By Michael Vagnini
These are my thoughts and comments, and not those of any of my colleagues.
Council recently approved a motion to borrow $205 million and gave direction to staff to proceed with establishing the loan.
In representing my constituents, I voted against the motion, as I could not rationalize how this could benefit the city’s taxpayers. In my role as councillor, ethics dictate I must support majority rule of council. Ethics also dictate I must explain to constituents what this action will mean for them.
I have since investigated possible consequences, which indicate there will not be any benefit to taxpayers, only another bill to pay.
A reason given council to justify the loan was that borrowing the money would only cost taxpayers $60,000 per year. I have been informed the loan would be made for 30 years at a locked-in interest rate of 2.63 per cent, creating an annual interest payment of $2.75 million.
All of the interest, except $60,000 annually, would be offset by investing the money in a high-interest deposit account (HIDA) in which taxpayers have invested. Investment income gets accounted for as revenue in the annual budget. In this case, it will not be counted as revenue and will actually create an interest expense of $60,000 per year. It is not clear how the principal repayment expense of $4.5 million (first year) will be funded other than a tax increase.
As funds from the loan are used, the investment income drops and the loan interest of the used funds will then be added to the tax levy, along with an increased principal payment ($4.7 million in the second year). Without a rigid schedule of when the money will be used, there is no means of determining when the additional taxes will become payable.
The federal government says inflation for the next year will be about 1.9 per cent. The $205 million sitting in a HIDA for one year will erode the purchasing power of that $205 million by $3.8 million. The loss of purchasing power together with the principal repayment will impose a financial burden of $8.1 million on taxpayers in one year.
While the interest rate on the loan can be locked in at 2.63 per cent, interest rates for similar loans are predicted to drop. The US Federal Reserve decreased its overnight rate by 25 basis points about two months ago. Generally, whatever happens across the border comes to pass in Canada. The US has about 50 per cent of the world’s wealth, Canada has about 2.75 per cent. Some countries in Europe are now doing negative debt financing as the yield on the bond curve is flat and even inverted. This means you can actually borrow $100,000 and only have to pay back $95,000.
If, in Canada, the overnight loan interest rate goes down by 25 basis points (-0.25 per cent) that would save taxpayers about $5 million annually on this loan, provided the loan is not locked-in. This type of drop has been predicted for several weeks and as recently as Sept. 4 in the Financial Post and by financial institutions.
Interest generated by the HIDA was at 1.665 per cent as recently as 2017 and is currently at 2.6 per cent. The rate is floating and can drop back to the 2017 level overnight. Consequences of such a drop would be an additional $1.86 million in differential added to the tax levy raising the cost to taxpayers from the stated $60,000 per year to $1.916 million. If this happens, the financial burden to taxpayers will be about $10 million in one year.
I have asked the finance department what financial institution will be holding this money, and what guarantee we have on the money either under the CIDC or any other guarantees to protect the people’s investment. I’ve been told we have $217 million sitting in the HIDA account at the city. What is this money being used for and is it possible to use some of this money in place of this $205 million that we want to borrow?
Financial evaluation indicates the $205 million loan presents considerable risk to the taxpayer.
— Michael Vagnini is the city’s Ward 2 councillor and a certified financial planner.