Staff Report to Committee of the Whole: Breakdown of Internal Debt

EXECUTIVE SUMMARY:

At the April 22, 2025, Regular Meeting, Council passed the following motion:

THAT Council direct staff to prepare an itemized list of:

1. Internal Capital debts contained within the proposed 2.57% line item increase in the report dated April 8, 2025; and
2. Parcels of land that are currently owned by the City of which have no identified strategic purpose at this time;
   AND
   THAT staff bring this list back to a future Committee of the Whole meeting following the approval of the 2025-2029 Financial Plan.

The 2025 budget included a $1,000,000 budgeted transfer from the operating fund, (i.e. Property Taxes), to the Capital Fund to pay for part of the capital items the City has purchased and funded through internal debt for over 15 years. The projected 2026 budget, as outlined in the 2025-2029 Financial Plan, increases this $1,000,000 transfer to $2,600,000 (approximate 2.57% tax increase). The current Proposed 2026-2030 Financial Plan maintains $2,600,000 in 2026.

The purpose of this document is to provide information on the numerous items that are currently funded through internal debt and need to be paid for in future years. Staff will bring forward a separate In-Camera report to address parcels of land that have no strategic value once all of the Master Plans are completed.

The figures included in this report are as of September 30, 2025, and are unaudited. Staff are currently working through the 2025 Financial Statement year end which will finalize the balances as of December 31, 2025. Should Council wish to have updated figures they will be available by early May 2026.

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BACKGROUND:

For more than 15 years, the City has funded various capital projects, and, in some cases, capital budget overages, through the use of internal debt. This approach effectively allows the City to proceed with strategic investments by committing to pay for the associated costs in future years. Over time, the internal debt balance has fluctuated for several reasons, including capital projects exceeding their budgets and property acquisitions that were approved to be funded through debt but ultimately not borrowed from an external lender. As capital program demands have grown and property values have increased significantly over the past five to seven years, the internal debt balance has grown correspondingly. It is important to note that the YMCA building was not financed using this method as it was funded through Municipal Finance Authority (MFA).

Reductions to the internal debt balance have been achieved primarily through the sale of strategic land holdings and through incremental property tax revenues allocated to pay down these obligations. However, over the past five years, the volume and cost of unfunded capital items have risen substantially. This has, in turn, increased the amount of annual property taxation required to service and retire internal debt.

Although debt may be perceived negatively, when used strategically it can be a powerful and sometimes necessary financial tool, particularly for a fast-growing municipality. Langford has experienced rapid and sustained growth, outpacing many comparable communities, which brings both opportunities and pressures. Strategic investments made at key moments can ensure that the City continues to meet the community’s evolving needs.

Past examples of strategic investments supported by internal borrowing include approximately $5 million invested in downtown lands (at the time required for potential parking), which was an essential component of the successful business case that secured Provincial approval for the Royal Roads University campus in downtown Langford. Similarly, targeted acquisitions such as residential parcels on Jenkins/Glen Lake Road enable future amenities like an art studio and childcare, the Happy Valley Road property adjacent to the trolley hall creates options such as medical offices and housing, and the purchase of 889 Hockley Avenue will provide necessary additional parking at City Hall, among other potential uses.

Staff acknowledge that not every internally funded investment has produced the benefits originally anticipated (e.g., the 3680 Trans Canada Highway property). Nonetheless, many decisions have demonstrated significant foresight, such as the acquisitions of Woodlands Park, the Sooke Lake Road property, the expansion of Veterans Memorial Park, and the downtown lands surrounding Danbrook Park, ensuring the City can continue delivering amenities and services that support long-term community needs.

Going forward, Council may wish to consider using debt only when other funding tools are not available, rather than as a primary funding source. Ensuring a sufficient and sustainable annual funding stream to service existing and future debt obligations is essential. For this reason, staff recommend limiting new initiatives that rely on internal borrowing until current obligations have been substantially reduced or retired. At the same time, staff emphasize that forthcoming master plans will provide a clear strategic framework to guide future decisions and ensure they remain aligned with community priorities.

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COMMENTARY:

As at September 30, 2025, the balance that requires payment/funding through future year transfers from the Operating Fund equals approximately $19,600,000 ($12,692,624 + $6,875,000). This balance will increase due to the 2025 capital budget including capital projects budgeted to be funded by internal debt.

As of September 30, 2025, the balance of the “internal debt” can be broken into two general categories: internal debt with no current specific plan for repayment and internal debt with specific full or partial plan for repayment. The items that fall under the category of no plan for repayment require repayment through the collection of property taxation, as does the net costs associated with the internal debt with a partial specific repayment plan.

Within the category of “No current specific repayment plan” it can be broken into two further categories, Net Capital Projects and Net Land.

The balances of these categories is:

• Net Capital Projects: $5,441,308
• Net Land: $7,251,316

The total for these two categories is $12,692,624. With the current amount of $1,000,000 built into the financial plan, it would take approximately 13 years to pay this debt off.

Within the category of “Full or Partial Plan for Repayment” the total is $11,096,030, of which $3,229,706 has been committed to being repaid through committed future property tax increases, $858,495 is to be repaid over time through revenue generated related to the Al Cheron Training Centre, $208,330 related to Langshire Water to be repaid as development occurs in that area and approximately $80,000 of the City Hall renovation is budgeted to be funded in 2025. Approximately $6,875,000 requires repayment through future property tax collection.

A breakdown of the details of the balances above are outlined below:

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Summary of Internal Debt

For 2026 Budget Purposes
As at September 30, 2025

TOTAL INTERNAL DEBT WITH NO CURRENT PLAN FOR REPAYMENT

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Repayment Plan:

In addition to ensuring adequate taxation collection for repayment of this balance, an equally important consideration for Council to consider is, beginning in 2026, the discontinuation of budgeting “property purchases” in the budget with a funding source of “debt”, unless that debt is externally borrowed or the purchase is critical and no other funding source is available. As noted below, depending on the repayment schedule chosen, the City will have a significant funding source that can be used to fund property purchases in future years once the internal debt balance is paid.

The Proposed 2026-2030 Financial Plan includes the same figures as were included in the approved 2025-2029 Five Year Financial Plan:

2026: $2,600,000 ($1,600,000 increase)

TOTAL INTERNAL DEBT WITH ALL OR PARTIAL PLAN FOR REPAYMENT

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The Proposed 2026-2030 Financial Plan continued:

2027: $3,700,000 ($1,100,000 increase)
2028: $4,155,000 ($455,000 increase); and,
2029: $5,305,000 ($1,150,000 increase)
2030: $5,305,000 ($0 increase).

The total of these budgeted values from 2026-2030 is $21,065,000. If these projected balances remain in the financial plan the current balance of $19,600,000 would be paid by 2030. Under this scenario, starting in 2031, a budget of $5,305,000 annually could be used for land purchases or other capital purchases/projects.

As part of the options to reduce the 2026 tax increase to 11%, 9%, 6%, and 3%, staff have included the option to adjust the $2,600,000 budgeted in 2026.

Under the 11% option the $2,600,000 would be reduced to $1,800,000. Under the 9% option the $2,600,000 would be reduced to $1,800,000. Under the 6% option the $2,600,000 would be reduced to $1,600,000 and under the 3% option the $2,600,000 would be reduced to $1,400,000.

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11% and 9% reduction options:

Should Council wish to choose to reduce 2026 to $1,800,000 (11% and 9% options), staff would recommend adjusting 2027-2030 accordingly:

• 2026: $1,800,000
• 2027: $2,500,000 ($700,000 increase)
• 2028: $3,300,000 ($800,000 increase)
• 2029: $4,155,000 ($855,000 increase)
• 2030: $5,105,000 ($950,000 increase)
• 2031: $5,305,000 ($200,000 increase)

It is worth noting that these adjustments result in a tax increase in 2030 and 2031, that would otherwise not be included in those years if the current proposed payment plan is chosen by Council. Under this scenario, starting in 2032, a budget of $5,305,000 annually could be used for land purchases or other capital purchases/projects.

6% reduction option:

Should Council wish to choose to reduce 2026 to $1,600,000 (6% option), staff would recommend adjusting 2027-2030 accordingly:

• 2026: $1,600,000
• 2027: $2,400,000 ($800,000 increase)
• 2028: $3,300,000 ($900,000 increase)
• 2029: $4,255,000 ($955,000 increase)
• 2030: $5,205,000 ($950,000 increase)
• 2031: $5,405,000 ($200,000 increase)

It is worth noting that these adjustments result in a tax increase in 2030 and 2031, that would otherwise not be included in those years if the current proposed payment plan is chosen by Council. Under this scenario, starting in 2032, a budget of $5,405,000 annually could be used for land purchases or other capital purchases/projects.

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3% reduction option:

Should Council wish to choose to reduce 2026 to $1,400,000 (3% option), staff would recommend adjusting 2027-2030 accordingly:

• 2026: $1,400,000
• 2027: $2,300,000 ($900,000 increase)
• 2028: $3,200,000 ($900,000 increase)
• 2029: $4,155,000 ($955,000 increase)
• 2030: $5,105,000 ($950,000 increase)
• 2031: $5,855,000 ($750,000 increase)

It is worth noting that these adjustments result in a tax increase in 2030 and 2031, that would otherwise not be included in those years if the current proposed payment plan is chosen by Council. Under this scenario, starting in 2032, a budget of $5,855,000 annually could be used for land purchases or other capital purchases/projects.

Additional reduction option:

In addition to the options outlined above, in the event Council wishes to make an even larger reduction in 2026, and spread the payments over a longer period, through 2033, Council may choose to consider the following repayment structure:

• 2026: $1,000,000 ($0 increase)
• 2027: $1,500,000 ($500,000 increase)
• 2028: $2,000,000 ($500,000 increase)
• 2029: $2,500,000 ($500,000 increase)
• 2030: $3,000,000 ($500,000 increase)
• 2031: $3,500,000 ($500,000 increase)
• 2032: $4,000,000 ($500,000 increase)
• 2033: $4,500,000 ($500,000 increase)

The above repayment schedule would have a 0% tax increase in 2026 related to this item and in future years the $500,000 increase would be no more than a 0.80% tax increase. This schedule would fully fund/pay the current balance of internal debt by 2033, and it would result in $4,500,000 available annually, starting in 2034, to fund land purchases of capital purchases/projects.

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FINANCIAL IMPLICATIONS:

The current internal debt balance must be repaid. This report outlines repayment options for Council consideration through the budget process. The sooner the debt is paid off, the City will have available annual revenue that could be used for land purchases or other capital purchases/projects.

Going forward, Council may wish to consider using debt only when other funding tools are not available, rather than as a primary funding source. Ensuring a sufficient and sustainable annual funding stream to service existing and future debt obligations is essential. For this reason, staff recommend limiting new initiatives that rely on internal borrowing until current obligations have been substantially reduced or retired.

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LEGAL IMPLICATIONS:

Pursuant to provisions of the Community Charter, municipalities can use internal, or interfund, borrowing to temporarily finance capital projects. For all borrowing/debt the City must collect sufficient revenue in a future year to pay off the debt, internal or external.

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OPTIONS:

Option 1

THAT Committee of the Whole receive this report for information.

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SUBMITTED BY:

Michael Dillabaugh, CPA, CA, Director of Finance

Concurrence:

• Melisa Miles, Manager of Legislative Services
• Donna Petrie, Senior Manager of Communications & Economic Development
• Yari Nielsen, Director of Parks, Recreation and Facilities
• Leah Stohmann, RPP, MCIP, Director of Community Planning and Development
• Katelyn Balzer, P.Eng., Director of Engineering and Public Works
• Marie Watmough, Director of Legislative & Protective Services
• Braden Hutchins, Deputy Chief Administrative Officer