Continuation of Municipal Bonds in Alberta
IT IS THEREFORE RESOLVED THAT the Alberta Urban Municipalities Association (AUMA) advocate to the Government of Alberta to ensure that there is a sufficient supply of capital for local authorities to continue to access low-cost infrastructure loans as needed through the Government of Alberta; and
FURTHER BE IT RESOLVED THAT the AUMA advocate for the Government of Alberta to provide a regulatory environment where municipal governments can issue bonds to generate capital for local infrastructure needs and offer an opportunity for local, domestic, and international investors to invest in Alberta communities.
FURTHER BE IT RESOLVED THAT the AUMA advocate to the Government of Alberta to ask the Canada Revenue Agency (CRA), through the federal Minister of National Revenue, to consider Alberta municipal bonds as a tax-exempt investment income instrument.
WHEREAS it is difficult for Alberta municipalities to build capital projects based on funds generated by property taxes alone;
WHEREAS the Government of Alberta, as outlined in the 2019-2023 Municipal Affairs Business Plan, wants to “work collaboratively with municipalities in continuing to offer and develop tools and programs to support well-managed, accountable, and sustainable municipalities”;
WHEREAS the Government of Alberta desires to help municipalities “meet their strategic long-term infrastructure needs”;
WHEREAS Alberta municipalities depend upon a variety of funding sources to support capital projects in our communities, inclusive of low-cost loans;
WHEREAS Alberta municipalities understand the Government of Alberta’s desire to reduce provincial spending;
WHEREAS Alberta municipalities understand that part of this reduced spending includes alterations to existing structures, programs, and services under the purview of the Province;
WHEREAS in the absence of various Provincial structures, programs, and services, Alberta municipalities lack the appropriate tools to generate additional revenues for capital projects;
WHEREAS the Government of Alberta is dissolving the Alberta Capital Finance Authority (ACFA), with the role of providing low-cost loans to local authorities to be continued by the Province;
WHEREAS maintaining access to low-cost loans is important to allow community projects to proceed as needed while limiting the long-term cost of community infrastructure for taxpayers;
WHEREAS one of the strategies used by ACFA to generate funds was through the issuing of municipal bonds (called “munis”);
WHEREAS the Government of Alberta could support municipalities by continuing to issue munis;
WHEREAS as a further strategy to encourage investment into Alberta and Alberta municipalities would be to make munis an appealing investment tool.
The Alberta Capital Finance Authority played a critical role in providing low-cost loans to municipal governments and other local authorities to lower the costs of capital projects for Alberta communities. As of 2019, municipal authorities and regional service commissions have $10.3 billion in ACFA loans, representing 64 per cent of ACFA’s total loan portfolio[1]. The Province’s 2019-2023 Fiscal Plan states that existing ACFA loans and liability will be taken on by the province, and that “the program of providing low cost loans to local authorities will be continued by the province.” (p. 168) However, the volume, distribution, and conditions of this lending have yet to be outlined.
Municipalities are familiar with the terms, conditions, and processes of the ACFA’s municipal bonds. If the Province is continuing to provide lending to local authorities, it would be effective for both the Province and municipalities for the issuance of ACFA’s municipal bonds to continue in some form. Across all of Alberta’s municipalities, this would ensure continuity in work and anticipated deadlines. Allowing the process to remain despite the change in oversight ensures that our communities can still fund vital projects responsibly without creating additional risk or concern.
While the Province is struggling during this time to balance books just as much as any other governing body, if the supply of low-cost loans for local projects is reduced, it will actively harm our communities, making necessary growth and development less affordable for the communities that need it the most. While budgeting to ensure short terms sustainability for our province is important, investing in our communities and our future is how we develop a provincial economy that is not only stable, but sustainable. As funding for capital projects becomes less and less predictable, services and infrastructure necessary for daily life will have less support, and quality of life overall will fall in our province. Maintaining municipal bonds as a resource for municipalities is a stopgap against the economic hardships our communities are already facing.
The recommendation that municipal bonds be considered a tax-exempt investment tool is to further encourage investment in Alberta communities as a stable investment with limited tax burden. This practice is common in many regions of the United States to encourage investment in communities.
[1] 2019 ACFA Annual Report, page 23. https://acfa.gov.ab.ca/nav/annual-reports.html
In January 2021, AUMA received the following response from the President of Treasury Board and Minister of Finance.
Access to low-cost loans
The Alberta Capital Finance Authority (ACFA) was dissolved on October 31, 2020 to make government more efficient and reduce red tape. The Province will continue to offer low-cost loans to local authorities, and this will improve management of credit risk of the ACFA portfolio for the Province by integrating the management of loans, debt, and cash resources to the Province. The Ministry of Treasury Board and Finance will administer the lending program and has retained the lending processes, policies, and structures that ACFA had in place.
Create an environment for municipalities to issue bonds and be a tax-exempt investment tool
The Province does not currently have a position with respect to the issuance of tax-free bonds by municipalities. This type of program would require the cooperation of the federal government through the Canada Revenue Agency. There have been no recent precedents of such a program being supported by the federal government, despite attempts by some provinces to establish such programs.
It is “likely that the costs to municipalities would still be greater under a tax-exempt model than through our current lending model. This would be particularly true for small municipalities that would have a more difficult time attracting investor interest.”
“We continue to believe that the current lending method of providing low cost loans to municipalities allows for the best access to adequate supply of capital at the lowest possible cost of funds.”
Intent partially met
On April 26, 2022, ABmunis received a response from the Minister of Treasury Board and Finance explaining the province’s rationale for dissolving the ACFA and for increasing lending rates. Notably, the letter also encourages “Alberta Municipalities to explore alternative methods of financing, including using bonds, to generate capital for community infrastructure.”
Despite advocacy by ABmunis, Budget 2023 did not offer any change to the province’s policy on pricing of municipal loans at a premium based on what the Government of Alberta can borrow capital for in the bond market.
BILD Alberta hired consulting firm MNP to conduct a comprehensive review of the current off-site levies mechanism and identified alternatives to fund future infrastructure projects. BILD shared the report with ABmunis, and it is available by request through its website. The paper finds that offsite levies are widely used across North America. It also suggests that, given the diversity of municipalities, a variety of tools that include alternative financial measures, such as bonds, should be pursued.
BILD provided a presentation to the Municipal Governance Committee at their April 2023 meeting. BILD is open to opportunities for aligned advocacy for bonds and similar mechanisms.
ABmunis will continue to explore the merits of municipal bonds in how they are used in other provinces and details may be shared in the Future of Municipal Finances Webinar Series that ABmunis plans to launch in late 2023 or early 2024.