The City of Greater Sudbury’s debt load will soon total $355 million, with the city’s elected officials approving the addition of $103 million during tonight’s meeting.
Although city staff were cleared to secure the debt during tonight’s finance and administration committee meeting, city council’s decision was almost a foregone conclusion.
The expenditures were all previously approved, with the only question on the table being whether city staff should secure the debt now or later. It was a question that low interest rates of today, which are only expected to rise, made short work of.
The added debt load will include $43 million toward 2020 and 2021 roads and bridges program investments and $59.9 million toward the Pioneer Manor Bed Redevelopment project.
As finance chair and Ward 9 Coun. Deb McIntosh clarified during tonight’s meeting, city council unanimously approved a business case for Pioneer Manor on March 30, 2021, and unanimously approved the past few years’ capital budgets.
“We’ve already approved borrowing this money,” she said. “This is just about when we’re going to the bank to borrow it.”
As city staff indicated in both their report and during tonight’s meeting, now is the optimal time to secure the debt for these projects, with interest rates projected to begin rising.
In fact, they’ve already increased from the 3.08 per cent outlined in the city report presented to mayor and council members tonight, and now hover around the 3.5 per cent mark in reaction to global volatility, particularly the conflict in Ukraine.
Ward 1 Coun. Mark Signoretti, Ward 2 Coun. Michael Vagnini and Ward 3 Coun. Gerry Montpellier voted against the motion, which the balance of city council voted in favour of.
While Vagnini and Montpellier did not offer an explanation for their decision during tonight’s meeting, Signoretti expressed concern about whether the city was getting as low a rate as possible by going with National Bank and Bank of Montreal as the syndicate to complete the debt issuance.
City executive director of Finance, Assets and Fleet Ed Stankiewicz clarified that the issuance of debt greater than $100 assures a commission rate of 0.7 per cent, which is lower than they would secure by taking the debt out in smaller pieces and that all major banks award.
National Bank is the No. 1 municipal bond issuer in Canada and is the same organization the city went to when securing a debt of $200 million for various major projects in 2020.
Signoretti also indicated he was uncomfortable with tying the hands of the next city council by adding a 2023 levy requirement of approximately $1.9 million in debt servicing.
“To me, to do this ahead of the next council, I’m not comfortable with that,” he said. “I don’t think it’s appropriate.”
This year, the city is projected to spend approximately $24.3 million on debt servicing as a result of debt secured by city councils both current and past as far back as 2003. A full breakdown of where this debt comes from can be found on Page 43 of the city’s proposed 2022 budget document. This document excludes the amounts approved tonight.
The city has a debt policy wherein staff only recommend debt in cases where the cost of taking on debt is less than the cost of saving up money in a reserve fund and undertaking the project years down the road.
Recent months have seen various projects face cost overruns as a result of today’s volatile marketplace, spurred by various complications related to the COVID-19 pandemic.
A 14-unit affordable housing project on Sparks Street was also highlighted during tonight’s meeting, whose costs have jumped from its initially budgeted $5.3 million to $6.3 million, which city council approved.
The Pioneer Manor build saw an additional $4.75 million tacked onto its initially projected cost of $58.1 million last year as a result of various COVID-related overruns.
“The cost of doing that would be a lot higher than taking out debt, because the rates are low and the inflation would eat up the savings we’d have,” Stankiewicz said after tonight’s meeting.
These expenditures are in keeping with city council’s prioritization of infrastructure investments, Mayor Brian Bigger said.
“Every time we do a citizen survey, they rank very highly on the top of mind and the desire for citizens to see us upgrade those pipes and the roads, and so yes, we are definitely investing in roads and pipes,” he said.
“It makes sense to borrow when we see the construction costs increasing significantly, and yet we’re able to fix them now and avoid future costs with those roads and pipes, but also pay for it with lower interest rates than we’ll be seeing in the near future.”
By taking on an additional $103 million in debt, the city’s additional debt servicing cost will jump by approximately $4.5 million in 2023, including a 2023 levy requirement of approximately $1.9 million. Next year’s levy jump is to accommodate the roads and bridges program, with the debt servicing cost associated with Pioneer Manor to be expensed through the city’s capital fund.
This year’s projected debt repayment increase of $3 million will be funded from a city reserve.
These numbers all rely on the 3.08 per cent interest rate the city had initially anticipated, which has since jumped to around the 3.5 per cent mark.
“The geopolitical unrest we’ve had in Europe has subsided a bit and allowed the rate to go down,” Stankiewicz said, adding that the city is meeting with bankers on a daily basis to help determine the optimal time to secure the lowest-possible interest rate.
“Hopefully we go out before the Bank of Canada announces an interest rate hike – that might affect it as well – and they’re having their meeting on March 3.”
This isn’t the first time the city has jumped at the opportunity to secure debt when interest rates are low, with municipal debt increasing from $18.98 million in 2014 to approximately $251 million at the end of last year.
Last year, Standards & Poor’s Global Ratings reaffirmed the City of Greater Sudbury’s AA credit rating, at which time they also anticipated the city reaching a debt load of $327 million this year.
The discrepancy between this estimate and the city's latest projection of $355 million has to do with the fact the city's estimate does not include the principal portion of debt repayments, including sinking fund contributions, made throughout 2021 or 2022 whereas the S&P figure does. Further, the S&P forecast included an estimate of $98 million for the roads and bridges and Pioneer Manor debt, where it ended up being $103 due to cost overruns with the Pioneer Manor project.*
Rather than divide its debt issuance between 2022 and 2023, the project’s full anticipated debt load is now being issued as part of the lump sum of $103 million the city’s elected official agreed to tonight. Although this decision was made during a finance and administration committee meeting, it was promptly ratified during a special city council meeting that followed.
* This updated information is from city manager of Financial Planning and Budgeting Steve Facey, who on Wednesday revised a previous explanation for the discrepancy that was given to Sudbury.com shortly after Tuesday's meeting.
Tyler Clarke covers city hall and political affairs for Sudbury.com.