After interviewing Mayor Fougere about the financing plan for the stadium (complete transcript here), I had a chance to talk to Brent Sjoberg, the deputy city manager who’s leading the project. In future, I’d like to start calling him council’s Stadium Czar. What do you guys think?
Now, apparently, the cable on the mic I use to record phone conversations is shot and if I move it the sound cuts in and out. And I was waving my recorder around while we were talking and so there were some gaps in the recording.
Consequently, what I’ve posted below isn’t a complete transcript of our interview, just the portions that actually recorded. Fortunately, that does cover the majority of the interview.
prairie dog: The Riders are going to be putting $25 million into the project up front and $500,000 per year for 30 years. Have you looked at how they’re going to fund this?
Brent Sjoberg: The Riders are going to develop a capital campaign so naming rights would be part of it. There’s a host of sponsorships through the facility that they might be able to sell. So they might be able to see the naming of rooms — I’m just coming up with things off the top [of my head]. But so what they’ll do is they’ll generate a campaign on that basis. They may have money in the bank as well. They may say, “Well, we went out to the community and raised $22 million so we have to take $3 million out of our bank account to make up the difference.” We’re not really prescriptive of how they do it.
So it could include things like a “Buy A Brick In The Stadium” program?
I assume the Riders will come up with a number of different ideas in terms of how to raise money. Obviously corporate sponsorships will be a large chunk, I would assume. They’ll probably generate a number of campaign ideas that will also generate funds.
The report notes the possibility of capital cost overruns. But I thought the point of going with this Public Private Partnership procurement model was that it would shift the risk of capital overruns onto the developer.
You’ve got that right. It reflects two things. One is that the agreement with the other two partners, the Riders and the province, states that they are not going to contribute to capital cost overruns. The P3 approach has been one of the city’s strategies to manage that risk. So in this case, the risk of capital cost overruns in the P3 approach is if for some reason we decide to change the design at a later date. So we’ve gone out to market, we’ve said here’s what we’re looking for, here’s all the things we need, and give us a proposal within the budget, and that’s done. They start building it and we say, “Wait a minute. We want now a 1,000 person room as opposed to a 500 [person] room and we want this, that and the other thing,” that’s not a risk that the contractor will take on. They’ll say, “You’re going to have to pay for those differences later.” As long as we stick to the program that’s laid out throught the RFP process, then the risk is transferred to the contractor. And what the contractors have to do is design and build it within the budget. And historically, the challenge in almost any capital project ends up being who do you hold accountable when the designer is pointing to the builder and the builder is point to the designer, saying it’s their fault. In this case, they’re one and the same and so they carry that risk.
What about the interest rate on the loans we’ll be taking out? The report mentions that if the interest rate goes up, that will increase the amount we predicting we’ll have to pay back. Interest rates are historically low now. Why doesn’t the report factor higher interest rates in?
The borrowing the rate is fixed. So when we go out to market for this debt in the next year or two or three, we’ll borrow and the interest rate is fixed over the period. So, for instance, for the provincial loan, if we borrow $100 million through the province next year, and our rate is accurate, the 3.5 per cent, the rate is not going to change over 30 years.
Oh. So the city doesn’t need to renegotiate its mortgage every five years or whatever.
The report mentions that we haven’t applied to the Saskatchewan Municipal Board yet to see if the $100 million loan will count against our debt limit.
Can’t happen until after council has passed the resolution of the plan here on the 28th. We can’t apply to the SMB until there’s a council decision saying they want to go forward.
Is it likely that the SMB will agree to our request?
What the Municipal Board looks at is debt level but also they do a calculation based on revenue. And since we have a brand new revenue stream which is the facility fee coming on that also factors in. So I would assume that the Municipal Board will look on it quite favourably.
And we should not have an issue because they’ll look at it and say you’ve got new debt but you’ve also got a new revenue stream that’s allocated to pay that debt so there’s really not much more risk to the city at all. Obviously, there’s some risk in the variation of the revenue stream but that’s pretty small in the grand scheme.
There was a report last November that looked our debt burden ratio, debt capitalization ratio and debt service ratio. Those ratios are currently quite low and a sign that our debt is manageable. But according to the stadium report, our debt levels could quadruple by 2017, what with the money we’re borrowing for the stadium, the wastewater treatment plant and other things. Is there a concern that our credit rating will be hurt by all the debt we’re taking on in the next few years?
I wouldn’t characterize it as damaging our credit rating. What the credit rating agencies will do is look at all those ratios and what they’re really looking at is the risk of the city not being able to repay it’s debt when they look at setting the credit rating. It could have an impact. We’re at AA+ which is next to the top at AAA. So we already have a very high credit rating. So it could result in a slight reduction but in that case I wouldn’t see it as being really significant. It could have an impact on future borrowings from that point forward but it wouldn’t have any impact on any debt that’s already outstanding.
The key issue for us is obviously we need to strategically manage this debt and keep an eye on what projects may or may not be upcoming. The city’s revenue streams are growing all the time so it’s not a static thing. We’ll keep managing those. We’re always reducing debt as well. It’s a bit of a moving target over time. The reports reflect that our debt is going to grow over what it is today and we have to pay attention to that and actively manage it.