7/7/10

Governance: End Debt Growth

Lured by promises of two-thirds funding from the feds and province for infrastructure upgrades, Mississippi Mills has taken on loads of debt to finance its one-third share of new projects. How much debt is too much?

The accumulated Town debt at the end of 2009 was $5.4 million. That year, the Town paid $262,000 in interest and $368,000 in principal on that debt.

The 2010 budget added another $1.2 million to pay for further renovations to the Old Almonte Town Hall, upgrades to the Almonte arena, and the purchase of a new fire truck. The Town must borrow at least another $8.5 million over the next two years to finance the new sewage and septage treatment plant.

All that debt adds up to over $15 million. The interest payments alone, assuming a modest interest rate of 4%, would equal $600,000 annually.

Warning Signs

Each year, the Ministry of Municipal Affairs and Housing gathers financial data from municipalities and then issues a report, the Financial Indicator Review (FIR). The FIR for Mississippi Mills compares its financial status to 50 other small towns in Southern Ontario.

The FIR for 2008, when the Town's debt was $5.3 million, stated the total debt per household was $1086. This was almost double the average ($597) of the towns in the comparison, and over four times the median ($232). The FIR states an amount over $1000 is high risk.

The report also lists the Town's debt charges, as a percentage of operating expenditures, at 5.1%. The average is 3.2% and the median is 2.3%. However, the FIR considers 5.1% a moderate risk, and the combination of the two indicators puts the town's debt in the moderate risk category. This means that in 2008 the debt was considered manageable.

When the Town's debt load exceeds $15 million, that will just about triple the debt per household and increase annual debt payments. This could push Town debt load into the high risk category.

Real Estate Speculation

The Town's long-term financial philosophy is that growth fuelled by subdivisions (a projected 2000 new homes in 20 years) will provide new revenue and steady cash flow to pay down debt. This strategy could fall victim to macro-economic or regional economic problems beyond the Town's control.

The Town is speculating on continued real estate expansion. That comes with risks. For example, most people who move into Almonte's new subdivisions work in Ottawa. Imagine the impact when gasoline hits $3 a litre, as it surely will eventually. How attractive will those homes be then? Growth could end abruptly.

My position: Mississippi Mills Council must not take on additional long-term debt until it repays a significant portion of the accumulated debt. And, we must find ways to accelerate debt repayment (without raising taxes) as a hedge against a future cash crunch. One way to pay debt faster is to apply the hydro revenues to the debt principle. That would reduce interest costs and benefit all wards.

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