Provincial Lending Rates to Municipalities
IT IS THEREFORE RESOLVED THAT Alberta Municipalities advocate to the Ministry of Treasury Board and Finance to implement measures to restore the policy that permitted municipalities to obtain loans with lower interest rates, as was provided prior to 2021, to allow for improved financial flexibility to encourage municipalities to fund capital projects and save taxpayer dollars.
WHEREAS Albertan municipalities must build capital projects to support future growth and ensure their long-term sustainability;
WHEREAS it is difficult for Alberta municipalities to fund the building of capital projects using funds generated by property taxes alone;
WHEREAS the Government of Alberta provides loans to municipalities to fund the building of capital projects;
WHEREAS in 2021, the Government of Alberta announced that any new loans to municipalities would henceforth be charged a higher interest rate similar to what a large City could obtain in the bond market, as opposed to the lower rate available to the Government itself;
WHEREAS the Government of Alberta communicated that the new spread between the province’s borrowing rate and the rate charged to municipalities is an approximate increase of 0.5%;
WHEREAS in addition to the increase of interest rates imposed by the Government of Alberta on municipalities, the shift in national and global financial markets since 2021 has caused a massive increase in debt servicing costs municipalities must pay in comparison to debt servicing costs paid prior to 2021;
WHEREAS the increase in debt servicing costs has created greater strains on municipal finances, forcing municipalities to make difficult financial decisions in order to provide well-managed, accountable local government to Albertans;
WHEREAS the burden of increased debt servicing costs has resulted in Albertan property owners paying more to fund the building of community infrastructure; and
WHEREAS the Government of Alberta’s fiscal standing has significantly improved since 2021, with the Government posting a budgetary surplus of $10.4 billion in the 2022-2023 fiscal year in addition to a projected surplus of $2.4 billion for the 2023-2024 fiscal year.
Albertan municipalities finance the building of capital infrastructure projects in their jurisdictions that are critical for long-term community sustainability and growth. Such capital projects, including the construction of roads, bridges and utilities, are required to support growth essential to Alberta’s long-term economic prosperity.
Although grants and provincial funding such as the Local Government Fiscal Framework (LGFF) are provided by the Province, such funding is often inadequate to cover the entire cost of capital projects. Consequently, municipalities must utilize other fiscal tools to fund the construction of capital infrastructure projects to avoid placing undue burdens on citizens through the raising of property taxes or the reduction of essential services. One such tool is obtaining loans issued to municipalities by the Government of Alberta.
Loans are issued to municipalities with interest rates calculated by the Province, based on current market conditions. Municipalities are required to pay the principal of the loan back to the province, in addition to interest based on the type of loan and payment term. For example, on a 20-year term “Blended Amortization” loan of $10,000,000.00 borrowed on April 15, 2023 (4.93% interest), municipalities will have paid in total, at the end of the term:
• Principle: $10,000,000.00
• Interest: $5,840,712.80
• Total: $15,840,712.80
In 2022, the City of St. Albert needed to obtain the following loans to finance three capital projects critical to economic growth and sustainable development of essential infrastructure. The following loan terms and interest rates were obtained:
• Ray Gibbon Drive Construction:
• $15,000,000.00 – 20 Year Term – 4.78% Interest
• North St. Albert Trail Construction
• $7,000,000.00 – 20 Year Term – 4.78% Interest
• Community Amenities Site & Lakeview Business District (RR260):
• $4,000,000.00 – 3 Year Term – 4.77% Interest
At the end of payment terms for these loans, St. Albert taxpayers will have paid $12.75 million in interest payments. Had the Government of Alberta restored the previous policy of offering loans with interest rates that are available to the government itself – a ~0.5% reduction in the above-listed interest rates – St. Albert taxpayers would pay $11.268 million in interest at the end of the payment term, equating to a savings of over $1.48 million. These savings will instead be received by the Government of Alberta as a revenue stream.
With higher interest rates set to only increase the burden on taxpayers if the City borrows more money from the province to fund new capital projects, St. Albert’s City Council is forced to consider deferring the approval of new capital projects, despite the economic growth and development such projects would generate.
Across Alberta, municipalities are faced with making similar decisions regarding approvals of capital projects. Consequently, certain projects may not receive municipal approval – not because these projects wouldn’t support the growth of new developments and availability of more local jobs for Albertans, but because related debt servicing costs would risk the ability of municipalities to continue to fund essential services without imposing further tax increases on Albertans.
Given that the Government of Alberta posted a budgetary surplus of $10.4 billion in the 2022-2023 fiscal year in addition to a projected surplus of $2.4 billion for the 2023-2024 fiscal year, the Province is in a position where the charging of higher interest rates to municipalities is unnecessary for its own fiscal health, and instead levies increased pressure on municipalities who rely on loans to fund capital projects.
Should the Ministry of Treasury Board and Finance take measures to restore the policy of issuing loans with interest rates similar to those available to the Province, more capital projects may receive municipal approval; more infrastructure will be built, more local jobs will be created, taxpayer dollars will be saved, and Albertans will see increased growth and economic prosperity in their communities.