In September 2009, the Alberta government started to do something it hasn’t done in many, many years – borrow money. Over the past few months the money has been borrowed through public bond offerings. However, starting in February, the government will attempt to get Albertans to embrace the return to debt, by selling them exclusive, Alberta-only, savings bonds. Savvy taxpayers should save themselves the long-term headache and boycott the bonds.
At the time of the 2009 budget, the government claimed they wanted to take advantage of ‘low-cost’ borrowing. In a nutshell: instead of pulling money out of the $17 billion Sustainability Fund, they would borrow the money to build some infrastructure projects. The belief was that the government could, for example, earn a four per cent return annually on the money in the Sustainability Fund, while borrowing money at a 3.5 per cent interest rate, thereby creating a potential 0.25 per cent to 0.5 per cent spread.
If, and that’s a big ‘if,’ investment markets don’t tank like they did last year, the expected profit on $3.3 billion of borrowed money ($1.1 billion borrowed per year for three years) would amount to a windfall of – wait for it – $8.25 million to $16.5 million annually. Quite the risk for a profit that would amount to a rounding error in their $37 billion budget.
In June 2009, the government amended its plans to increase the total, three-year, borrowing amount from $3.3 billion to $4.5 billion to cover the first payment on the unfunded liability in the Alberta teachers’ pension plan ($1.2 billion).
In addition to all of this borrowing being unnecessarily risky, the worry taxpayers should hold is that it could open the door for the Alberta government to go into real, 1980s-style debt. To date, the only positive is that the interest rates taxpayers will have to pay on this debt have been half-decent.
Four sets of public bond issues have resulted in $950 million borrowed at four per cent annually for ten years and $750 million borrowed at 2.75 per cent annually for five years. In addition, $291,414,000 was borrowed privately from the Canadian Pension Plan Investment Board at 2.93 per cent annually for five years. In total, the Alberta government borrowed $1,991,414,000 in 2009.
Unfortunately, for the next round of government borrowing, the rates may not be so favourable. In February 2010, $100 million will be available just for Albertans to lend to the Alberta government, with the money, ostensibly, going to build seniors’ facilities. Infrastructure Minister Jack Hayden has suggested that the government “could offer a premium to entice Albertans to invest.”
That’s right, Alberta taxpayers may pay an even higher than normal interest rate, just to ensure fellow Albertans are incented to lend their after-tax dollars to their government.
While the initial plans for borrowing were questionable and risky, the funds were at least borrowed at the most competitive rates, with the – official – goal of saving taxpayers’ money. The next round of borrowing is intended to do the exact opposite, benefit bond holding Albertans, while sticking the bill to taxpayers (many of whom will be the same people). All this while trying to convince Albertans they are somehow fast-tracking the building of seniors’ facilities. If that is indeed the case, it would only be because the government had abandoned their intentions to only use debt as a way to save money, and not as a way to simply pay for things for which they don’t otherwise have the cash (ie. real, old-fashioned, 1980’s-style debt).
If Albertans really want to save money, they should refuse, en masse, to purchase the bonds. The “premium” the government will pay to attract Albertans to invest may go in the right-pocket; but it will surely come out of the left-pocket soon enough. Plus buying their bonds only encourages them. If enough people refuse to play it might force the government to rethink its priorities.