The take away news from yesterday’s council meeting is that the Forum and Centennial Arenas were saved, a new Dartmouth 4-pad arena will be constructed, and four other single ice pad arenas will be closed: Lebrun, Devonshire, Gray, and Bowles.
But before getting into those specifics, the whys and the wherefores, let’s step back and consider the broader context, which involves the city’s long-term debt and future capital needs.
I was surprised that council yesterday dove into the debt and capital issue. I thought a staff presentation from a previous Audit and Finance Committee meeting was merely on the agenda for informational purposes for the arena debate. But it turns out that council fully dove into the debt and capital issue, which really is far more important than the arena issues everyone is excited about.
Debt, and especially public debt, has acquired a negative connotation far beyond what’s warranted. A city government shouldn’t borrow money to pay its operational costs—you don’t take out loans to pay for snow plowing or cutting the grass in the parks. But it’s reasonable, even sensible, to borrow money for large capital projects like arenas, police stations, large road projects and so forth. Those public works projects are going to be around a long time—40 or 50 years. Those people living in Halifax decades from now will still enjoy the use of the facilities we build today, so there’s no moral or practical reason they shouldn’t also help pay for them.
Of course we can’t let debt get out of control. And probably the most under-reported story in Halifax government over the past decade is how successfully council has contained the city debt and, far more important, develop policies that keep things from going south. I give credit to former finance director Cathie O’Toole, who brought in the debt policies for council’s consideration, although councillors should be congratulated for mostly following O’Toole’s advice.
The part of debt most people consider is the big number: how much are we in debt for. For Halifax, that number has been decreasing steadily since the high debts run up right after amalgamation. Here’s a simple chart showing the decline:
(I’ll ignore that the chart is somewhat misleading, in that the X axis should be 0.) The $20.5 million blip in 2008 is due entirely to the Bedford four-pad arena. Council had anticipated that two-thirds of the $50 million cost of the project would be paid for by the federal and provincial governments, but that fell through at the last minute, after the city had awarded tenders for construction, when the federal Conservative government refused to fund the arena, siding with Bedford area Conservatives who wanted the bubble arena at the Bedford Common funded instead. It really is a despicable story, and the Conservatives should’ve paid a political price for it, but didn’t.
But the big number for total debt isn’t so important. More important is the quality of that debt (is it paying for stuff that matters?), the controls around the debt, and the future cost of maintaining the stuff you build with the debt. So far as controls go, the city is doing pretty well. Council adopted a debt servicing plan in 2009 that includes a number of indicator measures and the thresholds for council to aim to keep within. Again, the good news is these have all been met, easily:
O’Toole had additionally attempted to bring in a radical new policy, which was to set aside two percent of the capital budget for maintenance and replacement of capital projects. The idea was that the average projected age for any large building is 50 years, so if you set two percent aside every year, in 50 years you can can replace the building at no new cost. More pragmatically what it means is you spend that two percent on maintenance so you don’t have a bunch of stuff breaking down and falling apart, increasing your costs. There was some initial success with that set-aside, but after O’Toole left the city to work for Halifax Water, it seems to have fallen by the wayside. Too bad.
Still, the city’s debt situation is good. In fact, I would argue that the debt is too low, not too high. So long as we have proper controls on the debt, we should be increasing debt during low-interest times like the present, getting the most bang out of our buck, especially if we are building stuff that lowers our future costs. Like, for example, transit. A better transit system that attracts more riders reduces the future costs of expanding and maintaining roads; it’s money well spent.
This gets back to the question: Are we are borrowing money to pay for stuff that matters? There’s no one right answer to that question—people have different opinions about what matters, and to some degree, almost everything we could possibly build with borrowed money has at least some civic value that will make the city a better place for at least some people. Judging these issues of value and worth is a political decision, not a financial one.
Which brings us to yesterday’s discussion of debt and the capital projects. The city’s current finance director, Greg Keefe, brought forward a sort of grab bag of big projects either about to be commenced or that councillors have been entertaining, including: rebuilding the Cogswell interchange, the Dartmouth four-pad arena, some solution to the peninsula ice arena issue, a new police station, a new fire training centre, new libraries, a $50 million commitment to downtown projects, a stadium, a performing arts centre, and a fast ferry or light rail project.
Keefe attempted to put ballpark figures to each of the projects, and his report assumes that no federal or provincial money would go to the projects—he budgets conservatively, Keefe told council, because “in terms of finances, I believe all surprises should be pleasant.” His presentation wasn’t intended as a roadmap or to provide exacting details for how to build all the stuff on his list, but rather to wrap council’s head around the order of magnitude of the potential debt, and how that could be managed.
The short of it is this: council agreed, conceptually anyway, to increase the city’s debt by a potential $100 million, and to pay for the debt by selling off stuff (like the two St. Pat’s schools), and adding a one-cent per $100,000 assessed value property tax. The new tax will have to be adopted at next April’s budget session, but it’s not a crazy idea. It will amount to about $25 on the average house, dedicated to capital projects. I suspect that council will at the same time drop the general tax rate by the same amount, meaning no one will pay any additional tax, but that remains to be seen. (One aim of past council policies has been to reduce the “debt from operating” expense to $0, and this would complete that process.)
So that’s the overall context of the city’s debt position: even with a potential increase of $100 million in debt, the city will still be within the debt limits council has established, and the overall quality of the debt remains good.
We can—and should!—argue over the need and desirability of any of the projects on Keefe’s list, but again, these are political arguments, not financial ones. For example, I started off somewhat ambivalent about a stadium, but the more I learn about it, the less likely I am to support a stadium proposal, although of course the details matter. This is what Keefe’s report, and council’s acceptance of its recommendations, do: start doing some serious financial planning around each of the proposals, and with that information council can later decide whether they make sense or not. And we should recognize that there’s a zero sum game at work: debt spent on arenas or stadiums is debt not spent on transit.
Finally, that brings us to council’s decisions on the arena issues. In order to save the Forum a political deal was made: rather than first build a four-pad on the peninsula (staff wanted it built at CFB), a four-pad was first approved for Dartmouth, to be open in 2017. This brought the Dartmouth councillors on board, even though that comes with closing Gray and Bowles arenas. Councillor Russell Walker, representing Fairview, came along once it was decided a rebuilt Forum complex would be a three-pad, not a four pad, and the fourth pad would be a rebuilt Centennial. With Dartmouth going first, that gives three more years for figuring out the details of the Forum reno, which is projected to be completed in 2019.
People will disagree about saving the Forum, but it’s a bit simplistic to say that council “left $25 million on the table.” For one, the staff report was obviously tilted to favour demolishing the Fourm. But, back to my earlier point, there is value in everything; it’s how we assess it that matters.
As Mayor Mike Savage put it: “We could sell the Public Gardens and make a lot more than $25 million, but we wouldn’t do it.”
Well done. I am sure it took a lot of work to present this in a manner so easily understood.
An anecdote, referring to the idea of setting aside a small percentage annually to provide for replacement of old infrastructure when the time comes: Exeter in the UK has a building (I’m sorry I can’t remember what it is called) with huge oak beams as part of the structure. We were told that when the building was erected an oak forest was planted as the builders knew that by the time the woodworm had done in the original beams, the new trees would be ready for the replacements. That time came in the 20th century, the new wood was duly harvested, and another forest planted in preparation for the next time new oak will be needed, in about four hundred years!
Like others I appreciated the in depth explanation of capital expenditures but I think the Forum will end up back on Council’s table in 2 years.
Clear analysis, Tim. This is your best yet.
Excellent, clear article on a potentially mind-numbing subject. Nicely done!
This was a great summary of how the municipalities debt works. I found it extremely helpful. I think putting those mega projects in the context of our ability to pay for them (which you’d think most decisions would be made) also helps to rationalize whether they are in fact worth the investment (or in this case the taking on of more debt to pay for them).
I also really appreciate this article, especially the Municipal Debt overview, something I have never really given much consideration.
Tim, I really appreciate this kind of reporting — consideration of the trade-offs, clear accounts of the issues and the values in play. Other civic reporting I see gives me a lot of facts and information, but this piece gives me storylines and understanding. Thanks so much.