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HomeMy WebLinkAboutCS 06-03 REPORT TO FINANCE & OPERATIONS COMMITTEE Report Number: CS 06-03 Date: May 14, 2003 From: Gillis A. Paterson Director, Corporate Services & Treasurer Subject: Lease Financing Policy Recommendation: 1. It is recommended that Report CS 06-03 of the Director, Corporate Services & Treasurer be received and that: 2. the attached Lease Financing Policy be approved effective immediately; and, 3. the appropriate officials of the City of Pickering be authorized to give effect thereto. Executive Summary: The Province of Ontario recently passed Ontario Regulation 401/02, under the Municipal Act, 2001, as amended, which deals with financing leases for municipal capital facilities. A "financing lease", as defined under the Regulation, is a lease allowing for the provision of municipal capital facilities if the lease mayor will require payment by the municipality beyond the term for which the Council was elected. "Municipal capital facilities" include land, as defined in the Assessment Act, works, equipment, machinery and related systems and infrastructures. The Regulation specifies that Council must adopt a statement of lease financing policies and goals before Council enacts a by-law authorizing a financing lease. To ensure compliance with the Regulation, attached Policy on Lease Financing has been prepared for Council's approval. Financial Implications: This policy is required to be approved by Council under the Municipal Act, 2001 as amended and Regulations thereunder before any leases can be entered into. While none are forthcoming at this time, it is prudent to have this policy in place now, before any need is identified. Report CS 06-03 Date: May 14, 2003 Subject: Lease Financing Policy Page 2 Background: This policy is subject to the Legislation and Regulations of the Province of Ontario including but not limited to the Municipal Act, 2001, as amended and Ontario Regulation 401/02 and any amendments thereto. The proposed policy states that the City of Pickering is committed to the philosophy whereby City facilities and infrastructure are not built unless City funding is available, including, internal loans and/or debt financing. However, the City also recognizes that there may be circumstances when leasing an asset is preferred over purchasing it outright. It is the City of Pickering's intent to use lease financing where in the opinion of the Treasurer, it is financially advantageous over other forms of financing or it provides a benefit in the acquisition or use of an asset. The purpose of the policy is to establish a framework and outline requirements for entering into leases of municipal capital facilities, and for reporting such leases to Council. All lease payments are a long-term financial obligation and shall form part of the Annual Repayment Limit as established annually by the Ministry of Municipal Affairs and Housing and the Treasurer shall update the amount approved under this Limit and provide such certification as required. The policy identifies types of financing leases which will not typically result in a material impact for the City. These include but are not limited to: 1. Any lease entered into in accordance with the City's Budgets, By-Laws and Policies consisting of: . Office equipment; . Vehicles; . Information technology infrastructure, hardware, and software; and . Communications equipment; In such cases materiality, financial or otherwise, becomes the determining factor in considering lease financing for the above capital expenditures as may be approved by Council in the annual current or capital budgets. 2. Any leases in place at the time of Council approval of the attached policy. The attached policy also defines "material impact" as 10% of the annual Debt and Financial Obligation Repayment Limit for the City of Pickering or a lease that extends beyond 5 years. The City's Annual Repayment Limit (ARL) is approximately $11.2 million for 2003 of which approximately $9.5 million remains uncommitted. The Lease Financing Policy also identifies types of leases which are expected to have no material impact on the municipality. Report CS 06-03 Date: May 14, 2003 Subject: Lease Financing Policy Page 3 This policy is being presented to Council prior to receiving input from the Policy Review Committee in order to have it in place prior to a need arising. This Committee's review may result in some changes to wording to ensure consistency with other City policies. Attachments: 1. Lease Financing Policy Prepared I Approved I Endorsed By: GAP:vw Attachment Copy: Chief Administrative Officer ,~~~ Gillis A. Paterson Director, Corporate Services & Treasurer Recommended for the consideration of Pickering City Council " CITY POLICY/PROCEDURE Approval: Date Originated: Policy Number: Chief Administrative Officer Classification: FIN Reference: Date Revised: Category: Subject: 001 Policy Title: LEASE FINANCING POLICY POLICY STATEMENT: This policy constitutes the statement of the City of Pickering's lease financing policies and goals under Ontario Regulation 401/02, to the Municipal Act, 2001, as amended. POLICY OBJECTIVE: The City of Pickering is committed to the philosophy whereby City facilities and infrastructure are not built unless City funding is available, including, internal loans and/or debt financing. However, the City also recognizes that there may be circumstances when leasing an asset is preferred over purchasing it outright. It is the City of Pickering's intent to use lease financing where in the opinion of the Treasurer, it is financially advantageous over other forms of financing or it provides a benefit in the acquisition or use of an asset. The objective of this Policy is to ensure that prior to entering into any lease agreement the details are reviewed and approved by the Director, Corporate SeNices & Treasurer and that the full disclosure of all details, terms and conditions of all leases which, in the opinion of the Treasurer, mayor will have a material financial impact on the City are provided to Council prior to the lease agreement being approved. When considering a financing lease the Council and the Treasurer must take into consideration financial and other risks associated with this type of financing including but not limited to: costs of arranging and entering into a lease; term; annual and total payments; buy-out provisions; costs of termination; cost of ownership of the asset at the end of the lease; restrictions or covenants on use and maintenance of the facility during the term of the lease; useful life of the facility being leased; other forms of acquiring and financing the use of the facility; budgetary implications and the residual value of the asset. Page 1 of 1 CITY POLICY/PROCEDURE Approval: Date Originated: Policy Number: Chief Administrative Officer Classification: FIN Reference: Date Revised: Category: Subject: 001/001 Policy Title: LEASE FINANCING POLICY GENERAL: 01 Definitions 01.01 01.02 01.03 01.04 01.05 01.06 Combined Material Impact - The costs or risks of a proposed Non- Material Lease which, when combined with all other Non-Material Leases entered into or proposed to be entered into in a particular year by the municipality, would result in a Material Impact. Financinq Lease - A lease allowing for the provision of Municipal Capital Facilities (Capital Lease) or services (Operating Lease) if the lease mayor will require payment by the municipality beyond the term for which Council was elected. There are two categories of Financing Lease: Material and a Non-Material Lease. Material Impact - Costs or risks that significantly affect, or would reasonably be expected to have a significant effect, on the municipality's Debt and Financial Obligation Annual Repayment Limit prescribed under Ontario Regulation 799/94, as amended, in the amount of 10% or greater, or the lease extends or can be extended beyond a five year term. Material Lease -- A Financing Lease which would result in material financial impact for the municipality. Municipal Capital Facilities -- Includes land, buildings, works, equipment, machinery and infrastructures and related systems used in the course of City business. Non-Material Lease - A Financing lease which would not result in a Material Impact or a Combined Material Impact for the municipality or those leases included under Non-Material Leases (Refer to Section 09). Page 1 of 7 CITY POLICY/PROCEDURE Approval: Date Originated: Policy Number: Chief Administrative Officer Classification: FIN Reference: Date Revised: Category: Subject: 001/001 Policy Title: LEASE FINANCING POLICY 02 Responsibilities: 02.01 Council to: (a) (b) 02.02 Approve this policy. Actively support the Lease Financing Policy. Chief Administrative Officer to: (a) 02.03 Actively support the Lease Financing Policy. Department /Division Heads/Manaqers to: (a) 02.04 Actively support the Lease Financing Policy. Director. Corporate Services & Treasurer to: (a) (b) (c) 03 Authority 03.01 Implement, oversee and interpret the Lease Financing Policy. Approve amendments to this policy which are minor in nature and which do not result in a material change to the intent of the policy. Actively support the Lease Financing Policy. Subject to this Policy and subject to applicable Provincial Legislation and Regulations the Director, Corporate Services & Treasurer is authorized to: Page 2 of 7 CITY POLICY/PROCEDURE Approval: Date Originated: Policy Number: Chief Administrative Officer Classification: FIN Reference: Date Revised: Category: Subject: 001/001 Policy Title: LEASE FINANCING POLICY (a) determine which leases are Material or Non-Material and administer the review and approval of the leases accordingly; (b) enter into leases for the acquisition of municipal capital facilities. 04 Classes of Municipal Facilities Financing lease agreements may be entered into for the provision of the following classes of municipal capital facilities: facilities used by council facilities used for the general administration of the municipality municipal roads, highways and bridges municipal local improvement and public utilities, except facilities for the generation of electricity municipal facilities related to the provision of telecommunications, transit and transportation systems municipal facilities for water, sewers, sewage, drainage and flood control municipal facilities for the collection and management of waste and garbage municipal facilities related to policing, fire-fighting and by-law enforcement municipal facilities for the protection, regulation and control of animals municipal facilities for public libraries parking facilities ancillary to facilities described above municipal community centers and ancillary parking facilities municipal facilities used for cultural, recreational or tourist purposes and ancillary parking facilities municipal general parking facilities Page 3 of 7 CITY POLICY/PROCEDURE Approval: Date Originated: Policy Number: Chief Administrative Officer Classification: FIN Reference: Date Revised: Category: Subject: 001/001 Policy Title: LEASE FINANCING POLICY 05 Required Contents Every Financing Lease must include a schedule of all amounts of payment, required under the lease and that may be required under any possible termination, extensions or renewals of the lease. 06 Process for Approval of a Material Lease 06.01 Treasurer's Report Before entering into a Material Lease, the Director, Corporate Services & Treasurer shall prepare a report to Council assessing the costs and financial and other risks associated with the proposed Material Lease, including any possible extensions or renewals. The report will include: (a) (b) (c) a comparison between the fixed and estimated costs and the risks associated with the proposed Material Lease and those associated with other methods of financing; a statement summarizing, as may be applicable, the effective rate or rates of financing for the Material Lease, the ability for lease payment amounts to vary, and the methods or calculations, including possible financing rate changes, that may be used to establish that variance under the lease; a statement summarizing any contingent payment obligations under the lease that, in the opinion of the Director, Corporate Services & Treasurer, would result in a Material Impact for the municipality, including lease termination provisions, equipment loss, equipment replacement options and guarantees and indemnities; Page 4 of 7 CITY POLICY/PROCEDURE Approval: Date Originated: Policy Number: Chief Administrative Officer Classification: FIN Reference: Date Revised: Category: Subject: 001/001 Policy Title: LEASE FINANCING POLICY 06.02 07 (d) a summary of the assumptions applicable to any possible variations in the lease payment and contingent payment obligations; and (e) any other matters the Director, Corporate Services & Treasurer or Council considers advisable. As part of the consideration of any lease including those requiring Council's approval, the Director, Corporate Services & Treasurer is authorized to obtain such legal and financial advice, as is considered necessary. Council's Role 07.01 07.02 07.03 07.04 Council is responsible for determining whether the costs of financing for the proposed Financing Lease are lower than other methods of financing available to the municipality, and whether the risks associated with the Financing Lease are reasonable. In considering the report and recommendation from the Director, Corporate Services & Treasurer, Council is responsible for ensuring that legal and financial advice has been obtained, and must consider whether the scope of the proposed lease warrants further legal or financial advice from an independent source. Prior to entering into the lease, Council must advise the Region of Durham, in writing, of the proposed Financing Lease. If Council decides to approve entry into the Financing Lease, such approval shall be by by-law. Page 5 of 7 CITY POLICY/PROCEDURE Approval: Date Originated: Policy Number: Chief Administrative Officer Classification: FIN Reference: Date Revised: Category: Subject: 001/001 Policy Title: LEASE FINANCING POLICY 08 Chanqe in Circumstances 08.01 09 If, at any time after a report is made, but before the Financing Lease is entered into, the Director, Corporate Services & Treasurer becomes of the opinion that a changed circumstance with respect to the proposed lease may result in a Material Impact or a Combined Material Impact for the municipality, the report must be updated as soon as is reasonably possible and presented to Council. Non-Material Leases 09.01 10 The following types of Financing Leases will not result in a Material Impact for the municipality and are therefore deemed Non-Material Leases: (a) Any lease entered into in accordance with the City's By-laws and Policies including, but not limited to, leases of: office equipment; vehicles; information technology infrastructure, hardware and software; communications equipment; machinery and equipment; (b) Any leases in place at the time of Council approval of this policy. Meaninq of Combined Material Impact 10.01 A proposed Non-Material Lease would have a Combined Material Impact if the total value of all such Non-Material Leases were greater than 10% of the City's Annual Repayment Limit. The proposed Non- Material Lease is to be reported and reviewed by Council as if it were a Material Lease under this policy. Page 6 of 7 CITY POLICY/PROCEDURE Approval: Date Originated: Policy Number: Chief Administrative Officer Classification: FIN Reference: Date Revised: Category: Subject: 001/001 Policy Title: LEASE FINANCING POLICY 10.02 Where such total value is less than 10%, a proposed Non-Material Lease is not required to be reported to and reviewed by Council under this policy. 11 Annual Report to Council 11.01 Once in every fiscal year, the Director, Corporate Services & Treasurer shall provide a report to Council containing the following: (a) (b) (c) (d) a description of the estimated proportion of the total financing arrangements of the municipality that is undertaken through Financing Leases to the total long-term debt of the municipality; a description of the change, if any, in that estimated proportion since the previous year's report; a statement by the Director, Corporate Services & Treasurer as to whether, in his/her opinion, all Financing Leases were made in accordance with this policy; any other information that my be requested by Councilor that, in the opinion of the Director, Corporate Services & Treasurer, should be recorded, Page 7 of 7