Should you be concerned about an increasing amount of municipal debt in your city?
Precedent has been set in the US for municipal bankruptcy
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at email@example.com
by Max Fawcett
On July 18, 2013, the City of Detroit filed for Chapter 9 bankruptcy. In the process, it became the largest city by both population (706,000 and falling) and total debt (an estimated $20 billion) to ever go belly up. And while Canada’s cities aren’t in any danger of suffering the same fate any time soon, that hasn’t stopped people in both Calgary and Edmonton from raising the red flag about rising levels of government borrowing. But are those concerns justified? Should citizens of Alberta’s two biggest cities be worried about the level of debt their municipal governments are carrying on their books?
By the end of 2013, Edmonton’s municipal debt will be just shy of $3 billion, or approximately $3,500 for every man, woman and child. And while that might not sound like an insurmountable amount, it’s a heck of a lot more than it used to be – back in 2001, it was at just $411 million. And the 2013 figure doesn’t include the more than $500 million that will be borrowed to build the new arena district. Edmonton’s not alone, mind you. Calgary’s $3.2-billion pile of debt amounts to more than 40 per cent of total municipal debt in the province, a figure that has itself rocketed up from $2.5 billion in 2004 to $7.2 billion 2010.
That borrowing might seem fairly harmless in the here-and-now, with interest rates at record lows and a need to accommodate the growing populations of Alberta’s big cities. But it also represents a tax on future generations, borrowing to which they can’t consent and will be solely responsible for paying off. And while the real value of that burden will be whittled away if inflation remains in the range that central banks around the world want it to stay, if we fall into a deflationary cycle – hardly an unrealistic possibility – the value of that debt will only increase, and with it our (or, perhaps, their) inability to pay it back.
Despite what some might say, debt isn’t something that’s measured in morality. There is good debt and bad debt, just as there are good investments and bad investments. Rather than focusing on the existence of debt, we need to pay attention to where and how it’s being spent. And make no mistake: there’s still room to spend a lot more. In 2011, municipalities in Alberta had borrowed 19 per cent of what provincial legislation would allow them to. And with rates at rock-bottom levels, debt is about as cheap as it will ever be. Rather than fretting about the debt they have, cities ought to be exploring the possibility of issuing some long-maturity bonds and invest in the kind of infrastructure projects that will allow the city to continue to grow – grow its population, its economy and the tax base that comes from both.
Yes, there are candidates running for office who have suggested that, like families, cities must live within their means. But, of course, cities aren’t families, and so suggesting that they behave like them is a bit like asking your horse to behave more like a Porsche. Cities have much longer timelines, both in terms of the nature of their obligations and the shape of their aspirations. Debt is a tool that, used properly, can help fulfill both.
The Results Are In
Last month in this space we asked you if you thought the notion of “peak oil” was a thing of the past.