City finances must weather some incoming storms
Inflation, interest rates and investment returns are three I’s finance officials say will have marked effect on city finances heading into 2023, a committee heard Thursday afternoon.
The audit committee heard that as interest rates rise, so too will future borrowing costs for the City of Medicine Hat, but the nature of how the city borrows money should avoid any large rate shock.
As well, administrators say the city’s $120-million annual budget is subject to inflation, but is braced this year by a surplus in 2022, and the effect of lower returns in the $500-million investment portfolio could be short lived.
Corporate services division head Dennis Egert said the city has a strong balance sheet and a strategy to manage its longterm oil and gas well liabilities, but wider economic factors, like rising costs and lingering effects of COVID, could cause strain of city finances.
“We do expect challenges in 2023 and beyond, and we’ll have to work with the community collaboratively in order to get beyond that,” said Egert in conclusion, noting the economic uneasiness is well known — poorly performing stock, markets, rising prices and central banks raising interest rates to curb inflation.
The city does not, by regulation, borrow money at variable rates, and longer-term procurement process, labour contracts and buying policy can avoid inflation — noted at 6.3 per cent in Alberta — for a time, said Egert, but the city is not immune.
“It will increase the cost of providing municipal services, all of it will be impacted,” said Egert. “The question is whether it’s permanent or transitory and time will tell, but it could take longer than we might have expected (in previous inflationary cycles).”
In terms of income, the city is expecting $3.4 million less than budgeted in usable investment income, and lower general revenue related to pandemic slowdown.
That is a forecast to yearend, and could be offset by $5.7 million in surplus set aside last year to cover lingering challenges left over from COVID’s effect on the economy.
If projections holds, that would leave a $2.3-million surplus to cushion unexpected blows this year.
As for borrowing, the city’s $401 million in long-term debt is subject to locked-in term rates by provincial regulation, but those rates offered on new debt are in most cases double compared to last June.
Coun. Andy McGrogan questioned how the city might consider scaling back new construction considering the higher borrowing costs.
“Inflation is a real factor, and each project has a contingency amount, and if that’s not enough, then there’s a question of smaller scope, or coming back to council for (re-approval) with a budget amendment,” said Egert.
The 2023-24 city operating and capital budget will be finalized later this year, but two large items in the current capital plan still need financing this year — a new $26-million water treatment plant, and the final tranche of financing for the Unit-17 power plant.
That $66-million power project could cost $13 million less than expected, according to new estimates.
Overall, the city’s investment holdings posted a negative 6.55 per cent return over the first four months of 2022, about equal to benchmarks the city uses as comparisons.
City treasurer Ryan Wright told the committee in five years since the portfolio was broadened to include equities, it has produced $50 million more than had it remained in conservative bonds.
“Nobody likes to see negative returns, but that needs a little framing,” he said. “Fixedincome (investments) and the markets have performed very badly, and inflation is the worst it’s been in 30 years.”
He said markets would recover, and the city holds a long-term strategy for funds, most of which is needed for long-term priorities.
“We have a well-diversified investment portfolio and a long-term view in respect to volatility,” he said.
In business units, the high gas and power prices could add an additional $18 million in profit for the city’s utility production businesses.
The original budget predicted a $66-million surplus by year end for the combined gas and power production business unit, but now could see increased sales revenue push it to $88 million.
Once capital requirements are factored in, the commodity businesses could provide a $48-million dividend to a variety of city funds.