Borrowing and Leasing Changes

Municipal Borrowing

• limit the annual cost of servicing financial liabilities to 25% of revenues from the previous year; and
• exempt some liabilities from the requirement to seek elector approval, including the establishment of an approval free liability zone.

Liability Limitation
The limitation of municipal liabilities relates to a percentage of certain municipal revenues from the prior year (defined under the regulation as “annual calculation revenue”). Determination of this revenue amount is a simple calculation for which the ministry has provided software. Information about the precise nature of the revenues, which are included for the purposes of this limitation, may be obtained from a Financial Analysts in the Local Government Department’s Infrastructure and Finance Division.
 

The annual liability servicing cost needs to be updated by the municipality’s Financial Officer whenever the possibility of incurring a new liability is being considered. This is primarily because the annual liability servicing costs are “rolling”, rather than based solely on prior year-end financial information.
 

There are five liability types captured in the Municipal Liabilities Regulation (911 KB):

1. Loan guarantees, such as guarantees of borrowing by a partner or a not for profit enterprise;
2. Unused borrowing under loan authorization bylaws, which is the amount of borrowing authorized less the amount already borrowed;
3. Debts under loan authorization bylaws, including both temporary and long-term financing;
4. Contingent capital commitments, such as a guarantee of revenues to a partner that relate to the capital component of the partnering agreement; and
5. General capital commitments, such as capital leases or short-term capital borrowing.

These liabilities are captured by the limitation regardless of the authority under which they are incurred. So, for instance, a capital commitment would be captured whether it is authorized under Community Charter sections 175 (liabilities under agreements), 176 (liabilities imposed under prescribed enactments), 178 (short-term capital borrowing), 179 (loan authorization bylaws for long-term borrowing), or 181 (temporary borrowing under loan authorization bylaw).
 

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All liabilities incurred under loan authorizations are captured, whether or not the liability is capital in nature. For other liabilities, the distinguishing feature is the nature of the liability, with only guarantees and capital commitments being captured. In all cases, it is the nature of the liability and not the term of the agreement under which the liability is incurred that will determine whether or not a particular liability is captured under the limitation. This means that borrowing of 20 years under a loan authorization, short-term capital borrowing for five years, borrowing under an agreement for four years or a partnering agreement for two years under which the municipality guarantees the partner’s borrowing, will all be captured under the limitation. The term of the agreement affects whether or not elector approval is required prior to incurring the liability, but it does not affect whether or not the liability itself is to be included in the limit.
 

An important improvement in the current limitations over those under the Local Government Act is that liabilities under agreement that relate to operating costs are not captured by the limits. Under the previous provisions, any liability under an agreement was included in the limitation. This was problematic in that it treated liabilities under an agreement in a different way than operating costs incurred directly by the municipality, which created a disincentive to consideration of public private partnerships. The current limitations exclude operating costs under an agreement, or the portion of an agreement that relate to operating costs, thereby treating partnerships in a similar way to municipal services operated directly by the municipality.
 

The annual cost of servicing liabilities that are captured under the limitation is defined under the regulation to be the average actual costs associated with financing the liability, or, in circumstances where the commitment has not yet been realized, the implied cost calculated as the total amount of the commitment divided by the number of years remaining in the commitment. Only the cost related to a liability that is captured under the limit requires calculation of annual servicing costs. So, for instance, in circumstances where a partnering agreement includes operating and capital components as well as a guarantee, the annual cost of servicing the liability will be calculated only in relation to the guarantee and the capital component of the agreement and not the operating component of it.
 

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Elector Approval Requirements
Most long-term borrowing and other liabilities incurred by municipalities are subject to elector approval. The Community Charter provides specific exceptions to this general rule (e.g., liabilities under agreements that are less than five years - including all rights of renewal, or borrowing needed to comply with orders under the Environment Management Act). The Municipal Liabilities Regulation adds the following exceptions for obtaining elector approval:

• Any liability incurred under an agreement (in accordance with Community Charter section 175) that is not either capital in nature or a loan guarantee. In other words, for liabilities under agreement, if the liability is not of the type that would be captured under the limitation, then elector approval for the liability is not required. This should resolve some of the previous problems with elector approval for such actions as acquiring rights of way on private property where the only liability of the local government relates to maintaining the land in its original condition.
• Borrowing required to comply with Drinking Water Protection Act orders to provide water treatment facilities where the Inspector of Municipalities approves the liability.
• Any liability if the servicing costs for all municipal liabilities is less than 20% of the municipality’s liability servicing limit (i.e., “approval free liability zone”).

New Procedural Requirements
Under the annual liability servicing provisions, neither the ministry, nor the Municipal Finance Authority will be aware of a municipality’s total liability servicing costs at the time it wishes to incur a new liability. Therefore, both organizations are relying on the municipality’s Financial Officer to certify whether the municipality will be exceeding its annual liability servicing limit if it incurs a new liability. This certification will be provided in a form called the Liability Servicing Limit Certificate (33 KB).
 

The Certificate must be submitted to the ministry whenever a municipality submits a loan authorization bylaw for the approval of the Inspector of Municipalities at third reading, or when a municipality submits a leasing request to the Municipal Finance Authority. This requirement is intended to protect the municipality from challenges to its authority to incur the liability. In addition, the certificate will be relied upon by the Municipal Finance Authority’s solicitors in giving an opinion in connection with the borrowing and the issue of securities in respect to the borrowing.
 

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The Certificate may be completed by either the Financial Officer or, at the municipality’s discretion, the municipal auditor. It is expected that in most circumstances, such as where the municipality relies heavily on Municipal Finance Authority’s borrowing and leasing, certification will be a simple process. In circumstances where the municipality enters into complex agreements, the certification may become somewhat more challenging. In those circumstances, estimating the portion of an agreement that relates to capital and the implied annual servicing costs related to that portion of the agreement may require considerable professional judgment, such as that which may be obtained through the municipal auditor.
 

When council has adopted a loan authorization bylaw and the municipality is ready to start the process to obtain financing through the Municipal Finance Authority, a statutory declaration is required to be signed by the municipality’s Corporate Officer certifying that appropriate procedural requirements have been met in relation to the bylaw. The statutory declaration is required in order to obtain a Certificate of Approval from the Inspector of Municipalities. The statutory declaration is being replaced with a Corporate Officer’s Certificate that is simpler to use and no longer requires certification by a Commissioner for Taking Affidavits. There are two forms (LA1 (25 KB) or LA2 (27 KB)) depending on whether the assent of the electors was required prior to the adoption of the bylaw.
 

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Regional District Borrowing

• Any liability incurred under an agreement (in accordance with Community Charter section 175) that is not either capital in nature or a loan guarantee. In other words, for liabilities under agreement, if the liability is not of the type that would be captured under the municipal annual liability servicing limitation, then elector approval for the liability is not required. This should resolve some of the previous problems with elector approval for such actions as acquiring rights of way on private property where the only liability of the local government relates to maintaining the land in its original condition.
• Borrowing required to comply with Drinking Water Protection Act orders to provide water treatment facilities, where the Inspector of Municipalities approves the liability.
• Borrowing for regional park or regional trail purposes, to a maximum of $5 million or $5 per $1,000 of assessed values within the RD. This continues an exception that was available under the Park (Regional) Act that was repealed last year.

New Procedural Requirements
When a regional board has adopted a loan authorization bylaw and the regional district is ready to start the process to obtain financing through the Municipal Finance Authority, a statutory declaration is required to be signed by the regional district’s Corporate Officer certifying that appropriate procedural requirements have been met in relation to the bylaw. The statutory declaration is required in order to obtain a Certificate of Approval from the Inspector of Municipalities. The statutory declaration is being replaced with a Corporate Officer’s Certificate that is simpler to use and no longer requires certification by a Commissioner for Taking Affidavits. There are two forms (LA1 (25 KB) or LA2 (27 KB)) depending on whether the assent of the electors was required prior to the adoption of the bylaw.
 

In addition, a statutory declaration had been required to accompany regional district security issuing bylaws when they were approved by the Inspector of Municipalities. While this approval is no longer required, a Certificate of Approval must still be obtained for security issuing bylaws. The statutory declaration is being replaced with a Corporate Officer’s Certificate (Form SI (22 KB)).
 

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Leasing Through the Municipal Finance Authority
There are a number of procedural changes relating to the Municipal Finance Authority’s leasing program stemming from the new regulations and as a result of recent Court challenges to certain local governments’ authority to lease. These challenges related primarily to the term of the lease agreement and a consequential consideration of whether or not elector approval for the lease was required. Since such challenges can be costly to both the local governments involved and to the Municipal Finance Authority’s leasing program, ways to minimize both the cost and risk related to leasing were reviewed and the following changes implemented.
 

Leasing contracts have been changed in order to make the terms of the arrangement clearer. All terms relating to the lease will be written directly into the leasing document, eliminating the need for a separate Letter of Understanding. There are two different leasing options available: either less than or equal to five years with no renewal terms and no residual or greater than five years including possible renewal terms. The lease, if entered into under the terms of the Community Charter section 175 – Liabilities Under Agreement, will state which option is being exercised. In essence, if there are no renewal terms, payments under the lease will represent the full cost of the asset purchased by the municipality, which should help to clarify the nature of the lease from both an accounting and a public transparency and elector approval perspective. In other words, a lease cannot be renewed over five years unless approval of the electors is obtained. Each lease request will be accompanied by a Liability Servicing Limit Certificate (33 KB) as outlined for other local government borrowing.
 

If the lease contains renewal terms or a provision for a non-zero residual value, the leasing contract will include the requirement for public approval, if such approval is necessary. The primary purpose of including this requirement in the contract is to ensure that the liability to be incurred under the leasing agreement has received elector approval, if such an approval is required.
 

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Since the Municipal Finance Authority considers all of their leasing agreements with local governments to be capital in nature, the local government must comply with elector approval requirements under the Community Charter unless it can incur the leasing liability under its approval free liability zone, or the lease is for less than or equal to five years when considering all renewal terms. Verification of compliance with this procedural requirement will help to eliminate the risk of legal challenges to these leases, thereby ultimately reducing overall leasing costs to all local governments.
 

Important Note:
Local governments should be aware that the Community Charter procedural requirements relate to liabilities regardless of whether the local government is borrowing or leasing through Municipal Finance Authority or another institution. While the provision of confirmation of public approval, where applicable, is a requirement of the Municipal Finance Authority, the Corporate Officer should be aware of the need to comply with these requirements even if such certification is not requested by commercial lending or leasing institutions.

The Municipal Finance Authority will be providing more specific leasing program requirements regarding liability servicing limit certificates, residuals, renewals and the lease options requiring public approval to their leasing clients under separate correspondence.
 

For further information contact:
Ministry of Community Services
Local Government Department
250 387-4060 or 250 387-4020
http://www.cserv.gov.bc.ca/lgd/
 
Municipal Finance Authority
Shelley Hahn
(250) 383-1181
http://www.mfa.bc.ca/capital.htm
 

Please direct questions or comments to Advisory Services Branch.