A line of credit (LOC) could help the City of Moose Jaw cover its projected expenses, but in the process, it would also add to the municipality’s debt level.
During its April 13 executive committee meeting, city council voted 6-1 on a recommendation to authorize the mayor and city clerk to sign the necessary Scotiabank documents to establish a line of credit of $15 million should the city’s bank accounts become overdrawn, while city administration would prepare a borrowing bylaw for this amount.
Coun. Brian Swanson was opposed.
The recommendation must be approved at a future regular council meeting to become official.
Background
The report about the proposed line of credit and current and future cash flows was written on March 9, before the coronavirus pandemic took off, explained finance director Brian Acker.
“The unforeseen event of a pandemic does underline the need for a line of credit,” he said. “Even if it is something that doesn’t happen often, it is important to have for most organizations.”
The process to establish an LOC can take several months, Acker continued. A council has to ratify a recommendation about setting up a line of credit, while city administration needs to bring back a bylaw that requires three readings before the LOC goes into effect.
The line of credit will affect the city’s debt limit, which has sufficient room to accommodate the LOC, he pointed out. The current debt is $59.2 million and the limit is $95 million. The LOC — if fully used — would increase the debt level to $74 million.
Moose Jaw has never had a line of credit before, Acker added.
“This is prudent planning. It’s interesting to note we have not had a line of credit before, but we are in interesting times,” said Coun. Crystal Froese. “This is a good safety net for us.”
Financial details
The municipality has about $10 million in bonds that mature each year, which gives flexibility with cash-flow needs, Acker said. During the past few years, the municipality has maintained a large bank balance due to favourable interest rates. This has “resulted in ample (financial) balances” and eliminated any need for an LOC.
Since 2015, city hall has spent between 34 per cent and 69 per cent of its allocated capital budget on projects. The municipality has committed to spending between 85 per cent and 90 per cent of its capital funding in 2020 and beyond, which would increase demands on cash flows, he continued.
“The city has sufficient short-term monies available for its operating fund, but may not have sufficient funds at all times for its capital needs due to the large capital demands,” said Acker. “This includes over $82 million in planned capital and equipment spending in 2020 alone.”
The planned capital spending this year will be funded by using municipal revenue and non-invested reserve sources. However, uncertainty around the timing of provincial and federal grants, plus uncertainty in the arrival of land development proceeds and reimbursements for those costs, has created “the potential for the city to overdraw its short-term operating funds,” Acker noted.
Estimated cash flows
There was $38.3 million in short-term funds available to start 2020. Acker’s report listed the cash inflows and outflows for all four quarters of this year:
- Quarter 1: $64.4 million/$29.2 million
- Quarter 2: $66.4 million/$34.1 million
- Quarter 3: $59.6 million/$41.3 million
- Quarter 4: $43.8 million/$29.2 million
This means the net cash flow — or difference between the inflow and outflow — during all four quarters of this year is expected to be:
- Q1: $35.1 million
- Q2: $32.2 million
- Q3: $18.2 million
- Q4: $14.5 million
The cash flow forecasts indicate Moose Jaw should remain in a positive position this year, however, the potential to overdraw its short-term resources is a possibility, Acker admitted.
Scotiabank can provide the LOC for an overall interest rate of 1.7 per cent. The LOC would be tied to the municipality’s bank accounts and would be accessed if the accounts “dropped below a specified level.” The city would only pay interest, Acker said, on any balances for however long the LOC was used. The LOC could be used for weeks or months to bridge funding shortfalls or short-term scenarios.
The next regular council meeting is Monday, April 27. However, similar to this last meeting, the media will likely be locked out of the meeting and prevented from attending in person.
