Provinces Can Learn About Debt from their Municipalities

Commentary, Local Government, Randy Patrick

As a parent, I have been able to learn from my children. I’ve learned restraint. I’ve found that children are different, and that they still come back to me after they have left the house for guidance and advice. That surprised me, but learning is learning.

Maybe it’s time that the provinces learn from their children, the municipalities, on how debt should be handled. Municipalities are created through provincial authority, and the province transfers some of their authority to municipalities through legislation. Alberta’s Municipal Government Act is a good example.

The challenge for both municipalities and provincial governments is to avoid taxing for today’s operational costs and calling it an investment. This process moves today’s cost to the taxes our children will need to pay even when it makes little economic sense.

Municipalities will typically pay for larger capital expenditures in one of two ways. First, they may have saved the money for the expenditure and put it in a reserve. Second, they may borrow for the project.

In Alberta, the Municipal Act clearly states that municipalities cannot borrow beyond a debt limit imposed by the provincial legislation without the permission of the Minister. In Saskatchewan, unless the borrowing is approved, a municipal council is not allowed to exceed its debt limits. In British Columbia, councils are limited on how much they can borrow unless they have the approval of an inspector.

By limiting the ability for municipalities to borrow, there are assurances that municipalities can, in fact, pay off their debts. Intuitively, this makes a lot of sense. Regardless of the political benefit of borrowing, there is only so much a council can borrow.

Debt, if used wisely, is a way to reduce taxes to pay for major additions to communities, for roads, overpasses, recreation centres, water/wastewater treatment plants, and for other local projects. For major capital projects, it ensures that both the users of the future and today’s users are contributing to a project from which they both benefit.

Calgary, in 2016, borrowed $3,303,092,000 and used 43% of its debt limit (which is twice the City’s own revenues). Saskatoon, with $318.8 million in long-term debt, is at almost 57% of its debt limit, and Regina and Edmonton are at 65% and 59% respectively. Over the past five to ten years, these cities have all seen substantial growth, and it would be expected that they used their debt to fund much of the infrastructure that the public demands. The thing is, at some point, municipalities are not able to borrow more money because they are restricted by provincial legislation, and every time they borrow they increase their future spending just to pay off the debt. Alberta and Saskatchewan have restrictions, but most other provinces have no restraint on their debts.

With municipalities being ‘creatures of provinces’, and the rules on debt, maybe the provinces should learn from their children and create debt limits that they do not go beyond. Unfortunately, no one can force provinces to do this, and they are, in fact, increasing their debts at an alarming rate which future generations will need to pay back.

Another place that the provinces could follow municipal government is with the creation of reserves for funding future capital projects. Even if the reserves are only for the replacement of assets, using savings would be a welcomed change in the financial options for the province. In this way, the children can teach their parents some important financial lessons.