Liability Servicing Limits
Section 174 of the Community Charter "Limit on borrowing
and other liabilities" provides authority for Cabinet to limit either the
aggregate liabilities of a municipality, or the annual cost of
servicing the aggregate liabilities and for a method for determining
that limit. BC Regulation 254/2004
(Municipal Liabilities Regulation) limits the annual cost
of servicing certain defined liabilities.
The annual cost of servicing liabilities (referred to as
"liability servicing cost") is the total of the average actual
principal and interest charges on defined liabilities, where
expenditures in relation to those liabilities are being made, plus
the total of the average "implied" costs for all defined liabilities
that are not yet realized.
The use of an annual liability servicing limit has been chosen as
the limitation model because it provides a clear picture of the
amounts of revenue required to pay for past transactions and events
as well as proposed liabilities, which will assist in the financial
planning process. The limit is based on a percentage of certain
municipal revenues, which is considered a good indicator of a
municipality’s ability to pay.
The maximum value of liability servicing cost for a given year is
25% of a municipality’s controllable and sustainable revenues for
the previous year. Section 174 also provides the authority for a
municipality to exceed this limit with the approval of the Inspector
of Municipalities. Guidelines and policies for this approval are
currently being developed in consultation with the Municipal Finance
What is requiredLiability servicing cost consists of amounts actually paid with respect to long-term capital obligations, and estimates for those amounts that would be paid if all unrealized obligations were realized. It is the municipality’s responsibility to ensure that the servicing of a proposed liability will not cause the municipality to exceed its annual liability servicing limit.
Therefore, each time a defined liability is proposed, the
Financial Officer must determine whether the servicing costs for the
proposed liability, when added to all other annual servicing costs
for defined liabilities, will exceed the annual liability servicing
limit established for that year. For this purpose, a statutory
declaration is required whenever a loan authorization bylaw is
submitted to the Ministry for approval or a leasing request is
submitted to the Municipal Finance Authority. This declaration
states the extent of total liabilities outstanding and the related
annual servicing cost, along with certification that the
municipality has not exceeded its annual liability servicing limit.
Whether or not the liability to be incurred is one for which a
statutory declaration is required, the Financial Officer will want
to consider these same issues. Given that the municipality is only
authorized to incur liabilities up to the limit, it is
important to ensure that the limit is not exceeded. Exceeding the
limit without seeking prior approval of the Inspector could leave
the municipality open to a Courts challenge that it did not have the
authority to incur the liability.
What to considerRevenue
Only those revenues which can be considered both controllable by the municipality and sustainable for long periods of time are used to calculate the liability servicing limit.
The amount of Class 4 (Major Industry) revenue that may be
included in revenue calculations for the purpose of a municipality’s
limit may be less than actual revenue received from this source.
This limitation recognizes that Class 4 taxation revenue represents
greater risk than other taxation revenue. Both assessed values and
tax rates may be adjusted for Class 4 revenue. Class 4 assessed
value is limited to 20% of the total assessed value of all
properties in the municipality, and the class 4 general municipal
tax rate is limited to the provincial average. Class 4 revenues are
also adjusted to take tax sharing agreements into consideration, if
The calculation to determine the amount of class 4 tax revenue to
be included in the liability servicing calculation is obtained by
multiplying the lesser of the class 4 assessed value and 20% of the
total assessed value by the lesser of the local government’s class 4
tax rate and the provincial average class 4 tax rate. In the case of
tax sharing municipalities, the assessment and the tax rate must be
derived, taking into account the amount received or paid. A
municipality which pays tax revenue to another municipality will
deduct the corresponding assessed value from both class 4 and from
the total assessment, while the receiving municipality adds this
same amount to its total.
Specifically excluded are:
The exclusion of operating leases or operating costs under an
agreement is a significant improvement over the previous liability
limits, which captured any operating costs under an agreement if the
agreement exceeded five years, or could, by exercising rights of
renewal or extension, exceed five years.
The amount of liability servicing costs will be easy to determine
for most liabilities. For example, in the case of MFA debt, the
liability servicing cost will be the total amount of principal and
interest on the debt divided by the term of the debt. Similarly,
liability servicing costs for short-term capital borrowing are the
total principal and interest payments, divided by the term of the
borrowing (typically five years). In the cases of capital leases, the
liability servicing cost is the total of the lease payments divided by
the term of the lease.
In some cases, liability servicing costs will need to be
estimated. For example, in the case of authorized but unissued debt,
principal and interest costs are estimated based on the current
MFA interest rate for debt of the term authorized in the bylaw. In
the case of a guarantee, liability servicing costs are estimated
based on the total amount of the commitment that might be realized
under the guarantee, divided by the number of years remaining in the
Where an agreement or other obligation combines both operating
and capital components, as is typical in many
partnership (P3) (361 KB) agreements,
only servicing costs related to the capital portion of the agreement are included in
the liability servicing cost limit. While this is an improvement over previous
limits, which captured the operating portions of these agreements,
it requires the Financial Officer to make estimates of the
annual servicing costs under the agreement and apportion these costs
to capital components (which are included in the limit) and
operating components (which are excluded from the limit).
This determination is based on the substance of the
agreement, rather than the form of the agreement. This "substance
over form" parallels accounting standards, which require the same
considerations in determining whether a lease is a capital lease or
an operating lease. This means that the Financial Officer needs
to look further than the form of liabilities arising out of the
agreement, and consider the substance of the overall agreement in
making these determinations (e.g., one cannot assume that a P3
agreement is entirely operating even if the only liability arising
out of the agreement relates to annual revenue guarantees to the
private sector partner).
For both leases and other forms of agreements, Financial Officers may wish to consider the following questions in deciding if an obligation should be included in the calculation:
Answering "Yes" to any of these questions is a signal that there
is a capital component to the obligation and that it should be
included in the calculation of the liability servicing limit.
Professional accounting standards are of benefit in making
some of these determinations. Further information can be found in
the Canadian Institute of Chartered Accountants’ Handbook section
3860.18, Public Sector Guidelines 2 and 3 and in the
Municipal Help Manual.
BC Regulation 254/2004 also provides some exemptions to the
requirement that municipal loan authorization bylaws and liabilities
under agreement receive elector approval.