can no longer shift cash to projects with the expectation that new business revenue will replace it, he said.
“After these presentations, I usually feel good, but I’m also scratching my chin,” he said. “If it continues, it changes the landscape … We have to plan for lean years, and hope for better years.”
The next several years will be challenging, said Barta, with “great uncertainty.”
“In 2021 to 2023 we have large amounts of free cash flow due to high electric commodity prices, however the forecasts for 2024 to 2031 are expected to decline,” she said.
Each year’s deposits reflect business results and profits in the previous year. With $134-million dividend at the end of 2023, reserve balances grew in 2024.
But, that fell to just $12 million last year, which will be divided this financial year between two main funds that could be drawn down by $55 million in 2025.
The operating reserve balance was $32 million at the end of 2023, and grew by year-end after a $19.7-million deposit and a $16.2-million deduction. That fund is the source of $11 million per year in payments to offset taxes and cover an operating budget shortfall.
“If $15 million is withdrawn annually, and we don’t have sufficient funds going back in, it would only last two or three years,” said Barta.
For the capital reserve however, a $19.4-million deposit in 2024 only partly covers a $39.6-million withdraw for ongoing projects. That left the fund about $18 million lower at $208.5 million.
This month, city council endorsed holding a public meeting required ahead of moving to a municipally controlled corporation for power plant and power and gas distribution companies. Administrators and outside consultants state it would drive better results and potentially more stable dividends.
Three other funds operate on a somewhat different basis.
The Medicine Hat Endowment, formerly known as the Heritage Savings Reserve, provides about $7 million per year, once inflation is factored in to protect the principal, growth projects and tax subsidy.
An abandonment obligations reserve was set up last year with a $75-million transfer to stand against estimated liabilities of $180 million, not including the eventual decommissioning of the river valley power plant.
“It’s primarily related to out oil and gas assets, and only 55 per cent of the amount is currently funded, so it needs to continue to grow in order to pay for future asset retirement obligations,” said Barta.
That fund sits at $76.3 million after income in 2024, as does another $75-million fund earmarked for Energy Transition Work, which could be tapped this year, likely if the Saamis Solar project is approved.
The city currently has $635 million in liabilities, including $363 million in long-term debt.
