Q&A: Understanding York Region's $2.5B debt

YorkRegion.com
Feb. 25, 2015
Lisa Queen

At a regional budget meeting last week, some councillors said they are routinely asked about the region’s debt and are concerned about people’s misunderstanding of the issue.

York Region CAO Bruce Macgregor and treasurer Bill Hughes sat down with The York Region Media Group this week to explain what the region’s debt is all about.

Q: How much is the region’s debt?

Macgregor: $2.5 billion.

Q: We all understand the concept of debt, but can you explain the region’s debt in terms the average person can relate to?

Macgregor: I throw out a mortgage as an analogy because it is a huge purchase and I know very few people who buy their first home, let alone subsequent homes, (with just) cash. I don’t know any of these people. Everybody with that sizeable of an investment borrows and pays it off over time. It’s a big investment. And so, too, is the infrastructure needed to underpin communities.

Hughes: The region borrows money to build infrastructure — water and wastewater and roads and all that kind of infrastructure. The region borrows money to build the infrastructure needed to support growth. So, when a new person comes to the region and they buy a new house, part of what they are buying is all of the services to make that house something they can actually live in. You need your toilets to flush, you need to be able to turn on the tap, you need to be able to drive your car somewhere. All that infrastructure that makes living in the house possible has to be built and it has to be built before the houses are built. So, the region borrows the money in order to build all that infrastructure. And the way the debt, the money the region has borrowed to build that infrastructure, gets repaid is that when somebody buys a (newly constructed) house, they pay, as part of the price of the house, something called a development charge. The developers pay the development charge to the region. The development charges then become part of the price of the house. And that fee, the development charges, is what is used to pay back the debt.

Q: Why is the debt so high? We keep hearing the region’s debt is high, especially in comparison to regions around us.

Hughes: The region’s debt is high because we had to build a lot of infrastructure in advance of growth. If you think of the region of York, what makes York different from other regions? There are a couple of things that make York different. One thing that makes York different, it is not directly connected to the lake (Lake Ontario). So, Toronto, Peel, Halton, they are all right by the lake. So, when they take water from the lake or they return water to the lake after it has been treated, they’re right there. Whereas York, we are on top of those regions, but we are still getting most of our drinking water from the lake and we still return the water to the lake. We have to go much farther for that to happen. And, also, the region is very big geographically. It is very big. So, it’s expensive to service all the different parts of the region compared to more compact municipalities that are right on the lake. So, there are things about the region itself that make it more expensive to build the infrastructure needed to support growth. Also, the region has a lot of debt because it is at a relatively early stage of its development. So, you have to build the infrastructure first before the development comes and you get the development charges to pay back the development. If you compare us to some other regions, we’re still at a relatively early stage of development. And that has changed how we finance infrastructure to some extent. Because our development is somewhat later, we don’t benefit from provincial subsidies to the same degree that other regions that developed sooner under a different financial arrangement from the province benefitted. We’re paying for more of our development through development charges that some others didn’t.

Q: So, Peel or Halton got money from the province when they were developing that we didn’t get?

Hughes: Not exactly and that’s complicated. But the province actually built some of Peel’s system and then there was a de-evolution of responsibility for water and wastewater (infrastructure) some years ago, So, Peel acquired a system that the province already built. Not the whole system.

York Region CAO Bruce Macgregor: We benefitted from some of that in the early years as well. The early parts of the York-Durham system were subsidized provincially and federally at the time because both governments had an interest in making sure there was an adequate housing supply in what was emerging as the Greater Toronto Area. So, we had that early benefit but that waned in the 80s and what took its place in the early 90s was the Development Charges Act and the notion that growth will, to the extent it can practically, pay for growth and the provincial and federal governments pulled themselves out of those subsidy arrangements.

Q: But the region has been growing quickly over the last 25 years, so why is the debt an issue now?

Macgregor: The debt for some of our infrastructure until the late 90s was on the provincial books. We were paying it, but it was on the provincial books. It was associated largely with the York-Durham (sewage) system and the original build…Part of the de-evolution in the late 90s was transfer of water and wastewater works from the province to municipalities. That was when we and Durham took over the York-Durham system. With the system came all of the liabilities, which included some of the debt.

Q: When did the debt become more of a concern in York Region?

Macgregor: We’ve added to the debt as we’ve constructed additional infrastructure improvements. So, that debt has grown and if you wonder when it became a concern, I would say 2013, 2014 as we reached (debt) numbers that were significant and had to specifically take into account some growth management tools to ensure our master planning wasn’t advancing too fast in advance of the rate of growth…I’m not sure concern is the right word, because we’ve always been monitoring our debt relative to our growth and how much we build in advance of the growth we’re anticipating. So, we cautiously watch that. And the (economic) downturn that hit the entire province, in fact the planet, in 2008-2009 saw slower growth rates in all of our communities and the consequence of that was to look at the capital projections we had before that time…(We still need to build infrastructure because) the reality is it’s been proven over time that growth will occur in the Greater Toronto Area and it will occur in our communities. We can either plan for it and prepare for it or not plan for it and be ill-prepared for it and face the consequences of people just piling into existing communities and overloading existing systems. It’s not debt we’re taking on per se. It’s debt we’re issuing so we can continue to grow, we can continue to offer employers choices in terms of locations in our communities. That’s a success story in York Region. We’ve been pretty good at attracting top employers and along with that comes places where (employees) can live in those growing communities.

Hughes: The easy way to explain it, we’ve had to build some really big pieces of infrastructure, really, big, expensive pieces of infrastructure that will last for a long time and will serve population growth for decades. For example, there is a lot of work that has been done at the York-Durham sewage treatment plant. There was also a southeast collector sewer that was about $500 million dollars on its own. There have been a number of quite large pieces of infrastructure that had to be built. And they last a very long time, but you can’t build them in little pieces. You have to build them all at once. The nature of capital investment is that it is lumpy

Q: Are you worried about the amount of the region’s debt?

Hughes: I don’t think worry is the right term. I think it’s prudent for us to manage the region’s debt. The debt is high and we’ve taken steps to prevent it from becoming very much higher.

Q: Is it higher than it should be?

Hughes: No.

Q: What is a reasonable amount of debt to have?

Hughes: I’m paying attention to the debt. Where we were a couple of years ago with the capital investment plan that we had, we would have accumulated a much higher level of debt than we have now. In fact, the projections at the time showed our debt would have more than doubled compared to what we have now. I think that would have been too high. So, starting last year, council took pretty strong measures to try to bring what we call the peak level of debt, which means the highest amount that we will ever have, down a lot. From over $5 billion peak level of debt, we came down with last year’s budget and the fiscal strategy associated with that budget, we came down to $3.7 billion. And now, with this year’s budget and fiscal strategy, we are coming down to $2.9 billion as a maximum amount of debt we will ever have, in 2017. We’re at $2.5 billion now and we will still be accumulating debt for the next couple of years and then the debt will start to fall. The region is not like the federal and provincial governments in how we deal with debt and how we accumulate debt. The federal and provincial governments run operating deficits, for example, and that adds to the total amount of debt. If you spend more than you have in any given year, you have a deficit. You have to borrow that money and it becomes part of your debt. That’s what the federal and provincial governments do. Municipalities are not allowed to do that. We are not allowed to run operating deficits. We are only allowed to borrow money for capital (infrastructure)… There was some deferral of (regional) capital projects last year and this year, but that was only part of the fiscal strategy. Another key part of the fiscal strategy was to make sure we build up our reserves and use them wisely and minimize the amount of debt. For example, we have something council created last year called the debt reduction reserve and the purpose of that reserve is we don’t have to issue any debt that will be paid for through property taxes. So, in 2014, there was no debt issued that will be paid for through property taxes. Based on this year’s budget, there will be no debt issued in the next 10 years that will be paid for through property taxes.

Q: How is the debt being paid off?

York Region treasurer Bill Hughes: Let me deal first with the property tax. The total amount of debt that your average person in York Region owes that you pay through property taxes is $218 and the amount they are paying on their property tax right now is less than three cents per dollar of property tax. On the water and wastewater rate, the per capita debt, so the amount each person owes that will be paid back through water rates, is $327. All the rest of the debt, about 85 per cent of the debt, will be paid back through development charges or fees developers pay for new houses or new retail or new offices or whatever There is no new tax levy debt in 2014 and there will be no new tax levy debt, but there is some tax levy debt that was previously issued so that is where the $218 per capita comes from. You pay that back gradually over time. We issue debt typically for a 20-year period and it takes about 20 years to pay it off.

Q: So, my grand total, unless I buy a newly built house, is $545?

Macgregor: That is the total extent of your indebtedness.

Hughes: Over 20 years, which is the typical term of a debt, if you just count the principle and not the interest, it’s about $25 to $27 a year (for the average resident).

Q: What interest rate are you paying for this?

Macgregor: The last 20-year debenture was 3.815 per cent. A (lot) better than a credit card.

Q: What am I getting for my money?

Hughes: You’re getting the whole range of infrastructure that the region provides that is not growth-related infrastructure, so there’s a portion of water and wastewater that is not growth-related. So you’re buying that with your tax levy debt. You’re buying regional roads, You’re buying affordable housing.

Macgregor: Some transit.

Hughes: The community environmental centres, like waste management depots. All these kinds of things, regional facilities, get paid for through tax levy debt to the extent we issue tax levy debt. Like I said before, we’re not going to have to do that any more because of the debt reduction reserve.

Q: Why was our credit score lowered by Standard and Poor’s?

Hughes: It went down one notch. They have different classes of credit ratings and the top class is called superior credit rating, so AA+, which is one down from AAA, is still in the superior credit rating category. Better than Ontario, better than Quebec, better than Toronto, better than Montreal. So, we’re in very good company in terms of the credit rating. Why it went down? Essentially, two reasons that are connected. One is what is called after capital budgetary performance. Essentially, what that means in layman’s language, Standard and Poor’s thought the region was spending too much on capital and that was leading to the second reason, it was leading to high debt levels, which carried with it some risks. That was the reason they lowered us one notch….Given the level of development charge collections we’ve seen in the last two or three years, we felt, independent of what the credit rating agencies did or didn’t do, we felt it was prudent to bring our total level of debt down, the peak level of debt, plus the total amount of new debt we would issue over the next 10 years. We felt it was prudent to bring that down, bearing in mind growth has not been as fast as in the really fast-growing times.

Q: Do you think the debt is affecting York Region’s reputation?

Hughes: The only way I can talk about that is to talk about our ability to issue debt. The purpose of a credit rating is to signal to the people who buy your debt how credit-worthy you are, so how likely you are to pay back your debt. What you would expect to see if potential investors were concerned about your debt, you would expect to see fewer people buying your debt, you would expect to see it take longer to sell your debt issue and you would expect to see it cost more. In other words, you would pay a higher interest rate. We’ve had one debt issued since Standard and Poor’s downgraded our credit rating. It sold out in five minutes. We had a number of brand new investors as well as old investors and the interest rate was one of the lowest rates we’ve ever had. So, you might ask why is that when they had just downgraded our credit rating? There are a couple of reasons. One, it’s still a really great credit rating. The other reason is a lot of investors do their own assessment. So, yes, they look at what the credit agencies say, but they also do their own assessment of York’s credit worthiness and they all think York is very credit worthy. So, it really hasn’t had an impact on our ability to issue debt.