Report to: General Committee Report Date: Sep 20, 2010
SUBJECT: Development Charge Borrowing Policy
PREPARED BY: Mark Visser, Senior
Manager of Financial Strategy & Investments
RECOMMENDATION:
1) THAT the
report dated September 20, 2010 entitled “Development Charges Borrowing Policy”
be received and adopted by the Town;
2)
AND THAT the statement “The Town may use funds to cover shortfalls in the Town’s
Development Charge Reserves so long as the interest charged to such reserves
are at a competitive interest rate” be added to the Town’s Investment Policy;
3) AND
THAT staff be authorized and directed to do all things necessary to give effect
to this resolution.
EXECUTIVE SUMMARY:
Forecasts of Development Charge (DC) Revenues and spending are indicating that the DC Reserve Balances will be in a negative balance in the first half of 2012. In advance of this occurring, the Town needs to adopt a DC Borrowing Policy (Appendix 1). The policy will allow the Town to borrow internally though the Town’s general investment portfolio, or externally through York Region’s debenturing process or low interest loans through government agencies. The goal is to minimize the overall borrowing costs to the Town.
PURPOSE:
The purpose of this report is to obtain approval for a DC Borrowing Policy that will minimize overall borrowing costs and allow the Town to plan its long term investment strategy.
BACKGROUND:
In June 2008, Council approved the Town Wide Hard (TWH) and Area Specific (ASDC) background studies and bylaws. In June 2009, Council approved the Town Wide Soft (TWS) background study and bylaws.
As part of these updates, multi-year capital programs were approved by Council. Due to the timing of these capital programs, it was communicated that there will be significant borrowing required to fund these projects in advance of the Town collecting the related DC’s. The background studies estimated that the Town would have to begin borrowing by 2012.
In April 2010, the Integrated Leisure Master Plan (ILMP) was adopted by Council. As part of that process, an updated DC forecast was presented to Committee in which it was estimated that DC reserves would be in a negative balance by late 2011.
|
ILMP
Forecast |
2010 |
2011 |
2012 |
2013 |
|
DC Reserves End Balance (in millions) |
$39.5 |
($9.9) |
($58.9) |
($114.0) |
Since April, the DC revenues have been more favourable than forecasted and it is now expected that the reserves will be depleted in early to mid 2012 instead of late 2011. As a result of these forecasts, it is prudent to determine a course of action well in advance in order for the Town to properly adjust its investment strategies. For instance, if rates continue to stay low through the first quarter of 2011, it may be advisable to begin borrowing externally for the Town’s portion of the PanAm facility and/or the East Markham Community Centre. Staff will report to General Committee in 2011 with an updated DC cash flow forecast that incorporates the updated PanAm facility.
OPTIONS/ DISCUSSION:
There are really only two funding options available to the Town. The first is to borrow funds through debenturing or government agency sponsored loans (i.e. Canada Housing and Mortgage Corporation for certain projects). The second is to borrow internally. Under either method, the interest on the borrowed amount can be charged back to the Developers, under the Development Charge Act.
Debentures (External Borrowing)
For the majority of its external funding requirements, the Town would have to borrow through the Region of York (the Region has an AAA credit rating; Markham does not have a rating). As at August 24th, the issuance rate was 4.10% for a 10-year York Region Bond and 4.75% for a 20-year bond (these rates include an approximate 5-10 basis point cost of issuance). The disadvantages of this approach are that the Town would have to borrow in advance of needing the cash and in significant sizes that would result in situations of having borrowed money (at higher rates) sitting in the bank (at lower rates) for prolonged periods of time. As well, there would be an uncertainty regarding the required term of the borrowing. If the Town collects DC’s faster than expected, that money will be sitting in the bank waiting to repay the external debt at maturity. Or alternatively, the Town collects less DC’s than expected and does not have enough money to repay the debt at maturity and requires further borrowing. Under this method, the Developers may end up paying more interest than necessary. The disadvantages of external borrowing can be negated by combining the approach with an internal borrowing strategy.
Internal Borrowing
The Town currently has an average general investment portfolio of approximately $200 million. This $200 million figure is an average balance that fluctuates between $100 million and $300 million throughout the year (the major sources of this balance are non-interest bearing reserves, unspent capital, and Region and School Board taxes collected and yet to be dispersed). This general portfolio balance is a potential source of borrowing for the DC reserves. Under the right conditions, this type of internal borrowing can benefit both the Town and Developers since it allows for greater flexibility as it does not require the involvement of York Region and the comparatively longer lead times for borrowing.
Internal borrowing will be capped at a maximum of 25% of the previous year’s average general portfolio balance, in order to not restrict the Town’s ability to invest in other opportunities. The internal borrowing rate will be determined by the York Region debenture rate at the time that borrowing is required. Currently the 10-year York Region Debenture rate is approximately 120 basis points higher than similar term Bank of Canada bonds. This will allow the Town to reap higher rates of return for its general portfolio, while still allowing the DC reserves to borrow at market rates but with greater flexibility.
The strategy will be to take advantage of external borrowing when rates are low and to use internal borrowing when rates are higher. The attached DC Borrowing Policy combines both the internal and external approaches.
Any internal borrowing will be tracked and accounted for in the same manner as the Town’s existing money market and bond investments. As such, it is recommended that the Town’s investment be amended to include this type of internal investment.
Debt Limits
The maximum borrowing limit (from all sources) is dictated by Ontario’s Municipal Affairs and Housing. The Town is allowed to have an annual repayment limit of 25% of net revenues. Therefore the Town’s 2010 annual repayment limit was $53,862,269. This equates to the Town being able to borrow $500-600 million (assuming 20 year debt in the 6 - 9% range). Based on forecasts, the Town will not reach these levels of borrowing. Forecasts indicate the Town’s peak borrowing level will be approximately $140 million, occurring in 2019.
FINANCIAL CONSIDERATIONS AND TEMPLATE: (external link)
By pegging the Town’s internal borrowing rate to the York Region debenture rate, this allows the Town to earn a competitive rate on its investments. Currently the 10-year York Region Debenture rate is approximately 120 basis points higher than similar term Bank of Canada bonds.
ENVIRONMENTAL CONSIDERATIONS:
Not Applicable
ACCESSIBILITY CONSIDERATIONS:
Not Applicable
BUSINESS UNITS CONSULTED AND AFFECTED:
Not Applicable
RECOMMENDED
BY:
ATTACHMENTS:
Appendix
1 - Development Charge Borrowing Policy
Appendix 1
DEVELOPMENT CHARGE BORROWING
POLICY
OBJECTIVE
The objective of this policy is to provide a framework with respect to borrowing funds to complete Development Charge (DC) related capital projects.
SOURCES OF BORROWING
This section outlines the sources of funding available when the DC Reserves are in (or are approaching) a deficit balance.
Internal Borrowing
The Town may loan the DC reserves up to a cumulative maximum of 25% of the previous year’s average general portfolio balance (i.e. the Town’s cash and investments, as defined under the Eligible Investments section of the Municipal Act, that are not attributable to interest bearing reserves, reserve funds, and trust funds). For example if the average general portfolio balance was $200 million, the Town could provide up to $50 million of funds to the DC reserves. The 25% limit was chosen as it still allows the Town to maintain a high level of liquidity and mirrors the 25% annual repayment limit decided upon by the Ministry of Municipal Affairs and Housing.
Term of Borrowing
The internal borrowing provided from the Town’s General Portfolio will act as a loan for a predetermined period of time. DC Reserves will be able to continue to use these funds while there is a negative balance. At any time, the Town can decide to call upon these funds if the money is needed elsewhere. It would be at this point, the DC Reserve would turn to external borrowing. (Note: there would need to be enough time to secure external borrowing before the loan could be called).
Internal Borrowing Interest Rate
The internal borrowing rate will be based on the York Region debenture rate for a similar term as the internal borrowing is estimated to be required.
External Borrowing
Any funding requirements not covered by internal borrowing will require external borrowing. The determination of the source of the funds (i.e. debenturing through the Region of York or borrowing through a bank or government agency) will be made at that time depending on the length of term required, market conditions and rates. All external borrowing needs to be coordinated through the Region of York.
ADMINISTRATION
Any external borrowing will be brought to Council for approval. Any internal borrowing will approved by the Treasurer and be reported to Council no fewer than twice per year. The determination of the borrowing source will be at the discretion of the Treasurer of the Town of Markham.
Any internal borrowing will be tracked and accounted for in the same manner as the Town’s existing investment portfolio.
As per the Municipal Act, before authorizing any specific work or class of work or any increase in the expenditure for a previously authorized specific work or class of work that would require a long term debt or financial obligation, the Treasurer will calculate an updated annual repayment limit using the most recent debt and financial obligation limit determined by the Ministry of Municipal Affairs and Housing.