Aggressive approach to paying off all borrowing in 5 years has saved Steinbach millions: city official

Steinbach's aggressive debt repayment strategy is an approach many cities across Canada couldn't implement even if they wanted to.

The southern Manitoba city pays off every debenture, whether it's a new street or wastewater improvements, in just five years.

The practice, which a current official says has saved the city millions of dollars, came about in the mid-1980s.

At that point, double-digit interest rates were stretching Steinbach's finances, said the city's former city manager, who campaigned for the quick-payoff approach in the beginning.

"When you analyze the city's position back in the '80s, they were just about capped out as far as overall debt, because it was all long-term," recalls Jack Kehler, who worked as the city's top administrator from 1979 to 2014.

To ease that burden, the community decided it would eliminate debt for all future capital projects in five years, rather than the usual borrowing terms of 10, 15 or 20 years.

While the policy has continued to this day, "I didn't think it would last," Kehler said. 

"I would have probably said [it would last] to the next term of council."

Part of the reason it's lasted may be that "the community is fairly conservative with spending," he said.

"Most of the people are prudent spenders. They see the government doing the same thing, and it just works better for overall governance in the short-term and long-term."

Councils kept policy in place

The practice isn't actually a law in Steinbach. It's a draft policy council could abandon at any time, but hasn't. 

"There were moments where different council members said, 'OK, we should go for a longer [borrowing] term because we need to borrow more money,'" Kehler said.

Steinbach has "gone through nine or 10 different elections, but there was always a core [on council] that kept that five-year debt as a focus, and it's always worked," he said.

Council's commitment to five-year debentures was recently tested when it took on the biggest infrastructure project in Steinbach's history.

The city expects to take out a $7.5-million loan for the planned Southeast Event Centre, a new $61-million recreational centre — though last year, council approved borrowing as much as $12.5 million if necessary. The city is also contributing to the project through operating and reserve funds.

That maximum debenture amount is more than one-third of the entire $33-million 2022 budget for Steinbach, a rapidly growing city that had a population of just under 18,000 people in the latest census.

Kehler said the city has the ability to pay off its debt in short order because its tax base keeps growing. Steinbach also charges a capital development fee to developers. 

But University of Winnipeg political science professor Aaron Moore said retiring a debenture in five years isn't practical for many cities, since they'd face astronomical costs to pay off multimillion-dollar capital projects like bridges and overpasses in a brief span.

Policy could constrain municipalities: professor

Such policies could also prevent municipal governments — including Steinbach's — from adapting if other pressing needs emerge, Moore said. 

"If you're really sticking to that five-year horizon, it really restricts or limits a municipality to making significant investments into their infrastructure within the city," he said.

Small rural municipalities may have the means to retire debt issues quickly because they don't borrow as often, he said.

But Waldo Neustaedter, a longtime real estate agent in Steinbach, argues the city's approach to borrowing money is more a help than a hindrance.

It's kept taxes reasonable while giving administrations flexibility by "not stifling future governments, future councils" from entertaining other projects, he said.

Troy Warkentin, who replaced Kehler as city manager, said administration has consistently found five-year amortization terms superior and less costly than lengthier terms.

City staff have estimated Steinbach has saved more than $12.8 million in interest payments over the past two decades — assuming a four per cent interest rate — by paying off debt in five years rather than 20.

The average interest on the city's outstanding debt has actually been lower than four per cent since 2011, according to city records.

Nonetheless, the money saved has probably helped Steinbach accomplish projects it otherwise wouldn't have, Warkentin said.

Short waits for new capital needs

"If you are being more aggressive with a repayment schedule, maybe in the short term it can mean that projects have to wait," Warkentin said.

"But at the same time, given that it's a five-year amortization term … if you do have to wait a short time for other projects to be put in the queue and on the list for completion, it's not going to be a long time to wait."

Duane Nicol, president of the advocacy organization Manitoba Municipal Administrators, said Steinbach has several factors working in its favour, ranging from strong continuous development to a healthy reserve fund.

Still, he said the city deserves credit for sticking with a policy choice that, while not feasible for every municipal government, has worked for Steinbach.

"They've had good administration, good leadership at both elected and administrative levels for a long period of time, and that facilitates good analysis and longer-term thinking," he said.