Dear Winnipeg

A Fun Blog About Infrastructure and Municipal Finance

If It Looks Like a Debt, and It Quacks Like a Debt, Then It Must Be a… Zombie?

Look at all that crumbling infrastructure!

Dear Winnipeg,

I went to City Hall again today to speak to Council about the new Financial Management Plan. Yup, just another random crazy guy going to Council to rage against the machine.

[Actually, that’s only half true. I wasn’t there to rage against the machine.]

Here’s a version of what I said:

Good morning Madam Speaker, Mayor Bowman, esteemed Councillors,

My name is Michel Durand-Wood and I am here today to speak about the proposed Financial Management Plan before you.

Look, I realize reading through a Financial Management Plan sounds about as fun as crossing Portage & Main on foot (except not as controversial).

But, as you certainly know, this is a key policy document for the City. It’s basically what will frame all other policy decisions, including budgeting.

So as a responsible, and I guess somewhat nerdy, citizen of Winnipeg, I did my civic duty and I read through the plan. And later, when my electricity finally came back on after the storm, I watched the YouTube videos of the SPC meeting and the subsequent EPC meeting to see what councillors had to say about it.

So colour me shocked when I found out that EPC approved it without any discussion or even a single question. Surely a document of this importance deserved a little more than a rubber stamp?

I was reassured somewhat watching the councillors in action during the Finance Committee meeting. I really want to congratulate Councillor Gilroy and Councillor Nason for their relevant and often probing questioning of the public service on this plan.

But one question in particular, and I believe it was from Councillor Nason, really stuck with me.

As you know, the Financial Management Plan sets out eight financial goals, and I’m quoting directly from the plan here, “against which current and future financial performance can be measured”.

One figure in the plan reports that from 2011 to 2018, the City’s property assessment base grew by 58%.

Councillor Nason’s question was, “Compared to what?”

That’s an insightful question. Because as with any financial figure, reporting it on its own is kind of irrelevant. Is that good? Is that bad? We can’t know. A financial figure only has real meaning when it’s compared to something else… either that same figure over time, or in relation to another measurement.

Now Councillor Nason was asking to compare it in relation to the overall growth in GDP, and for the record, I don’t think he ever got a straight answer on that, but personally, I was more interested in comparing the growth of the assessment base to the growth under the other goals in the plan, specifically, #7 debt, and #5 infrastructure.

Because if you’re going to brag about the growth under one goal, surely you’ll want to do the same for all the goals?

Well, surprise, surprise, those numbers aren’t in there.

But being the resourceful nerd that I am, I WAS able to find the debt numbers in some other report buried on the City website, so I can present those to you now. [You’re welcome.]

While our assessment base grew 58% over those 7 years, it turns out our debt grew by about 100% over the same period. That’s right, it roughly doubled. And it is projected to continue increasing, so that after 10 years, it will have almost tripled.

[That 58% doesn’t sound too hot now, does it?]

And not to put too fine a point on it, but if Councillors Nason and Gilroy had been presented with that information at SPC, I’m pretty sure they might have had some follow up questions.

So what about the infrastructure comparison? How much did our infrastructure grow from 2011 to 2018? Well, I’m very sorry to have to let you all down, but it turns out my super-nerd powers have limits. I couldn’t find that information anywhere.

And that’s extremely troubling, and ultimately why I’m here today.

You see, the reason that’s troubling is that infrastructure, from a financial perspective, behaves very much like debt.

When a city borrows money, it comes with a future financial liability, an obligation to pay at a later date. We know when, and how much.

Similarly, when a city builds a piece of infrastructure, it also comes with a future financial liability, an obligation to the citizens of that city to maintain and repair it, of course, but also to eventually completely replace it when it comes to the end of its useful life. And to replace it again every time it comes to the end of its life after that. Forever.

From the moment we build something, like say, the sexy new Waverley Underpass, we already know that one day, we’ll have to replace it. And through the magic of Asset Management Planning, we can even know when, and how much it will cost. Just like with debt.

So if it looks like a debt, and it quacks like a debt, shouldn’t we treat it like a debt?

We obviously can’t take on an infinite amount of debt without compromising our ability to meet our future obligations to repay it.

But is it different with infrastructure? Can we just go out there and build an infinite amount of infrastructure, and then bask in the warm glow of assessment base growth?

Because that’s certainly what the underlying assumption seems to be in this Financial Management Plan.

Here’s how the plan treats debt: it measures both how much our debt costs us, as well as the total amount of debt that we can prudently afford.

But for infrastructure? It measures only how much it costs us.

What that says is that we’re assuming that more infrastructure is always better, because it also helps grow our assessment base, so no need to measure it. But we can debunk that myth with a single example.

Would we spend a trillion dollars to build infrastructure if it only grew our assessment base by a single dollar?

Of course not.

So, if 1 Trillion to 1 isn’t it, then what IS the ideal ratio for new infrastructure? Because remember, the new infrastructure should create enough new tax value not only to provide services to those new areas, but also to replace itself, continually, forever.

And furthermore, if that ratio exists for new infrastructure and its newly-created assessment base, then surely it also applies to existing infrastructure and the current assessment base.

It sounds like something the MBAs and CPAs we have working for us would be able to hammer out pretty easily. A lot like the maximum debt ratio we had them calculate.

Because here’s the kicker… infrastructure is like debt, except a lot worse. When debt comes to the end of its term, we pay it, and that’s the end of it. When infrastructure comes to the end of its life, we pay to replace it, and then the clock just resets and starts over again. It’s like a never-ending zombie debt.

And yet, we haven’t ever bothered to calculate the maximum amount of zombies our assessment base can handle.

Seems like a massive blind spot in our Financial Management Plan.

So here’s my question: As with debt, where we have determined a maximum amount we can prudently take on as a proportion of our income, what is the maximum dollar amount of infrastructure we can prudently take on as a proportion of our income, given the inevitable obligation to replace all of it, periodically, forever?

In other words, we have a debt ceiling, so how much is our infrastructure ceiling?

What I’m asking for here today doesn’t cost any money, and it doesn’t require a policy or a by-law change.

I’m just asking you to ask a question.

And I know you’re thinking, why should we listen to some random guy from Elmwood?

The truth is, I didn’t just wake up one morning having had a vision of assessment base to infrastructure ratios etched upon gleaming stone tablets handed to me from a cloud by the Mayor.

All across North America, a movement for Strong Towns is having cities do the math, all the math, on their financial decisions. Cities like Minneapolis, Edmonton, Victoria and even North Battleford, Saskatchewan are starting to ask themselves these questions, and the answers are leading them to very different policy choices than we are making.

We’ve had a Financial Management Plan in place since 1995 and this is now the third time we’ll have renewed it. Yet despite that, our financial position has continued to worsen. We never have enough money. Debt is increasing. Budgets keep calling for more and more “hard choices”.

Clearly there’s something we’re missing. And discovering what that is can start with a single question.

What is the maximum dollar amount of infrastructure our assessment base can reasonably be expected to pay to replace?

We have nothing to lose in asking, and everything to gain. So just ask.

Thank You.

— Me at City Hall today, pretty much

Love,

Elmwood Guy