Long-term Debt Limits in SaskatchewanCHALLENGES AND OPPORTUNITIES

THE POLICY SHOP

Kristopher Schmaltz, Sara McPhee-Knowles, Travis Reynolds, Cody Sharpe, Mike Veltri & Andrew Coffin

photo courtesy of BriYYZ on flickr.com

The Policy Shop is a student-managed consulting firm run by the Johnson-Shoyama Graduate Students’ Association at the University of Saskatchewan. Graduate student volunteers deliver research and analytic services to non-profits and charities on a pro-bono basis, which allows those organizations to receive policy expertise they would not otherwise have access to. At the same time, students build practical policy skills and gain valuable hands-on experience. This project was the first completed by the Policy Shop. It was presented to SUMA in June 2012.

Executive Summary

This report explains the policies and processes that comprise debt regulation of urban governments. Initially, the report was organized around answering the question of why the utilities-based debt is included in the debt-limit calculation. Analyzing the policy and speaking to municipal stakeholders, made it clear that municipal concerns about debt-limits are much broader in nature.

To gain a thorough understanding of the municipal perspective, a series of in-depth interviews were completed with municipal administrators, mayors, and senior staff. In addition, a survey was sent to members of SUMA to provide the research team with a larger sample, allowing for more reliable generalizations.

The current policy on debt-limits is as follows. Municipal Affairs regulates municipal debt through the Saskatchewan Municipal Board (SMB). The formula bases debt-limits on municipal revenues. Some urban governments have suggested that utilities-based debt should be excluded from the formula; since utilities are funded through user fees, they are self-funding and do not need to be regulated by the SMB. The SMB’s perspective is that they need to include utilities-based debt in the formula because they include revenue from utilities. Moreover, by including utilities-based debt in the formula, the SMB is better able to monitor municipal finances and ensure sustainability. Many municipalities believe that by excluding utilities-debt from the formula, they would have greater flexibility to access debt. In practice, it seems that the SMB is able to provide that flexibility so long as the municipality has a sustainable business plan. There are, however, a number of other important policy and process issues related to municipal debt among stakeholders:

n Policy Clarity: Urban governments are not clear on why the policy is the way it is, how it functions, and what they can expect from the province. There seems to be a lot of anxiety around debt-limits because urban governments are not convinced that they will be able to access sufficient debt in the future.

n Debt Capacity for Growth: Many municipalities do not have adequate debt capacity to accommodate the costs of growth. In many cases, municipalities rely heavily on grants. Moreover, they are experiencing an infrastructure deficit in key areas such as water and sewer, and roads. Many are concerned that without grants, they will not be able to maintain and upgrade key infrastructure, particularly as other levels of government change regulations and increase standards.

n Lack of Flexibility: Many respondents were convinced that the current regulatory environment is inflexible, and that municipalities are missing out on opportunities to take advantage of more flexible, lower-cost debt options.

n Process Issues: Many respondents believed that processes of the SMB could be improved to serve them better, such as quicker turn-around times.

In addition to diagnosing some of the key concerns, the report provides an analysis of comparative policies on debt-regulation for municipalities in the provinces of Alberta, Manitoba, and Nova Scotia. The most interesting policy option was found in Alberta where utility services are often delivered through regionalized bodies called Regional Service Commissions (RSC). These organizations are able to take on debt that is separate from municipal debt, and are able to reduce utility costs for municipalities, as well as provide higher quality services by operating regionally. The applicability of findings in other provinces was found to be minimal to moderate, with the most useful example of innovation being the RSC, which could potentially be emulated in Saskatchewan. In fact, there are examples of regional municipal service-delivery partnerships taking place in Saskatchewan around water.

The following recommendations were included in the report, and are for SUMA to consider in determining its stance in negotiations with the province around policy and program changes that would serve urban municipalities, which currently have to respond to major challenges created by a growing economy.

Key Issues

Recommendations

We recommend that SUMA consider the following alternatives to rectify the above policy and process issues:

1) Debt Capacity Issues

A. Work with the SMB to Develop Guidelines for Municipalities: Municipalities were very concerned about the lack of clarity on debt limit policy, and would like to see clear guidelines to help them plan for their interactions with the SMB.

B. Request that the Province Develop a More Substantive Policy: Many municipalities consider the current debt-limit policy to be a “one-size-fits-all” approach. It is recommended that the province be encouraged to consider ways in which it could re-design debt limit policy so that municipalities of greater capacity are given more freedom, while still providing oversight and assistance to those municipalities that need it.

C. Request that the Province Consider Removing Utilities Debt from Calculation: This option should be considered. It is unlikely that this alone would address the issues above, but it may, in some cases, provide additional flexibility to some municipalities.

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D. Advocate for a Province-wide Solution to Infrastructure Needs: Infrastructure challenges are the single most important issue driving the concern over debt-limits, and a provincial strategy around infrastructure may alleviate some of these concerns.

2) Infrastructure Challenges

A. Survey Members about Interest in Regional Service Delivery Options: SUMA should survey members to determine if there is an interest in creating partnerships around service delivery.

B. Communicate with Municipal Partners: Organizations such as SARM and other municipal partners should be approached about their interest in an initiative to increase regionalized service delivery.

C. Approach Province about Funding: If there is an appetite for this, SUMA and interested partners should approach the provincial and federal governments about targeted funding for setting up and implementing regional service delivery groups. It is clear from our research that regional service delivery arrangements require funding to be developed.

3) Process Challenges

A. Approach SMB about reviewing borrowing options: Municipalities have suggested that they are missing out on short-term borrowing options that would decrease interest costs. SUMA should request that the SMB examine its current policies to determine if this is the case, and if so, if changes could be made to increase flexibility and lower costs for municipalities.

B. Legislated Processing Times: The SMB should institute maximum application turn-around times.

C. Review Application Process: It was noted by the SMB that processing times are often lengthy due to incomplete applications. The application process should be reviewed to determine the reason for this so that it may be resolved through process changes, building municipal capacity, or both.

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Introduction

In Saskatchewan, many municipalities are taking on debt to finance the costs associated with development and a growing provincial economy. One issue that has recently become more important for urban municipalities in Saskatchewan is the legislation surrounding municipal long-term debt. At its 107th Annual Convention, SUMA passed a resolution to work with the Ministry of Municipal Affairs to initiate a review of the criteria for establishing long-term debt limits. This report is an analysis of long-term-debt legislation in Saskatchewan, as well as a stakeholder analysis of the issues and concerns surrounding this policy. The report contains four main sections:

1. An analysis of municipal long-term debt legislation in Saskatchewan: This section examines the legislation governing municipal long-term debt in the province of Saskatchewan.

2. A stakeholder analysis: To gain an adequate understanding of the perspective of municipalities on long-term debt policy, a stakeholder consultation and analysis was performed utilizing a survey and a number of interviews. Several urban governments were interviewed, and over 100 were surveyed. The purpose of this section is to construct a definition of the problems that municipalities are facing with regard to financial capacity and long-term debt issues.

3. A comparative perspective on long-term debt policy: This section provides a comparative assessment of the policies and regulations surrounding municipal long-term debt in other provinces. The purpose of this section is to provide examples of alternative policies used elsewhere that could inform discussions on potential modifications to Saskatchewan policies.

4. Recommendations: This section provides some recommendations on how policies and processes might be improved.

An Overview of Municipal BorrowingMunicipal expenses are generally funded in two ways:

internal and external revenue sources. Internal revenue sources include: operating revenues; earmarked taxes, reserves and reserve funds, special charges (improvement charges or levies, lot levies, and other special fees), and development charges. External revenue sources fall into two basic categories: grants and borrowing. Grants are transfers from the provincial or federal levels of government. Borrowing is when the municipality accesses capital through borrowing arrangements, and this practice has become much more common as municipalities are expected to deliver a greater level of services (Kitchen 2002, 193–202).

Municipal Borrowing:

Short-term Borrowing:

Short-term borrowing can be used to finance capital expenditures or cover short-term deficits in general operating budgets (Kitchen 2002, 202).

Long-term Borrowing:

Long-term borrowing is used for capital expenditures only, and “is justified if one can reasonably expect the benefits from the project to fall on future users, so that the financing term will match the asset’s lifespan. The project is financed by borrowed funds and the principle and interest charges are repaid out of future operating revenues. This policy attempts to make sure that future beneficiaries are also those who bear the costs” (Kitchen 2002, 202). Borrowing is typically controlled by provincial regulations. The reason for provincial limits being placed on municipalities is that “municipalities are creatures of the province and the provinces do not wish to be responsible for unlimited municipal borrowing and possible repayment of municipal debt” (Kitchen 2002, 202). Borrowing is controlled through regulations such as those that limit borrowing to:

n Capital projects

n Tax payer approved debt

n Debt approved by provincial regulatory body

n A specified percentage of revenue for financing debt

n Limiting borrowing to a provincially controlled “municipal fund” (Kitchen 2002, 202–203)

Every province, with the exception of Ontario, makes use of a provincially-organized body that assists municipalities with undertaking long-term borrowing. In these provinces, municipalities “apply for funds through the province-wide authority which totals up all of the requests for local funds and issues long-term debentures against the authority itself. . . When the authority receives the proceeds from the sale of the debentures, it distributes the funds among the requesting municipalities, usually on the basis of a loan agreement with the municipality” (Kitchen 2002, 203).

Decisions on financing instruments, whether to borrow in the short-term or long-term, and whether to take on debt of any kind are largely made based on the needs of the municipality, taking into account financial capacity, interest-rates, level of growth, and other factors. Many municipalities in Saskatchewan are experiencing growth, and thus are making large investments in major capital projects such as recreational facilities, sub-division expansions, water and sewer, waste disposal, etc. With relatively low interest rates, coupled with the recent availability of federal and provincial stimulus funding that provided matched funding for infrastructure projects, municipalities in the province have been increasing their

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long-term debt to take advantage of these opportunities. Municipalities are also having to deal with aging infrastructure and are looking for additional financial capacity to maintain and upgrade their infrastructure.

Constitutional BackgroundA few points of constitutional background

are important for framing the relationship between municipalities and the federal and provincial governments. The municipalities are “creatures” of the provinces; all municipal powers are conferred by provincial legislation. This has two important implications:

n Firstly, municipal powers cannot exceed those of the provinces, an issue that has become more pressing as certain large, metropolitan cities’ populations have far exceeded that of the smaller provinces.

n Secondly, municipalities cannot introduce bylaws that intrude into areas of exclusive federal jurisdiction (Stefaniuk 2007, 54).

A further important point, now contained in the Interpretation Act, is that federal and provincial governments are not bound to comply with municipal bylaws, although they will generally make efforts to do so as a means of ensuring positive relations. Municipalities, however, are bound to comply with all federal and provincial legislation (Stefaniuk 2007).

Municipalities are in the difficult position of having to provide basic services to urban residents, without having the autonomy to do a number of things, such as increase their debt thresholds without permission from the province. Urban governments vary in size and capacity, and some of these governments in Saskatchewan have voiced concerns that the current policy is not meeting their needs. It is not plausible, nor constitutionally possible, for the province to stop regulating municipal debt, and so it is essential that the policies and processes around debt-limits be designed to meet the needs of municipalities within these jurisdictional restrictions.

Current Saskatchewan Policy

Summary

Debt limits in Saskatchewan are regulated by both legislation, and by an administrative body called the Saskatchewan Municipal Board (SMB). While debt limits in Saskatchewan are legislated, municipalities are expected to work very closely with the SMB to establish debt-limits consistent with their operational plans. Thus, many of the decisions around debt-limits are ad hoc and depend upon the ability of the municipality to work with the SMB to establish adequate financial plans.

Legislation and Regulations

In Saskatchewan, three pieces of legislation and the Saskatchewan Municipal Board form the legislative foundation for long-term debt limits. Municipalities in Saskatchewan are governed by one of three pieces of legislation, depending on the municipality’s particular characteristics:

1. The Cities Act: governs municipalities with populations greater than 5,000.

2. The Municipalities Act: governs towns, villages, and rural municipalities.

Populations range from:

n Towns: generally range from 500 to 5,000.

n Villages and resort villages: populations under 500.

n Rural municipalities: established on the basis of area, not population, and include any unincorporated communities (hamlets and organized hamlets) that fall within their boundaries.

3. The Northern Municipalities Act, 2010: governs towns, villages, and hamlets and other unincorporated northern settlements located in northern Saskatchewan.

These pieces of legislation also spell out the requirements for long-term debt limits. For the purposes of this report, we will focus on urban governments regulated by the Cities Act and the Municipalities Act. Under the Cities Act, debt limits are determined by the Saskatchewan Municipal Board (The Province of Saskatchewan 2002). The board is responsible for reviewing applications and establishing the debt limits for cities, which are renewed every three years. If a city wishes to have a debt limit established, or its current limit exceeded, the SMB requires a resolution or bylaw be passed by city council indicating the size of the debt limit desired, or the amount of excess borrowing. As per the Municipalities Act, a municipality’s debt limit is equal to the total amount of own-source revenue for the previous year (The Province of Saskatchewan 2005).

Determining debt limits falls under the jurisdiction of the Saskatchewan Municipal Board, which was established on October 1st, 1988. The SMB’s mandate is to decide on regulatory and judicial issues surrounding local authorities, including municipalities and school boards. The regulatory function of the SMB is to review debt obligations and provide oversight, particularly with respect to the financial health of municipalities. The Board’s judicial function is to adjudicate, at the provincial level, appeals from the general public in municipal matters relating to property tax, assessments, planning and development issues, and municipal orders (for example, property maintenance orders). Specific to municipal debt, the SMB reviews local authorities’ long term debt applications, which are subject to approval. This review process is intended to ensure the municipality’s financial stability, which provides assurance to taxpayers and lenders (Saskatchewan Municipal Board).

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Within the SMB, the Local Government Committee is responsible for the review and approval of a number specific issues. Borrowing by a town, village, resort village, or rural municipality must be approved if it:

n causes the municipality to exceed its debt limit;

n is not repayable within a three year term; or

n is secured by a debenture issue.

Also subject to approval are cases where the above municipal governments:

n lend money or guarantee a loan in an amount that causes the municipality to exceed its debt limit;

n enter into an agreement to purchase or lease capital property, if the term exceed five years; or

n share in the operating losses of a service, facility or project, if the term exceeds five years.

In addition to this, the SMB is also responsible for approving:

n water and sewer utility rates for towns, villages, resort villages, rural municipalities and northern municipalities;

n investments made by the above local governments in certain securities not listed in the Municipalities Act; and

n local improvement projects pursuant to the Local Improvements Act, 1993.

Finally, the SMB has the general authority to inquire into the financial, and other, affairs of a city, urban, or rural municipality when the local authority’s financial position warrants such an action.

Challenges and Concerns To identify challenges and areas of concern among

urban governments regarding Long-Term Debt (LTD) policy, a number of interviews were conducted with six municipalities, which will be identified here as Municipalities A, B, C, D, E and F, a representative from the SMB, and representatives from Municipal Affairs.

The first municipality, Municipality A, indicated that a previous provincial government program, the Saskatchewan Infrastructure Growth Initiative, was very helpful for municipalities experiencing infrastructure needs related to growth. This municipality was experiencing increased costs due to a growing population, but was limiting risk by building smaller subdivisions to account for peaks and valleys in growth. A larger city, Municipality B, specifically mentioned cash-flow issues due to high growth in four sectors around the city all at once. However, this municipality indicated that they would not be interested in borrowing beyond the debt limit because of credit rating concerns. Specifically, the representatives mentioned developing innovative opportunities for revenue to lessen the need for additional

debt. In particular, this municipality mentioned focusing on mill rate supported debt, rather than debt supported by federal gas taxes or utility rates, since mill rate supported debt is the prime concern for the city’s taxpayers.

Municipality C noted that they were experiencing exceptional growth in both population and business, and that debt limits had held back their potential for growth. This municipality’s debt has increased significantly in the last ten years, in part due to a lack of provincial funding. Two projects have contributed to the debt limit cap: a water treatment plant and a health centre, even though these projects are both fully funded through own-source revenues. The water treatment plant is funded through utility rates and the health centre from the leases paid by medical professionals, such as dentists and optometrists. One recommendation from this municipality was to remove projects funded through own-source revenues from the debt limit calculation. This recommendation was also echoed by Municipality F; these officials felt that the current system is limiting, and would appreciate more clarity from the province as to how own-source revenue is currently used in calculations.

The final municipality we interviewed, Municipality F, is experiencing major resource related growth. This municipality has seen its debt level double in recent years. The municipal officials were most concerned about the potential for debt-limits to constrain future growth. Currently, the municipality is able to access sufficient capital through debt arrangements approved by the SMB. However, there is a concern that the SMB could inhibit growth by not permitting extensions in the future. The municipality expressed an explicit desire to be treated more autonomously and given more flexibility. For example, in the future there will likely be more infrastructure spending programs from the federal government, and the municipality needs to be ready to match those funds when they come available, otherwise it might miss out on an important opportunity. This point was also reflected by Municipality A. In terms of utility-related debt, it was suggested that perhaps the SMB should classify utility debt separately from regular debt; this would give the municipality more flexibility to grow. Utility debt can be larger since it is paid by service fees.

All municipalities mentioned their dealings with the SMB. One representative noted that dealings with the SMB had been overwhelmingly positive, and that their administrators had received help making a debt plan and felt well-supported. One other representative noted that the municipality had not dealt with the SMB during her tenure.

Three of the six noted that the time taken to complete debt limit increases was longer than expected. Representatives from the largest municipality, Municipality B, indicated that, since they had planned in advance, this delay was not a problem and that the whole process seemed quite smooth. Officials from Municipality A expressed that the time delay was a concern that could result in lost opportunities for growth. A potential policy recommendation mentioned by those from the larger municipality was that it would

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make sense to have debt limits indexed to the municipality’s revenue, so that as revenue increases the debt limit would increase automatically rather than the municipality needing to constantly re-apply for debt limit increases. Municipality C’s respondent mentioned that the SMB had been difficult to work with, as it provides an unwanted layer of redundancy and bureaucracy. This representative mentioned that they have a professional staff for planning and accounting that prepare applications, and although the application was eventually approved, the work the professional staff did to prepare the business plan was sent back multiple times with minute detail changes to ultimately arrive at the same conclusion. This municipality mentioned that the SMB should take into account the larger municipalities’ ability to handle their own affairs, particularly when those municipalities have professional staff capacity. The SMB could then take on more of a partnership or resource role for those able to prepare their own debt plans, while providing additional oversight for municipalities that lack capacity and need more assistance with application preparation.

Officials from two of the other municipalities (D and E) were concerned about other levels of government imposing regulations on municipalities, leading to increased costs. For example, the federal government has recently changed water standards, requiring the municipalities to make expensive upgrades. No additional support for municipalities has been provided. One municipality’s representative noted that simpler grants would be greatly appreciated, as the current applications are complex and require either a professional grant writer or multiple rejections and revisions – both of these entail high costs.

A number of municipal officials mentioned the concern that utilities-related debt is included in LTD calculations. The general perspective of these municipalities is that utilities-related debt does not impact general financial capacity of municipalities because utilities are paid for by user fees, which rise as costs increase. For example, if a municipality makes upgrades to its water and sewer system, the costs associated with servicing debt and paying for the upgrades is paid for by user fees; the municipality’s ability to service debt for other purposes is not impacted. For this reason, many urban governments would prefer to see the policy around LTD calculation modified to remove utilities-based debt from the formula.

In summary, the main themes raised by the municipalities were centred on autonomy, flexibility, and preserving growth. These municipalities raised concerns around the current “one size fits all” policy of SMB oversight, and recommended additional flexibility so that municipalities that have sufficient capacity can be autonomous and those that need more assistance with applications and financial monitoring can receive the support they need. By introducing more flexibility into the current system, the municipalities will have access to the resources they need during times of growth.

SMB Response

The legislation does not clearly outline a rationale for the inclusion of utility debt in the formula for calculating LTD for municipalities. SMB was able to provide a basic explanation of the practice. First, utility debt is included in the LTD limit calculation as are revenues from the utility. Second, SMB is responsible for approving sewer and water rates, and it is important for them to be able to see that utility debt is supported by utility rates. The perspective of the SMB was that whether utilities are included or excluded from the formula should not be an issue; under the current system, it will not make a difference to the SMB when making a decision about debt extensions. The primary issue for SMB is that the municipality has a business plan for supporting the debt when they are asking for a debt extension. If the business plan for utilities-based debt shows that utilities debt is covered by utility fees, then the SMB will take this into consideration in determining whether to approve a debt limit increase.

In response to the issue of lengthy approval times, the representative from the SMB indicated that it does take some time for the SMB to assess applications, in part because of efforts to undertake a comprehensive review that assesses all relevant factors. The SMB representative also noted that, in many cases, the received applications are incomplete and this results in further delays. The SMB works with municipalities to revise applications and repayment plans to ensure they meet all of the regulations.

The representative from Municipal Affairs indicated that debt limit calculation is an area that they have flagged as potentially requiring review, and they are quite open to considering potential amendments to the relevant legislation. The representative mentioned that the department has also conducted some comparative work and may be open to sharing some of their research in this area.

Survey FindingsIn order to gain an adequate understanding of the

perspective of urban governments on the issues surrounding LTD policy in Saskatchewan, a survey was conducted. The survey was sent to all urban governments in Saskatchewan that had not already been interviewed or surveyed by other means. The survey highlighted further issues and challenges. The majority (127 of 135) of respondents represented towns and villages. Moreover, a majority of respondents represented communities of less than 1000 residents. A number of interviews were conducted with larger urban centers, and thus the number of small urban municipalities that responded to the survey was helpful in providing the research team with a better understanding of the issues facing urban governments of all sizes.

Of the 135 urban governments surveyed, 91 reported that their population had been increasing. Growth rates were varied with 31.8% of respondents reporting a growth rate of less than 10%, 27.4% reporting growth of 10-24%, and 4.4%

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reporting a growth rate of 25-50%. Growth is a common factor among the urban governments in this province.

Policy Clarity

During the interviews, responsiveness to municipal requests for debt-limit re-calculations and clarity of rationale for debt-allocation were reported as challenges in the process for obtaining debt approval through the SMB. To gain a better understanding of the urban government perspective on the SMB, respondents were asked to rate their satisfaction with the SMB based on past experiences:

As can be seen in Table 1.0, no apparent trends emerged, with respondents reporting a mixed level of satisfaction. On average it should be noted that more respondents were satisfied than were dissatisfied, which suggests that the interactions between the SMB and urban governments are generally positive. However, the mixed level of satisfaction does suggest that there are areas for improvement according to urban governments interviewed. For example, timely service and clear communication were two areas where urban governments would like to see the SMB improve.

Perspectives on Utilities Debt

The issue of utilities debt has been mentioned as problematic by some municipalities. To better appreciate the level of utilities-related debt in urban governments in Saskatchewan, respondents were asked to provide a rough estimate on the level of municipal debt currently used for utilities purposes. Over 58% or respondents reported that less than 25% of debt is currently associated with utilities. Utilities-related debt does appear to play a significant role in the debt of urban governments in Saskatchewan, but it does not comprise total debt capacity for the majority of urban governments: only 27% of respondents reporting utilities related debt of 50% or greater. However, 20% of respondents did note that utilities-related debt accounted for nearly 100%. In some cases, utilities debt does appear to be a significant factor, and this warrants closer investigation into the reasons behind these abnormally high utilities debt levels.

Debt Capacity and Growth

Respondents were asked the following question: Based on your expectations for growth, and any planned projects that you know about, do you believe that the current debt limit formula for your urban government is sufficient to meet borrowing needs over the next five years? A number of important issues and challenges arose from this question.

Reliance on Grants:

Many smaller communities are not eligible for loans to increase major infrastructure because they cannot service the debt. These small communities are heavily dependent upon infrastructure grants to make any improvements to infrastructure. Some of these municipalities are experiencing declining populations, or have already seen their populations shrink considerably.

Infrastructure: Water, Sewer, Roads, and Recreation

The most significant infrastructure need reported is water and sewer infrastructure. Most respondents raised the concern that water and sewer upgrades were very costly, and would far exceed their municipality’s current debt threshold. Most of these municipalities would not be able to proceed with necessary upgrades without increased debt, grant funding, or both. The second largest infrastructure challenge is the maintenance of roads, followed by recreational infrastructure. Both are a challenge, especially for smaller municipalities.

The Challenges of Growth:

Some municipalities reported that growth in population and size of the municipality has placed pressure on the municipal governments to increase capacity in utilities such as water and sewer. One municipality was experiencing growth of over 400 lots, and needed to upgrade infrastructure to accommodate; entailing a debt increase beyond current limits.

Very dissatisfied

Somewhat dissatisfied

Neither satisfied or dissatisfied

Somewhat satisfied

Very satisfied

Responsiveness to your needs 11% (6) 6% (3) 15% (8) 20% (11) 48% (26)

Timely service 11% (6) 20% (11) 17% (9) 20% (11) 31% (17)

Clear communication 7% (4) 9% (5) 17% (9) 22% (12) 44% (24)

Understandable decision-making process 9% (5) 6% (3) 15% (8) 28% (15) 43% (23)

Simplicity of applications 9% (5) 20% (11) 17% (9) 28% (15) 26% (14)

Table 1.0

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Debt-Limit is Too Low:

Over twenty respondents (out of the 39 responses) reported that the debt-limit is too low to accommodate growth in the municipality. Some reported that even if their debt-limit were increased, they do not have the ability to service and repay increased debt. Of these respondents, many noted that their projects will not proceed if they are unable to access more capital. Moreover, many of these respondents mentioned that they are counting on federal, provincial, or other types of grants to assist with infrastructure costs. In addition to the general need to upgrade out-of-date infrastructure, many municipalities mentioned that increased lot development was creating significant pressure in terms of utilities services.

Other Comments:

Some municipalities noted that the debt-limits were currently sufficient to accommodate municipal needs. Others were unsure of what their debt limit was. They were also unsure of how debt-limits are calculated, pointing to a lack of policy and process clarity, as well as municipal capacity.

Suggested Changes to LTD Policy

If you were given the authority to make changes to current legislation, regulation and process relating to the issue of municipal debt limits, what changes would you make?

The above question was asked of municipalities to provide them with an opportunity to concisely outline what, in their opinion, should be changed about current long-term debt policies. This section is not meant to serve as a list of formal recommendations. Rather, it serves as a list of possible alternatives given by practitioners in the field of municipal administration, and should form the basis of an informed discussion on how to improve current process and policy according to an important group of municipal stakeholders.

Abolish or Limit Role of SMB in Setting Debt Limits:

Some municipalities suggested that the SMB should be removed altogether, whereas others suggested that it needed to be reformed. In general, municipalities fell into two camps with regard to the SMB.

1. Local governments are autonomous and accountable to their residents, and thus the function of provincial oversight is not necessary.

2. Municipalities are financially responsible, and should only have to report on their financial status and business plans to the SMB, but should not have to ask for their permission (see above section on constitutional limitations on municipal governments).

Distinguish Between Utilities-Related Debt and Other Debt:

Many municipal representatives believed that utilities related debt should be separated from general borrowing because utilities are self-funded, and do not actually impact the municipalities’ overall financial capacity if the fee structure is sustainable and does not require subsidization by the municipality.

Permit Greater Flexibility

One municipality mentioned that permitting municipalities to include income from community-owned businesses would increase debt-capacity. It was believed that this practice would not only make infrastructure self-sustaining, but also profitable in some cases.

The Importance of Growth

Many respondents mentioned that growth is an important factor in their municipalities, and that there was an immediate need for greater levels of infrastructure grants to ensure that they can move forward and prepare for future growth.

Improvements to SMB and Debt Regulation Process

Respondents recommended that the SMB be improved in the following ways:

1. Simplify the process: make applications and interactions with the SMB much simpler.

2. Increase the transparency of SMB operations.

3. Clarity: Provide clear explanations of how debt-limits are calculated, as this was unclear for many municipalities. Some municipalities were concerned that the lack of clarity as to how debt-limits are arrived at makes planning difficult.

a. Some municipalities find terminology, such as “own source revenue,” unclear.

b. Another municipality was confused about whether the ownership of municipal controlled corporations affects municipal debt levels.

4. Capital Expenditures: Some municipalities would like to see the SMB allow capital expenditures to be over the debt-limits and restrict operating borrowing to current legislation and regulations. It was suggested that capital expenditures should be linked to capital asset management, and maintained separately from the operating side of the equation.

5. Turnaround Time Standards: Many respondents reported a lengthy turnaround time, and suggested that the SMB have legislated turn-around times and that the province should increase staffing of the SMB.

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6. Maintain Regulation While Increasing Flexibility: While a number of municipalities noted their preference for the SMB to be abolished entirely, others noted a preference for the maintenance of the SMB as an important oversight mechanism. However, these respondents did note that the SMB’s policies and processes need to be changed to permit more discretion for municipalities to increase or decrease debt-limits when necessary. It was also suggested that more flexibility needs to be given to municipalities to allow them to take advantage of short-term borrowing options and lower interest rates.

7. Problem is larger than LTD: There was the general sense that the smaller municipalities are able to borrow more money than what they can afford to pay back, which is not enough to cover their infrastructure needs – thus, increasing debt-limits is not viewed as the answer, but rather increasing revenue streams and improving sustainability of infrastructure.

Comparative Policies

In addition to interviews and the survey, we conducted a comparative analysis of policies in Nova Scotia, Manitoba, and Alberta to gain a better understanding of how other provinces have approached municipal governance and long-term debt calculations. These provinces were chosen for a number of reasons: Nova Scotia does not include utility debt in long-term debt calculations, Manitoba has a similar population, and Alberta has led growth and implemented some interesting policies to cope with regional growth. The section to follow describes the current policy environment in these three provinces, and provides an overview of potential lessons to be drawn from them.

Nova Scotia

Legislative and Regulatory Environment

Rules surrounding municipal borrowing in Nova Scotia are the responsibility of three bodies and one piece of legislation: the Minister of Housing and Municipal Affairs; Service Nova Scotia and Municipal Relations (SNSMR); the Nova Scotia Municipal Finance Corporation (NSMFC); and the Municipal Governance Act, 1998. The roles of each of these entities and how they interact with one another will be discussed in turn.

The Minister of Housing and Municipal Affairs has control over whether or not a municipality is allowed to borrow for capital projects. Section 86 of the Municipal Governance Act, 1998 gives the Minister the power to establish borrowing limits for each municipality; Section 87 prevents him from setting such limits or approving any borrowing if the municipality has not filed its annual capital budget with SNSMR; and Section 88 gives him the power of final approval over a municipality’s borrowing request (The Province of Nova Scotia 1998).

Service Nova Scotia and Municipal Relations (SNSMR) is the line department responsible for enforcing the borrowing limits set by the Minister and reviewing the municipal capital

budgets required under the Municipal Governance Act. At present, the policy of SNSMR is that municipalities should not have a debt service ratio in excess of 30% (Service Nova Scotia and Municipal Relations 2010, sec. 3.5) . Two points ought to be made about this rate. First, it is a flat rate which applies to every municipality without modification, regardless of its specific financial context. While the Municipal Governance Act does allow the Minister to set rates on a case-by-case basis, this power is apparently not exercised in Nova Scotia. Second, SNSMR’s 30% debt service ratio does not include the debt carried by municipalities which are attributable to water and electrical utilities, including transmission infrastructure. Ministerial approval is still required when municipalities attempt to borrow for utility capital projects, as well as approval from the province’s Utility and Review Board.

The Nova Scotia Municipal Finance Corporation (NSMFC) is responsible for issuing debentures on behalf of municipalities; two issues are produced per year. The Corporation also reviews the borrowing plans produced by municipalities – suggesting some administrative overlap with SNSMR – and uses a 15% debt service ratio as a benchmark to evaluate each municipality’s fiscal situation. This 15% does not have the same standing in policy as SNSMR’s 30% ratio, but nor does it include debt attributable to water and electrical utilities. The Corporation provides additional services to municipalities, including financial training for municipal employees involved in the borrowing process, assistance with long-term financial planning and a short-term borrowing program for municipalities which have received approval to borrow but are still awaiting the next debenture issue(Service Nova Scotia and Municipal Relations 2010, sec. 3.4). Finally, the Corporation monitors its own performance with annual satisfaction surveys of the municipalities which participated in the borrowing process that year (Nova Scotia Municipal Finance Corporation 2011).

Finally, the role of the Municipal Governance Act, 1998 has been mentioned, but two more sections ought to be highlighted. First, Section 91 gives municipalities the right to set rates, repayment schedules and issue debentures on their own, without going through the NSMFC. To date, no municipality in Nova Scotia has taken advantage of this option, suggesting that the quality of service and administrative savings offered by the NSMFC are significant. Second, Section 99 grants that municipalities may borrow from their own capital reserve funds to pay for capital projects at the same interest rate the municipality would pay if it accessed outside sources of funding. Interestingly, this borrowing may be done by resolution of the council alone, and does not require the approval of the Minister (The Province of Nova Scotia 1998). Finally, while the Regional Municipality of Halifax does have its own Charter, similar to Ontario’s City of Toronto Act, its sections on municipal borrowing are lifted verbatim from the Municipal Governance Act, 1998 and contain no special provisions or processes (Government of Nova Scotia 2008).

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Manitoba

Legislative and Regulatory Environment

All borrowing by urban governments in Manitoba is conducted in accordance with the Municipal Board Act, the Municipal Act, the City of Winnipeg Charter Act, and the Debt Management Policy of the City of Winnipeg. The City of Winnipeg Charter Act applies only to that City, while the Municipal Board Act and Municipal Act apply to the remainder of Manitoba’s urban governments. The two provide largely similar methods and requirements regarding municipal borrowing and debt limits.

The Municipal Board Act provides the legislative framework for the province’s twenty-five member Municipal Board, and charges it with the duty of reviewing all bylaws that include capital borrowing in municipalities other than Winnipeg. As a quasi-judicial body, the Municipal Board is empowered to reject, amend or accept all proposed capital borrowing bylaws; they do so according to a legislated series of considerations, including “the nature of the work, undertaking or proposed project,” “the necessity or expediency thereof,” and “the financial position of the local authority.” The Board has some scope for discretion and further investigation, and may consider “any other relevant matter” (The Province of Manitoba 2011).

In passing judgment, the Municipal Board may conduct public hearings as well as require urban governments to submit five-year capital forecasts. Furthermore, Section 69 of the Municipal Board Act states that the Board may “require the municipality to submit the by-law or contract for the sanction of the voters or ratepayers …” Municipal governments are not bound by the approval of the Municipal Board for any debts that are repayable within the year (Amborski 1998, 19–20).

Neither the Municipal Board Act nor the Municipal Act set a statutory limit to debt for urban governments. However, the ratio of debt to municipal assessment is often used by the Board to determine whether taking on additional debt is advisable. Amborski’s qualitative study of the Municipal Board’s actions showed that the Municipal Board often took population trends and economic growth potential into consideration (1998, 20). In of the 33 applications made to the Board in 2008 and 2009, 9 were accepted, 10 dismissed and 14 withdrawn (Tyler 2011, 72). Unless the Board can be shown to be applying the law incorrectly or acting beyond its jurisdiction, its decisions cannot be appealed.

The City of Winnipeg Charter Act requires that City to submit its borrowing plans to the Minister of Finance for approval. The Minister may, at his discretion, forward the application to the Municipal Board for review, though the Minister is not bound by the Board’s advice. Like Manitoba’s other urban governments, no statutory limit on debt exists. However, Winnipeg does regulate debt according to the guidelines established in an internal document, the Debt Management Policy; this self-imposed policy was intended to shift the City toward pay-as-you-go financing for tax-supported capital works. In 1996, City Council established an annual debt limit of $61 million on both internally and externally-

raised financing for tax-supported capital projects. The Debt Management Policy is the only document that imposes a limit on capital borrowing and reports “no new external borrowing for tax-supported capital expenditures has been approved since 1998” (The City of Winnipeg n.d., 2) The policy also imposes a restriction on the length of financing periods. Under normal circumstances, the repayment period will not exceed the useful life of the asset being financed.

All urban governments in Manitoba are free to pursue loans in the private sector. The City of Winnipeg does not have a specific objective to maintaining relationships with rating agencies but does note in the Debt Management Policy that a high rating is desirable as it determines interest rates and may be used as a comparative measure of general well-being. Winnipeg is currently rated by Standard and Poor’s and Moody’s. The City of Brandon also maintains a relationship with Moody’s.

None of the acts, regulations or policies explicitly mentions utility debt, or any other type of specific debt.

Municipal Stakeholder Perspectives

City administrators who agreed to be interviewed reported that their ability to grow was not inhibited by the decisions of Manitoba’s Municipal Board. An administrator of one smaller urban government confided that the amount of debt that they had been cleared for exceeded what he deemed to be fiscally responsible.

One emerging trend involves financing utility projects through ratepayer or user fees rather than taxes. Though loans are still required, these schemes are based on utility revenue forecasts and allow for increased security for the province, which is ultimately responsible for insolvent municipalities. The administrator who brought this trend to light noted that their upcoming capital project will be funded by taxpayers but that passing the debt on to ratepayers entirely was considered more politically legitimate.

The Association of Manitoba Municipalities is currently arguing in favour of development fees – one-time levies on developers to finance the costs associated with development – to fund projects such as extending utility services to new housing projects. Their argument is that it is unfair to burden existing taxpayers with the expenses of municipal expansion. The Association argues instead that development expenses ought to be transferred to buyers of new homes, commercial, and industrial properties (Slack 2011, 40).

Alberta

Legislative and Regulatory Environment

Municipal debt-limits are regulated in Alberta through the Municipal Government Act. The Act outlines how debt-limits are determined, including a basic formula. Alberta is unique in that it has legislation governing debt-limits for regional service commissions – corporate structures that are owned by municipalities and provide utility services on a regional basis. Municipalities in Alberta have established

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commissions for various reasons: the commission’s debt may be calculated separately from the municipality’s debt, commissions have higher debt-ceilings, and commissions create regional economies of scale because they are owned by several municipalities.

Long-term Debt Limits for Municipalities in Alberta

Debt-limits for municipalities in Alberta are determined via two basic formulas. For most municipalities, total debt cannot exceed 150% of total municipal revenue, and their debt-service ratio cannot exceed 25% of municipal revenue (The Province of Alberta, sec. 2). The figures applied to Calgary, Edmonton, Medicine Hat, and the Regional Municipality of Wood Buffalo are different, however. The debt of these municipalities cannot exceed 200% of the revenue of the municipality, while their debt-service ratio may not exceed 35% of the same. (See Appendix for outline of formulas).

Municipal Stakeholder Perspectives On Municipal Debt

Representatives from The City of Calgary suggested that the bulk of impediments to municipal borrowing were self-imposed; they cited the City’s internal debt ceiling, internal debt-service ratio limit and the desire of both elected and bureaucratic officials to maintain the City’s AAA credit rating as examples of such self-imposed financial choke-points (Amborski 1998, 41). This latter goal also influences current behaviour in Saskatchewan, where cities such as Saskatoon want to maintain their AAA credit rating and restrain their borrowing activity accordingly.

The Town of Okotoks, a town of approximately 25,000 which is located 20km south of Calgary, is currently debating how to handle its long-term municipal debt. The town was one of the ten fastest growing communities in Canada between 2006 and 2011, and serves as a good comparator to small-and-medium sized Saskatchewan cities because of this sustained growth. The town operates under a self-imposed debt limit that is only 75% of the limit that the town is legally permitted to assume under provincial legislation. Since 2007, municipal debt has risen dramatically and both councillors and residents have been openly asking whether or not Okotoks will change its internal debt-limit to cope with the costs of growth. The current municipal government is committed to remaining fiscally conservative while simultaneously accessing as many grants as possible for infrastructure upgrades, and monitoring whether debt increases are actually tied to growth. In short, the municipality does not find provincial debt limits to be problematic. Rather, the municipality is being challenged by the costs of growth, and is examining whether its own internal fiscal policies are exacerbating this stress (Patterson 2011).

Okotoks is not alone in operating under this kind of self-imposed fiscal responsibility. One of the fastest growing municipalities in Canada, the Regional Municipality of Wood Buffalo, has also imposed strict limitations on itself. As noted above, Wood Buffalo – along with the Cities of Edmonton, Calgary, and Medicine Hat – has a total debt-limit of 200%

of municipal revenue and a debt-service ratio limit of 35%. However, the RM has chosen to further restrain their debt obligations by setting their municipal debt-limit at 75% of total revenues (Regional Municipality of Wood Buffalo 2012).This limitation is rooted in a belief that each generation should pay into the cost of infrastructure, resulting in a pay-as-you-go approach to building and maintaining infrastructure.

There was no evidence that Albertan municipalities would like to see utilities based debt calculated separately from other municipal debt. However, this may have more to do with the common use of alternative regional service delivery mechanisms in Alberta, such as Regional Service Commissions, regional partnerships, or Municipal Controlled Corporations (as is the case in Calgary and Edmonton).

The Role of Corporate Structures in Utilities Service Delivery: Regional Service Commissions (RSC) and Other Arrangements

In Alberta, many municipalities are utilizing corporate structures to own/operate/maintain infrastructure and to provide municipal services on a regional basis. These entities range from simple inter-municipal partnerships to Regional Services Commissions to municipal-controlled corporations. These more complex structures, such as RSCs, enable municipalities to borrow more money from the Alberta Capital Finance Authority, because the debt limits for these bodies are recorded separately from the municipality and are larger as a percentage of revenue (200% for RSCs vs. 150% for municipalities).

Regional Service Commissions play a major role in the delivery of services to municipalities. They lower the cost and/or increase the quality of utilities services for municipalities by delivering these services on a regional basis through a regional administrative body. The use of RSCs allows Albertan municipalities to increase the quality of drinking water, something that is often a challenge for small urban and rural municipalities.

RSCs are very significant in terms of their role in constructing and managing regional water and sewer infrastructure in Alberta. There are 69 RSCs, and the majority of these are in the water/wastewater/waste management service areas. In an interview, an official from the Ministry of Municipal Affairs was not able to provide a precise measure to quantify the significance of RSCs in terms of their role in municipal debt, but the official did note that the majority of debt limit extension approvals made by the province are for RSCs that require start-up capital for the construction of infrastructure for water/waste water utilities. In terms of administration, having utilities managed by a separate entity frees up administrative capacity for other initiatives. Moreover, RSCs have a higher debt-limit ratio as a percentage of revenue.

RSCs have become increasingly important in Alberta for the delivery of potable water. Several years ago the government initiated the Water for Life Strategy, which came from a policy that high quality water should be available for all residents of Alberta, no matter where they live in the

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province (Government of Alberta). The province has been providing up to 90% grants to municipalities to set-up RSCs to deliver water on a regional basis because this increases the quality and reduces the costs of infrastructure for municipalities, thereby reducing demand on the province for infrastructure dollars. Although costs for the municipality have been reduced, municipal residents have seen their water costs rise because they are now paying the true cost of water. This has been somewhat problematic in that some residents are upset with cost increases. In some cases, water bills may have increased by as much as 500%, which is incredibly difficult for those customers that were not prepared for the increase, nor given time to adjust their water consumption habits. However, in the long-term, the municipalities and residents will benefit in that infrastructure will be sustainable and consumption will be curbed.

RSCs are not just used for water services. They are also utilized for the delivery of sewer, waste management (recycling and solid waste), community planning, and even public transportation. Wherever there is a public service that a number of municipalities within a region perceive as a benefit, and where these municipalities are interested in working together, an RSC may be utilized. Water, sewer, and waste management are the most common forms of RSC.

Why are Regional Service Commissions so Common in Alberta?

Government grants have incentivized the development of RSCs. The official with Alberta Municipal Affairs noted that many of the RSCs would probably not have been created if it were not for significant provincial grants to assist with set-up costs. For example, the Water For Life Strategy included up to 90% grants for the set-up of water service delivery RSCs. Other grants have been made available for sewer, and waste management infrastructure. Organizing the delivery of services in this way has made possible for some fairly significant achievements in terms of service delivery. For example, one major infrastructure project involves the piping of water from Edmonton, several hundred kilometres away to Vermillion, servicing many jurisdictions along the way through a modernized web of service commissions. However, it is important to note that these would not likely have taken place without major provincial support.

Benefits and Challenges of Regional Arrangements

When asked about whether regional bodies such as RSCs, or other such regional partnerships for the delivery of utilities services in Saskatchewan would be beneficial, one official with the Ministry of Municipal Affairs in Alberta noted that some kind of regional service mechanism is likely a good idea, but the key is to provide an incentive, such as covering start-up costs, to develop them regionally and to make them competitive. This official thought that it was quite likely that many municipalities would fear the loss of control over regional entities, as well as the loss of jobs within their community, or even the idea that water or some other service

would potentially come from a facility in another community. These challenges would need to be overcome before a regional service delivery option could be feasible. This official suggested that regardless of the challenges and hurdles, the benefits far outweigh the costs for smaller municipalities that would be able to access higher quality services for their residents, and reduce infrastructure costs through some form of regionalized service delivery mechanism. This official emphasized that though RSCs are a useful tool, they should only be one tool in the arsenal of municipalities experiencing growth, and that there are other options. The key point is that municipalities need to build capacity.

RSCs provide for greater utility debt flexibility in the long-term because they have a larger debt threshold. Alberta’s legislation says that RSCs are entitled to a debt limit of 200% of revenue. But since RSCs do not have revenue when they begin operating, they require provincial approval of a debt-limit extension to give them time to set-up and begin delivering services to earn revenue. Only those municipalities that have the capacity to set up an RSC with a solid business plan, including 5 year projections on operating a capital budgets, will be granted base-extensions for up to five years to get them operational. Thus, the ability of municipalities to take advantage of this type of mechanism largely contingent upon financial and development capacity. Regardless of what the debt-limit is in legislation, the government of Alberta works with municipalities and RSCs to ensure that they have solid business plans and organizational capacity. The Alberta Government is examining options to give municipalities more autonomy, such as greater debt limits, but would likely increase reporting requirements, such as quarterly reporting. An important feature of this method of service delivery is increased operational capacity. Many of the RSCs have their own dedicated staff including a chief administrative officer (CAO). It was noted by one official that these RSCs were the most effective because they had the management capacity to operate as an effective business.

Another regional mechanism that may become more common as growth pressures increase is the Municipal Controlled Corporation. Many municipalities would like to convert their RSCs into municipal controlled corporations. RSCs are not permitted to make a profit, whereas Municipal Controlled Corporations are. Examples of this are Enmax in Calgary. Municipal Controlled Corporations are over 50% owned by a municipality. Although regulated, these corporations can raise funds, and sell-stocks, so long as the municipality maintains control of them. This could be problematic for the province if a significant number of municipalities created municipal controlled corporations, and if those corporations experienced significant financial hardships, as the province could potentially be liable for any losses. The province has much better capacity to regulate the use of RSCs than it does Municipal Controlled Corporations.

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Summary of Alternative Service Delivery Arrangements: An Alberta Perspective

The use of alternative service delivery arrangements in Alberta has proved useful to both municipalities and for the province. For the province it has created a venue through which to standardize the delivery of certain services, including potable water, among municipalities. It has also created service delivery capacity among municipalities, which could potentially reduce the demand for grants in the future, especially among self-sustaining RSCs. For municipalities, the adoption of RSCs has improved the quality of some services, reduced infrastructure costs for the municipalities, and created regional economies of scale. Success in this area was only possible because of a willingness on behalf of municipalities to work together, as well as leadership and support from the province in the provision of grants for the creation of RSCs. Some RSCs have been challenged by financial capacity, administrative capacity, and other issues. Others have been hugely successful, and some have even created an administrative identity that has become separate from that of the municipality. It is important to note that RSCs are only useful insofar as municipalities are committed to

investing in their administrative capacity, and if the province is willing to support their development. They may be a potential opportunity for reducing utilities-related costs for municipalities in Saskatchewan, but they will only be part of the solution.

Comparison with SaskatchewanThe table above compares municipal debt policy in

Saskatchewan with the three comparator provinces. It is interesting to note that a municipal board that regulates municipal debt is only present in Saskatchewan and Manitoba. In Nova Scotia debt is regulated by the Ministry responsible for municipal government, and in Alberta, only municipalities seeking debt-level extensions above legislated limits require ministerial approval. Each province differs on their debt-limit calculation formula. Nova Scotia is the only province we analyzed where utility debt differentiated from other municipal debt. As well, in Nova Scotia, debt-limits are regulated largely by a service limit as a percentage of revenues, rather than by a total debt limit as a percentage of revenue as is the case in the other provinces.

Who approves borrowing

What are the restrictions on borrowing?What is the turnaround time on applications to borrow?

Province Minister Board Restrictions Turnaround

Nova Scotia Yes1 n/a

n 30% debt-service limit n 15% debt-service limit used as

a benchmark by NSMFC n utilities debt not included in calculation

2-4 weeks

Manitoba Yes2 Yes3

n Winnipeg may carry no more than $61 million in debt on tax-funded capital expenditures, and is presently moving to pay-as-you-go financing

10-30 days

Alberta Yes4 n/a

n Calgary, Edmonton, Medicine Hat & RM of Wood Buffalo: maximum debt load of 2 times municipal revenues; debt service ratio of 35%

n all other municipal governments: maximum debt load of 1.5 times municipal revenues; debt service ratio of 25%

1-4 weeks

Saskatchewan No Yes

n Municipalities: 100 % of previous years revenue

n Cities: Determined in consultation with SMB and expressed as a percentage of revenue (very ad hoc in nature).

Varies

Notes1) Save for borrowing from capital reserve fund2) For the City of Winnipeg

3) For all other urban areas4) For debt limits that exceed legislated limits.

Table 2.0 Comparison with Saskatchewan

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RecommendationsBelow are potential changes to policy and process that

could be beneficial to urban governments in Canada. These recommendations have been informed by our understanding of long-term debt policy in Saskatchewan, in other provinces, and from surveys and interviews conducted with urban governments and stakeholders in Saskatchewan. These recommendations are meant to focus the attention of SUMA on specific issues and options that, in our view, would address the issues that we uncovered over the course this project.

Policy Problem 1:

A significant number of municipalities interviewed noted that their debt capacity is insufficient to accommodate future needs and growth.

Analysis:

In our discussions with municipalities and municipal stakeholders, a number of issues arose that are related to the concern over debt, and that inform our recommendation:

1. SMB in Practice: Under the current system, municipalities must work with SMB to establish a debt-limit when the debt-limit exceeds their current limit. The current practice of the SMB is to work with the municipality to ensure that a sound business plan is in place to ensure that the financing of the municipality is sustainable. So long as debt is sustainable as outlined in the municipality’s business plan, the SMB will likely grant a debt extension. There were no examples of municipalities being refused debt extensions from the interviews and surveys, so this system, while unpopular with some municipalities, appears to be providing urban governments with adequate debt capacity on average. Some municipalities suggested that including utilities-based debt in the debt-limit formula is inappropriate because utilities-based debt is funded by user fees, not mill rates, and by excluding this type of debt, municipalities would have greater capacity to access debt for non-utilities purposes without having to approach the SMB for an extension.

a. The SMB approach to regulating debt is very ad hoc. Municipalities can count on receiving a review of their debt-management plans, and being granted a debt-level extension so long as a plan is in place. Thus, the system is ad hoc and flexible. Some municipalities were comfortable with this, while others were concerned that the system is unclear and potentially unpredictable, as they worried about missing opportunities in the future if the SMB decided not to grant the municipality an extension.

2. Infrastructure Needs and Additional Debt Capacity: Concern over insufficient debt-capacity is most often associated with the need for major infrastructure upgrades for utilities such as water and sewer. However, in most cases it was suggested that the municipality would not be able to afford these upgrades without significant provincial or federal grants.

3. Responsiveness: Some of the larger municipalities were of the opinion that the current policy is a “one size fits all” approach providing the same level of oversight to larger municipalities with adequate professional staff as to smaller municipalities without adequate capacity. These municipalities would like to see the policy and practice of debt-regulation reformed to recognize the various levels of capacity among municipalities.

Recommendations: It does not appear that the current system has reduced

the capacity of municipalities to access sufficient debt. So long as an adequate business plan is in place, the SMB works with municipalities to ensure that they can access debt. Thus, the inclusion of utility debt is more of annoyance for some municipalities than it is a hindrance to growth. What seems to be the bigger concern among municipalities is the lack of clarity around how debt-levels are determined, the rationale for the inclusion of utility debt, and generally, the policies of the SMB. Moreover, in cases where debt-levels are insufficient, the municipality is often unable to service additional debt, and thus is in need of additional municipal grants for infrastructure rather than additional debt-capacity.

In order to address the above concerns, SUMA should consider the following actions:

A. Work with the SMB to Develop Guidelines for Municipalities: Approach the SMB about developing a comprehensive guide to municipal debt to provide municipalities with a thorough explanation of how debt levels are calculated, application criteria, key terms such as “own source revenue” and other factors that they should consider. This could help alleviate some of the concerns that municipalities have about obtaining adequate debt. Currently there seems to be a high level of uncertainty among municipalities about how the SMB works.

B. Request that the Province Develop a More Substantive Policy: The survey data indicated that there are some municipalities that are growing and will continue to require additional debt capacity; they can handle additional debt. However, there are others that cannot service additional debt. The current system permits the SMB work with municipalities in an ad hoc manner to determine if an extension should be granted. If SUMA would like to advocate on behalf of municipalities that are frustrated by this process, it should consider requesting that the province change its policy to provide greater long-term debt limits to municipalities that demonstrate a capacity to manage greater debt, and that are growing. The SMB could utilize a tier system, where different tiers of municipalities are granted different levels of debt automatically, and only need to approach the SMB for maintenance of that status periodically. This system could preserve the oversight and financial regulation of smaller municipalities that cannot accommodate greater debt, while providing greater capacity and flexibility to growing municipalities. The current policy allows the province to ensure that small municipalities maintain reasonable levels

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of debt, while permitting the province the flexibility to increase debt where feasible. If this is too ad hoc for municipalities, then a more precise policy needs to be developed so that municipalities can plan.

C. Request that the Province Consider Removing Utilities Debt from Calculation: As mentioned above, Nova Scotia does not include water and electrical utilities debt in debt-limit calculations. Debt for these utilities is still regulated by province. Saskatchewan could do the same, and continue to regulate municipal debt through the SMB, which would ensure oversight maintained. However, this may, in some cases, provide greater flexibility to municipalities.

D. Advocate for a Province-wide Solution to Infrastructure Needs: Many municipalities mentioned that they need to make major upgrades to water and sewer system, as per new federal regulations. Many of these municipalities cannot afford to make these upgrades without increasing their debt load, but cannot feasibly service debt at the levels needed to meet the new requirements . Thus, it appears that there is a need for a strategy to assist municipalities with developing sustainable infrastructure.

Policy Problem 2:

A number of municipalities are facing infrastructure challenges, and cannot afford to replace necessary utilities infrastructure such as water and sewer.

Analysis:

Our comparative research on Alberta’s RSC models, as well as our discussions with municipal officials in Saskatchewan highlighted the option of regionalized service delivery, which may make replacing infrastructure feasible for some municipalities. This is especially true for smaller municipalities in rural areas where it may not be possible for one municipality to build its own water treatment plant, but where collaboration on a regional scale might be achievable. It may also be easier for municipalities to access grant funding to build regional infrastructure, as was the case with the Sask Landing Regional Water Pipeline Utility. To summarize, the two options we examined are:

1. RSCs: As mentioned, municipalities in Alberta engage in RSCs to deliver services on a regional basis. This is potentially beneficial because it removes some utilities-based debt from the municipality to the RSC, creates efficiencies in service deliver, reduces costs, and allows some municipalities to access grants for service delivery through RSCs. With RSCs the municipality frees up administrative capacity for other activities.

2. Regional Service Delivery in Saskatchewan: One group of municipalities has regionalized the delivery of water purification and transportation. The Sask Landing Regional Water Pipeline Utility, which was created by a group of towns and RMs including the Towns of Kyle and Elrose, will treat and deliver potable water to the Towns of Kyle and Elrose,

as well as to the residents of the surrounding RMs, and some major customers such as nearby Hutterite colonies and large farm operations (Infrastructure Canada). The Sask Landing Regional Water Pipeline Utility was set up because water quality was poor, and it was a solution that was recommended by SaskWater. The municipalities were able to develop this because of grant funding available from the federal and provincial governments, and funding costs worked out to roughly 1/3 municipal, 1/3 provincial, and 1/3 federal dollars. In the long run, because the utility is separate from the municipality, and because the costs are recovered on a fee for service basis, this should shift utilities related debt away from the municipalities, freeing debt capacity for other needs. One municipal partner suggested that this type of initiative, while it is innovative and has proved successful, would not have been possible without grant funding. Moreover, the willingness to work together with neighbours and create a third party organization was imperative to the success of this initiative, which is now shovel ready with pipes being laid in some areas.

Recommendations: The above two examples are options for Saskatchewan

municipalities to consider in addressing infrastructure challenges, especially water and sewer, which appear to be significant challenges in Saskatchewan.

In order to address the above concerns, SUMA should consider the following actions:

A. Survey Members About Regional Service Delivery: Survey members about their interest in engaging in regional service delivery arrangements. Determine the level of interest, as well as the perspective of members on how such an arrangement ought to be designed.

B. Communicate with Municipal Partners: If there is an appetite among members, SARM should be approached to determine if their members have an interest in this.

C. Approach Province about Funding: If there is an appetite for this, approach the province and federal government about targeted funding for setting up and implementing regional service delivery groups. It is clear from our research that regional service delivery arrangements require funding to be developed.

Process Problem 3:

A number of municipalities mentioned that the processes of the SMB could be improved and streamlined to better serve municipalities.

Analysis:

The municipalities we interviewed mentioned that streamlining and simplifying the application process would improve efficiency. This was also reflected in the survey data. Municipalities suggested that the SMB could be improved in the following areas:

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1. Flexibility: Many municipalities suggested that they would benefit from greater flexibility in order to take advantage of short-term borrowing options and lower interest rates, particularly with the historic low interest rates currently available.

2. Speed: Most municipalities suggested that the SMB could improve the speed at which applications are reviewed. Some municipalities believed that in the future they might miss important opportunities while awaiting approval of debt-limit extensions. One suggestion revealed in the survey data was for the SMB to legislate turnaround times, which would require additional staff resources from the province.

Recommendations:

In order to address the above issues, the following policy solutions should be examined:

A. Approach SMB about reviewing borrowing options: Municipalities have suggested that they are missing out on short-term borrowing options that would decrease interest costs. SUMA should request that the SMB examine its current policies to determine if this is the case, and if so, if changes could be made to increase flexibility and lower costs for municipalities.

B. Legislated Processing Times: Many municipalities were concerned that processing times for applications to the SMB were too lengthy. The province should be encouraged to legislate standards in this area.

C. Review Application Process: It was noted by the SMB that processing times are often lengthy due to incomplete applications. The application process should be reviewed to determine the reason for this so that it may be resolved through process changes, building municipal capacity, or both.

Appendix

Alberta Debt-Limit Formula

Debt limits are calculated by determining revenue, total debt, and debt service costs:

Revenue =

“the total revenue reported in the last audited annual financial statement of the municipality prepared before the calculation time, less transfers from the governments of Alberta and Canada for the purposes of a capital property reported in that statement if those transfers are included in the total revenue, and less amounts reported as contributed or donated tangible capital assets if those amounts are included in the total revenue” (The Province of Alberta, sec. 3)

Total debt is calculated in the following way: TD = (a + b) – c

TD = total debta = “the principle outstanding at the calculation time on borrowings made by the municipality;”b = “the principle outstanding at the calculation time of loans in good standing that have been guaranteed by the municipality, plus the amount that the municipality is liable to pay at the calculation time under loans not in good standing that have been guaranteed by the municipality;” (The Province of Alberta, sec. 4)c = “the amount of a and b that the municipality is entitled to recover from another municipality at the calculation time” (The Province of Alberta, sec. 4)

To summarize, total debt is the principle outstanding at the time of calculation, plus the principle outstanding at the calculation time for loans in good standing, and that have been guaranteed by the municipality in addition to the amount of money the municipality is liable for on loans not in good standing minus the amount of a and b that the municipality is owed by other municipalities at the calculation time.

Debt servicing limits are calculated as follows: DS = (a + b) – C

a = the sum of:i) The total amount of the principle and interest that the municipality is required to pay for those debts where the municipality is required to pay principle during the 12 months after the calculation time; andii) For those debts where the municipality is not required to pay any of principle during the 12 months after calculation, the total of the pro rata amounts for those 12 months.

b = the total amount that the council estimates “on reasonable grounds” that the municipality will be liable for during the 12 months after calculation time for loans not in good standing but that have been guaranteed by the municipality.c = the amount of a and b that the municipality is entitled to recover from another municipality during the 12 month

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period after calculation time (The Province of Alberta, sec. 5).Debt Limit calculations may or may not include regional

service commission debt. A municipality “may choose to calculate its revenue, total debt and debt service as though one or more of the controlled corporations are part of the municipality” (The Province of Alberta, sec. 6.1). If the municipality chooses to do this, then all of that corporation’s “revenue, borrowings, guarantees and loans must be included in those calculations except” (The Province of Alberta, sec. 6.2) for the following conditions:

n Revenues that arise from transactions between the municipality and the corporation, or between the corporation and another municipal controlled corporation are not to be included in the combined revenues.

n Guarantees and loans between the municipality and controlled corporations or between municipal controlled corporations are not to be included in combined total debt or debt service calculation.

Regional Service Commissions (RSCs) Debt Limits

Debt limits for regional service commissions are separate from municipal long-term debt regulations. Both are covered by the Municipal Government Act, but appear in separate sections.

RSC Providing Public Utilities

For regional service commissions authorized to provide public utility services to municipalities, total debt must not exceed 2 times revenue of the regional service commission. Debt service must not exceed 0.35 times revenue of the regional service commission (The Province of Alberta 2000, sec. 1).

RSC Providing Non-Utility Related Services

For regional service commissions that are authorized to provide services other than public utilities, total debt must not exceed 0.5 times the total revenue, and debt service must not exceed 0.1 times the revenue (The Province of Alberta 2000, sec. 2).

Debt-Limit Calculation Formula

Revenue for Regional Service Commissions is calculated similar to municipalities. Revenue is “the total of all revenue reported in the most recent audited financial statement of the commission, excluding transfers from the governments of Alberta and Canada for the purposes of a capital property reported in that statement if those transfers are included in the total revenue, and before expenses are deducted” (The Province of Alberta 2000, sec. 3). Debt of regional service commissions is quite simply the total principle outstanding at calculation time, minus the amount of principle the commission is entitled to recover from another RSC or municipality at that time.

Debt service is calculated as follows:Debt service = the sum of the total interest and principle

the RSC will have to pay for debts that will be serviced during the 12 months after calculation time plus the pro rata amounts on debts for which the municipality does not pay principle during the 12 months following the calculation time, minus the amount the RSC is entitled to recover from another RSC or municipality (The Province of Alberta 2000, sec. 5).

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References Amborski, David P. 1998. “Review of the Regulatory Environment of Municipal Capital Borrowing”. ICURR Press. http://www.

muniscope.ca/_files/file.php?fileid=fileZOMcseGaEn&filename=file_Review_of_the_regulatory.pdf.

Government of Alberta. “Water for Life.” http://www.waterforlife.alberta.ca/.

Government of Nova Scotia. 2008. Halifax Regional Municipality Charter: An Act Respecting the Halifax Regional Municipality.

Infrastructure Canada. “Grant and Contribution Awards Over $25,000.” http://www.infrastructure.gc.ca/pd-dp/gc-sc/reports-rapports-eng.php?type=c&ref=83&p=2008&q=3.

Kitchen, Harry M. 2002. Muncipal Revenue and Expenditure Issues in Canada. Canadian Tax Paper. Toronto, ONT: Canadian Tax Foundation.

Nova Scotia Municipal Finance Corporation. 2011. “Crown Corporation Business Plans for the Fiscal Year 2011-2012”. Government of Nova Scotia.

Patterson, Don. 2011. “Town Debt Rising Close to Limit.” Okotoks Western Wheel, August 3.

Regional Municipality of Wood Buffalo. 2012. “Debt and Debt Management Summaries, 2008-2012.” http://www.woodbuffalo.ab.ca/Assets/Departments/Financial+Services/2012+Proposed+Budget+$!26+Financial+Plans/2012+Proposed+Budget/Debt+$!26+Debt+Management+Summaries.pdf.

Saskatchewan Municipal Board. “Saskatchewan Municipal Board: About the Board.” http://www.smb.gov.sk.ca/.

Service Nova Scotia and Municipal Relations. 2010. “Local Government Resource Handbook”. Government of Nova Scotia.

Slack, Enid. 2011. “Roles and Responsibilities of Government in Funding Municipal Infrastructure.” Municipal Leader.

Stefaniuk, John D. 2007. “Municipalities and the Constitution Part 1: Powers and Paramountcy.” Municipal Leader.

The City of Winnipeg. n.d. “Debt Management Policy.” http://www.winnipeg.ca/finance/files/approved_debt_management_policy.pdf.

The Province of Alberta. 2000. Municipal Government Act: Regional Services Commission.

———. Municipal Government Act. Chapter M - 26.

———. Municipal Government Act - Debt Limit Regulation. 255/2000.

The Province of Manitoba. 2011. The Municipal Board Act. CCSM C. M240. http://web2.gov.mb.ca/laws/statutes/ccsm/m240e.php.

The Province of Nova Scotia. 1998. Municipal Governance Act.

The Province of Saskatchewan. 2002. The Cities Act. Chapter C-11.1.

———. 2005. The Municipalities Act. Chapter M-36.1.

Tyler, Robert L. 2011. “The Manitoba Municipal Board.” Municipal Leader.

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