Welcome back to Part 2 of our Q&A series on municipal borrowing and infrastructure planning. Last week, we covered key aspects of our 10-Year Linear Infrastructure Capital Plan and how it aligns with our town's long-term goals. Today, we'll delve deeper into the strategy by outlining the financial considerations related to reserves and regulations around loans to local authorities and tie it all together on how it impacts our community's sustainability and resilience. Join us as we continue to provide clarity and answer your questions about these important topics.  

Did you miss Part 1??  Check it out HERE

Reserve Questions

1. How and where do Reserves fit into this strategy?

Capital renewal or replacement is done through either borrowing of dollars or paying through reserves that have been built up over time.  In our case we are working on using a combination of the two.   While we are borrowing for the current rehabilitation/replacement we are also working on building reserves so our long-term our goal is to transition to reserve funding for existing infrastructure.  In the future, borrowing can then be utilized for new infrastructure projects.

1. What steps has the town taken to build and maintain reserves specifically for infrastructure investments?

The plan utilizes two strategies to help build and maintain a reserve for this.  1) the Utility Infrastructure Reinvestment Rider (UIRR) is a surcharge on users of the utilities.  It’s important to note that not all properties pay taxes but the majority pay utilities.  With a surcharge added to the users of the service it ensures that taxes are not being utilized to build this reserve but rather the users of the utility are. 2) We also have some debenture projects that will be
 “falling off” over the next few years.  The funds that would otherwise go towards these payments will then be reinvested into a reserve for utility infrastructure.   Reducing the need to fund existing infrastructure via borrowing in the future.  We are also in the process of reviewing our current reserve policy but that involves more than just our linear infrastructure.

2. Why is it important to maintain reserves and can you explain how they are distinct from simply accumulating more tax revenue?

Maintaining reserves is a user pay system.  As your infrastructure depreciates you put away annually the amount it depreciates so you have funds for replacement at a later day rather than borrowing.   And in the case of utilities it takes pressure off the tax base to fund as it’s the users of the system, who don’t always pay taxes, who support it’s replacement at later date.

3. Can you elaborate on the potential consequences of not having reserves for infrastructure projects and relying solely on immediate tax increases or budget/service cuts to fund them?

To be blunt you have the following options, borrow, reserve funding, tax increases or service cuts otherwise you lose the service.  With utilities that the Town provides, such as water and gas this is not an option.

4. How do building reserves for infrastructure investments align with the town's long-term vision and goals for sustainable growth and development?

Reserves give us the financial flexibility to determine what projects we borrow for and which we use  reserves for.  If our reserves are healthy it also gives us the ability to “borrow from ourselves” rather than the province -  where we can lower or eliminate the need to pay interest.

While borrowing gives us a means to deal with the current infrastructure now it’s important to note that borrowing has limits and while we like to plan for numerous situations we cannot plan for every single thing that may occur.  It’s important to balance the use of reserve and borrowing funding to ensure we are in a good position regardless of what occurs around us.

Loans to Local Authorities Questions:

1. Managing debt servicing and adhering to debt limits are critical aspects of responsible financial management for any municipality.  What regulations and guidelines are in place that govern this?

The Debt Limit Regulations, specifically Alberta Regulation 255/2000, outline the framework for managing debt limits and debt servicing in municipalities.  The guidelines define Debt Limits and Debt Servicing Requirements.   The Municipal Government Act (MGA) provides additional requirements related to financial management and reporting. Under the MGA, all municipalities are required to report on their financial status annually, including details on debt levels and debt servicing obligations. Long-term financial planning is also emphasized, with municipalities required to develop and review three-year operating plans and five-year capital plans annually to ensure alignment with fiscal goals and objectives.

2. Can you explain how debt limits are determined, and what factors are considered in establishing these limits?

Debt limits are standardized across municipalities which ensures consistency and standardization.  The debt limit is set at 1.5 the municipalities revenue and the debt service limit is calculated as 0.25 times such revenue.  While financials need to be interpreted these thresholds assist to identify municipalities that could be at financial risk if further debt is acquired. 

3. What measures are in place to monitor and manage debt levels to ensure they remain within allowable thresholds and do not exceed prudent financial constraints?

As part of our reporting requirements, our annual Audited Financial Statements must convey our Debt limits.  Incurring debt above the thresholds outlined in the Debt Limit Regulations requires the approval of the Minister Municipal Affairs.   As of December 31, 2023 we have the following unused to total limits: 

4. What role does financial planning and forecasting play in assessing the town's capacity to borrow responsibly within regulatory limits?

Financial planning and forecasting, while required, plays a critical role in assessing our Town’s capacity to borrow responsibly within limits.  This is looked at annually during the budget process but it is important to continuously assess our financial position throughout the year, particularly during project planning and implementation. 

During the development of our borrowing strategy and Linear Capital Plan, we conducted financial assessments to determine the feasibility of our approach. This involved exploring various scenarios and arrangements for project financing to ensure that essential infrastructure needs are met while maintaining fiscal prudence.