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News

Town's financial position 'getting awfully close to the edge'

Posted December 4, 2013

New Tecumseth has long term debt of approximately $53 million, not including interest. The 2014 budget projects to increase that further by $5.8 million. As it stands now, about $33 million of the debt is assigned to be serviced by development charges (DC), with the remainder financed by taxation.

According to a Provincial calculation that controls how much debt a municipality is allowed to carry, New Tecumseth's annual repayment limit is calculated to be $2,991,753. Based on current interest rates, the Town could further incur long-term debt for the following amounts and terms: $25,400,000 for a 10 year period at 3.21 per cent; or $40,900,000 for a 20 year period at 4.01 per cent; or $50,000,000 for a 30 year period at 4.33 per cent.

Looming on the horizon is the requirement to debenture more than $20 million to pay for the new wastewater treatment plant in Tottenham, which even though it is DC eligible, it still applies against the Town's credit limit, which restricts borrowing capacity to deal with other infrastructure requirements.

On Monday night, Allister Byrne, retired Town auditor and former partner of the accounting firm Grant Thornton, who was engaged by the municipality to provide a "high level" overview of financial stability, told councillors that it was his "observation you are getting awfully close to the edge, possibly a precipice of sorts on two very important fronts."

In his oral presentation that included some graphs comparing New Tecumseth with its neighbours Bradford West Gwillimbury and Innisfil, he pointed to shrinking general reserves, and a high combined debt level that would come close to its capacity with the Tottenham sewage plant financing.

"From my perspective, there is a pressing, possibly even urgent need to recognize there's an elephant of sorts in the room, the issue that has not yet in my view been fully addressed yet by the Town. That issue is financial sustainability, both in the short term basis, as well as long term."

Mr. Byrne pointed to the recently tabled Asset Management Plan prepared by RV Anderson, which concluded the Town was facing a $14 million infrastructure gap, but reduced it to a five year horizon, which brought that down to $5 million.

"That's better news than $14 million, but the problem is still the same irrespective of the amount," he said. "Where's the money going to come from?"

The presentation was verbal, and the handouts provided were some graphs that compared New Tecumseth to Bradford West Gwillimbury and Innisfil. Of the three, New Tecumseth had the lowest level of tax revenues.

"Congratulations, I think. .... One has to ask, how has the Town managed to keep its taxes lower than the others over the last five growing years? The answer in my view is the Town using parts of those reserves, your savings, over a number of years to achieve balanced budgets. This practice of course keeps taxes lower for the residents than they might have otherwise been, but you have to ask yourself, at what cost?"

Mr. Byrne predicted that at the current rate, general reserve accounts would be depleted by 2015, possibly even next year. His recommendation to add a one per cent capital replacement levy to property taxes, approximately $18 per household, would raise about $247,000 annually toward replenishing reserves. The draft budget proposes an eight per cent municipal tax levy hike to fund $2.4 million in expenditure increases.

"Over a 10 year period such a policy would generate $15 million that it would not otherwise have to borrow or find money for," he said.

While Mr. Byrne suggested council lobby the province to remove DC debt from the borrowing capacity equation, he also recommended the Town return to a policy whereby developers pay the hard services portion of DCs at the draft plan stage as it was previously. Spurred on last year by Alex Troop and his Beeton proposal which now involves the Walton Group as partners, councillors agreed to make all DCs payable at the building permit stage.

Ward 3 councillor Paul Whiteside noted it was a "split vote, deferred the collection of our hard service DC from the signing of agreement to building permit stage, which I was not supportive of. You mentioned that the timing of those helps reduce that. Are we going to have to look at other alternatives, have developers finance that upfront, because we certainly can't go up to our ceiling, and then say we'll we've hit the ceiling."

"Well, like everything in life, there is a balance," replied Mr. Byrne. "But as you get to acknowledge and recognize the challenge that you have everybody's got to kind of share the pain a little bit. I think it makes a solid business case to go back to the development community and look to be funded sooner. That's option 1. Option 2 in my mind, in a community that is growing as quickly as yours, that what makes sense to me is going to the province and asking them to exclude DC related borrowing from the borrowing limit. Because not every municipality has those challenges. And quite frankly, it's not increasing the financial risk to the province or the Town or whatever. It's in essence like a very rich man owing you money. You know there's a lot of resources there. Same thing applies with development charges debt. You know that the development community can afford to repay and service that debt."

Mayor Mike MacEachern, a proponent of the change in DC timing, told Mr. Byrne that "I know we did a little bit of financial analysis with regard to collection of DCs, but
your comments seem to be different than the advice we were getting at the time."

That prompted New Tecumseth CEO Terri Caron to explain that in their view, when DCs are payable didn't make any difference to the bottom line.

"One of the issues that we discussed at the time whether the DCs hard services being paid at the time of subdivision draft approval was important, or whether it could be at building permit stage, what we found was happening through experience is that it really didn't make a big difference because what the developers would do is phase the subdivisions, so the amount that would be paid wouldn't be very different, and they would be selling the lots, building what they need for the lots that they sold," she said. "So the timing between when it would be paid as the lump, or be paid with the building permit was really not very significant. They wouldn't register the whole plan and give you all those hard services up front, they did it in the phases, so that was the information we provided based on the review we had done and the experience that we had."

The mayor added, "I just want to be careful about trying to take this, and sort of put it out to support something else, that's not really supporting it at all."

Ward 8 councillor Jim Stone said New Tecumseth is in a better position than most municipalities because "we've used our debt to produce our capability of accepting development, and we at this present time probably have more capability of accepting development, like industrial development, we have the hard services, we have the sewage plant, I don't think other municipalities are up to that."

The mayor acknowledged "the rather large jump in debt happened in this term" and was connected to the regional waste water treatment plant, a DC eligible project.

"It's a valuable asset because it's generating a good revenue source for you and it has extra capacity, it's the best of both worlds," said Mr. Byrne. "But that graph says it still has to be paid for. It uses up that line of credit, which is I think what people forget about."

"The challenge too is if you don't have the thing to sell, you don't have anything to sell," added the mayor. "So when we talk about that capacity that is within that sewage treatment plant, without it, you don't have anything to collect DCs on, because they need the servicing in order to be able to progress to the building permit stage where we collect the development charges."

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