Threatened with a credit rating downgrade within the next three years that could result in higher lending costs and more burden on taxpayers, York Region is working to cut the amount it borrows over the next decade and beyond.
The region will likely approve its nearly $3 billion 2014 fiscal plan today, but much of the focus throughout this year’s budget process has been on reducing its debt.
York’s debt stands at about $2.26 billion and while credit rating agencies Moody’s Investor Service and Standard and Poor’s recently gave the region Aaa/AAA standing for the 13th consecutive year, the latter firm also revised its outlook from stable to negative, which could be a harbinger of a credit downgrade within the not-too-distant future.
Regional finance committee chairperson and Richmond Hill Mayor Dave Barrow described the move by S&P as a wake-up call.
“I think it’s a big deal,” he said. “As the issuer of the debt, we don’t want to be seen as more of a risk than others.”
Even before S&P revised its outlook, there had been fretting about the size of the region’s debt load. Much of the $2.26-billion figure, around 80 per cent of it, will be recovered through the collection of development charges, Mr. Barrow said, but the fact remains it’s a huge amount of money.
In any case, the region is taking steps to try to reduce the amount of debt it intends to take on, York treasury office director Ed Hankins explained.
To do that, it is employing a three-pronged approach that will reschedule some components of the region’s 10-year capital plan to ensure they’re ready when they are needed rather than years in advance, establish a debt-reduction reserve and put more money aside for asset replacement.
The re-aligning of the capital plan will see certain projects shifted into future 10-year plans, while the latter two initiatives will expand the reserve balances and cut the amount of tax levy-supported debt that will be required, Mr. Hankins said.
If adhered to, Mr. Hankins estimates the new approach will help the region avoid $1.5 billion in debt during the next decade.
York’s debt was projected to exceed $5 billion as of 2020 under its original long-term capital plan, but, as per the new strategy, the revised forecast anticipates the region’s debt won’t reach $4 billion.
At the same time, the region plans to boost its reserve balances from the current $1.6 billion to nearly $4.7 billion by 2023.
Interestingly, while the region’s debt is forecast to climb upward, it is expecting a year-end surplus of $19.1 million on the operating side of the ledger.
The current policy with respect to surpluses, dictates any funds left over from a given year’s operating budget be allotted to cover contingent liability reserves, such as working capital and insurance, then fuel-stabilization, if required, with the remainder assigned to the general capital reserve fund.
Under a proposed policy, future surpluses would be assigned to the aforementioned reserves, such as general capital and others, on an as-needed basis, with the rest being assigned to the new debt-reduction account.
The supplementary tax policy would also change to assign half of the funds collected through it to the asset replacement fund, with the remaining amount dedicated to debt reduction. The operating budget would also list a debt-reduction line item starting at $11.8 million, all to help establish the new fund.
In the past, some have suggested municipalities would do well to avoid taking on debt and, instead, compel the developers to pay the costs of servicing their projects up front.
Mr. Barrow and Mr. Hankins agree that can work on a relatively smaller scale, but isn’t practical at the regional level.
Some of the water and wastewater projects the region builds to serve new growth, for example, come with price tags in the hundreds of millions of dollars, if not more, Mr. Hankins said.
“You’re not building something that will support one subdivision, but hundreds of subdivisions over the next 20 to 30 years,” he said. “Obviously, the cost of doing that is much larger.”
A certain amount of debt is unavoidable in a municipal context and shouldn’t be cause for too much concern as long as there’s a sound plan in place to pay it back, Centre for Urban Research and Land Development professor and director David Amborski explained.
S&P’s revision of its outlook from stable to negative isn’t intended to set off the alarm bells, but it is meant to get the region’s attention.
“That’s an early warning,” he explained. “It’s to get the decisionmakers thinking about doing some things differently.”
It would be a different story if S&P were to downgrade the region’s credit rating, he added.
As it stands, provincial legislation caps what a municipality can borrow, with an annual repayment limit that states total financial obligations can’t exceed 25 per cent of revenue.
The region, however, has a special arrangement with the province that gives it an additional cost supplement over and above this limit, equating to 80 per cent of the average development charges collected over the previous three years.
Regardless, anything a municipality can do to mitigate debts, be it deferring some projects or exploring public-private partnerships, is a good thing, Mr. Amborski said.
Even so, an increase in development charges isn’t the solution to helping municipalities, such as York Region, diminish their debt, Mr. Amborski said. Ontario has among the highest development charges in the world, so if growth isn’t paying for growth here, it isn’t anywhere, he said.
“You can’t just treat development charges as a bottomless pit,” he said. “They do get passed on to the homeowner at the end of the day.”
Higher development charges also result in higher home prices which, in turn, can lead to a dearth of affordable housing, he added.
That being said, not all growth is created equal, Mr. Amborski continued.
Employment growth pays a relatively hefty development charge in most municipalities, but puts significantly less pressure on municipal services, especially in the recreation and leisure side of things, compared to residential construction, Mr. Amborski said. As a municipality, you want a healthy supply of residential growth coming in, as employers generally follow people, he said, but if a town, city or region is having to constantly approve new housing to pay down the debt accrued from servicing previous residential developments without adequate employment growth occurring that could certainly spell trouble.
“I would argue residential growth does pay for itself if you have employment growth along with it,” Mr. Amborski said. “You need that balance in the assessment between employment and residential.
“You don’t want to be a bedroom community.”