Municipal Finance 101

by Shaun McLaughlin

According to brochures from nine of the current slate of candidates, the municipality’s finances are a mess. Their statements at candidate meetings reinforce that perception: apparently, the municipality taxes too much, it has too much debt and it mismanages our reserves.

Voters should view all such remarks with skepticism. First-time candidates — and reruns trying to make a mark—always make alarmist statements about municipal finances. I did in 2010. I wasn’t lying—I just had my facts wrong. That is okay. It is an honest mistake. Sadly, one mayor candidate is calling for a forensic audit. That is just posturing and fear mongering. (The town has its books audited each year by the same firm that audits the county and most municipalities in Lanark.)

Let’s have a look at reserves, debt and taxes. (I have had all this material vetted. You can count on the numbers.)

Taxes

The municipality needs money to provide services and programs, and to maintain or enhance its infrastructure. Money comes from taxes, user fees and grants.

The town had to raise taxes faster than inflation between 2013 and 2018, under the long-range financial plan (LRFP). There was no choice. Previously, our town did not spend enough on buildings, roads and bridges to keep them in good shape. For example, eight years ago, Public Works said we had fifteen bridges that needed replacement or major overhauls within 15 years. (We’ve fixed eight so far, at a cost of between $400,000 and $1.3 million each.). We did this by planning for replacements over time, which resulted in a few years of higher-than inflation-tax increases.

Now that the six high-tax years are behind us, we hope tax increases will be set at about the inflation rate or less.

Along with the LRFP, we have an asset management plan. It lists all infrastructure (buildings, roads, bridges, vehicles) and includes a schedule for repairs and replacement. This way, we always know what capital projects are pending. It takes the guessing out of budgeting. (Such plans are now a provincial requirement under a new asset management regulation.)

Reserves

Several candidates are campaigning on the premise that the municipality is mismanaging or squandering our reserves. The truth is the polar opposite.

Reserves are funds accumulated similar to a savings account. When a municipality has healthy reserves (money in savings), it can borrow from itself for some capital purchases and avoid bank interest. The municipality department that borrows the money pays it back to reserves through its budget anywhere from 5 to 10 years in order to preserve the reserve and not deplete it entirely. For example, Public Works used $300,000 in reserves to switch old streetlights to modern LEDs. The savings in energy costs will pay off the “borrowed” money in 10 years.

Reserves will rise and dip, but the long-term trend should be up. At the start of the LRFP in 2013, total reserves were just under $5.9 million. At the start of this year, they were at $8.15 million. Several capital projects in the 2017 budget were not completed. They shifted to the 2018 budget along with their reserve allocation so that Council didn’t have to find the money again.  That led to an extra $820,000 coming from reserves this year, but unexpected money came in from the sale of industrial park lots to partly compensate. At the end of this year, reserves should be around $7.6 million.

Several candidates are alarmed that reserves dropped this year and promise to fix it if elected. Nothing is out of place. A temporary drop in reserves means the municipality is borrowing from itself and not banks or using money set aside in reserves for unfinished capital projects from the previous year. The money did not disappear. It is either being used temporarily to fund capital and will be replaced or it is being used for the projects that it was originally set aside for.

Debt

Debt is what the municipality must borrow from outside institutions (banks mostly) to help fund large infrastructure improvements, like bridges. Borrowing spreads the cost of the project over the life of the asset being replaced. Consider the alternative. If the municipality tried to pay for a $2 million bridge in one year, every property in Mississippi Mills would be hit with a one-time extra levy of about $400. People today would pay for an asset newcomers would enjoy for free. Borrowing is fairer, equitable and sound fiscal management.

As of the end of 2018, our total debt to lenders is estimated to be just over $17 million. (A third of that relates to the wastewater treatment plant.) Because of the huge cost of repairing culverts and bridges, the municipality will need to borrow $3.5 million in 2019 once the 2018 projects wrap up. In 2019 the debt will peak at just over $23 million. The town took advantage of lower interest rates to address the backlog of capital replacement. Don’t worry, the municipality’s debt is still within the safety zone for debt set by the province. Under the LRFP, our total debt will decline steadily and thus reduce the burden on taxpayers.

If a new Council decided to stop borrowing, where would they find the money for big projects? The only option would be to deplete reserves or raise taxes and user fees.

Stay the Course

Lanark County, where over one-third of your property taxes go, already benefits from a similar financial plan. Between 2006 and 2012, the county imposed high annual tax increases to catch up. Tax increases have been about 2% in the last three years. The county’s debt, already far less than its reserves, is headed for $2 million by 2020. This is an enviable financial position. This is where Mississippi Mills will be if we stick to the plan.

Any attempt by a new council to mess with the fine balance between debt, taxes and reserves—like promising no tax increases for four years—could lead to a widening infrastructure gap and financial problems later.