Municipality to Guarantee Borrowing undertaken by Society (Subsidiary)

HAS ANYONE GUARANTEED BORROWING UNDERTAKEN BY A SUBSIDIARY, IN THIS CASE AS SOCIETY

From my research, it appears that it is allowed but that the guarantee by the muni will have the same effect on the liability servicing limit of the muni as if the muni had borrowed directly themselves. It also looks like borrowing could be from either the Municipal Finance Authority or a Financial Institution.

I would welcome any and all comments from those of you who have undertaken such an adventure!

The download of information below is my research so far in support of such a guarantee and the impact on the municipality doing the guarantee'ing. (not required reading but I believe in sharing!)

Bylaws of Langley Facilities Society, Section 14.2 ‘Borrowing Powers’ states….
(Bylaws updated by NRF August 29, 2017)

_In order to carry out the purposes of the Society, the Board may, on behalf of and in the
name of the Society, raise, borrow or secure the payment or repayment of money in any
manner it decides, including the granting of guarantees, and in particular, but without
limiting the foregoing, by the issue of debentures.
_
Launching and Maintaining a Local Government Corporation
A Guide for Local Officials 2006
(Published by the Ministry of Community Services, Province of BC)

Section: Why Create a Corporation, page 7

_If the enterprise will need to borrow to acquire assets or to operate, a corporate structure
will provide greater flexibility. It will not be limited to borrowing through Municipal Finance Authority.
_
Section: Capitalize the Corporation, page 18

Purchasing Shares and Debt Financing
_The corporation may finance its undertaking either through capital investment (share issues) or debt financing.
The corporation is not bound by the borrowing rules applicable to the municipal owner (except for relevant limitation established in the articles). Lenders may find an enterprise sponsored by a municipality to be an attractive type of debtor.
A municipality will need to bear in mind, however, the limitation on its ability to guarantee the debt of the corporation against the municipality’s security. It must ensure that no indirect guarantee is offered that may be counter to those restriction.
_
Community Charter, Section 179, Loan Authorization Bylaws for Long Term Borrowing
_179 (1) A council may, by a loan authorization bylaw adopted with the approval of the inspector, incur a liability by borrowing for one or more of the following:
(a) any purpose of a capital nature;
(b) lending to any person or public authority under an agreement;
(c) guaranteeing repayment of the borrowing, or providing security for the borrowing, of a person or public authority, if this is provided under an agreement with the person or public authority;
(d) complying with an order or requirement to pay money into the Supreme Court as security
(i) for payment of a judgment or other debt,
(ii) for damages or costs, or
(iii) for the costs of an appeal from the decision of a court or an arbitrator;
(e) satisfying a judgment or other order of a court against the municipality;
(f) satisfying an award resulting from an arbitrator's determination of liability or quantum of damages against the municipality, including orders of the arbitrator related to that determination;
(g) paying compensation in respect of property expropriated or injured or carrying out works referred to in section 32 (3) [entry on land to mitigate damage].
_
Municipal Liability Servicing Limits
https://www2.gov.bc.ca/gov/content/governments/local-governments/finance/borrowing-liabilities/municipal-liability-servicing-limits

_Municipalities may incur liabilities, such as leases and debt, to fund services; however, the maximum amount of liabilities a municipality may undertake is subject to the liability servicing limit. A municipality may not incur a liability if the total annual servicing cost of the aggregate liabilities is greater than 25 percent of annual revenues.
_
Municipal Liability Servicing Limit Calculation
https://www2.gov.bc.ca/gov/content/governments/local-governments/finance/borrowing-liabilities/municipal-liability-servicing-limits

_The Municipal Liabilities Regulation sets the liability service limit at 25% of specific municipal revenues. The revenues used in the calculation relate to those that are primarily within the municipality’s control, such as taxes and fees, unconditional grants and payments in place of taxes.
The limitation applies to the cost to service all borrowing, leases, loan guarantees and general capital commitments that are of a capital nature.
Servicing, in this context, means principal and interest on debt, lease payments or other commitments to repay the liability and related financing charges.
Contractual payments under a partnering agreement would also be captured by the limitation if the payments relate to items of a capital nature.
_
_Municipalities may incur liabilities, such as leases and debt, to fund services; however, the maximum amount of liabilities a municipality may undertake is subject to the liability servicing limit. A municipality may not incur a liability if the total annual servicing cost of the aggregate liabilities is greater than 25 percent of annual revenues.

If the Township guarantees a loan taken by Langley Facilities Society, that loan impacts the Township’s Liability Servicing Limit calculation as if the Township had taken out the loan themselves.
_
Province of BC Website

Limitations & Requirements
https://www2.gov.bc.ca/gov/content/governments/local-governments/governance-powers/powers-services/municipal-powers-services/corporate-powers
_While municipal corporate powers are broad, some limitations and requirements apply.
These are both general requirements – such as municipal purposes which include providing for stewardship of the public assets of the community – as well as more specific requirements.
For example, while a municipality may sell a parcel of land it owns, it must first publish notice of its intentions because it owns the land on behalf of the community.
Another example of limitation on corporate powers is, that although a municipality may create any officer and staff positions it chooses, it must create the positions of corporate officer and financial officer to ensure appropriate corporate and financial administration of the municipality.
In some cases, a power that might typically be considered a corporate power – such as authority to borrow money – can only be exercised if the power is specifically found in legislation and subject to a number of accountability requirements.
For example, if the term of borrowing is longer than five years, the municipality must typically seek approval of their electors and must obtain approval of the Inspector of Municipalities because the costs may be borne by the residents _and taxpayers of the municipality over a long period.

Comments

  • Hello Karen

    The City of Powell River is just wrapping up a loan guarantee that is set to expire (5 years) at the end of August. It has been an interesting process and sec 179 of the CC is a key component. Further you are correct with the guarantee having an affect on the municipalities debt servicing calculation/limit.

    If the guarantee is going to last beyond 5 years elector approval for the guarantee is required.

    Furthermore when setting up the agreement you must be sure to structure the agreement that it clearly identifies how the guarantee is not an aid to business.

    Adam

  • Squamish had a few guarantees when I joined the team. Happy to discuss with you. Think very carefully about it. The guarantee can have a significant effect on your borrowing capacity. In our case the Ministry considered the full loan as callable at any time so the debt payment calculation was very significant.

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