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Infrastructure &
Finance Division
 

Inter-fund Borrowing

 

Circular No. 12:11
ARCS File#: 195-20

 

May 3, 2012

 

To: All Regional District Financial Administrators

 

Re: Inter-fund Borrowing


Bill 8, 2011 (Bill) (Community, Sport and Cultural Development Statutes Amendment Act, 2011) received Royal Assent on March 15, 2012.  While this Bill addresses a number of different issues, the issue of relevance to regional districts is an amendment to section 814 of the
Local Government Act (Act).

Prior to the Bill, money in reserve funds for regional district services were segregated from each other, i.e. money in a reserve fund for one service could not be lent or transferred to a reserve fund in another service, in accordance with section 814(4) of the Act.

The Bill amends section 814 of the Act by permitting a regional district to lend money from a reserve fund for one service to a reserve fund for a different service, subject to the following rules:

  • both reserve funds must be established for a capital purpose;
  • the money in the lending fund must not be currently required for the purpose of the fund;
  • the borrowing (or receiving) fund must repay the lending fund with the interest that would have been earned if the funds had not been borrowed; and
  • the repayment must occur before the lending fund requires the money.

Importance of Planning
While this amendment creates flexibility for regional districts, careful planning and management is required when lending between reserve funds (also called inter-fund borrowing).  The Province of British Columbia recommends that the regional district board have a plan to repay borrowed money to the appropriate reserve funds.  This plan should be in place prior to any inter-fund borrowing.

 

The plan should take into account the timing and estimated amount of future capital expenditures for the services involved in the proposed inter-fund borrowing to ensure reserve fund money is available when needed by the appropriate services.  The regional district should also keep a schedule detailing all the inter-fund borrowing, including annual repayments.

 

Inter-Fund Borrowing versus Long Term Borrowing
It is extremely important to note that inter-fund borrowing is not intended to replace long-term borrowing through debenture debt or to avoid elector approval.  If the regional district board has any concerns that inter-fund borrowing will not be repaid to the lending fund when needed, it should not consider inter-fund borrowing.  Instead, the board should pursue a loan authorization bylaw in relation to the service requiring the immediate money.

 

Inter-fund Borrowing as Temporary Borrowing
In some cases, the regional district board may use inter-fund borrowing as a form of temporary borrowing. Under this scenario, the service may use inter-fund borrowing to finance capital works under an approved loan authorization bylaw during the construction period (as opposed to going to an outside lender).

 

After the construction is completed, the inter-fund borrowing is rolled into debenture debt through a security issuing bylaw in accordance with section 825 of the Act.  The money raised from the security issuing is then used to repay the inter-fund borrowing.

 

This process only works if the inter-fund borrowing is done through a temporary borrowing bylaw under section 823.2 of the Act.  In accordance with sections 823 of the Act and 179(4) of the Community Charter, a loan authorization bylaw expires after five years if there is no temporary borrowing or security issuing against it.  Thus, without the temporary borrowing bylaw, there is a distinct risk that the underlying loan authorization bylaw may lapse if there is no security issuing in five years.

 

To avoid this risk, the regional district board should always use a temporary borrowing bylaw when inter-fund borrowing for the purposes of temporary financing during construction.

 

Inter-Fund Borrowing is only for Capital Purposes
Additionally, inter-fund borrowing is intended for capital purposes only.  This new authority cannot be used for operational purposes, including revenue anticipation borrowing or other similar forms of liquidity management.

 

Consultation with Participants
While consent of the electoral area director or a participating municipality is not required for inter-fund borrowing, the board should seriously weigh the opinion of the director/council when lending money from a service under their geographic purview.

 

Consultation with Ministry
Before considering inter-fund borrowing, a regional district should consider all possible ramifications and consult its provincial financial analyst.

 

Talitha Soldera, CGA
Director, Local Government Finance

 

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