Premier Danielle Smith’s decision to take on debt for school construction raises concerns about long-term fiscal sustainability
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Premier Danielle Smith recently announced that the Alberta government is committing $8.6 billion, with $6.5 billion in new funding, to build 90 new and modernized K-12 schools over the next seven years. This ambitious project is expected to create space for 200,000 additional students and meet the growing demands of Alberta’s population.
Rather than handing over construction funds directly to school boards as in the past, the government is adopting a different approach – taking on long-term loans, retaining ownership of the schools, and leasing them back to the boards.
While there is little doubt that this investment is necessary, financing $6.5 billion through debt raises some questions. Alberta could have instead explored other creative solutions earlier in the planning process, especially given that population growth and rising student enrollments were foreseeable. The premier explained that this new funding model spreads the costs over the lifetime of the projects, allowing the government to avoid impacting the operational budget while still fulfilling promises like tax cuts.
However, this decision also reflects Alberta’s tricky financial situation. The province’s revenue heavily relies on natural resource prices, which have been unstable. With oil prices falling, then rising, then falling again, Alberta is facing tough budgetary challenges. If the full $1.4 billion tax cut promised for Budget 2025 is implemented, the budget deficit will rise to $2.5 billion in 2025-26, with further deficits looming in the following years.
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Given this backdrop, it’s easy to see why the government opted to take on more debt for school construction – it’s a temporary fix to a long-term issue.
Another concern is the lack of transparency. The government has not released a full update to its three-year fiscal plan, scheduled for November 2024. This raises questions about what the government is keeping under wraps and how deep Alberta’s financial challenges really go.
When looking at school construction funding, it’s important to understand how the province’s budget system works. School boards are currently fully consolidated into Alberta’s financial statements, meaning the province considers schools as government assets. Capital spending for new schools is treated as a long-term asset on Alberta’s balance sheet. However, Alberta’s Sustainable Fiscal Planning and Reporting Act (SFPRA) only applies spending limits to operational expenses, allowing capital expenses to balloon without much restraint.
This loophole could create future issues, especially when considering the operating costs that come with building new schools. Constructing 90 schools means hiring more teachers, education assistants, and staff, and these costs will fall on Alberta Education’s operating budget. The government announced a $125 million increase in operational support for schools earlier this year, but this might not be enough to cover the staffing needs for 90 new schools over seven years. Alberta taxpayers deserve to know the full costs of this massive school construction project, including operational expenses.
Adding $6.5 billion in debt for school construction will further strain Alberta’s already substantial financial burden. Alberta faces over $32.5 billion in taxpayer-supported debt maturing within the next four years. Although interest rates are decreasing, this trend is not guaranteed to continue. If rates rise again when these debts are refinanced, the province’s annual debt-servicing costs could increase significantly. For every one percent increase in interest rates, Alberta would face an additional $150 million in annual costs.
Higher debt-servicing costs will lead to more of the budget allocated to paying off debt and less money available for essential services like healthcare and education, putting further pressure on the province’s finances.
So, what can be done to avoid this scenario? The key lies in long-term planning. If Alberta had a permanent spending review process to find savings or had anticipated population growth sooner, the province might not have had to take on so much debt. In fact, adopting a better governance structure for infrastructure spending – similar to the frameworks in Ontario and Quebec – could provide much-needed transparency and stability for Alberta’s capital projects.
A smart move would be for the Alberta government to present a comprehensive 10-year capital plan. This plan should lay out detailed information about costs, completion dates, and funding sources for all infrastructure projects. Having this level of transparency would prevent the “boom and bust” cycles that Alberta has experienced with past infrastructure investments. Additionally, the government should clearly outline the operational costs of new projects so the public knows exactly what’s coming in terms of future spending.
In short, while Alberta’s new approach to school construction might help in the immediate term, the province needs to adopt better long-term fiscal practices to ensure sustainability. Capital spending and operational costs need to be balanced, and more proactive measures should be taken to plan for population growth.
If Alberta wants to avoid a growing financial crisis, it’s time to focus on long-term solutions rather than quick fixes. Political will is essential to implement the necessary changes and ensure the province’s infrastructure plans are sustainable and responsible.
Lennie Kaplan is a former senior manager in the Fiscal and Economic Policy Division of Alberta’s Treasury Board and Finance Ministry, where, among other duties, he assessed best practices in long-term capital planning. He was also an external advisor to the Auditor Genera’s 2017 audit on government capital planning.
Explore more on Alberta politics, Smith government, Alberta budget, Government debt and deficit
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