New policy will guide debt management in Dawson Creek

The debt management policy, prepared and submitted by chief financial officer Shelly Woolf, was adopted on Monday at a regular meeting of council. Woolf said while many of the objectives and guidelines included in the policy are already followed, the document serves as a comprehensive and integrated approach to debt management.

“This policy is broad in nature to provide guidance, promote objectivity and promote long-term planning," she said. "It looks at the city’s capacity, as well as looking at affordability and flexibility, and it provides targets and measures.”

The objectives of debt financing as laid out in the policy are for long-term capital investment, as a leveraging tool to secure third-party funding for capital investment, and to ensure an equitable distribution of investment cost for ongoing service delivery.

"Long-term borrowing is important for funding assets of a significant amount," said Woolf. "You want to spread the cost over the lifetime of the asset, but you want to do it in a sustainable manner so that the debt load is stable, not volatile."

The policy also stipulates debt may be taken on, temporarily, for the purposes of ensuring a line of credit pending the receipt of tax revenues, as a bridging instrument pending long-term financing or for unanticipated financial emergencies, but not for operating activities.

In terms of repaying debt, Woolf said the policy seeks to take a more comprehensive approach to ensure cost effectiveness. She said traditionally water and sewer projects would be financed over a 20-year term, for example, but the new policy will consider factors such as interest rates, current and future debt load, and the expected lifespan of the asset to determine the most cost-effective term of repayment.

"When you at long-term borrowing, you want the security of a fixed debenture, but over 20 years you are paying twice as much interest as if you would had you paid it over 10 years," she said. "Short-term financing in the last five years has been significantly lower than long-term rates, so if use short-term instruments, you can actually gain a little bit by the interest gap."

She added the policy will be complimented by the tangible capital asset policy undertaken last year that puts a lifespan on each asset the city owns.

Woolf also submitted a statement of financial condition, which includes financial indicators such as financial assets to liabilities and own-source revenues to taxable assessments for the municipality as of Dec. 31, 2010. The document is meant to serve as a baseline and provide historical data and future trends to guide debt management decisions.

"You have to look at the story underlying the numbers to understand what is happening," said Woolf. "These indicators actually tell a story, and it's important to consider that story or trend within the context of what we're planning to do in the future."

She added there is still work to be done on indicators such as the depreciation of capital assets over time and demographic data that could further inform that long-term planning.

In summing up the policy, chief administrative officer Jim Chute said it represents “a significant change for council.” He said while the debt objectives and provincial mandates outlined in the policy are not new, the guideline for never spending more than 15 per cent of operational expenditures on debt repayment is new and will be a limiting factor when considering future debt.

He added regardless of those guidelines, and the limitations imposed by the Community Charter, council will also consider the indicators included in the statement of financial condition when considering taking on more debt, which he said is not common among municipalities.

As of 2010, the city’s outstanding debt totaled $25.4 million, and is expected to fall to $23.5 million in 2015. Woolf said the city is carrying 57 per cent of its debt capacity as of this fiscal year, which she said is “a very flexible, affordable, sustainable balance to have at this time.”