High interest rates mean $27M city hall budget surplus (but it's already spent)
Finally, some good news from high interest rates.
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Finally, some good news from high interest rates.
City hall expects to post a more than $27-million budget surplus this year, largely because its investments have made more money than projected due to higher rates, according to a staff report going to city council on Tuesday.
But hold any thoughts on a multimillion-dollar spending spree. The money is already spoken for to pay down debt and offset tax increases, deputy mayor Shawn Lewis said.
“This comes from the various investments we have. The city is doing well. We’re in a high-interest market so there’s better return than we’ve seen in the past,” he said Monday.
The budget report breaks down into three categories:
- Property tax budget projects a surplus of $18 million.
- Water rate surplus is expected to be $5.5 million.
- Wastewater and treatment budget projected surplus of $3.7 million.
The projected surplus is an improvement over 2022 when the surplus was $14 million.
In 2021, city hall finished with $19.6 million in extra cash and in 2020 London ended the year with a $22.3-million surplus despite uncertainty of the COVID-19 pandemic.
But higher interest rates also take a toll as the city faces higher borrowing costs while preparing for its next round of multi-year budget planning in December.
“We will have to pass on inflationary pressures. It will cost more to keep buses and policing on the road, more for staff,” Lewis said.
Of the projected $18-million property tax surplus, $14 million is from increased revenue due to high interest rates, the staff report stated. Of that cash, $9 million will go to reduce debt and $9 million for capital and community investment reserve funds.
The water rate and sewage budget will see a similar split, with half going to reduce debt in their departments and the balance to reserve funds.
The Bank of Canada raised its interest rate from 0.25 per cent in March 2022 to five per cent in July 2023. While higher interest rates are painful for consumers with a car loan or mortgage, it offers higher return for savings and fixed-income investments, such as bonds.
“The surplus is primarily driven by higher-than-anticipated investment revenue due to higher interest rates,” the staff report on the projected surplus said.
The water and wastewater surpluses are driven by greater use.
Any increase in revenue from tax-base growth from building does not contribute to the surplus as it is used to pay for additional services, such as infrastructure, transit and policing, Lewis said. “That’s really all about growth paying for growth rather than hiking taxes on existing homeowners,” he said.
The Bank of Canada will announce in the last week of October whether there will be a rate freeze or hike, and Lewis is hoping for no more increases.
“It’s doing what it intended. It’s hard for people to get into the housing market. I hope it’s stabilizing,” he said. “It makes housing (construction) more expensive, it drives up the cost of borrowing and we’re trying to make homes more affordable.”
The staff report also forecasts some budget troubles ahead, including:
- Bill 23, the More Homes Built Faster Act, will change building practices, which may cost the city in new staff hires, waiving of development charges in some areas and some unforeseen costs.
- Bill 93, the Building Broadband Fast Act, will increase the city’s costs related to providing utility services.
- Long-term care, housing stability services, Middlesex London Health Unit: There are continued COVID-19 expenditures to maintain safety for residents and no sign yet funding from the provincial and federal governments will increase.
Another report going to politicans takes a look at what city hall is spending on building.
At the midway point of 2023 the city has budgeted $3.4 billion for capital projects; $1.9 billion of which is committed to projects while $1.5 billion remains uncommitted.
Much of the uncommitted amount has been earmarked for housing and related infrastructure and services as the city has a goal of adding nearly 50,000 units in 10 years, Lewis said.
The largest projects on the city’s building schedule are:
- $199.5 million, for the demolition and rebuild of the London Transit Commission’s Highbury Avenue headquarters.
- $40 million for a London police headquarters expansion.
- $69.5 million for southeast and northwest community centres combined.
- $44.4 million for the Wharncliffe to Becher underpass.
- $147.1 million for the south and east corridors of the bus rapid transit project.
- $87.6 million for the Adelaide Street underpass.
- $42.2 million for the roadmap to 3,000 affordable housing units.
“It does seem to be a steady-as-she-goes capital budget,” Lewis said.
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