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30-year borrowing term for community facility
By Chris Conway/e-KNOW
District of Invermere council has authorized the borrowing of $5.6 million over a 30-year term at an interest rate of 2.78%.
The loan will cost district taxpayers $4.7 million in interest and will be funded through an annual parcel tax of $96.16 starting in 2016.
The loan will be obtained through the provincial Municipal Finance Authority (MFA) for $5.6 million and will fund the construction of the new multi-purpose community centre.
The borrowing is authorized pursuant to the Loan Authorization Bylaw, which was adopted by council on Nov 12, 2013. On Nov. 2, 2013 a referendum on the bylaw received 75% approval from residents.
At the July 14 council meeting, Chief Administrative Officer Chris Prosser presented council with a resolution for borrowing over a 20-year term, which would set the associated parcel tax at $128 per year. Prosser apologized to council that this would exceed the $100 parcel tax as had been promised in the 2013 referendum. He stated, however, that a 20-year term would reduce the total interest burden on the municipality. Prosser advised that increasing the term of the loan would reduce the parcel tax amount and that this option was available to council. He reminded council that the life of the building is 80 to 100 years and hopefully longer.
A report prepared for council projected a parcel tax of $128.76 for a 20-year term with total interest of $3,113,600. Alternatively for a 25-year term the parcel tax would be $109.01 and $3,892,000 in interest. A 30-year option had a parcel tax of $96.16 and interest of $4,670,400.
In all term options the interest rate is the same at 2.78%, which is locked in for the entire term of the loan.
Prosser also presented the option of deferring borrowing until the spring of 2016. However, he stated this would incur the risk of an increased interest rate. He stated that the interest rate for longer term MFA loans has been rising.
Mayor Gerry Taft asked Prosser about early payment options. Prosser responded that a 20 and 25-year term would offer a 15-year early payout option. A 30-year term would offer a 20-year early payout.
Taft stated that 2.78% was a low interest rate for such a long term comparing it favourably to the true inflation rate.
“My personal opinion is that I see some wisdom in doing the 30 years and keeping the parcel tax lower in the beginning phase and err on the side of caution,” said Taft. “Over time if we do have money set aside we can pay out the loan early and basically pay the same amount of interest as doing the 20 year borrow, but make things a little bit more comfortable in the beginning first few years of payments to our taxpayers.”
Coun. Justin Atterbury agreed with Taft. “I hate paying interest, but it’s cheap money,” said Atterbury. “The difference between a parcel tax of $96 and $128 is huge and it’s going to be a shock the first year it comes up. I’m fine with the 30 years.”
“I’m certainly onboard with the longer term,” said Coun. Al Miller. “The interest rate is wonderful and the fact that we can pay it out early if we want to is very good.”
Coun. Paul Denchuk said he wouldn’t mind paying the extra $32 per year to save the town$1.5 million in interest. “The only thing holding me back from doing the 20 (year term) is that we committed to keeping it under $100 or close to it,” said Denchuk.
“Thirty bucks a year, spread it out over 12 months,” he added with a shrug.
Mayor Taft said that Invermere does not do a lot of parcel taxes. He said that other municipalities keep their tax rates low but have a lot of parcel taxes. Invermere does it the other way.
“In addition to the parcel tax, we know there’s going to be operating costs for this facility, we know that the library and other groups are going to be looking for more money,” said Taft.
“So the true cost of the facility (to each taxpayer), setting aside amortization and maintenance on the building, is going to be well higher than $100 per year. So it’s how you want to spread that out and divide it, a little bit more on the parcel tax, a little bit less on the general tax, it all comes from the same taxpayer, we know that.”
Denchuk asked if there is a plan to save up for the early payout. Taft responded that the district has done some early payouts but that where it makes the most sense is on loans with a high interest rate.
“We have some loans right now that are at the six-seven per cent so arguably in that sense we’d be better off to borrow this at the lower rate and pay those other ones early at the higher rate, so then maybe at the 20-year mark maybe we have the money to pay it out.”
“It’s also a balance of how much does you tax current citizens for the future and how much do you pass on to the future? It’s a 100 year facility but we also have to keep it in good shape so that it lasts 100 years.”
Council discussed at some length the pros and cons of the various terms, the cost to the taxpayer and the savings over the full term of the loan. Mayor Taft moved an amendment to change the original resolution from a 20-year term to a 30-year term. Further discussion of the various options ensued.
When all discussion was concluded, the amendment was passed unanimously. Council then voted unanimously to authorize the loan.
The resolution will now be forwarded to the Regional District of East Kootenay by July 29 to be included in its security-issuing bylaw at its August 7 meeting. A regional district security resolution is a requirement for MFA loans to municipalities. The final deadline for the completed application to the MFA is August 21.
The MFA provides long- and short-term financing, investment management, leasing and other financial services to communities and public institutions in B.C. The MFA is independent from the Province of British Columbia and operates under the governance of a board appointed from the regional districts within the province.
According to the MFA website, loans are made twice per year. Proceeds on a loan request will be 98.40% of the gross amount of the loan. One per cent is deducted by the MFA for security against loan default (this is held in trust by the MFA and will be refunded to clients, with interest, at loan expiry). The other 0.60% is deducted to cover the costs of raising money.
Further information about the MFA may be found at www.mfa.bc.ca
