Debt-service ratio well below maximum allowed, far below ’90s levels
The net debt for St. John’s is nearly a quarter of a billion dollars, but the city’s finances are in great shape, say councillors and staff.
St. John’s Coun. Danny Breen answers questions about the city’s latest budget in the Green-Foran Room at St. John’s City Hall Monday evening. — Photo by Rhonda Hayward/The Telegram
As noted in budget documents released Monday by the city, the net debt is about $246.8 million, an all-time high, up from $202.2 million a year ago. But the city’s debt-servicing ratio — the percentage of revenue spent on debt — sits at “a respectable” 10.2 per cent, notes the budget.
Bob Bishop, the city’s director of finance and city treasurer, noted the city’s long-term debt policy allows it to go as high as 17.5 per cent.
“If you go back to the mid-’90s, we hit around 20 per cent at one point,” he said. “We’ve been very successful in getting that debt-service down.”
Coun. Danny Breen, chairman of the city’s finance and adminstration committee, pointed to recent positive credit ratings from financial agents Moody’s and Standard and Poor’s as evidence of the city’s excellent financial health.
“Our positive credit ratings have allowed us to take advantage of lower rates in the market, thus lowering our debt-service charge,” he said.
An imminent $60-million bond issue is expected to have an interest rate of 4.5 per cent, a rate that has been trending downwards for the past 20 years, said Derek Coffey, the city’s manager of budget and treasury.
By comparison, a $5-million bond issue that matures in 2015 has an interest rate of 9.4 per cent, and an $18-million bond issue that matures in 2025 has an interest rate of 5.534 per cent.
Coffey acknowledged part of the decline is an overall drop in interest rates, but it’s also due to the city’s good credit record. The city borrows for capital works projects — such as the convention centre expansion — issues 20-year bonds to pay for them and includes debt payments in the operating budget.
Without borrowing, said Coffey, the city simply wouldn’t be able to afford much-needed projects that are cost-shared with other funding partners such as the province and the federal government.
“If we had to go out and do every capital project out of cash flow every year, we’d never be able to afford it,” he said.
“If we wanted to stay debt-free and not borrow anything, the more projects we did in a year would drive our expenditure base up and down, all over the place, depending on how many projects we did.”
When bonds are issued, the city puts payments in a sinking fund, which reserves funds — 2.5 per cent a year each year — over the life of the bond to retire it when it matures. For the $5-million bond maturing in 2015 mentioned above, for example, the city has $4.7 million in reserve.
“A sinking fund ensures you have half the fund there automatically,” he said.
“We use that cash, of course, over the life that it’s in that sinking fund to buy investments in the city’s funds, so we’re earning interest in there as well, which also goes towards paying back the bonds. That’s another reason we have a great credit rating, because when we put the cash into the sinking fund, effectively half the debt is guaranteed anyway.”