The Plante administration says the borrowing was to take advantage of low interest rates but others call it creative accounting.
Hocus-pocus, Montreal is sitting on $602 million in cash to help pay for infrastructure projects so it doesn’t have to borrow and increase its debt — except that most of the cash was borrowed.
That’s the way the opposition at city hall is describing what it calls an accounting sleight of hand by the administration of Mayor Valérie Plante, which borrowed all of the money to finance Montreal’s capital expenditures in 2021 even though it had committed in last year’s budget to pay $409.9 million of it in cash to enable less borrowing.
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Alan DeSousa, a councillor with opposition party Ensemble Montréal and a member of city council’s finance committee, said he believes it’s the first time in at least seven years that Montreal has paid entirely for capital works through borrowing and increasing debt.
“This is really unusual,” he said. “They’re sitting on $600 million in cash, and yet the debt has gone up.”
Since 2014, successive administrations at city hall have made a commitment to pay increasing amounts of cash for capital works to lessen the city’s dependence on debt. The pay-as-you-go edict, which was introduced by former city manager Alain Marcoux during Denis Coderre’s term as mayor, was intended to ease the burden on future generations, who pay the interest and fees on debt incurred by previous generations.
The edict flows from the fact that Montreal has one of the highest debts relative to revenue of any Canadian municipality, and one of the highest interest payment burdens relative to revenue, as the Montreal Gazette reported last year. For 2022, Montreal is forecasting it will pay $428 million in interest and fees on its debt.
However, the city didn’t spend a penny in 2021 from its reserve earmarked for cash payments for capital works, the city’s finance department revealed in a four-page report in early January. The finance department issued the report to city council’s finance committee in response to Ensemble Montréal, which asked about the state of the reserve during the committee’s hearings on the 2022 budget.
The city transferred $337 million out of its operating budget and into the infrastructure cash reserve in 2021, the report showed. That brought the total amount in the reserve up to $602 million as of Dec. 31, 2021. But no money was actually taken out of the reserve to pay cash for infrastructure work in 2021, the report showed, even though the budget had forecast $409.9 million as cash payments for capital expenditures.
Instead, the city increased its borrowing in 2021, DeSousa said.
The city borrowed $338 million more in 2021 than it did in 2020, a comparison of the last two years’ operating budgets reveals. While the city borrowed and refinanced $744.7 million in debt in 2020, it borrowed and refinanced $1.083 billion in debt last year. Most of the amounts in both years was new borrowing.
As a result, DeSousa said, the cash that was left untouched in the infrastructure reserve in 2021 was financed through borrowing, which defeats the purpose of a “cash” reserve.
“Approved at the highest levels of the administration, the city chose not to follow the cash payment strategy in place since 2014,” he said, adding that council was never informed of the change. “It went on a debt binge, paid no cash and did not tell a soul.”
Asked about the opposition’s contentions, the Plante administration said in a written declaration that the city is taking advantage of low interest rates and can use the money accumulating in the reserve to pay cash later, when higher interest rates make it more costly to borrow.
“The capital cash payment reserve allows the city to optimize its financial strategy taking into account the city’s debt objectives and policies and market conditions,” the statement from executive committee spokesperson Marikym Gaudreault said.
The administration is still adhering to the cash payment strategy, Gaudreault added. The plan initiated in 2014 is supposed to increase annual cash payments until they reach $800 million, a target that the current budget pegs as 2026.
The administration’s response suggested the cash payment indicated in the annual budget is the city’s forecasted contribution to its cash reserve — not the amount it will pay as cash down for capital works that year.
“Whether or not the reserve is used does not change the annual cash payment contribution strategy,” Gaudreault said.
However, that’s not how the pay-as-you-go strategy was intended, said Beaconsfield Mayor Georges Bourelle, who is vice-chairperson of the council finance committee and represents the island’s de-merged suburbs on the panel.
“That’s a new approach,” he said of using the reserve to amass cash payments. “The idea was to increase cash payments for capital expenditures every year.”
Bourelle said he can see no reason why Montreal increased its debt in 2021 while using no cash from its reserve.
Bourelle, who has been critical of the Plante administration’s financial management in the past, said he believes “Montreal is doing very creative accounting” to fulfill Plante’s election promise not to increase city of Montreal tax bills by more than two per cent in 2022.
For his part, DeSousa called the budget manoeuvres “smoke and mirrors.”
As another example of accounting gymnastics, he said, the city’s 2022 operating budget forecasts a transfer of $172.8 million out of the $602 million infrastructure cash reserve and into the budget while simultaneously transferring $336.6 million the opposite way — from the budget to the cash reserve — as the city’s annual cash contribution (another $63 million will go into two smaller cash reserves dedicated to water and roadwork). That means the city is really making a net contribution to the infrastructure reserve of $163.8 million, which is even less than last year, DeSousa said.
He added that it’s the first time the city is taking funds out of its infrastructure reserve to plug into its operating budget.
City executive committee chairperson Dominique Ollivier, Plante’s second-in-command, defended the city’s decision at a council meeting on Jan. 20: “The very clever strategy of our finance department was to take advantage of the very low interest rates that we experienced during the pandemic,” she said. “This will ultimately save us millions of dollars and when the rates go up, we will be able to put this money back into the payment of the debt.”
However, DeSousa said the cash payment for infrastructures is supposed to be generated from savings or new revenue in the city’s operations, not through borrowing.
“The thing that’s curious is that they borrowed to get cash that down the road they’ll use to say ‘This is a cash payment so we don’t need to borrow to finance infrastructure’,” he said of the reserve.
“It goes against the whole notion of ‘cash payment’ when you have to borrow to make the cash payment.”
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