Debt Servicing Pressures
The following blog is a summary of the section “Debt Servicing Pressures” from the fiscal gap report put together by City Administration. The full report can be found here:
https://pub-edmonton.escribemeetings.com/filestream.ashx?DocumentId=236515
Unlike other orders of government, the City does not borrow for operating expenditures, but as a financing tool for large capital projects.
There are three reasons why the City uses debt towards capital infrastructure program:
To distribute capital costs over time
To advance large projects that could not otherwise proceed
To leverage grant funding dollars
In 2023, tax-supported debt servicing was the third largest operating spending category, at 11% of total operating expenditures behind policing (14%) and transit (12%).
From 2004 to 2006, tax-supported debt servicing as a percentage of total operating expenditures was relatively low, in the 0.6% to 1.1% range. The share gradually increased from 2007 onward, reaching 10.9% in 2023.
Prolonged periods of funding capital on a cash basis resulted in very low debt servicing levels, but also a large backlog in the City’s capital program, including a significant infrastructure deficit.
As seen in the graph above, our city began reintegrating debt as a financing tool for major capital projects for both growth projects and renewal.
The City holds an AA credit rating from S&P, in 2019 the City’s lone credit rating agency downgraded the City’s credit rating from AA+ to AA. At that time, S&P noted that the downgrade “reflects Edmonton’s significant capital spending plans and corresponding growth in debt over the next several years.”
In 2022, the AA rating for the City of Edmonton was confirmed, with a stable outlook that “the City’s execution of the capital plan will not result in a significantly higher reliance on debt or internal resources relative to their current expectations.”
The growth in debt servicing’s budget share does not imply that debt servicing levels are too high. Rather, the historical avoidance of debt produced very low debt servicing levels, and the reintroduction of debt as a capital financing tool initiated the increase from 0.6% to 10.9%.
While the Debt Limit Regulation per the Municipal Government Act specific that the total debt limit is two times the revenue of the municipality, and the debt servicing limit is 0.35 times the revenue of the municipality, the City’s own Debt Management Fiscal Policy adopts a more conservative approach.
Updated in 2022, the following guidelines were put in for total debt servicing and tax-supported debt servicing:
Tax-supported debt servicing is limited to 18% of tax-supported net operating expenditures. Tax-supported debt servicing can exceed the 18% limit for the following reasons:
To provide City match-funding to leverage external funds, where the external funds are at a minimum one-third of total project costs.
Where the debt is self-supporting tax-guaranteed debt; or
Where the tax-supported debt is required for emergency purposes
Total debt servicing is allowed up to 21% of City revenues and includes debt servicing related to tax-support debt and self-liquidating debt.
Total debt servicing is permitted up to 26% of City revenues, but only for emergency purposes as defined in Policy C203D
The City is projected to reach 68% of its tax-supported debt servicing limit (18%) and 54% of its total debt servicing limit (21%) by the end of 2024. The City is projected to reach its peak debt servicing levels in 2028, at 89% of the tax-supported debt servicing limit.
Based on projected borrowing rates, the City has $800 million of unconstrained tax-supported borrowing capacity available before the tax-supported debt servicing limit is reached in 2028. After 2028, more debt room will become available.
As the City closes in on its tax-supported debt-servicing limit, an important consideration is the impact of incurring additional tax-supported debt between now and 2028.
Although some room is available, if the City were to reach the 18% limit, it would not longer be able to advance projects that are fully financed using tax-supported debt. There are two categories of projects that have historically been fully financed with tax-supported debt:
Large growth projects that have no project spending grant funding available from other orders of government (ex: recreation centres)
Large renewal projects that cannot be funded with unconstrained funding due to their large size and the impact it would have on the rest of the renewal program (ex: High Level Bridge Renewal)
Because debt financing is a critical part of advancing capital projects, the limitations and constraints on borrowing will continue to put pressure on the City’s capital program for the next four to five years. Limited debt servicing room limits the City’s capacity for advancing major capital projects.
