The increase in interest rates does not seem to have any impact on the City of Montreal’s budget. The municipal finance department forecasts stable financing costs in 2024 compared to 2023, despite an increase in debt of 200 million.
The City explained this surprising result by the fact that it will renew at a lower rate in 2024 old loans which are maturing and which bear high interest.
To avoid an even more rapid increase in the debt, the administration is also paying a greater proportion of fixed assets in cash. In 2024, around 500 million will be paid counting on capital expenditures of 2 billion.
Financing costs amounted to 451.4 million in 2023. Little change is expected in 2024, the budget sets them at 452.9 million. To give an idea, the City spends 393 million annually on the fire department.
The interest bill is nevertheless up 50 million compared to its pre-pandemic level.
Debt service represents 16.6% of the City’s expenses.
According to the budget, the City’s net debt will stand at 6.9 billion at the end of 2024, compared to 6.7 billion at the end of 2023.
In derogation of its own policy
The City has deviated from its own debt management policy since 2019. According to this policy, direct and indirect net debt must not exceed 100% of the City’s revenue. The municipal administration took this decision to increase investments in infrastructure. The exemption sets the maximum limit of the City’s debt at 120% of its revenues.
In the budget, it is expected that debt will represent 108% of income in 2024. For 2023, it was 105%. The return to a ratio of 100% is still planned for 2027.
If the City deviates from the maximum debt threshold, it continues to respect the maximum ratio of the cost of debt limit once the financing of the initial pension plan debt is excluded.
The City plans to borrow 1.2 billion on the markets in 2024. In 2023, it finally raised 900 million on the markets. The weighted nominal interest rate that the City pays on its loans stood at 3.47% as of December 31, 2022. The administration did not provide a more up-to-date figure. These days, the province borrows at 4.65% for a 10-year term. Usually, the City of Montreal’s borrowing cost is higher than that of the Quebec government.
Despite the debt in recent years, the City has maintained its Aa2 credit rating from Moody’s. Standard and Poor’s, for its part, improved its rating to AA in 2022.