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Thread: 1970s debt imbalance workout

  1. #1

    Default 1970s debt imbalance workout

    Now that we have the benefit of 20/20 hindsight, can anyone determine roughly how long would have taken the City of Edmonton to work its way out of the debt imbalance caused by its accumulated debt that it took on in the 1970s and early 1980s?

    Is there a rule of thumb for municipal borrowing beyond just matching debt terms to project life. As in, this piece of infrastructure will last 40 years so we'll issue 40 year debt.

    i.e. Was the city's debt sustainable in the low growth economy of the 1990s or was it still a drag?
    If it was still a drag, how much longer would it have taken had rising oil prices not come to the rescue?

    What I'm getting at is; that 'excess'* debt is easy and quick to accumulate but often slow and cumbersome to extinguish. It takes years, so cities (think Detroit, NY...) have to think financially out into the future quite a few years not just on a project by project basis but in terms of matching revenue streams.

    I'm guessing that in looking at cost/benefits of projects, their revenue streams look at averages and so indicate that a facility will generate an average sustaining cash flow over its life and as a result the project is deemed sustainable when in fact, during recessions cash flows may dip substantially.

    * I'm thinking excess debt would be debt that seems well worth taking on in good times but significant threatens operating and solvency in average times. (Average times are rare though.)

  2. #2
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    ^The fact that the City maintains a stellar credit rating I would believe demonstrates that it has been able to repay all outstanding debts as required. It also is not anywhere near its debt ceiling.

  3. #3

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    ^ So a repeat of city's financial / operational tactics through the 1980s and 1990s would be desirable? (Not that we are anywhere near the same 1980s situation but what lessons have we learned to guide us through the next recession?)

    Nice graph here of the Calgary situation. It exceeded its debt limit. In the second link you'll note the idiocy of the Edmonton situation.


    Page 9
    http://www.ucalgary.ca/iaprfiles/pol...r-pb-06003.pdf



    A CofC paper on Edmonton and smart debt...
    Excerpt:
    "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. "...
    "In 2002, to address growing infrastructure issues and flat sources of financing, tax- supported debt was reintroduced through an amended Policy. "...

    http://www.edmontonchamber.com/exter...0200:cool:.pdf



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    Last edited by KC; 28-12-2013 at 07:44 PM.

  4. #4

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    It's pretty easy to rationalize taking on a lot of debt when times are booming.

    Eg.
    China $3 trillion local government debt stirs alarm | Reuters
    http://in.reuters.com/article/2013/1...9BT09M20131230

  5. #5

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    One issue we need to consider is that society, in general, looks ahead not back. These exercises of what have been delivered against promises of the past, is great but most people will not even think about it. When average-Joe votes, it mainly looks at the promises being made not what has actually been achieved, IMO.

    I read a number of interesting analysis by major investment banks in the run up to London Summer Olympics 2012, of what added-value the organization of such major event had on the local economy in previous Olympics. See for instance page 25 of this Goldman Sachs analysis: (Page 25: Sydney 2000: “The Best Olympic Games Ever.” Was It Worth It?)

    http://www.goldmansachs.com/our-thin...economics-.pdf

    But as mentioned, no one really remembers the promises after the fact.

  6. #6

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    ^ on one hand people pasha debt but then they go out and enjoy a lot of legacy infruatucture projects that were built 30 40 years ago and Were only "paid off" very recently.

    So silly..... So myopic in my opinion
    "Do you give people who already use transit a better service, or do you build it where they don't use it in the hopes they might start to use it?" Nenshi

  7. #7

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    ^ valid point, but i think KC's question had to do with how that goal is achieved. A city can be reckless or prudent in how to fund and deliver its infra (and other) projects. Ultimately tax payers have to pay for it. My point was unless things go spectacularly wrong, these thought don't occupy our minds for long.

  8. #8

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    And it's only myopic if you get to blissfully ride out any subsequent problems (loss of contracts, jobs, property values, historical buildings, children's programs, etc.) when a city swings from one extreme to another and slashes spending and infrastructure repair and maintenance spending in order to pay down previously 'sustainable' debt.


    Just yesterday I heard the mayor say that snow removal budgeting is based on the typical winter and because this winter is more costly, funding will have to be grabbed from other programs. So, what is a typical winter and how often in say the past 10 or 20 years have we actually had a typical winter?
    Last edited by KC; 01-01-2014 at 07:26 AM.

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    We also have to understand that municipalities can only operate within the means granted by the Province through law. The finance departments in Edmonton and Calgary have thought of various new ways to raise and manage new revenue to help pay for services, infrastructure, service debt, etc but cannot legally implement such ideas until the Province grants them the powers to do so.

  10. #10

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    Quote Originally Posted by ChrisD View Post
    We also have to understand that municipalities can only operate within the means granted by the Province through law. The finance departments in Edmonton and Calgary have thought of various new ways to raise and manage new revenue to help pay for services, infrastructure, service debt, etc but cannot legally implement such ideas until the Province grants them the powers to do so.
    I believe this should be rephrased to. ThE province granting cities and municipalities authority to tax and spend it's residents more. May as well add in the fact we have a spending problem not a revenue problem.

  11. #11

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    Quote Originally Posted by KC View Post
    And it's only myopic if you get to blissfully ride out any subsequent problems (loss of contracts, jobs, property values, historical buildings, children's programs, etc.) when a city swings from one extreme to another and slashes spending and infrastructure repair and maintenance spending in order to pay down previously 'sustainable' debt.


    Just yesterday I heard the mayor say that snow removal budgeting is based on the typical winter and because this winter is more costly, funding will have to be grabbed from other programs. So, what is a typical winter and how often in say the past 10 or 20 years have we actually had a typical winter?
    Smart budgeting would have seen surpluses from years of reduced snow put into a fund to balance years of high snow fall... But instead that money was given to one time expenditure projects more than likely.

    There must be a better way to budget than this yearly cycle..,., now I think THAT would be an interesting conversation. Compared to the never ending det whining that seems absurd to me. Our income to debt ration is nothing..... relatively speaking.
    "Do you give people who already use transit a better service, or do you build it where they don't use it in the hopes they might start to use it?" Nenshi

  12. #12

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    Quote Originally Posted by edmonton daily photo View Post
    Quote Originally Posted by KC View Post
    And it's only myopic if you get to blissfully ride out any subsequent problems (loss of contracts, jobs, property values, historical buildings, children's programs, etc.) when a city swings from one extreme to another and slashes spending and infrastructure repair and maintenance spending in order to pay down previously 'sustainable' debt.


    Just yesterday I heard the mayor say that snow removal budgeting is based on the typical winter and because this winter is more costly, funding will have to be grabbed from other programs. So, what is a typical winter and how often in say the past 10 or 20 years have we actually had a typical winter?
    Smart budgeting would have seen surpluses from years of reduced snow put into a fund to balance years of high snow fall... But instead that money was given to one time expenditure projects more than likely.

    There must be a better way to budget than this yearly cycle..,., now I think THAT would be an interesting conversation. Compared to the never ending det whining that seems absurd to me. Our income to debt ration is nothing..... relatively speaking.
    So how much more debt should or could the City reasonably take on to stay within reasonable bounds? And in a recession would the City continue to act intelligently or would it repeat the 1980s, 1990s behavior?

  13. #13

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    ^ That is a set up and an unfair question. I am not a auditor, accountant nor do I have access to all the raw data needed to make such a choice. What I have is a vote.. I vote for the best steward I feel is presented.

    I think the better question would be why one of the fastest growing cities in the fastest growing province is made to borrow. Were is the support from the province and the feds?

    It is illegal for us to borrow to pay for services. We have a debt ceiling that we should have maxed out years ago. We are behind the eightball. How much did inaction cost us? So all these "questions" are great but it ignores the fact that what is being done can't be ignored.

    Now.. we could debate did we need the "fancy" new Walterdale bridge... We could have just build a ugly flat one. This is the heart of our city and a structure in our best asset. The cost of not doing it right, although unlikely measurable in dollars, was simply too high. Much higher than not doing it well.

    I wold rather question what HAS to be done and how are we going to do it.

    We simply has stuff that NEEDS to be done and that includeds things that some may view as wants such as rec centers.
    Last edited by edmonton daily photo; 02-01-2014 at 11:52 AM.
    "Do you give people who already use transit a better service, or do you build it where they don't use it in the hopes they might start to use it?" Nenshi

  14. #14

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    ^"^ That is a set up and an unfair question. I am not a auditor, accountant nor do I have access to all the raw data needed to make such a choice. What I have is a vote.. I vote for the best steward I feel is presented."

    That's somewhat the point of this thread. We got what we voted for in the 1970s and then in the 1980s and 1990s. Did we learn a single thing from that experience that we could use going forward? We can be our own worst enemies by not having a clue as to what is truly sustainable debt and what is seemingly unsustainable, hence our behaviour throughout the 80s and 90s. We have no rules of thumb.

    This is not to say that we can't support very high levels of debt and even turn that debt into truly amazing gains, but if we were to attempt that we should do so knowing the risks. We should have in idea of how much and how long tax revenues could stall or plummet in real terms and what we would have to axe given various interest rates. We should also have a rolling public list of major infrastructure projects that would be most beneficial to tackle in the toughest of times rather than defer until costs triple under a return to good times.

  15. #15

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    Lets remember that a nice chunk of the debt on the books is for the LRT... and that debt is backed by Federal/Prov gas tax dollars under a long term funding agreement.

    Some of this debt on our book is no risk from the city. Likely a good portion of it.
    "Do you give people who already use transit a better service, or do you build it where they don't use it in the hopes they might start to use it?" Nenshi

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    The city's debt at the start of 2013 was $2.2 billion. Under the city's own debt guidelines the maximum debt level allowed is $2.65 billion, under the provincial rules it's $4.2 billion. By borrowing for the arena alone the city will almost reach it's own debt limit.
    Add LRT, another rec center and another bus garage and the provincial limit is reached.
    So in a few years the city will be $4.2 billion in debt.
    We are currently enjoying the lowest interest rates in history. The city's long term borrowing costs are at 3.27%. That means that in a few years, once the debt limit is reached and assuming that interest rates stay the same for the foreseeable future, the city will be paying over $137 million per year in interest alone.
    http://edmonton.ca/city_government/d..._sheet_(1).pdf
    Every 1% increase in interest would add $42 million in servicing costs alone.
    I understand that some debt will be retired, and some borrowing costs will be locked in but the reality is there will always be demands for capital projects and once the debt limit is reached these will have to be paid out of tax revenue.
    Think of where the city will be if in 10 years interest rates are at 6% (historically still low) and there are capital works that need to be built. The city won't be able to borrow and will have to pay interest of $250 million/year before there is any money for anything new.
    But boy that shiny new rec center sure looks good.

  17. #17

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    Ralph, great numbers!!!!! But come on let's live in the now! After all the smiths and jones' are!

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    ^
    ^^
    you also have to remember that the city's debt isn't as absolute as presented here. in the last 20 years our population went from 616,000 to 818,000. it's not unreasonable to think it will reach 1.2 million in the next 20 years. on a per capita basis, that means that the previously adopted "ceiling" on city debt would in fact be about half of what it was when first imposed. and just like the last 200,000, the next 400,000 won't be bringing their own roads and schools and fire halls and police stations and rec centres with them either. in many respects it makes a great deal of sense for those things to built with borrowed money to be paid back by those who use them rather than requiring current residents to front all of the costs in cash.
    "If you did not want much, there was plenty." Harper Lee

  19. #19

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    As a city we should not be building out as much as we do either! Our city should not have(along with Calgary grown in land mass 33% in 5 years! So they can have brand new roads while I in west mount had a crater of a pothole that was down to clay ant 32 inches across? How about a city with dome balls push devolopers to build up more?

  20. #20

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    I believe justifying debt is dangerous. It's as bad as my neighbour buying a couch on his brick card because he does not know how to save 1% of his yearly income for a couch! I understand that the city is required by law to spend not save BUT. We waste to much this is the real problem, and legitimate items go on the credit card

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    so, out of curiosity, did your neighbor's neighbor pay cash for his house? or is your mortgage a sign that not all debt is dangerous debt?
    "If you did not want much, there was plenty." Harper Lee

  22. #22

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    In the early '80s thousands of people were losing their houses because of the climbing interest rates at reset and the tumbling economy. Recall the dollar dealing? A mortgage is a sign that not all debt is dangerous debt, but that under not too uncommon conditions, it can turn into dangerous debt which takes years to work out.

    I guess a question of clarification is now in order: Was Edmonton really in tough straights for between one and two decades before oil prices recovered, or was it all a ruse, that we could easily have handled the combined debt, aging infrastructure, inflation and other costs the City faced in the 1980s and 1990s. It's a valid question too, maybe tax increases should have been welcomed by Edmontonians during those times.

    Today we have near record low interest rates so it would seem reasonable to be opportunistic and consider loading up on low cost long term debt that future inflation would erode away. "Reasonable" until one considers that inflation assumptions of the past, maybe should stay in the past. If we're headed for deflationary times, then our 'real' cost of existing debt may increase.
    Last edited by KC; 04-01-2014 at 07:28 PM.

  23. #23

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    Quote Originally Posted by KC View Post
    In the early '80s thousands of people were losing their houses because of the climbing interest rates at reset and the tumbling economy. Recall the dollar dealing? A mortgage is a sign that not all debt is dangerous debt, but that under not too uncommon conditions, it can turn into dangerous debt which takes years to work out.

    I guess the question of clarification is now in order: Was Edmonton really in tough straights for between one and two decades before oil prices recovered, or was it all a ruse, that we could easily have handled the combined debt, aging infrastructure, inflation and other costs the City faced in the 1980s and 1990s. It's a valid question too, maybe tax increases should have been welcomed by Edmontonians during those times.
    Including my father and a bunch of family that lost their houses during the 80's. Prices crashed 40%(in Calgary) or more elsewhere, I had the 20% crash we just dealt with, also people do not talk about 10% interest on a savings account neither

  24. #24

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    Lol my neighbour inherited his house, it was built in 1925 and most houses were bought with cash before ww2. I believe that's when cmhc was invented? But when we are closing perfectly good schools in inner city neighbourhoods(just to bus them to the outskirts) is this the same as positive debt like a mortgage can be. I believe governments/ municipality's should be providing essential services with good programs not frivolously wasting money, which I believe they do to much of.

    The 80's and 90's were leaN times financially and for positive growth of community as a city, I'll admit it's not an easy balance, I'd rather pay some more taxes then live on a credit card

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    I understand the need for some debt but the city seems to think they're doing fine because they haven't reached their debt ceiling yet.
    Every pet project seems to become an urgent priority.
    The city needs Recreation Centers right now, but can't even be bothered to look for corporate sponsorships. St. Albert, Sherwood Park, Spruce Grove and Fort Saskatchewan have all sold the naming rights for their Rec Centers but Edmonton is above that.
    Edmonton needs to build LRT to downtown right now, but vehicular traffic counts downtown have been static since 2006 at least.
    http://www.edmonton.ca/transportatio...flow-maps.aspx
    I'm not against LRT, I just think it needs to be done more efficiently.
    I'm not against Rec Centers, but at least do something to defray the cost.
    Debt is a very dangerous thing, when interest rates climb (and they will) the city will be spending a fortune to service the debt and will be extremely hard pressed to fund basic services.

  26. #26

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    Fun fact, let per use $7.50 a net loss!! Maybe it would make sense to subsidize positive devolopments in Todd zones? We need a denser city to help with lrt expansions and smart routes. # 1 priority is having schools, hospitals,grocery stores and dense devolopments like dt or it will put us in debt as it is going. However lrt/subwAy is a long term investment and successful throughout the world giving it time for such devoloemts

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    ^I am quite certain the city calculates inflation on the cost to service their debt over the longterm. That would fall under accounting 101.

  28. #28

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    ^ "I am reminded of the story Nobel Prize winner Ken Arrow tells about his experience trying to make long-range weather forecasts for the military during World War II. He told his superiors that his forecasts were so unreliable as to be useless. The word came back that the General knew his forecasts were useless, but needed them anyway for planning purposes. " - Bill Miller

  29. #29

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    Although this thread mainly focused on City's debt,, I came across this astounding piece today regarding the province's debt:

    http://www.calgaryherald.com/news/Fi...214/story.html

    Here is our debt clock (thanks to the Canadian Taxpayers Federation):
    http://debtclock.ca/provincial-debtclocks/alberta/

  30. #30

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    ^ you beat me to it. Very interesting article and surprisingly I couldn't find a thread dedicated to the provincial debt. So I started one here:
    http://www.connect2edmonton.ca/forum...548#post573548

  31. #31

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    Quote Originally Posted by FamilyMan View Post
    Although this thread mainly focused on City's debt,, I came across this astounding piece today regarding the province's debt:

    http://www.calgaryherald.com/news/Fi...214/story.html

    Here is our debt clock (thanks to the Canadian Taxpayers Federation):
    http://debtclock.ca/provincial-debtclocks/alberta/
    Some historical Alberta provincial debt/deficit perspective:


    excerpts:





    “As you can see, our deficit works out to about 3.1 per cent of GDP — the largest among all the provinces and the federal government for the current fiscal year.

    That's a hefty amount, to be sure. It's among the larger deficits Alberta has ever run. But it's not unprecedented. The 1986, 1991, 1992 and 2016 budgets involved more borrowing, as a share of the total economy at the time. ...”




    “Another takeaway is that Alberta's financial position has been sliding generally downward for roughly the past decade. Since 2008, the province has, for the most part, been spending more money than it's been taking in. But the past couple of years, in particular, have pushed us most heavily into the red.

    At the same time, any other province would gladly trade places with us.

    Even with all our recent borrowing, our net debt represents only about 6.5 per cent of our economy, compared with about 15 per cent in neighbouring B.C. and Saskatchewan and a staggering 45 per cent in Quebec.





    Alberta's budget: You've heard the spin, now take a look at the real numbers - Calgary - CBC News



    http://www.cbc.ca/news/canada/calgar...data-1.4559769





    Debt/GDP is always interesting. In a boom bust economy like Alberta relying on debt/GDP for decision making is just further embracing the double edged sword nature of liabilities. Ie boom and bust economies see relatively extreme movements of GDP. It’s like someone in a career with extreme income volatility using bank prescribed debt levels based on averages etc. Even smoothing income over several years or even averaging previous lows still leaves one vulnerable when income falls below the average used when taking on debt.





    A cross-re link:

    A plan for a debt free alberta - 1999

    Quote Originally Posted by KC View Post
    This was a result of years of austerity and unexpected growth. It provides a bit of economic history too plus talks about preparing for uncertainty in the future and rebuilding the heritage savings trust fund.

    Note: the massive relative borrowing levels back then (and in the years and decades before) was justified despite interest rates being at much, much higher rates than today.


    http://www.connect2edmonton.ca/showt...e-alberta-1999

    Bolding mine

    So where’s Edmonton debt at now and how does it break down?
    Last edited by KC; 23-03-2018 at 08:47 AM.

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