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December
1999 Newsletter
Region's
Debt Rating Drops
The
front page of the Spectator's Enterprise section
on November 30 carried a short article with the above headline
stating that: "The Canadian Bond Rating Service (CBRS) report
on the region issued last week drops Hamilton-Wentworth's
rating from AA+, the third highest, to AA. In its report,
the agency said that the rate was lowered because of concern
for the massive amount of debt the region will take on over
the next five years to pay for projects such as the Red
Hill Creek Expressway."
The
lowered rating means that local taxpayers will now have
to pay higher interest on the $124.5 million in debt accumulated
by the Region of Hamilton-Wentworth. If "capital expansion"
spending continues unchecked (the largest proposed project
being the North-South Red Hill Creek Expressway), the region's
debt will balloon to $326.7 million by 2003. Since regional
reserves in 2003 are forecast to be only $221.7 million,
the region's debt/reserve ratio will be 1.5. A debt/reserve
ratio this high means that the region's credit rating (or
the credit rating of whatever entity inherits the region's
finances) will remain in jeopardy. The resulting tax increases
necessary to service the high debt under this scenario would
result in a long term drag on the local economy.
The
Region is currently using several creative accounting practices
in order to keep the figure it tells local homeowners the
expressway will cost low. Four of these practices are the
"buy now, pay later" plan, the "don't pay a cent of interest"
plan, the "development charge" plan, and the "deferred maintenance"
plan.
In
the "buy now, pay later" plan, even though borrowing for
the expressway has already begun, and will be completed
(according to the region's plan) by 2002, interest payments
do not begin in full until 2005 (and will continue till
2022). In this way, the tax impact of the region's borrowing
will not become apparent until after both the 2000 and the
2003 elections.
Under
the "don't pay a cent of interest plan", the region adds
the borrowing required for the expressway to the general
regional debt. The figures the region reports for expressway
costs for homeowners only include repayment of the principal
of the loan. The interest payments (which just went up because
of the credit rating drop) will just be added to your tax
bill under "general debt servicing".
In
the "development charge" plan, the region pretends that
it is collecting enough in development charges to help pay
for the expressway. While the region is collecting some
development charge revenue, it has always been an insignificant
amount relative to total spending for capital expansion
projects. As a result, the development charges account is
habitually overspent and is "bailed out" by the local taxpayers.
In 1995, $53.4 million in debt accumulated in the development
charges account was transferred into general regional debt.
Even though when the money was spent by the region it was
covered by "development charges", the end result is that
the repayment of both interest and principal eventually
makes it on to your tax bill.
The
real ticking time bomb is the "deferred maintenance" plan.
In this plan, the region is using money from the current
budget in order to finance capital expansion projects (the
largest being the expressway). In order to find money in
the current budget to do this, the region postpones maintenance
of roads, waterworks, and sewers. In 1998, maintenance of
this vital infrastructure was "underfunded" by $117 million.
The
reason to do this is the same as the "buy now, pay later"
plan: the tax increases that would be necessary to properly
finance the expressway can be deferred until after the expressway
is completed (and after the next election). This is an extraordinarily
dangerous game to play with an entire city, because deferring
maintenance means infrastructure will begin to fail at ever
increasing rates. At a minimum, this will mean increased
risk of service disruptions (e.g., water and sewer) and
inconvenience (decreased "ridability" of roads, damage to
vehicles). The effects of more serious infrastructure failures
(e.g., the main trunk sewer line under Burlington Street
urgently needs $60 million in repairs) are more difficult
to predict.
The
drop in the region's credit rating is just the tip of the
iceberg. The region needs to move rapidly away from creative
accounting practices and deal with the underlying problems.
As a beginning, the region needs to recognize that since
it does not have the money to adequately maintain its existing
infrastructure, it is unreasonable to go heavily into debt
just to build more.
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