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

Last week I went to Winnipeg’s City Hall to speak to Council about the latest version of our city’s financial management plan. Maybe they assumed I was just another random, crazy guy coming to rage against the machine. But they would have been only half-right; I wasn’t there to rage against the machine.

The financial management plan is a key policy document for the City. It will frame all other policy decisions, including budgeting, for years to come. Reading through the financial management plan may not seem like a regular citizen’s idea of fun. But I’m not a regular citizen. I am a responsible, admittedly nerdy, citizen of Winnipeg, and so I did my civic duty and read through the plan. Later I watched videos of the Standing Policy Committee and the Executive Policy Committee (EPC) to see what councillors had been saying about it.

I was shocked to discover that our EPC had approved it without any discussion or even a single question. Surely a document of this importance deserved more than a rubber stamp? I was somewhat encouraged watching the councillors in action during the Finance Committee meeting. Two councillors in particular deserve to be congratulated for their relevant and often probing questioning of the public service on this plan. And one question in particular stuck with me.

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%. To this, Councillor Nason asked: “Compared to what?”

This is 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 overall growth in GDP, and, for the record, I don’t think he ever got a straight answer on that. Personally, I was more interested in comparing the growth of the property assessment base to two 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.

Being the resourceful nerd I am, I was able to find the debt numbers in some other report buried on the City website. What that report says is that, while our assessment base grew 58% over those seven years, our debt grew by about 100% over the same period. That’s right, it basically doubled. And it is projected to continue increasing, so that, after ten years, it will have almost tripled.

All of a sudden, that 58% doesn’t sound so hot.

What about infrastructure? How much did our infrastructure grow from 2011 to 2018? It turns out my super-nerd powers have limits. I couldn’t find that information anywhere. That, in and of itself, is extremely troubling. And that’s why I went to City Hall to speak to Council.

What I told Council is that infrastructure, from a financial perspective, behaves very much like debt.

The Louise Bridge in Winnipeg. The 108-year-old bridge needs to be replaced. Photo via Pixabay.

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 replace it when it comes to the end of its useful life. And then to replace it again. And so on. Forever.

From the moment Winnipeg builds 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 any 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 Winnipeg’s 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 we can prudently afford.

But 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 there is no need to measure it.

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 one trillion-to-one isn’t the ideal ratio for new infrastructure, then what is it? 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. 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 the City of Winnipeg has 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 never-ending zombie debt.

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

This seems like a massive blind spot in our financial management plan.

So here’s the question I asked Council: 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 what is our infrastructure ceiling?

What I asked Council for doesn’t cost any money, and it doesn’t require a policy or a bylaw change. It was just a question. But I knew what they were thinking: why should we listen to some random guy from the Elmwood neighborhood? So I answered their question preemptively:

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.

Editor’s Note: This article is adapted from a post on Michel Durand-Wood’s Dear Winnipeg blog. It’s worth noting that Michel’s presentation to Council caught the attention of local media. You can watch a recording of his presentation on YouTube (starting at 1:38:30).

Top photo via Ahmadreza Heidaripoor.

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About the Author

Michel Durand-Wood lives in the Winnipeg neighborhood of Elmwood with his wife and three children. He writes at DearWinnipeg.com, a really fun blog about infrastructure and municipal finance. He has no formal training or education in city planning, municipal finance, infrastructure maintenance, or anything else he talks about. He's just a guy, in love with a city, asking it to make better use of his tax dollars.