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Is Saskatoon mortgaging it’s future?

Former Mayor Henry Dayday thinks so.

Please accept this letter as a concern that a number of taxpayers have related to me as a former Mayor of the city. The city has been experiencing a boom period, but as in the past we know that times change.

The concern is due to the large amount of money that is being spent on new projects without a clear plan for financing and paying for these projects. To date, many of these projects have been built with financing that uses borrowed money, or financing that will reduce the revenues to the city for operations in the future, or will reduce the amount of money available through reserves.

The city, to date, needs $12M to service its present projected debt of $175M. The city has also agreed to use money from new developed areas of the city to finance capital projects such as the Clarence Street overpass, which is in addition to the one third that already goes from increased taxation in new development areas for capital projects. Some reserves that are in deficit have already received approval as exemptions from the normal requirement to be funded. There is also a conversion of one half million dollars that the Art Gallery received from assessment growth that goes as a capital contribution and will now be diverted to debt repayment. This means that the city now needs to find an additional one half million dollars to fund the already deficient reserves. In addition, City Council adopted a policy in March of 2008 that transfers annually a portion of the accumulated return on investment of approximately $5M from the land development activities to general revenue, which is in addition to the existing transfer of over $1M.

The city has now approved a proposed new police station that is estimated to cost the taxpayers $131M with $9M as a down payment in 2011. Each year, hence until 2016, the city will raise taxes by $850,000. By the year 2016, the taxpayers will have had a tax hike of approximately 5.8%. Then once the $7.5M repayment of the loan begins, the tax hike will be another 5.8% for a total tax increase of 11.6%. Furthermore, in 2016 the total cash paid is $38M leaving a loan of$93M. At a 7% interest rate, which appears to be the rate that is being paid on the present $175M debt, this requires that the taxpayer will need approximately $98M over 30 years for interest including the $131M as the principal cost for a total cost to the taxpayers of $229M. This is in addition to many other projects such as a new traffic bridge, the Mendel Art Gallery, the new transit headquarters and the relocation of the city yards, just to mention a few where there is no funding in place.

During my years as the Mayor, the administration and I negotiated an agreement with the Provincial Government to transfer City Hospital for a large tract of land in the north east sector of the city. This land proved to be very beneficial to the city and is meant to help the taxpayers by reducing tax increases in the future. Another objective is that the land sales are to be used not only for development, but also to replace the sold land through new land acquisitions. My concern is with the policy of March, 2008 where Council is drawing approximately $5M from the reserve annually. At this rate, that could deplete the reserve when sales slow down as well as not replace the land for future development whereby future taxpayers would not get the benefit that the land was intended to provide.

To my knowledge, the city has been required to have an actuarial review done on all its pension plans every three years. It is also my understanding that these reviews have been deferred. The taxpayers would be interested in knowing the status of these pension funds.

Every time the city changes a policy of transferring money from one account to another to finance a project and then does not replace the money or draws more money from an account, so that the account will not be sufficiently funded in the future, is another form of borrowing against the future.

The purpose of this letter is to answer the concerns that the taxpayers have raised. How do we pay for this spending and how will it impact on future tax increases?

To date, we have a borrowing limit of $400M with $175M already borrowed. We have a projected unfunded liability to the end of 2015 for reserves of $144M. We the have a number of expensive projects that are already started with funds committed such as the $131M police station, the $67M Art Gallery, the $26M traffic bridge and a $200M approved financing plan for a new transit headquarters and the relocation of the city yards without knowing the funding sources. These commitments already appear to exceed the borrowing limit.

In the past, major expenditures by the city, such as Credit Union Centre, had a financial plan in place as to how the project would be financed before we proceeded with any construction. As was the case with Credit Union Centre, the taxpayers voted twice as to the location of the facility and then on the approval of the $10M expenditure. If my memory serves me correctly, the cost for each household was approximately $15 annually for ten years. After ten years, City Council decided what to do with the extra $1M plus that was no longer required to fund the debt. To date, we have not seen any financial plans as to the impact all these major expenditures will have on the taxpayer in the future.

He has some recommendations as well and the art gallery will probably cost more than $90 million when all is said and done.  There are a couple of city councilors who are avid readers on my website, I would love to see their comments.   My own personal view is that I don’t know how much debt it too much debt for Saskatoon’s GDP but as Richard Florida points out, some of the most desirable cities to work and live in North America (Seattle, Portland, Austin) have higher level of services and taxes.  At the same time, I see the city wanting the services but not the taxes so we are increasing debt.  The question that I have never see answered is “how much debt is too much.”  Former Mayor Dayday says that we are at that point now.  Are we?

3 Comments

  1. Bert Lang says:

    In the first civic election after I moved to Saskatoon in 1999, the biggest issue was whether it was resonable to use ashphalt overlays on cement sidewalks. I thought I must have moved to a great city for the question even to have been asked. How things change!!

  2. Sean S. says:

    We are currently borrowing $175 million to pay for things today with tomorrow’s money. On the surface that isn’t necessarily a bad thing. However, what I see is a desire to focus on large/visible projects instead of those that truly serve as the backbone of our city.

    Before we invest in new civic buildings and destinations (which I agree are an integral part of city building), we need to get our infrastructure deficit under control. Roadways, sewers, water mains, sidewalks, etc.. are falling apart. One only has to walk through the streets of most pre-1980s neighbourhood to see the stark evidence. Yet there doesn’t seem to be any real plan to systematically tackle these items with long-term, stable, funding sources.

    The costs associated with addressing this problem are substantial, and they certainly don’t provide good photo-ops for decision makers – yet if we don’t start tackling them now they will only become worse and the already high cost will exponentially increase.

  3. peter says:

    A couple of points:

    1) Currently the city owes $175 M, if all of the proposed projects go through we would at that point owe $400M or more.

    2) At $400M, the city would be facing the second highest debt load in the count as calculated per household.

    There are some 84,000 households in the city of Saskatoon. $400M / 84,000 = $4,760 per household. Based on the article below, only Montreal has a higher debt per household.

    “The study, which was prepared for the Montreal Economics Institute, reports Toronto has long-term debt of $2,671 per household. That put Toronto third in a group of Canada’s eight largest cities behind Montreal ($8,274) and Calgary ($3,843).”
    http://www.thestar.com/article/281270

    So I would say that this debt load is indeed excessive.

    3) Why does Saskatoon need a $131 million police station? Is there no way this could be done for less money? The mayor claims that the current police station is too small but have we considered simply building an auxiliary building? This seems like a very excessive quantity of money and if it is to be spent I would rather see it spent on police services rather than a gleaming new building.

    4) Cities in the United States which ran up debts during the good times are now cutting back on essential services such as police officers and education. Assets are being sold off to pay down the debt or even just the deficit. I would hate to see Saskatoon be put into such a situation but that is exactly what we are facing if we allow ourselves to fall into this debt trap.

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