COMMUNITY CHARTER A FINANCIAL PERSPECTIVE

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COMMUNITY CHARTERA FINANCIAL PERSPECTIVE
2
Background

• Province asked for MFA Involvement
• World is changing
• (US, Alberta, Ontario)
• Rating Agencies
• (Sept. 11 and Enron)

3
Borrowing Process Why Change?

• Rating Agencies focusing on cash flow
• Ability to Pay
• 1990s Inflated Property Values
• Current formula omits
• i) Revenue from GVRD Utilities, TransLink, RHDs
• ii) Debt payments covered by others
• Kelowna/BC Gas
• Sewer Water Grants

4
Borrowing Process Why Change?

• Ability to evaluate Knocks on our door
• Airport Authorities
• Library Boards
• Hospital Authorities
• One-off entities (eg. CMON)
• Evaluation of PPPs
• Are debt payments covered by 3rd party?
• Existing L/A S/I Bylaw Process Cumbersome

5
MFA Approach To Changes

• Involve MFAs members feedback
• KPMG
• Rating Agencies (to protect AAA)
• Alberta, Ontario USA (follow world trends)
• Discussion with several municipalities in MFA
  office
• Discussion with MCAWS
• Streamline the process

6
Thoughts On New Approach

• I) Borrowing Process
• II) Borrowing Formula
• Randy Decksheimer of KPMG

7
Borrowing Process

• Current

Proposed
1. Determine project. 2. Loan
Authorization (L/A) bylaw has 3 readings and
application for Statutory Approval (S/A) is
made. 3. Appropriate assent process is
followed. 4. If project is approved, L/A bylaw
is brought forward for final adoption. 5. 30 day
quashing period applies from the date of
adoption. 6. Application for Certificate of
Approval is made.
1. Determined project and requirement for assent.
The assent threshold is meant to provide
flexibility but would remain voluntary. 20
Assent Threshold If used lt20 of Borrowing
Power no assent needed if gt20 used assent
required
Assent Required
Assent Not Required
2. Loan Authorization (L/A) bylaw has 3 readings
and an application for Statutory Approval (S/A)
is made. 3. Appropriate assent process is
followed. 4. If project is approved, L/A bylaw
is brought forward for final adoption. 5. No
quashing period 6. Application for Certificate
of Approval is made
2. Loan Authorization (L/A) bylaw has 4 readings
and an application for Certificate of Approval
(C of A) is made. 3. Not Applicable 4. Not
Applicable 5. Not Applicable 6. Done in step
2
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Borrowing Process (contd)
Current
Proposed
To Access Funds 7. Security Issuing bylaw is
given 3 readings and then sent to Ministry for
Statutory Approval. 8. Returned from Ministry
for final adoption 9. After final adoption,
application is made for Certificate of
Approval 10. Certificate of Approval allows MFA
to borrow funds for this L/A bylaw Regional
District and Member Municipalities Currently
Regional Districts follow the above process for
their own borrowings and also follow steps 7
through 10 for their member municipalities.
To Access Funds 7. Not applicable 8. Not
applicable 9. Not applicable 10. A council
resolution indicating they wish to access funds
for this L/A bylaw Regional District and Member
Municipalities Once the Certificate of Approval
is received on the member municipalitys L/A
bylaw, Regional Districts could pass, in one
meeting, a companion bylaw to cover the
municipalitys total borrowing requests for that
L/A bylaw.
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Borrowing Process Conclusion

• Proposed
• One bylaw L/A Bylaw (No S/I)
• Certificate of Approval still occurs
• Or assent needed if gt 20 Borrowing Power Used
• Regional District approval for member
  municipalities occurs in one meeting

10
Local GovernmentBorrowing Power Formula

• Update on the MFA/KPMG Analysis and
  Recommendations on Potential Changes

11
MFA Background/History

• Objective to bring all municipal borrowing to one
  place
• Eventual inclusion of all municipalities,
  including Greater Vancouver Sewage and Drainage
  District and Greater Vancouver Water District
• Extended to other organizations (GVTA, regional
  hospital districts, others)
• Graduated strength of credit rating through
  positive history of results and education of bond
  rating agencies
• Now over 3 billion in long-term borrowings, with
  no provincial guarantee

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Borrowing Limit Statistics

• Municipalities in the 20-50 category of debt to
  borrowing power represent various sizes of
  municipalities, big and small
• Generally, those over 50 are under 10mm in
  borrowing power
• Conclusion? The existing formula, when
  considered with the comfort the formula provides
  the bond rating agencies, are broadly
  accomplishing what they should allowing
  flexibility to municipalities whose borrowing
  power has been accessed less

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Are Borrowing FormulasWorking Now?
Yes
No

• Cost of borrowing minimized (AAA interest rate
  and benefits of central agency)
• MFA success story
• Public input assured
• Adequate inspector role with minimal
  interference

• Inflexible (real financial strengths and risks
  not measured)
• Administrative burden
• No recognition of varying risk assessment on
  different types of borrowing
• Other organizations not factored in (TransLink,
  etc)
• Off balance sheet items?

14
Rating Agency Concerns

• Smooth transition to new model needed no alarms
• Continue pooling to benefit all and protect
  lenders
• Debt limits are clear, appropriate, and overseen
  by Inspector (or other body?)
• Maintain sinking fund and reserve requirements,
  including investment guidelines
• Comfort in balanced budget, 30 year maximum
  borrowing, some public input

15
Considerations in Developingthe Formula
Overall financial health measurements should
drive borrowing administration and limits

• Consider
• Revenue capability and revenue based measures
• New PSAB reporting requirements facilitate
  revenue based measures
• Removal of certain assessments from formula
• Recognize off balance sheet and other commitments

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Simple Revenue BasedBorrowing Power Limit

• Revenue Base
• Consolidated net revenue
• Less
• Uncollected assessments
• Conditional transfers
• Add
• Prior year assessments collected

17
Simple Revenue BasedBorrowing Power Limit

• Borrowing Power Limit
• Revenue base times a factor (2 or 3)
• Add
• Accumulated operating surpluses
• Non-statutory reserves

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Simple Revenue Based Borrowing Power Limit
Debt Serviceability

• Total revenue for base XXX
• Add
• Accumulated operating surplus XXX
• Non-statutory reserves XXX
• Total Revenue/Reserve Base XXX
• x .2
• Debt Service Capacity XXX

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Simple Revenue Based Borrowing Power Limit

• Debt Service Capacity Room
• Debt service capacity
• Less
• Current debt service costs
• Lease payments
• Other material commitments
• Add
• Debt service recovered from others (governments,
  PPPs?)

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Examples (in thousands)

• Population Size (thousands) gt100 20100 lt20
• Current borrowing power limit 265,627 26,509 1,554
  
• New borrowing power limit 237,064 43,134 1,750
• Debt service capacity 15,804 2,734 116
• Debt service room 9,517 1,573 83
• Borrowing room available 60 57 72

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Considerations/Observations

• Overall limits should be consistent and perhaps
  moderately increased for smaller municipalities
• Annual calculation (audited?) based on year end
  numbers
• Is simple best?

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Other Items

• PPPs
• MFA must be kept informed if a guarantee or
  potential guarantee exists
• Auditors can review PPP Agreements and sign-off
  on info. sheet to MFA
• Rating Agencies have expressed interest that all
  PPPs info. be available to them (thru MFA - if
  material, reviewed one by one)
• Statistics
• Possible rating downgrade if data gt 2 years old
• MCAWS contract to
• i) simplify process and forms
• ii) Data to be under 1 year old
• iii) MFA/Rating Agencies need only 7 of 8 pages
• New RRSP Program