The City modifies its borrowing regulations due to the rise in interest rates
The unexpected rise in interest rates in the province has prompted the city to borrow funds sooner rather than later for the new Protective Services building and the Highway 1A improvement project.
The city’s borrowing plan for the new Protective Services Building and Highway 1A improvements is changing due to an unexpected increase in interest rates.
Executive director of corporate services Katherine Van Keimpama said the change means the board will have to borrow earlier to minimize interest payments, by March 15, as Bank of Canada guidance suggests further increases.
The Board originally approved the borrowing of $23 million over 25 years at a maximum interest rate of 4% in March 2021, when the borrowing rate was 2.789%.
“Since then, rates have gone up and over the past two months they’ve gone up exponentially,” Van Keimpama said at a Jan. 24 board meeting.
Rates started to jump on January 1, to the tune of 3.37%, and now stand at 3.6% on January 15.
Given the increase, the board approved the decision to seek funding by January 31 to receive approval for the next borrowing period in March, subject to willingness to pay an interest rate maximum of 7%.
Van Keimpama, who said the city was unaware of the change, learned earlier this month through an Alberta Municipalities (AM) article that the province was no longer providing loans below market to municipalities.
Rates started to jump for the 25-year borrowing rate on January 1, to the tune of 3.37%, and are now at 3.6% on January 15.
“I was watching the rates and was shocked at how much they had gone up, even before the Bank of Canada raised the prime rate,” Van Keimpama said.
The AM newsletter goes on to mention that the provincial government quietly informed municipalities in December 2021 of its change in position to increase interest rates on new loans to “better reflect the market cost of borrowing for local authorities”.
According to the association of municipalities, the decision reverses promises made to municipal governments in 2019 when the province chose to disband the Alberta Capital Finance Authority. They have since written a letter to the province asking it to restore below-market rates given the impacts on municipal budgets and local infrastructure plans.
The city received no notification from the province in December 2021 when it informed municipalities of the change.
“I want to point out that I have checked with our General Manager, as well as his support team and the Director of Finance, and we have not received any notification from the Province in December 2021 regarding the rate change. interest, otherwise I told you about it earlier,” Van Keimpama told the board.
Draw refunds for the new Protective Services Building will now begin on September 15th when they were previously not scheduled to begin until March 2023.
A total of 27.45% of payments will be funded from offsite drawdown reserves, as originally planned. RCMP rental revenue will account for approximately 39% of payments.
Because the board has not budgeted for the unforeseen change in accelerated repayments, and because RCMP lease payments will not begin until 2023, the lease-funded portion of the debt repayment of 2022 will be taken from the police operational reserve.
For the highway. 1A, the board originally passed a borrowing by-law in December 2020 for a repayment of $2,453,869 over 15 years, paying a maximum interest rate of 3%. The interest rate at the time was 1.78% and now stands at 3.32%, and further increases are expected.
The board approved the decision to borrow instead for 10 years to minimize the interest paid, with the draw also taking place on March 15.
The change means the city will save about $270,000 in interest, even though rates have gone up.
Similar to the Protection Services borrowing strategy, a repayment would be due in September. The amount will be known when the debt is contracted.
The municipal administration recommends offsetting the payment by using the fiscal stabilization reserve. A budget surplus of $1.2 million is projected for 2021 and he recommends transferring at least that amount to the stabilization fund.