Growth - costs and risks
Published December 28, 2007
We are in the biggest boom that the province has known in recent memory; however, as the media often points out, not everyone benefits. Some are in fact worse off than before. Municipalities are for the most part among those for whom this boom is more of a curse than a blessing. Rising petroleum prices have resulted in crushing inflation for those purchases that a municipality requires: fuel, asphalt for roads, skilled labour and materials for construction. At the same time, a burgeoning population is placing demands on transportation, housing, recreation and social services.
As if this were not enough, there is an expectation on the part of many that municipalities have a responsibility to act as banker for future development and to do so for free. Any area to be developed requires infrastructure linking the development to the existing community. It has become a tradition that the municipality both fund and construct this infrastructure - roads, sewers, water systems, sidewalks in advance. Once the development has been built out, the developers must reimburse the municipality for the cost together with interest paid. At first blush, this seems fair enough; however, digging a bit deeper shows that this system places the municipality at a disadvantage in several ways.
The municipality must borrow the money up front to construct these facilities. This amounts to a low interest rate loan to developer. The municipality makes no economic rent from this transaction as the principal and interest are repaid at cost. In a real business setting, the lender would be able to charge a risk premium to reflect the reality that lending money to a municipality is safer than lending it to private business. The risk that is absorbed by the municipality flows from the fact that the development may be delayed or never happens for various reasons such as changing market conditions or business failures. Any of these can leave the municipality holding the bag with a loan to pay off and reduced or no revenue to pay it. This does happen, more often than one might think. Meanwhile, the existence of this loan reduces the municipality's ability to borrow money for other projects, much as in the private world, co-signing someone else's loan reduces one's ability to borrow for oneself.
What does this mean to residents? Money, whether borrowed or taken directly from rates and taxes, spent in this way, is money not available for the recreation facilities, roads and services that we want and need. To justify spending on development in this way, there had better be strong evidence that there is a net advantage to the municipality. In the case of much industrial and commercial development, this is often true. In the case of residential development it rarely is. Growth is expensive. It requires financial sacrifice on the part of taxpayers. I hope they are seeing some return for this sacrifice, though the evidence is not strong that this is the case.
Alan Dunn
Councillor, Ward 6
780-464-8206
dunn@strathcona.ab.ca
Last updated: Wednesday, March 10, 2010
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