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HomeMy WebLinkAboutFIN-2022-207 - Capital Financing and Debit Policy Financial Services Department www.kitchener.ca REPORT TO: Finance and Corporate Services Committee DATE OF MEETING: May 16, 2022 SUBMITTED BY: Ryan Hagey, Director of Financial Planning & Reporting, 519-741-2200 ext. 7353 PREPARED BY: Debbie Andrade, Manager of Budgets, 519-741-2200 ext. 7114 WARD(S) INVOLVED: All Ward(s DATE OF REPORT: April 28, 2022 REPORT NO.: FIN-2022-207 SUBJECT: Capital Financing and Debt Policy RECOMMENDATION: That financial policy FIN-PLA- (Attachment A to report FIN-2022-207) REPORT HIGHLIGHTS: The purpose of this report is to approve the Capital Financing and Debt Policy. The key items included in the policy are the use of debt, debt approval, debt planning and monitoring, debt limits, term of debt, short-term capital financing and internal borrowing from reserves. This report supports the delivery of core services. BACKGROUND: In September 2020 Council endorsed the 2020-2029 Long-Term Financial Plan (LTFP). The plan included 22 recommended actions that are intended to be implemented / investigated further over the current term of Council. Four of the 22 recommended actions included in the LTFP focused on the development of new financial policies for the City, of which one was to adopt a Capital Financing and Debt Policy to clarify when debt, short-term financing, and internal borrowing should be considered to finance capital works. Recommended Action 4.1 of the LTFP, which is to adopt a Capital Financing and Debt Policy REPORT: Guiding Principles Included in the long-term financial plan is the financial framework that will direct the City moving forward and is built on three specific guiding principles. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. These guiding principles will provide the proper financial lens for evaluating priorities, supporting the decision-the goal of Financial flexibility is essential for the City to be able to respond to opportunities and challenges over time and to maintain a position of financial strength. Under the guiding principle of Flexible, 3 strategic areas of focus have been identified to help the City continue to move forward in this regard: Effective Debt Management Revenue Diversification Sufficient Reserves Effective Debt Management includes using debt responsibly to move ahead with strategic and corporate priorities, considering how new debt may impact current and future tax rate increases and ensuring total debt outstanding remains within acceptable levels. Debt Debt is funding the City has borrowed to complete capital projects and can be broken into four components: Tax Supported, Enterprise, Economic Development Investment Fund (EDIF) and EDIF 2.0. Tax Supported debt is issued each year to help fund the Capital pool. Enterprise debt is repaid from non-tax sources which includes Golf, Parking, the cemetery, and the Kitchener Rangers. EDIF debt was established to fund specific EDIF projects and will be fully paid off in 2027. EDIF 2.0 is debt that will be issuedstartingin 2022 and will be fully paid off by 2039 to fund Make it Kitchener (MIK) 2.0 initiatives. The following graph shows the total debt outstanding for the City: As shown in the following chart the debt per household for the City of Kitchener is within the target range as defined by the province: The annual debt and financial obligation limit for municipalities is determined under Ontario Regulation 403/02, whereby the annual repayment limit caps overall debt charges to 25% of the C. The following graph shows the Cis well within the Provincial limit. The following chart is t benchmark to guide decisions related to the City overall debt strategy (additional debt versus debt reduction): City has more funding in reserves than debt. All of these metrics indicate the City is in a good financial position and tracking well against industry and provincial benchmarks. Policy Summary The purpose of the policy is to establish guidelines and controls related to the issuance of long-term debt, short-term financing, and internal reserve fund borrowing, to ensure the infrastructure needs. The key items highlighted in the policy include: Debt will be considered as a means to finance new, non-recurring infrastructure requirements (acquisition, design, construction), portion of growth related project costs not covered from Development Charges, capital projects that will result in additional or new services for residents, replacement of infrastructure, where the cost of deferring replacement exceeds the debt servicing costs and where other sources of financing are not readily available, projects that are partly grant funded and require matching funds to proceed, and projects where a business case has identified debt as an effective financing option New debt will typically be identified through the annual budget process whereby Council approves the use of debt through the approval of the budget resolution which is consolidated in the Ci-law Debt Planning and Monitoring is key and before issuing new debt, consideration will be given to the , understanding the impacts of new debt charges within the annual operating budget and expected/reasonable rate increase, and ensuring that any increase in utility or enterprise related debt is reflected in user rate models that have been developed as part of long-term planning requirements To demonstrate a responsible approach to debt management, the City has established its own debt limits as follows: I. source revenues II. supported revenues III. Capital Pool debt charges will not increase by more than 5% annually External debt will only be issued for a term greater than 5 yearsand should not exceed the useful life of the underlying capital asset that it is financing and is in accordance with legislation. -as-you- work Borrowing from reserves for the purpose of addressing capital financing needs is permitted under the following conditions: I. A reserve fund providing funding will not be adversely affected as a result of providing funding for a purpose other than what it was originally intended II. The reserve should have a balance that is above its mid-level target III. The amount borrowed will be repaid with interest over a term not to exceed 5 years IV. Interest to be repaid will reflect annual interest that the reserve would rovided V. Funding provided under this scenario will be transferred to the Internal Borrowing Reserve Fund to support better tracking and transparency STRATEGIC PLAN ALIGNMENT: This report supports the delivery of core services. FINANCIAL IMPLICATIONS: The recommendation has no impact on the Operating or Capital Budget. COMMUNITY ENGAGEMENT: committee meeting. PREVIOUS REPORTS/AUTHORITIES: FIN-19-079 2020-2029 Long-Term Financial Plan APPROVED BY: Jonathan Lautenbach, Chief Financial Officer, Financial Services. ATTACHMENTS: Attachment A FIN-PLA-XXX Capital Financing and Debt Policy Policy No: Click here to enter text. POLICY Approval Date: Click here to enter a Policy Title: CAPITAL FINANCING AND date. DEBT Reviewed Date: Click here to enter text. Policy Type: COUNCIL Next Review Date: Click here to enter Category: Finance text. Reviewed Date: Click here to enter text. Sub-Category: Financial Planning Last Amended: Click here to enter a Author: Manager, Financial Planning date. Replaces: Click here to enter text. Dept/Div: Finance/Financial Planning Repealed: Click here to enter a date. Replaced by: Click here to enter text. Related Policies, Procedures and/or Guidelines: \[Start typing here\] 1. POLICY PURPOSE: The purpose of the policy is to establish guidelines and controls related to the issuance of long-term debt, short-term financing, and internal reserve fund borrowing, to ensure capital and infrastructure needs. 2. DEFINITIONS: Capital Expenditure any expenditure incurred related to the acquisition, rehabilitation, or replacement of a tangible capital asset or related infrastructure Capital Pool tax supported capital requirements that are funded from property taxes, dividends (hydro and gas utility), and debt Debt means borrowing of funds as defined under part XIII section 401(1) of the Municipal Act 2001 Debt Charges the amount needed to cover annual principal and interest payments Debt Limit the maximum level of debt that is deemed acceptable for the City 1 of 6 Policy No: Policy Title: Debt Term the period over which debt repayments will be made Enterprises business units that are self-sustaining and funded by user fees Internal borrowing borrowing from reserve funds for the purpose of funding a capital expenditure to avoid/minimize the need for long-term debt Long-Term Debt debt with a term of greater than five years, and debenture debt as defined under section 408(1) of the Municipal Act Operating Expenses expenses related to annual operations of the municipality/enterprises that are generally reflected as costs included in the City annual operating budget Reserve Funds funds that has been set aside by Council for a specific purpose or as required by legislation Short-Term Financing debt with a term of five years or less Temporary Borrowing borrowing not exceeding one year that may be required for the City to meet annual obligations and cash flow needs Tax Supported any expenditure that would typically be funded through property taxes 3. SCOPE: POLICY APPLIES TO THE FOLLOWING: All Employees All Full-Time Employees All Union Management C.U.P.E. 68 Civic Non Union C.U.P.E. 68 Mechanics Temporary C.U.P.E. 791 Student I.B.E.W. 636 Part-Time Employees K.P.F.F.A. Specified Positions only: Other: Council Local Boards & Advisory Committees Responsibilities Council municipality takes on can have significant financial implications if not managed properly. Council is required to make good decisions that adhere to the financial policies in 2 of 6 Policy No: Policy Title: procedures that have been put in place to provide financial governance for the municipality. Chief Administrative Officer Under section 229(a) of the Municipal Act 2001, the Chief Administrative Officer is responsible gps!fyfsdjtjoh!hfofsbm!dpouspm!boe!nbobhfnfou!pg!uif!bggbjst!pg!uif! nvojdjqbmjuz!gps!uif!qvsqptf!pg!fotvsjoh!uif!fggjdjfou!boe!fggfdujwf!pqfsbujpo!pg!uif! nvojdjqbmjuzfotvsjoh!uibu!qspdfttft!bsf!jo!qmbdf!uibu!tvqqpsu!uif!fggfdujwf! benjojtusbujpo!sfmbufe!up!dbqjubm!gjobodjoh!boe!efcu!nbobhfnfou/ Chief Financial Officer (Treasurer) Under section 286(1) of the Municipal Act 2001, the treasurer is responsible for all of the financial affairs of the municipality on behalf of and in the manner monitoring existing debt levels and the impacts of debt charges within the annual operating budget advising Council accordingly of any concerns related to overall debt levels promote the appropriate use of debt as a potential funding option as needs related to capital expenditures are identified through the budget process and as applicable throughout the year 4. POLICY CONTENT: 1. Use of Debt Debt will be considered as a means to finance: New, non-recurring infrastructure requirements (acquisition, design, construction) Growth related projects funded by development charges Capital Projects that will result in additional or new services for residents Replacement of infrastructure, where the cost of deferring replacement exceeds the debt servicing costs and where other sources of financing are not readily available Projects that are partly grant funded and require matching funds to proceed Projects where a business case has identified debt as an effective financing option Debt is not permitted to be incurred to: Fund operating expenses of the municipality or enterprises 2. Debt Approval New debt to be issued will typically be identified through the annual budget process 3 of 6 Policy No: Policy Title: Council approves the use of debt through the approval of the budget resolution which -law Once debt is approved, debt requirements will be provided to the upper-tier municipality for debt issuance 3. Debt Planning and Monitoring Before issuing new debt consideration should be given to: Understanding the impacts of new debt charges within the annual operating services within an expected/reasonable rate increase Ensuring that any increase in utility or enterprise related debt is reflected in user rate models that have been developed as part of long-term planning requirements benchmark to guide decisions related to the City overall debt strategy (additional debt versus debt reduction) 4. Debt Limits The City must comply with annual debt and financial obligations limits as outlined in Ontario Regulation 403/02. The Province provides the City with and Annual Repayment Limit that caps overall Debt servicing costs as a % of total revenues is used as an indicator by the assigning a rating based on the following thresholds: Low: <5% Mod: 5% to 10% High: >10% To demonstrate a responsible approach to debt management, the City has established its own debt limits as follows: own source revenues Rate rate supported revenues 4 of 6 Policy No: Policy Title: Capital Pool debt charges will not increase by more than 5% annually 5. Term of Debt Debt will only be issued for a term greater than 5 years The term of the debt should not exceed the useful life of the underlying capital asset that it is financing and is in accordance with legislation The preferred term for long- forecast 6. Short-Term Capital Financing The City will util-as-you- capital work Capital reserves funds will be reviewed as part of the annual budget process with available funding being allocated to address immediate capital needs 7. Internal Borrowing From Reserves Borrowing from reserves for the purpose of addressing capital financing needs is permitted under the following conditions: A reserve fund providing funding will not be adversely affected as a result of providing funding for a purpose other than what it was originally intended The reserve should have a balance that is above its mid-level target The amount borrowed will be repaid with interest over a term not to exceed 5 years Interest to be repaid will reflect annual interest that the reserve would have Funding provided under this scenario will be transferred to the Internal Borrowing Reserve Fund to support better tracking and transparency 5. HISTORY OF POLICY CHANGES Administrative Updates The date (yyyy-mm-dd) and a short annotation on the nature of the change to reflect the current corporate structure i.e. Departmental re-organization / Titling changes / Standing Committee restructuring. \[Start typing here\] Formal Amendments 5 of 6 Policy No: Policy Title: The date of the resolution pa-01-20 - As per Council/CLT directive \[Start typing here\] 6 of 6