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CITY OF WINNIPEG POLICY NO. FI-002
This document is an office consolidation of amendments to the policy. The City of Winnipeg
expressly disclaims any responsibility for errors or omissions.
1. Purpose
The City of Winnipeg (City) recognizes that the foundation of any well-managed debt
program is a comprehensive debt policy. This Debt Management Policy:
- sets the parameters for issuing debt and managing outstanding debt;
- provides guidance to decision makers regarding the timing and purposes for
which debt may be issued; and
- provides guidance on the types of debt and structural features that may be
used.
For the purposes of this policy, debt means public debentures issued, Public Private
Partnership liabilities, bank loans and loan guarantees to City affiliated entities that
form part of the City's Consolidated Financial Statements. Loan guarantees to external
entities are not considered to be debt for purposes of the City's Consolidated Financial
Statements.
Adherence to a Debt Management Policy helps to ensure that a government maintains
a prudent debt position and signals to rating agencies and the capital markets that a
government is well managed and therefore is likely to meet its debt obligations.
The benefits of this Debt Management Policy are as follows:
- Enhances the quality of decisions by imposing order and discipline, and
promotes consistency and continuity in decision-making;
- Rationalizes the decision-making process;
- Identifies objectives for the Public Service to implement;
- Demonstrates a commitment to long-term financial planning objectives; and
- Is regarded as a positive rating factor by the credit rating agencies in reviewing
credit quality.
POLICY TITLE
Debt Management Policy
ADOPTED BY
City Council
EFFECTIVE DATE
February 23, 2005
ORIGIN / AUTHORITY
Executive Policy
Committee
CITY POLICY NO.
FI-002
MOST RECENT
CONSOLIDATION
February 22, 2024
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The City has instituted sound management practices that support Our Winnipeg, the
organization's long-range policy plan and the Financial Management Plan, the
framework for the City's overall fiscal planning and management. In addition, the City
has followed practices that reflect positively in the credit rating process. Among these
are the Debt Strategy Policy, Financial Management Plan, Asset Management Policy
and Multi-Year Budget Policy.
Debt levels and their related annual costs are important long-term obligations that
must be managed within available resources. Issuance of debt must consider future
projected City revenues and remain affordable to the citizens of Winnipeg. An effective
Debt Management Policy provides guidelines for a government to manage its debt
program in line with those resources.
2. Definitions
2.1
"Borrowing Syndicate" Public debenture issuance syndication is the process
of involving a group of lenders (borrowing syndicate) to fund various portions
of a debenture for a single borrower. Borrowing syndication most often occurs
when a borrower requires an amount too large for a single lender to provide or
when the debenture is outside the scope of a lender's risk exposure levels.
Thus, multiple lenders form a syndicate to provide the borrower with the
requested capital.
2.2
"Defeasement" Defeasement relates to methods by which an outstanding
bond issue can be made void, both legally and financially.
2.3
"Loan Guarantee" A loan guarantee is a promise that the City will repay a
lender (e.g., a bank or other financial institution providing credit or funding to
another party) the amount guaranteed, subject to the terms and conditions of
an agreement and subject to the existing Council adopted Loan Guarantee
Policy, which aligns with the City of Winnipeg Charter sections 219 to 220. If
the borrower defaults, the City is responsible for payment of the balances
outstanding on the loan. The guarantee will reduce the lender's risk and should
enable the borrower to secure a loan at a lower interest rate or obtain a loan
that might not otherwise have been achievable.
2.4
"Private Placement" A private placement is a sale of bonds to pre-selected
investors and institutions rather than on the open public market
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2.5
"Public-Private
Partnership"
Public-Private
Partnerships
involve
collaboration between a government agency and a private-sector company that
can be used to finance, design, build, maintain and operate projects, (or a
combination of such actions) including public transportation networks,
roadways and bridges, or other significant projects. Financing a project through
a public-private partnership may facilitate capital project delivery, budget goals
and associated feasibility.
2.6
"Serial Debt" Serial debt, or amortizing bonds, refers to debentures which
have a portion of the outstanding principal retired on each coupon payment
date of the debentures (typically semi-annually) such that all of the principal is
repaid by the maturity date.
2.7
"Sinking Fund Debentures" Sinking Fund Debentures, or bullet bonds, are
debt instruments where a single payment is due on the maturity date of the
debenture. Interest payments occur during the term of the debt. Annual
principal contributions are also made to a Sinking Fund. These contributions
will earn interest, with the goal of funding the principal repayment upon maturity
of the debenture.
3. Debt Management Policy
The Debt Management Policy brings together in one document the existing rules,
regulations, and practices relating to external debt. The policy summarizes the City's
legal authority, restrictions, and responsibilities relating to external debt, which flow
from The City of Winnipeg Charter, and addresses other areas related to debt
management. This policy has been prepared in accordance with the Government
Finance Officers Association (GFOA) Best Practices on Debt Management Policies.
This policy includes:
1. Legal authorization and limitations;
2. Debt capacity and benchmarking;
3. Types of debt and structural features;
4. Debt management practices; and
5. Credit rating considerations.
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3.1
Legal Authorizations and Limitations
a) The City of Winnipeg Charter
Subsection 294(1) states that: "Subject to subsection (2), Council may pass by-
laws enabling the city to borrow money in such manner, in such amounts, and
on such security as council may consider necessary for any purpose for which
the city is authorized to make provision, including, without limiting the generality
of the foregoing, borrowing money required for local improvements." In
addition, subsection 285(2) states: "In adopting an operating budget, council
must ensure that the estimated expenditures for a fiscal year do not exceed the
estimated revenues for the year."
The City has never borrowed money for operating purposes on other than a
temporary or short-term basis. Long-term borrowing is restricted solely for
capital purposes.
Note that any deficits incurred in a fiscal year not resolved through reserves,
must be considered in the following fiscal year budget as per section 285 (1)
(b) of the City of Winnipeg Charter.
b) Debt Strategy Limitations on Indebtedness
On June 22, 2011, Council adopted a Debt Strategy which imposed limits for
tax supported, utilities and total City borrowing. Debt limits are reviewed
regularly to establish a prudent level of debt to support the City's capital
infrastructure program while maintaining an appropriate credit rating, long-
term financial flexibility and sustainability.
The City is currently facing an infrastructure deficit related to water and
wastewater facilities, roads, parks, transit, land drainage and community
facilities, with this financial figure being updated regularly in the City of
Winnipeg Infrastructure Plan.
To partially address the City's infrastructure deficit, the City has undertaken
several Public-Private Partnerships to enable delivery of capital projects. These
Public-Private Partnership arrangements constitute long-term financial
obligations that are factored into the debt metrics. In addition, the ability to
advance significant capital projects has also been aided through the
Government of Canada's Investing in Canada Infrastructure Program.
By ensuring debt remains within the limits set in the Debt Strategy, Council is
able to assess affordability when setting multi-year budgets. The Debt Strategy
uses three metrics: debt capacity, affordability (service levels) and debt per
capita.
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The use of debt to finance capital projects increases operating expenses which
reduces the ability to maintain service levels with the balanced budget
imperative, and it also potentially increases utility rates as debt servicing costs
(interest and principal) for the repayment of the debt are a component of the
operating budget.
Loan guarantees are legal commitments by the City of Winnipeg to back-stop
loans made to third parties. When the City guarantees such a loan, it must
disclose this contingent liability in its financial statements. In the case of an
entity which is included in the consolidated financial statements of the City, the
outstanding loan balance is recorded as a liability in the financial statements
and forms a part of the consolidated debt of the City. If the organization defaults
on the loan, the City would be obligated to make payments on the loan or pay
out the remaining balance of the loan. The City implemented a Loan Guarantee
Policy, effective September 28, 2016, to manage this risk.
c) Authority to incur Long-term Debt and issue Debentures
Subsection 294(1) of The City of Winnipeg Charter provides the authority for
the City to incur long-term debt and issue debentures. This section states the
following:
"Subject to subsection (2), council may pass by-laws enabling the city to
borrow money in such manner, in such amounts, and on such security as
council may consider necessary for any purpose for which the city is
authorized to make provision, including, without limiting the generality of the
foregoing, borrowing money required for local improvements."
Subsection (2) states:
"Before council gives second reading to a by-law under subsection (1), the
city must apply for and obtain the approval of the Minister of Finance for the
borrowing under the proposed by-law."
Therefore, the authority to incur long-term debt is subject to the approval of
the Minister of Finance for the Province of Manitoba. Under subsection
294(4), in considering an application by the City for borrowing approval, the
Minister must consider not only the financial position of the City, but may
impose terms and conditions of the borrowing which may include the period
within which the amount to be borrowed must be repayable.
Section 298 of The City of Winnipeg Charter deals with the authority of the
Chief Financial Officer regarding issuing debentures. Once a borrowing by-
law has been passed, the Chief Financial Officer has administrative authority
to issue debt in the City's name.
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Subsection 100(h) requires the Chief Financial Officer to ensure "that money
collected for the purpose of paying interest and principal of city securities is
properly applied to those payments." Furthermore, subsection 299(1)
requires the Chief Financial Officer to report on the issue and sale of
debentures "in such a manner as may be resolved by council."
d) Financing of Special Service Units
Section 215 of The City of Winnipeg Charter permits Council to establish
special service units (often referred to as 'Special Operating Agencies' or
'SOAs') to provide a commodity or service. Council may under subsection
215(4) authorize a special service unit to "borrow, on terms and from sources
approved by council, to finance the unit's operating and capital requirements".
3.2
Debt Capacity and Benchmarking
a) Ability to pay
The City has many competing spending priorities for the limited amount of
revenues collected each year. The City's capacity to issue debt is directly
related to its ability to service the payments required on the debt. These include
both annual interest and principal payments, including sinking fund payments.
Furthermore, the City's ability to service the payments required is directly linked
to the ability of the City to raise sufficient funds from either taxes or fees. This
in turn is related to the ability of the citizens to be able to sustain increases in
taxes or fees.
b) Capital Budgeting and Debt Financing Relationship
The Debt Management Policy has a direct link to the capital and operating
budget processes. Under Subsection 284(2) of The City of Winnipeg Charter,
Council is required to adopt an Annual Capital Budget and Five-Year Capital
Forecast. These plans reflect the coming 6 years and are updated annually.
The capital budget document contains descriptions of the projects, sources of
funds and the timing of capital projects, the effect of the projects on future debt
outstanding, debt service requirements and current revenue requirements.
Subsection 285(1) requires every operating budget to make provision for all
amounts required to pay principal and interest payments falling due within the
year of any debt of the City. It is important to recognize that a borrowing
decision made in the current year for the capital budget will impact future
operating budgets by way of principal and interest charges until the maturity
date of the debt.
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Borrowing to finance capital projects normally occurs in arrears as the project
progresses for major projects and subsequent to completion for other projects.
The City approves borrowing authority through the Capital Budget process or
Administrative Reports to Council. When capital expenditures warrant, the City
will issue debentures against the outstanding borrowing authorities, drawing on
the oldest borrowing authorities first. The outstanding borrowing authority
provides a record of which projects approved in past capital budgets have not
yet been completed and/or externally financed.
Borrowing authority is issued to back-stop internal borrowing. Internal
borrowing is limited to the balance in the Financial Stabilization Reserve.
c) Tax-Supported and Self-Supporting Debt
The City issues debt for two main purposes related to capital expenditures.
Tax-supported debt which is for capital projects that will be serviced from the
tax-supported operating budget and self-supporting debt which is for capital
projects that will be serviced from revenues from the City's utility operations.
d) Measurements
There are two measurements used to monitor both current and projected
outstanding debt levels and debt costs and to plan for future debt levels. This
is achieved through the City's Debt Strategy.
The main measurements are as follows:
- Debt interest costs as a percentage of consolidated revenues which may
be compared to previous and future years. This measurement allows
elected officials to be aware of the amount of the current year's annual
budget which is devoted to servicing debt.
- The other measurement is net debenture debt as a percentage of
consolidated revenues. This measurement identifies the percentage of
annual consolidated revenues that would be required to eliminate the City's
outstanding net debt.
e) Asset Life Considerations
The City's practice is to issue debt for a period that aligns with the useful life of
the asset being financed. For practical and efficiency reasons, the City issues
debt in significantly large amounts, there may be times when not all of the
issued debt can be allocated to capital projects with a useful life that matches
the maturity of the debt. However, as a matter of practice, every effort will be
made to ensure that this result is minimized.
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3.3 Types of Debt and Structural Features
a) Types of Debt
Subsection 298(2) of The City of Winnipeg Charter provides that City Securities
issued for long-term borrowing may include "...any provision that in the opinion
of the Chief Financial Officer is necessary or advisable to facilitate the sale of
the City securities...". Subsection 308(1) permits borrowing in currencies other
than the Canadian dollar.
In addition, section 293 of The City of Winnipeg Charter permits Council to pass
by-laws to provide for temporary borrowing not to exceed the revenues in the
City's operating budget for the previous fiscal year. The City has passed a by-
law establishing the annual amount the City is authorized to borrow in this
manner.
Even though the City has the authority and ability to issue debt in foreign
currencies., the depth of the Canadian capital markets is sufficient for the
funding requirements of the City. However, should the City exercise its ability
to issue debentures in a foreign currency, the City would immediately undertake
an analysis to determine if it should eliminate the exposure to foreign currency
fluctuations related to this transaction through hedging arrangements.
Subsection 291(1) of The City of Winnipeg Charter allows the City to enter into
agreements respecting the management of its debts once Council has adopted
a policy for entering into that type of agreement and this policy is approved by
the Minister of Finance. The City currently does not have a Financial
Instruments Policy with respect to debt management agreements (eg. these
agreements are used for derivative instruments) and has not entered into those
types of agreements.
The City's current portfolio of debt is primarily fixed rate including Sinking Fund
(Bullet) debt but has issued Serial debt in the past.
There may be merit to issuing debt that has a maturity date which is shorter
than the asset life being financed, for example, bridges have a very long useful
life.
Section 300 of The City of Winnipeg Charter allows the City to issue variable
rate debt. Council must, by by-law, establish a policy regarding the issuance of
variable rate securities prior to their use and this policy must be approved by
the Minister of Finance. The City has not issued any variable rate securities to
date.
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b) Structural Features
The City's historical preferred term of financing is 30 years which reflects the
average useful life of the projects the City finances with external debt. In the
event the capital markets are not receptive to an issue in this term, the City may
issue shorter term or longer debt. Alternatively, for inter-generational projects,
the City may choose to issue longer term debt. The City has typically issued
debentures with sinking fund provisions. However, the City could also issue
serial debt if market conditions so warrant.
Subsection 298(2)(b) provides for the issuing of Callable or Redeemable
debentures. Callable debentures allow the City to pay off the debentures earlier
than the maturity date without a penalty to the City. Redeemable debentures
allow the holder of the debenture to request payment of the debenture sooner
than the maturity date of the debenture without penalty. Each of these
debenture structures could have a benefit to the City depending on the interest
rate environment they were issued under. The City would pay a premium to
issue a redeemable debenture. The City has not used either of these features
in a debenture issue in recent years.
Derivative products may be considered for altering the debt structure from fixed
to floating and vice versa as well as a means of setting a ceiling on the coupon
rate of future debt issues. The City does not currently have a policy with respect
to the use of derivative products. Section 291 of The City of Winnipeg Charter
requires that a policy, approved by the Minister of Finance, must be established
prior to the use of derivative products by the City.
The timing and type of a particular debt issue is normally recommended by the
Corporate Finance Department - Financial Services Branch based on current
market conditions and in consultation with members of the City's Borrowing
Syndicate, subject to Council approved borrowing authority. Included in these
considerations will be the current interest rate environment as well as the
forecasted interest rate environment, capital markets receptivity as to credit and
term issues, actual versus budgeted costs of financing and any other issues
that may be determined to influence the success of issuing debt at a given point
in time. Since the capital markets operate in a dynamic environment, there is
no specific method or form of debt issuance that can be determined in advance.
Rather, in response to the dynamics of the capital markets, the benefits and
costs of the various types of debt will need to be considered in light of the
market conditions that exist at the time of issuance.
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3.4 Debt Management Practices
a) Method of Sale
Subsection 298(3) of The City of Winnipeg Charter outlines some of the powers
the Chief Financial Officer of the City has with respect to issuing debentures.
Included in this section of the Charter is clause (d) which states: the Chief
Financial Officer may do all acts and things he or she considers necessary...
Including ... "entering into agreements with respect to the offer, issue, sale and
trade of city securities and other transactions relating to city securities,
including underwriting, fiscal agency, pricing, exchange rate agency, paying
agency, trust, distribution, registrar or other agreements;". In this regard, the
City uses a Borrowing Syndicate for the issuance and sale of debentures. This
arrangement defines the parties the City uses when issuing debentures as well
as the commission structure payable. Regardless, the City has the ability to
enter into a private placement for the sale of debentures should it be
determined this is in the City's best interests both from a cost and administrative
viewpoint.
b) Method of Selecting Financial Consultants
The Chief Financial Officer reviews the composition of the Borrowing Syndicate
on a regular basis in order to keep it current. Subsection 298(3) of The City of
Winnipeg Charter provides the authority to the Chief Financial Officer to
determine when a formal review of the Borrowing Syndicate is warranted. The
formal review process may include establishing a set of criteria, including fee
structures, presence in the capital markets, placement of bonds in volume and
dollar terms, etc., and any other criteria that may provide value to the City
through the review process.
c) Refinancing and Defeasement
Section 302 of The City of Winnipeg Charter provides authority for refinancing
debentures. In practice, the City provides for a principal payment or sinking
fund levy on each fixed rate serial or sinking fund debenture issued. In most
cases, the annual serial payments or proceeds of the entire sinking fund will be
sufficient to repay the principal amount outstanding upon maturity of the
debentures
In the case of Sinking Fund debentures, should the Sinking Fund not be able
to earn a sufficient amount of interest over the maturity period of the debentures
to retire the debt, this may result in the need to refinance the maturing
debentures. In these instances where refinancing is necessary, the approval of
the Minister of Finance will be required prior to refinancing these debentures.
In certain situations, the City may choose to defease its outstanding
indebtedness through purchases of its securities on the open market.
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d) Disclosure Practices
The City is committed to full disclosure of financial information as it relates to
debt management. The City's financial statements are prepared in accordance
with Canadian accounting standards for governments established by the
Public Sector Accounting Board of the Chartered Professional Accountants and
includes a comprehensive section dealing with the outstanding debt and debt
obligations of the City.
e) Investment of Bond Proceeds
The City makes borrowing decisions based on cashflow needs as well as
capital market conditions. The City will not normally borrow money too far in
advance of when it is required. However, should this occur, the investment of
proceeds would be managed by Financial Services Branch - Money
Management area of Corporate Finance.
Section 290 of The City of Winnipeg Charter restricts the investments that can
be made with City funds and the City has adopted an Investment Policy with
respect to the types of investments permitted. Since the nature of funds
borrowed in advance of when they are required is typically short-term, only
short-term, liquid securities will be used for investing the proceeds.
f) Management of Debt Portfolio
The Chief Financial Officer oversees the management of the City's debt
portfolio including the servicing of the debt.
Section 100 of The City of Winnipeg Charter outlines the duties of the Chief
Financial Officer. Clause (i) outlines the Chief Financial Officer's duties with
respect to reporting and states: "The powers, duties and functions of the chief
financial officer include..."submitting to council, within six months after the end
of each fiscal years of the city, a report on the financial position of the city at
the end of that fiscal year, including balance sheets, statements of revenue and
expenditures and other financial statements necessary to provide full
disclosure of the financial position of the city;".
There are a number of reports regarding the City's debt contained in the
Detailed Financial Statements which is a companion report to the City's Annual
Report. Other reporting requirements are determined as required by the Chief
Financial Officer.
Regularly scheduled meetings are held to discuss issues related to outstanding
debt as well as potential new debt to be issued.
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3.5 Credit Rating Considerations
a) Credit Rating
The City of Winnipeg dedicates substantial time and effort to the credit rating
process.
Currently, the City maintains a relationship with S&P Global(S&P) and Moody's
Investors Service (Moody's). The City should always maintain a relationship
with a minimum of two recognized credit rating agencies as most institutional
investors require two credit ratings to purchase the City's debentures. Enabling
a larger pool of eligible institutional investors facilitates liquidity in the City's
debentures and may reduce borrowing cost.
A credit rating is very important to an entity which issues debt because it is one
of the key factors that determines access to Investors and the interest rate the
entity will pay on debentures when they are issued. In addition, the credit rating
agencies provide comparisons to other debt issuers and therefore a relative
measure of the financial well-being of the City.
While the City does not have a formal objective with respect to the credit rating
process it is implied that the City wishes to obtain the highest credit rating
possible without compromising the delivery of services deemed to be essential
by Council and in consideration of the tax impact to the public.
The City meets with the credit rating agencies annually and provides periodic
updates of information affecting the City's financial position as it becomes
available.
4. Responsibilities
4.1
Review of Debt Management Policy
This policy will be reviewed from time-to-time, at least once during each term
of Council to ensure its continued effectiveness. This will be done by the
Corporate Finance Department - Financial Services Branch in consideration of
meeting City debt management goals, the capital markets and associated
market conditions, technology, and industry best practices. Recommended
changes will be submitted to Council for consideration and approval.