Internal Borrowing

We're looking into internal borrowing from one capital reserve to another (as permitted under the community charter) and came up with the DRAFT guideline below. I'm curious what others have done and what accounting structure was set-up to plan and report out on this. Thanks for sharing your thoughts!

DRAFT Guideline
To provide more financial flexibility and to minimize borrowing costs, DNV will utilize internal borrowing to meet capital funding requirements when the following conditions can be met:

  1. An analysis of the affected reserve indicates funds are available
  2. The use of these funds will not impact the reserve’s current or future operations
  3. A clearly defined and attainable payback plan is in place with interest charges at the average rate or return (ROR) on the District’s investment portfolio at the time of borrowing

Comments

  • Hi Rick: your guideline looks good to me. We have been doing internal borrowing for a number of years, and while we haven't documented the guidelines we always describe the reasoning to Council in the same way you have written it.

    As far as the accounting goes, we have kept it simple. We maintain a ledger of the outstanding internal loans and track their continuity from year to year, and we do report this in our audited annual financial statements. You can check out our reporting here (pages 60-61 ): https://www.mission.ca/wp-content/uploads/2017-Annual-Report.pdf . The accounting does get tricky when DCCs reserves are the borrower, but once you realize that an internal loan payment from a DCC reserve becomes "amortization of restricted revenue" it should fall into place the same way you account for your restricted revenues in general.

    Food for thought: our internal loans are all related to DCC projects, so the clearly defined payback plan is an issue for us, since payback depends on DCC collections (which are difficult to predict and depend on external forces). Also, the requirement to pay interest to the lending reserve could be an issue if you don't have interest built into your DCC rates (you might notice the "interest adjustment" column in our annual report...that is another entirely confusing issue on its own...)

    Kris Boland, Director of Finance, District of Mission

  • Hi Rick, your query had me reviewing our Debt Management policy. While it discusses internal borrowing, it doesn't provide guidelines for doing so. I would appreciate a copy of your guideline, once you've finalized it. Cheers!

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