Sudbury’s debt binge may come back to bite
Unlike federal and provincial finances, municipal finances in Canada during the pandemic have not been an area of ongoing concern. First, municipalities have received substantial financial support from senior governments to cope with COVID’s disruptions and costs. Second, despite increased spending over time, unlike Ottawa and the provinces, municipalities require permission from provincial governments to borrow and have typically run surpluses or balanced operating budgets.
As a result, municipalities have acquired substantial reserves that on net often generate positive net worth. In Ontario, according to the 2021 BMA Municipal Study, reserves per capita in 2020 averaged $1,264 for municipalities, $1,847 for regional municipalities and $515 for county governments. The comparable corresponding figures for total debt outstanding were $685 for municipalities, $1,024 for regional municipalities and $146 for counties.
At the same time, municipalities face demands for infrastructure renewal; the combination of relatively sound finances and current low interest rates are a temptation to acquire debt given the prospect of rising rates. Case in point, consider the municipality of Greater Sudbury in northern Ontario with a population of approximately 170,000.
In 2014, Greater Sudbury had a total municipal debt of just under $19 million and average per-capita total debt outstanding of $196 compared to $1,024 (according to the 2015 BMA Municipal Study). Moreover, compared to the other major northern Ontario cities—Sault Ste. Marie ($132), Timmins ($360), North Bay ($1,147) and Thunder Bay ($1,537)—Greater Sudbury was the second-lowest in terms of per-capita municipal debt.
Fast-forward five years to 2020 and Sudbury embarked on a major program of capital investment debt acquisition acquiring approximately $200 million in debt. The projects included a $90 million arena, $68 million library/gallery/convention centre complex along with an assortment of road, culvert and water system projects. The interest rates were touted at an attractive 2.4 per cent, and on a total municipal operating expenditure outlay of more than $600 million, the debt service costs seen as quite manageable.
As a result, Sudbury’s per-capita municipal debt in 2020 rose to $1,543 making it the second-highest of the five major northern Ontario cities. And Sudbury’s per-capita debt was now 125 per cent higher than the municipality average of $685 and 51 per cent higher than the regional municipality average of $1,024.
This 2022 budget year brings yet another expansion of municipal debt in Sudbury as it acquires $103 million more, bringing its total debt to $355 million and adding approximately $1,175 to its per-capita debt, good for about $2,700. Based on 2020 numbers, this will make it one of Ontario’s highest per-capita municipal debts and reflective of debts in much larger urban centres such as York Region, Toronto and Ottawa.
So, should we be worried about Sudbury as a harbinger of more debt to come? Is Sudbury itself embarking on a path to unsustainable municipal finances?
On the surface, Sudbury should be able to carry the increased debt load using an interest rate of about 3 per cent bringing total debt service costs to under $11 million within a $662 million operating budget. Locking its current debt in at low long-term rates is not an unreasonable strategy to build infrastructure. The real issue is whether all this additional infrastructure is needed and not simply a spending spree based on low borrowing costs. Higher interest rates can lead to the selection of projects with higher rates of return whereas current low rates can allow lower return projects to meet the bar.
Moreover, the local surge in demand for labour and materials from this capital spending spree will likely inflate the cost of labour and materials, which will eat into future budgets. There are also the increased operating costs from facilities including the new arena, which in turn could affect municipal budgets down the road. And while municipal revenues are currently rather robust, the long-term trends for both provincial grants and property tax revenues can change if the economy slows.
The long and short of the matter is that things may look good at present, but Sudbury may potentially be biting off more than it can chew, setting the stage for substantial property tax increases down the road and serving as a warning for other municipalities in Ontario and across Canada.