Edmonton does not have a debt problem

There has been a lot of talk about Edmonton’s debt recently, with some candidates going so far as to highlight debt as a key election issue. Debt is one of those topics that is easy to complain about but difficult to understand. Throwing out a billion-dollar number and proclaiming it bad is easy, understanding how we got to that number in the first place and how it fits into the broader context of the City’s financial situation takes more effort.

Here’s a look at Edmonton’s debt history for the last fifteen years:

So we can see that at the end of 2012 our city’s debt totaled $2.2 billion, which is 53.4% of our debt limit as outlined by provincial legislation. Is that high or low? Let’s make some comparisons. Here’s what Edmonton’s per capita debt looks like compared with Calgary:

So we’ve got less debt per person than Calgary does, and have had significantly less over the last decade. What about the rest of the province? Municipalities collectively owed about $7.7 billion at the end of 2011, with Calgary and Edmonton together accounting for 69% of that amount.

Here’s a comparison of the amount of available debt used by Calgary, Edmonton, and all other municipalities grouped together:

Notably Edmonton has used less of its available debt than Calgary, with the gap narrowing only in the last few years. It wasn’t until 2003 that we started to take on more debt. Why is that? And what is the impact?

Here’s what current Ward 6 candidate Scott McKeen wrote in the Edmonton Journal back in 2003:

And of all the cities in Canada, Edmonton stands out for being a skinflint among cheapskates. Our per capita debt is about one-fifth of Calgary’s and one-tenth of Vancouver’s.

As you’re maybe already aware, Edmonton’s hell-bent determination these past two decades to eliminate civic debt has created its own set of problems: neglected and decaying roads; inferior civic services; dated, second-class public facilities.

But we so loved the idea of getting out of debt that we ignored our mounting repair bills. We also ignored the fact that some other cities — Calgary and Vancouver, for example — were busy borrowing money to pave the way for growth.

The kind of debt Edmonton has taken on in recent years is “smart debt”, money for which the debt servicing costs are tied to revenue. It’s not debt for operating costs, it’s another financing tool the City can use to build the infrastructure we desperately need.

The 2007 Debt Management Fiscal Policy Review also discussed this history:

At the end of the 1970s, tremendous growth pressure resulted in a relaxation of the City’s debt limit, leading to a threefold increase in the City’s annual borrowing.  This resulted in Edmonton’s tax-supported debt being higher than most other major Canadian cities at that time.

The recession of the early 1980s and high interest rates necessitated a revised Policy.  Under this new debt policy, tax-supported debt issues were limited to $25 million per year.  Moreover, new tax-supported borrowing was prohibited after 1990. Subsequent to 1990, an exclusive pay-as-you-go approach was adopted for capital expenditures. Shorter borrowing terms for utility debt (self-liquidating) were also required.

In 2002, to address growing infrastructure issues and flat sources of financing, tax-supported debt was reintroduced through an amended Policy.  A five-year borrowing guideline called for an annual approval of $50 million in debt-financed projects for 2003-2007, totalling $250 million.  Adoption of the five year guideline has enabled the City to construct a number of much needed projects such as fire halls, a senior’s centre, libraries, parks, an interchange and other road works.

It also included this chart which shows the amount of debt Edmonton had outstanding throughout the 1980s and projected amounts through 2016 as permitted under higher borrowing limits:

The jump might look significant, but Edmonton’s outstanding debt is still well within both the provincial debt limits and the City’s own more strict debt limits. The City’s credit ratings remain very strong.

It’s true that Edmonton’s debt has grown significantly over the last decade. But it’s also true that taking on that debt has enabled us to invest in much-needed infrastructure to support our growing city. Candidates that don’t recognize this risk pursuing a policy that would take us back to the 1990s, reversing any progress we’ve made toward tackling our ever-growing infrastructure deficit. As the City says, “an appropriate and sustainable level of tax-supported debt is recognized as a legitimate part of any long-term capital financing plan.”

Note: Much of the data in this post came from the Government of Alberta. While figures are available for 1994-1996 at that site, I excluded them because the values for Edmonton were highly inconsistent with the rest of the data and were extremely different from the City of Edmonton’s published values for those years. I have submitted an inquiry about the validity of the data.