Number of Municipalities. Funding (Millions) $ April 2003 to July 2003

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1 Introduction Te Department of Municipal and Provincial Affairs is responsible for matters relating to local government, municipal financing, urban and rural planning, development and engineering, and coordination of emergency planning for municipalities. In , te Department of Municipal and Provincial Affairs introduced a Debt Relief Program to assist municipalities in debt refinancing or debt restructuring. Te Program is intended to assist municipalities in poor financial condition as determined by a compreensive review of individual municipalities past performance in relation to financial activities, wit consideration of oter factors including economic conditions, taxing capacity, and out-migration. As at July 2003, Government as allocated approximately $47.0 million in Program funding to 75 municipalities as sown in Figure 1. In addition, non-financial assistance as been provided to 52 municipalities. Figure 1 Department of Municipal and Provincial Affairs Debt Relief Expenditure 31 Marc Year Agreement signed Number of Municipalities Funding (Millions) $ April 2003 to July Total 75 $ 47.0 Source: Department of Municipal and Provincial Affairs Auditor General of Newfoundland and Labrador 469

2 Scope and Objectives In October 2003, we performed a review of te Debt Relief Program. Te objectives of our review were to: assess te Department s progress in addressing te financial problems of te Province s municipalities; determine weter Program Guidelines were in place and being complied wit; and determine weter te Program was adequately monitored and reported. Conclusions In 1997 te Department estimated tere were 170 municipalities wic sould be reviewed to determine weter tey required assistance under te Debt Relief Program. Te Department targeted municipalities wic spent 30% or more of teir municipal operating grant and tax revenues on debt servicing costs. In May 1999, te Department estimated tat it would complete its review of te 170 affected municipalities by 31 Marc As of July 2003, 39 monts after te Department s target date of 31 Marc 2000 to prepare a plan and provide te necessary assistance for te estimated 170 municipalities, only 114 of te 141 municipalities meeting te 30% debt servicing cost to revenue ratio identified in 1997 ad been reviewed and assisted. Of te remaining 27 municipalities in tis category, 22 ad reviews at various stages of completion wile 5 ave not been reviewed. However, 13 municipalities were reviewed and assisted even toug tey did not meet te 30% debt servicing cost to revenue ratio identified in Of tese 13 municipalities, 6 received financial assistance wile 7 received non-financial assistance. Tree of te 6 municipalities wic received financial assistance still ad a debt servicing cost to revenue ratio of less tan 30% wen tey received assistance. Program Guidelines indicate tat te debt servicing cost to revenue ratios will be te basis for targeting municipalities for review. Altoug te Department determined te debt servicing cost to revenue ratios in 1997 to identify wic municipalities would be reviewed for assistance under te Program, tis information as not been updated since tat time. Instead, te Department concentrates on Newfoundland and Labrador Municipal Financing Corporation (NLMFC) arrears and requests from municipalities seeking assistance. As a result, te Department as not identified wic municipalities currently meet te debt servicing cost to revenue criterion necessary to prioritize reviews and determine eligibility for assistance. 470 Auditor General of Newfoundland and Labrador

3 Altoug reviews in progress in July 2003 ave identified tat te municipalities will require debt relief funding of approximately $9 million, tere was no Program funding in te approved budget. Furtermore, a request for more funding for to continue te Debt Relief Program was deferred by Treasury Board. Altoug Program Guidelines provide for an action plan tat will permit te municipality to maintain stability in its financial affairs, te financial analysis and resulting agreements wit municipalities did not address future capital works and funding requirements. As a result, tere may be issues relating to future financial stability. Monitoring and reporting is inadequate in tat inspection targets were not establised, annual inspections were not performed subsequent to assistance being provided, action plans addressing non-compliance wit agreements were not being prepared, and quarterly reports outlining te status of instances of non-compliance, are not being provided to te Assistant Deputy Minister. Findings and Recommendation Te Debt Relief Program was introduced in to assist municipalities in poor financial condition. Financial condition was to be determined by a compreensive review of individual municipalities past performance in relation to financial activities, wit consideration of oter factors including economic conditions, taxing capacity, and outmigration. Te municipalities targeted under te Program were tose wic spent more tan 30% of teir municipal operating grant and tax revenues on debt servicing costs. In April 1997, te Department estimated tat 170 of te Province s 290 municipalities met te target criteria and terefore would be reviewed under te Program. 1. Progress in Addressing Financial Problems As of July 2003, 127 of te Province s 290 municipalities ad been reviewed to determine weter tey qualified for assistance troug te Debt Relief Program. Seventy-five municipalities ave received financial assistance wile 52 municipalities ave received non-financial assistance in restructuring teir debt. Non-financial assistance would include advice relating to: debt refinancing and restructuring; increasing tax collection; preparation of financial plans; and preparation of montly reports to councils. Information on te assistance provided is outlined in Figure 2. Auditor General of Newfoundland and Labrador 471

4 Figure 2 Department of Municipal and Provincial Affairs Classification of Municipalities July 2003 Ratio Range June 1997 % Total Municipalities Financial Assistance # (Millions) Non- Financial Assistance Assessments in Progress Municipality not assessed for assistance > $ Sub-total or less Sub-total Total $ Source: Department of Municipal and Provincial Affairs Our review of te Department s progress in addressing te financial condition of te estimated 170 municipalities identified in 1997 to be reviewed under te Debt Relief Program identified te following: As of July 2003, 39 monts after te Department s target date of 31 Marc 2000 to prepare a plan and provide te necessary assistance for all 170 municipalities, only 114 (69 - financial assistance plus 45 - non-financial) of te 141 municipalities meeting te 30% debt servicing cost to revenue ratio identified in 1997 ad been reviewed and assisted. Of te remaining 27 municipalities in tis category, 22 ad reviews at various stages of completion wile 5 ave not been reviewed. 472 Auditor General of Newfoundland and Labrador

5 13 municipalities were reviewed and assisted (6 - financial assistance plus 7 - non-financial) even toug tey did not meet te 30% debt servicing cost to revenue ratio identified in In addition, 4 of te 26 reviews in progress at July 2003 related to municipalities wic, in 1997, ad a debt servicing cost to revenue ratio of less tan 30%. Of te 6 municipalities wic received financial assistance, 3 still ad a debt servicing cost to revenue ratio of less tan 30% wen tey received assistance. Of te 7 municipalities wic received non-financial assistance, 1 still ad a debt servicing cost to revenue ratio of less tan 30% wen tey received assistance. Furtermore, tere was no information on file for 4 of te 7 municipalities to determine teir debt servicing cost to revenue ratio at te time of assistance. Program Guidelines indicate tat te debt servicing cost to revenue ratios will be te basis for targeting municipalities for review. Altoug te Department determined te debt servicing cost to revenue ratios in 1997 to identify wic municipalities would be reviewed for assistance under te Program, tis information as not been updated since tat time. Instead, te Department concentrates on NLMFC arrears and requests from municipalities seeking assistance. As a result, te Department as not identified wic municipalities currently meet te debt servicing cost to revenue criterion necessary to prioritize reviews and determine eligibility for assistance. Altoug reviews in progress in July 2003 ave identified tat te municipalities will require debt relief funding of approximately $9 million, tere was no Program funding in te approved budget. Furtermore, a request for more funding for to continue te Debt Relief Program was deferred by Treasury Board. 2. Program Guidelines Te Department as developed draft guidelines for te Debt Relief Program. Our review of compliance wit tese guidelines disclosed te following: Program Guidelines require tat priority be given to te municipalities wit te igest debt servicing cost to revenue ratios. However, municipalities were not reviewed in tis order. For example, of te 30 municipalities identified wit te igest debt servicing costs to revenue ratio in 1997, tere are 7 municipalities were reviews are currently in progress; owever, Auditor General of Newfoundland and Labrador 473

6 tey still ave not entered into contracts for debt relief. Te initial 1997 arrears for tese municipalities totalled $200,000. As of 31 July 2003, te arrears for tese same municipalities totalled $2 million. Program Guidelines provide for negotiation and...acceptance of an Action Plan tat will permit te municipality to operate in a manageable financial environment tat will provide stability in its financial affairs. Our review indicated tat future infrastructure requirements of municipalities were not being addressed in te action plans. As a result, significant related financial commitments, wic could impact on te future stability of te municipality, ave not been factored into tese plans. Program Guidelines require tat te Debt Relief Program Review Committee include representatives from te Department of Municipal and Provincial Affairs and te Department of Finance. Tis Committee is responsible for reviewing and approving negotiated settlements as well as ensuring tat te Program objectives are met, issues are resolved, progress reports are reviewed and tat guidance and direction is provided. Altoug te Committee reviews summary information on funding distribution, tere was little evidence tat te Debt Relief Program Review Committee was ensuring Program objectives were being met, weter progress reports on Program objectives were being prepared and reviewed, and weter adequate guidance and direction was being provided. Te Minister of Finance is required to give final approval of allocations under te Debt Relief Program before te agreements are signed by eiter te municipality or te Minister of Municipal and Provincial Affairs. For 8 of 10 assistance agreements reviewed, te agreements were signed by te municipality and te Minister of Municipal and Provincial Affairs before tey were approved by te Minister of Finance. 3. Program Monitoring and Reporting In addition to providing assistance, te Department establised a process to monitor compliance wit te assistance agreements. Te objective was to prevent a recurrence of financial difficulty for te municipality. Our review indicated tat te Department was not complying in all instances wit te procedures establised to monitor municipalities for compliance wit assistance agreements. For example: 474 Auditor General of Newfoundland and Labrador

7 Inspection targets are to be establised by regional offices eac year and approved by te Assistant Deputy Minister. Departmental official indicated tat inspection targets were not establised by regional offices and approved by te Assistant Deputy Minister for any municipalities assisted under te Program. An initial inspection is to be carried out not later tan one year from te date of te agreement and annually tereafter. Initial inspections are not carried out for all municipalities witin one year of te agreement date and annually tereafter. For te 17 municipalities tat entered into assistance agreements during , 8 were not inspected as of July In addition, of te 9 municipalities tat ad been inspected at tat time, 4 of tese inspections occurred in excess of one year of te agreement date and terefore was still not in compliance wit monitoring requirements. At 31 July 2003 tere were 7 municipalities wic, altoug ad received financial assistance, were in arrears. We found tat tere were 5 municipalities wic were not inspected in accordance wit policy. In tese cases, 4 municipalities ad never been inspected wile 1 was inspected after te required date. A quarterly report is to be provided to te Assistant Deputy Minister outlining non-compliance and action to be taken. Quarterly reports, outlining te status of instances of noncompliance, are not being provided to te Assistant Deputy Minister. Furtermore, action plans are not always developed to outline ow instances of non-compliance are to be addressed. We found instances of non-compliance wit te agreement in 4 of te 10 municipalities reviewed relating to suc tings as purcasing capital items witout Departmental approval and not implementing tax increases. However, altoug tese 4 municipalities were required to prepare a total of 7 action plans to deal wit te non-compliance matters, only 1 was prepared. Auditor General of Newfoundland and Labrador 475

8 Recommendation Te Department sould ensure tat te Debt Relief Program is administered in accordance wit Program Guidelines and tat progress towards program objectives is monitored and reported. Department s Response Report Item: In your conclusion you note tat: In May 1999, te Department estimated tat it would complete its review of te 170 municipalities by 31 Marc As of July 2003, 39 monts after te Department s target date of 31 Marc only 114 ad been reviewed and assisted. Altoug tat target date is in te Carter, te Department soon realized in te early stages of te Program tat tis target date was unrealistic given te amount of work required to do financial analyses on tese municipalities and availability of staff to dedicate to te Program. Report Item: In your conclusion you indicate: 13 (municipalities) were reviewed and assisted even toug tey did not meet te 30% debt servicing cost to revenue ratio identified in You sould note from te review of tese municipalities tat wen tey were reviewed by te Debt Relief Program tey did, in fact, exceed te 30% debt servicing ratio. It was anticipated tat additional municipalities would fall into arrears to Newfoundland and Labrador Municipal Financing Corporation (NLMFC) and exceed te 30% debt servicing ratio as Municipal Operating Grants were reduced and Water and Sewer payments increased. Also, NLMFC arrears was a consideration for review and assessment. Report Item: In your conclusion you indicate: te list of servicing ratios in 1997 as not been updated. By nature te list is a moving target but wit te knowledge of staff and oter reporting mecanisms amendments are made to our status reports as necessary. 476 Auditor General of Newfoundland and Labrador

9 Report Item: In your conclusions, you state tat: te financial analysis and resulting agreements wit municipalities did not address te future capital works and funding requirements. It was never intended tat future capital works and funding requirements be addressed as a part of te review. Our review and te tax rates tat were to be imposed by te municipalities was intended to provide revenues to sustain current levels of service. Future servicing requirements were to be addressed troug increased taxes and oter financial considerations tat would enable te municipalities to meet teir new debt. Also, our capital works cost saring agreements give consideration to te level of debt and wat cost saring ratio between te province and municipality is affordable. Report Item: You also indicate in your conclusion tat monitoring and reporting is inadequate and tat inspection targets were not establised, annual inspections were not performed subsequent to assistance being provided, action plans addressing non-compliance wit agreements were not being prepared and quarterly reports outlining te status of incidents of non-compliance are not provided to te Assistant Deputy Minister. Staffing issues ave caused te Department some minor concern wit respect to monitoring and reporting. However, because our regional staff are familiar wit municipalities witin teir jurisdictions, efforts are concentrated on tose for wic we ave te greatest level of concern. Of te 127 reviewed tus far, seven municipalities ave gone into arrears on teir debt payments. Our regional offices are working wit tese municipalities to bring about corrective action. Report Item: Your report continues to refer to te 30% debt servicing ratio as being te criteria wit respect to targeting municipalities to be reviewed. However, if you review Section 1(2) of te Carter in its entirety, it is clear tat in addition to targeting municipalities tat spend more tan 30% of teir municipal revenue on debt servicing, consideration was also given to municipalities wo were in arrears to Newfoundland and Labrador Municipal Financing Corporation (NLMFC). Furter, if you refer to te Program Guidelines, te criteria for municipalities to be considered Auditor General of Newfoundland and Labrador 477

10 under te program includes tree conditions: (a) tose municipalities wose debt ratio is 30% or more (debt ratio is calculated at debt payments as a percent of local revenue plus municipal operating grant, (b) tose municipalities wic are in arrears to NLMFC, and (c) te municipalities wose water and sewer infrastructure is incomplete, extenuating circumstances prevent completion and te associated debt is unreasonable considering te minimal benefit to te overall municipality. In summary, te department is following te program guidelines and reporting structure it as establised. Because of departmental operating requirements and demands on staff, tere may be some minor departure from te intended process. However, because of te extensive knowledge of our regional staff wit regards to municipalities witin teir jurisdictions, we are able to use oter cecks and balances to be aware of te progress of municipalities reviewed under te Debt Relief Program. Te seven municipalities tat you report wic ad received financial assistance and are currently in arrears on payment of teir debt are being addressed troug our regional offices and our staff are working wit tese municipalities to take corrective action. Te department would deem tat if only 5% of te municipalities tat we ave assisted in restructuring teir debt are failing in teir compliance ten te program as been successful in meeting its objectives. Te Department anticipates tat even tese communities will become financially stable as te reasons for teir slippage is identified and corrected. 478 Auditor General of Newfoundland and Labrador