1. Considering Tax-Supported Debt May 10, 2004 Presentation to City Council Roger Rosychuk Corporate Services Department

2. Debt Strategy May 10, 20042 2 Today’s Presentation Our current infrastructure and infrastructure financing situation How does borrowing fit in today? Two-year DMFP review Impact of three scenarios What changes do we want to make? –Do we continue to use borrowing? –How can we use tax-supported debt as a strategic tool for urban sustainability?

3. Debt Strategy May 10, 20043 3 Our Current Situation

4. Debt Strategy May 10, 20044 4 Our Infrastructure Today Cities are infrastructure intensive

5. Debt Strategy May 10, 20045 5 Our Infrastructure Gap Rehabilitation $1.3 billion 20% SLRT $0.5 billion 8% Growth $1.7 billion 27% Unfunded capital $3.5 billion Funded capital $2.9 billion Rehabilitation $1.8 billion 28% Growth $1.1 billion 17%

6. Debt Strategy May 10, 20046 6 Upcoming Rehabilitation Issues Risk Assessment Complete Classification Good & Very Good Fair Poor & Critical

7. Debt Strategy May 10, 20047 7 $110 million/yr Average Current Condition $30 million/yr Risk Assessment on Infrastructure Condition ($15 of 18 Billion) Local Neighborhood Infrastructure Recreational and Small Buildings

8. Debt Strategy May 10, 20048 8 Infrastructure Financing External Funding (38%) Internal Funding (62%) Revenues are flat once Infrastructure program done 2004-2013 LRFP ($millions)

9. Debt Strategy May 10, 20049 9 Infrastructure Financing Cumulative Impact $151 M $128 M $279 M $279 million loss in spending power over ten years if sources do not increase 2004-2013 LRFP (Inflation & Population)

10. Debt Strategy May 10, 200410 10 Potential External Opportunities Federal and provincial funding changes are on the horizon (GST, infrastructure program, federal fuel tax, new deal with the province) Roadway assessment, discussions regarding developer levies Partnerships, P3s

11. Debt Strategy May 10, 200411 11 Potential Internal Opportunities Increase pay-as-you-go by inflation and population to fund rehabilitation needs in the long term Use tax-supported debt strategically Both opportunities require sustainable revenue increases

12. Debt Strategy May 10, 200412 12 Key Funding Observations External Opportunities - Most opportunities will take time to negotiate Internal Opportunities - Pay-as- you-go and debt require ongoing sustainable revenue source Each source alone is not enough to fix the infrastructure gap... Multiple sources are needed

13. Debt Strategy May 10, 200413 13 Our Borrowing Situation Today

14. Debt Strategy May 10, 200414 14 Long-term Debt: A Misconception All government debt is the same But … federal and provincial debt has historically come from annual operating deficits Municipal debt can only be for an investment in capital infrastructure

15. Debt Strategy May 10, 200415 15 What Borrowing Includes Self liquidating (utility) debt Local improvements Other (external agencies, capital leases) Tax-supported debt

16. Debt Strategy May 10, 200416 16 Debt Management Fiscal Policy Considerations Council approved amendments in Oct. 2002 Key changes: –Allows consideration of tax-supported debt –Establishes debt management thresholds –New debt servicing costs must be funded from new sustainable revenues –As debt servicing costs drop off, PAYG increases for capital projects. –Establishes general project guidelines Two-year DMFP review

17. Debt Strategy May 10, 200417 17 Tax-Supported Borrowing Direction Borrowing Guidelines (from 2003 budget): –up to $50 million annually approved by Council ($250 million over five years) –funded by one per cent annual tax increase $100 million borrowed to date

18. Debt Strategy May 10, 200418 18 Borrowing Considerations Maximum provincial limits: –Total debt - 2x annual revenues, less transfers –Debt servicing costs - no more than 1/3 of annual revenue DMFP thresholds for debt servicing costs: –Total debt - less than 10% of revenues –Tax-supported debt - less than 6.5% of tax-supported revenues Our willingness to pay the annual debt servicing costs - requires sustainable revenues

19. Debt Strategy May 10, 200419 19 Two-year DMFP Review

20. Debt Strategy May 10, 200420 20 Two-year DMFP Review Did the DMFP meet its objectives? Yes - additional tool generating $100M for infrastructure issues What issues have come up? Issues more procedural than policy-related What changes are we looking at?

21. Debt Strategy May 10, 200421 21 Three Borrowing Scenarios

22. Debt Strategy May 10, 200422 22 Debt Use Strategies to Consider For major hot spots until long term financing solution in place Based on project merits (current approach) Support strategic plans Larger growth projects so that those who benefit should also pay Large high impact (city- transforming) project (e.g. SLRT)

23. Debt Strategy May 10, 200423 23 Three Borrowing Scenarios Scenario One, Limited Debt - $150 million of additional tax supported borrowing over three years (status quo); stop in 2007 Scenario Two, Managed Debt - as above with tax-supported borrowing continuing at $50 million annually; no stop date subject to interest rates Scenario Three, Aggressive Debt - Scenario Two, plus borrowing to fund LRT to Heritage

24. Debt Strategy May 10, 200424 24 City’s Debt Position - Three Scenarios Borrowing $50 million per year

25. Debt Strategy May 10, 200425 25 City’s Debt Servicing Costs - 3 Scenarios Debt servicing

26. Debt Strategy May 10, 200426 26 Scenario 1, Limited Debt Infrastructure Impact: –$150 million (4%) of $3.5 billion gap eliminated –Strategy - Deal with hot spots (growth and/or rehab) Financial Impact: –debt servicing increase of $5 million annually for three years (like 1% tax increase annually for three years)

27. Debt Strategy May 10, 200427 27 Scenario 2, Managed Debt - $50 million borrowed annually Infrastructure Impact: –$.5 billion (14%) of $3.5 billion gap eliminated over 10 yrs –Strategy: Capacity to fund strategic plans (growth or rehab) Can use debt to deal with hotspots until ongoing revenue source in place (bridging), or... Implement high impact City building projects

28. Debt Strategy May 10, 200428 28 Scenario 2, cont’d. Financial Impact: –Debt servicing below 10% threshold –Debt servicing increase of $5 million annually for 10 years (like 1% annual tax increase)

29. Debt Strategy May 10, 200429 29 Scenario Three, Aggressive Debt $50 million annually plus LRT Infrastructure Impact: –$1.0 billion (28%) of $3.5 billion gap eliminated over 10 years –Strategy: Capacity to fund strategic plans (growth or rehab) Can use debt to deal with hotspots until ongoing revenue source in place (bridging), and... Implement high impact City building projects

30. Debt Strategy May 10, 200430 30 Scenario Three, cont’d. Financial Impact: –Debt servicing costs will approach threshold in future –Debt servicing increase of $5 million annually; $34 million base increase phased in over construction period for SLRT borrowing

31. Debt Strategy May 10, 200431 31 Should we continue to use tax-supported borrowing?

32. Debt Strategy May 10, 200432 32 Why Use Debt? Can address infrastructure gap more quickly Spreads cost over a longer period Those who benefit in future will also pay Borrowing works well for infrastructure expenditures, when debt tolerance is factored in Today’s rates are attractive - ACFA 15-year term - 4.6%, 25 years - 5.1%

33. Debt Strategy May 10, 200433 33 Administration’s Recommendation That tax-supported debt continue to be used as a tool to address infrastructure issues

34. Debt Strategy May 10, 200434 34 How can we use tax- supported debt as a strategic tool for urban sustainability?

35. Debt Strategy May 10, 200435 35 Administration’s Recommendations That a recommended project plan for Scenario One, Limited Debt be brought forward for approval as part of the 2005 Budget That a strategy to close the infrastructure gap using Scenario Two, Managed Debt in combination with other financing sources be developed and brought back for Council approval by June 2005

36. Debt Strategy May 10, 200436 36 Funding the Gap

37. Debt Strategy May 10, 200437 37 Background Material

38. Debt Strategy May 10, 200438 38 Project Selection Criteria Included in the DMFP Total project cost of $10 million or greater Expected asset life more than 15 years A valid business case: –project in line with established priorities –project demonstrates benefits: minimized costs, risk management, community impact and leveraged partnership funding –project has economic development and quality of life benefits to the community

39. Debt Strategy May 10, 200439 39 Did the DMFP meet objectives? Objective - Give Council an additional tool to deal with infrastructure issues Outcome - $100 million in projects approved: –Neighborhoods (roads and parks) - $20.4 m –Growth in arterial roads - $19.7 m –Interchanges including 23 Ave drainage - $32.8 m –Facilities (police & fire stations, Hall D) - $27.1 m

40. Debt Strategy May 10, 200440 40 Issues…what needs to be done? When should Council be approving tax- supported debt projects? Which projects should we select? Projects over $50 M - how to accommodate? Administrative issues - fix through process Total project versus annual cash flow approvals - no change needed; decision made once