If serviced correctly, debt can be a good thing.
So says Nanaimo Coun. Gord Fuller, one of nine politicians who will consider building a philosophy around debt as part of core service review recommendations.
City council hasn’t decided which core review recommendations it will act on, but the report suggests the city has room to borrow.
It recommends councillors come up with a philosophy on the use of debt to pay for major capital and infrastructure projects.
The province caps annual interest and principal repayments for municipalities – called the liability servicing capacity – at 25 per cent of a municipality’s ongoing revenues. Consultants of the core services review pegged Nanaimo at 3.2 per cent in 2015.
The city’s chief financial officer, Victor Mema, has a different number. He says Nanaimo is at 12 per cent of its liability servicing cost. The benchmark set out by the province is for recurring revenues, or revenue that’s there all the time, whereas Mema said the 3.2 per cent is from total revenue which he does not consider a good basis for comparison. Mema agrees the city has a low level of debt, but in consideration of a philosophy, sees the question as being whether debt is a good thing.
Mema knows of municipalities with a philosophy of using debt for certain kinds of assets, and others that will not utilize debt no matter what. Unless people are being reckless, there’s no right or wrong, he said.
From a due diligence and “smart finance” perspective, Mema said debt is a good thing to use for long-term assets. If the city paid cash for everything, it means taxpayers today must pay 100 per cent, but they might not be here tomorrow to use the asset. Debt spreads the cost over generations.
On the other side, debt is a fixed cost, which means flexibility is lost, he said, adding money is earmarked for debt payments, so if the city runs into an issue where the community is having difficulties raising property taxes, debt service has to be paid.
Last year the total outstanding debt was $48 million, amounting to $530 per capita. The number left the city with debt servicing capacity of $35 million, according to Mema.
“Council and the community will have to, at a certain point, come to a decision as to whether they want to increase our debt; that means utilize more of the debt capacity that we have, or less, and that’s a philosophy only council can make,” he said.
Fuller said if debt is serviced correctly it can be a good thing.
“Right now I believe our debt is well within control, it’s actually below the average,” he said. “If we had to take on more debt, depending on what it is, I would be for it.”
Coun. Ian Thorpe, referring to the core services report, said the city finances are healthy and there’s room to increase debt if council chooses. People think debt is automatically a bad thing, but sometimes it can be good, Thorpe said, adding that borrowing when interest rates are low to finance a large project or initiative is something he would be in favour of.
The right answer is a mix of debt and other funding, according to MNP’s Vancouver Island regional assurance partner Cory Vanderhorst, who said if there’s a municipality in a large debt position it is going to struggle and taxpayers are paying a lot of interest on debt, but without debt it means the municipality hasn’t done projects like new recreation centres or sewer and water system upgrades necessary for the community.
What the public should consider is debt means putting the burden on future taxpayers, he said.
“The real choice is a balancing act,” he said. “Do you want to pay a little bit more taxes now, or maybe a little bit more in the future, and there’s a bit on the future taxpayers, that their taxes might go up to pay for some of these big projects?”