Barrie and Borrowing

Some talk recently about the City’s debt. True that we have had to borrow recently to build (among other things) the new clean water plan, the expansion to the pollution control plant, and the Holly Recreation Centre.  Here’s a message I recently sent to someone who was asking about the City’s debt:

The easiest way to think about this is like a mortgage on your house.  Almost nobody has enough cash to buy a house outright, so you take out a mortgage.  The City is no different – we don’t have hundreds of millions of dollars in the bank to use when we need to build a new building, so we essentially take out a mortgage.   The key question in making this decision – just like with your home budget – is how much of a burden the mortgage payments are.  Can you make your mortgage payments, and pay for everything else you need in life, without running into any kind of financial trouble, based on your income. 

In 2010, our debt payments were 4% of annual revenue.  This is the equivalent of someone who makes $40,000 a year having mortgage payments of $1600 per year.  Obviously, that’s a very low level of borrowing costs relative to income. 

But – Barrie does have to take out a bigger mortgage over the coming years, because we don’t have the cash to build the clean water plant or the pollution control plant.  However, one of the reasons our credit rating has stayed consistent despite the extra debt is because not only is our current debt relatively low, but Standard and Poor’s feel that our revenues are also likely to increase in the coming years due to economic growth (the new TD operations centre is a good example).  So while our debt costs are increasing, they’re very low to begin with, and the analysts believe we will have more income to cover increased debt charges in the future.

Overall, however, I think Barrie does need to reduce some areas of capital spending.  While we actually need to spend more than we have been on fixing roads and pipes, we need to take a very hard look at other projects to ensure we’re making fiscally responsible decisions.  This year, the draft capital budget calls for a fairly dramatic reduction in spending and I think that’s appropriate given the level of spending over the past few years, associated in part with the economic stimulus projects.