3.35 Debt Relief Program. Introduction. Scope and Objectives

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1 Introduction The Department of Municipal and Provincial Affairs is responsible for matters relating to local government, municipal financing, assessment, urban and rural planning, development and engineering, and coordination of emergency planning for municipalities. During , the Department introduced a Debt Relief Program to assist municipalities in debt refinancing or debt restructuring. The Program is intended to assist municipalities in poor financial condition, determined by a comprehensive review of individual municipalities past performance in relation to financial activities, with consideration of other factors including economic conditions, taxing capacity, and outmigration. As at 31 March 1999, Government had advanced a total of $17 million in Program funding to the Newfoundland Municipal Financing Corporation, to be held in a reserve for use in mitigating arrears with respect to municipal loans. The amount of the allocation is determined through assessments completed by the Department with final approval from the Newfoundland Municipal Financing Corporation. Of the $17 million in Program funding, approximately $6.1 million had been allocated to 13 municipalities as at 31 March 1999, leaving an unallocated balance in the reserve fund of $10.9 million. Scope and Objectives We completed our review of the Debt Relief Program in September Our objectives were to: determine the nature and objectives of the Program; determine whether Program guidelines were in place and were being complied with; review how the Program is administered and how funds are allocated; and assess whether monitoring and reporting mechanisms have been established to measure success towards achieving Program objectives. 428 Auditor General of Newfoundland

2 Conclusions Our review disclosed that: Guidelines for the Program, defining the Program s objectives, organizational structure, processes, and expected outcomes have not been formally established. Draft Program guidelines did exist and were well structured; however, they were not formally approved by the Department. As well, criteria which would determine how much funding a municipality would be entitled to under the program, have not been well defined and properly approved. We were advised that the draft guidelines were to be in effect for the period covered by our review; however, certain provisions contained in the draft guidelines were not complied with. In April 1997, the Department estimated that it would complete a review of 170 affected municipalities by 30 October By January 1999, Departmental reviews had commenced with only 112 municipalities, with negotiations being finalized for only 47 of these 112. The Department indicated that the revised estimate for completing the remaining reviews is March The draft guidelines indicated that The municipalities that will be targeted are those that spend more than 30% of their municipal revenues on debt. As well, it is indicated that Order of priority will be given to municipalities with the highest debt to revenue ratio but priority may change to accommodate special circumstances. Our review indicated that the municipalities were not reviewed in this order. For example, of the 20 municipalities with the highest ratio, only 16 had been reviewed as at January 1999 while the review of the remaining 4 had not commenced. One of the first reviews undertaken was for the Town of Harbour Grace, which was listed as number 153 on the June 1997 list of priority and which had a debt to revenue ratio of less than the 30% targeted under the draft guidelines. The negotiated agreements which were signed with the municipalities required that the municipalities must meet certain conditions to access Program funding, including such conditions as raising municipal taxes and not applying for future capital works funding for up to 15 years. In the case of tax increases, the tax rates established by the Department are not consistent and vary by municipality. Auditor General of Newfoundland 429

3 Under the Debt Relief Program, a comprehensive review of each municipality was to be performed incorporating a number of factors, including past performance and the ability to raise revenues and service debt. The analyses completed by the Department did not typically address future capital works and funding requirements. In order for restructuring to be viable on a long term basis, it would be expected that these factors would be taken into account. Our review disclosed that a detailed financial analysis was not completed for all municipalities which were reviewed and received funding. Of the 13 municipalities which received funding, the Department did not complete a detailed financial analysis for 2. These 2 municipalities were assisted under the Program with debt relating to water and sewer infrastructure projects which were only partially completed in the past. Due to the fact that the systems were not completed, the intended services were not being provided to the communities involved. Such systems are considered as dry lines. For one municipality, the Department considered there was no need to complete a detailed financial analysis as it felt the town was in good financial position. It was indicated that the decision to assume the Council s share of the debt was based on principle rather than the financial position of the town as would be expected based on the draft Program guidelines and on the review of other agreements under the Program. It is understood from discussions with Departmental officials that the 30% debt to revenue ratio identified in the guidelines was a target and was intended to identify municipalities in need of assistance. However, the lack of definitive indicators as to qualifications for assistance resulted in a process which was not transparent to the various stakeholders involved. In the case of assistance provided under the debt relief program, many municipalities did not receive funding even though their debt to revenue ratio exceeded the 30% identified in the guidelines. As well, many municipalities that did receive funding were left with debt to revenue ratios exceeding 30%. Debt Relief Program agreements between the Department and individual municipalities were signed by the Department and the municipalities involved prior to receiving approval from the Department of Finance for allocation from the reserve fund. The Deputy Minister of Finance expressed concerns over such prior approvals in a letter to the Deputy Minister of Municipal and Provincial Affairs. 430 Auditor General of Newfoundland

4 Monitoring and reporting mechanisms established to measure success towards achieving Program objectives have not been complied with. In particular, the Debt Relief Program Review Committee indicated to be in place to ensure the program objectives are met, did not hold regular meetings or keep related minutes. Also, although the draft guidelines indicated a need to monitor the action plans of the individual municipalities, there was no related monitoring strategy in place. As well, other than through ministerial statements, no periodic overview reports were made on the objectives of the Program for the House of Assembly and other stakeholders. Findings and Recommendations 1. Nature and Objectives of the Debt Relief Program The Debt Relief Program was introduced in to assist municipalities in poor financial condition. Financial condition was to be determined by a comprehensive review of individual municipalities past performance in relation to financial activities, with consideration of other factors including economic conditions, taxing capacity, and outmigration. General objectives of the Debt Relief Program, as identified in draft Program guidelines, are outlined in Figure 1. The municipalities targeted under the Program were generally those which spent more than 30% of their municipal operating grant and tax revenues on debt servicing costs. In April 1997, the Department estimated that 170 municipalities met the target criteria and therefore would be reviewed to determine eligibility under the Program. Figure 1 Debt Relief Program Program Objectives To create strong financial independence, stability and accountability among municipalities. To serve to strengthen local government in the Province. To ensure the future viability of rural Newfoundland and Labrador. Auditor General of Newfoundland 431

5 2. Program Guidelines Although guidelines defining the Program s objectives, organizational structure, processes, and expected outcomes were drafted, these guidelines were not formally approved. Officials at the Department provided a copy of the draft Program guidelines, dated 28 April 1997, which were indicated to be in effect for the period covered by our review. The draft guidelines were well structured; however, they were not formally approved and the criteria which were used to assess whether municipalities were to receive funding and the amount they were to receive were not well defined. Our review disclosed that the Department had not complied with the following provisions of the draft guidelines: Debt Relief Program Review Committee The draft guidelines provide that the Debt Relief Program Review Committee is to consist of the Executive of the Department and the Program Manager. The Committee s responsibility is to ensure the program objectives are met, issues resolved, progress reviewed, and guidance and direction given. Our review disclosed there were no regular meetings held or minutes kept relating to this Committee. Although the Program Manager did prepare some reports on the status of the Program, there was no evidence that reports on the objectives of the Program were required by or presented to the Committee. Approved work plan and project schedule The April 1997 draft guidelines indicated that reviews of the estimated 170 municipalities under the Debt Relief Program would be completed at the rate of 8 to 10 municipalities per month, with reviews for all affected municipalities to be completed by October The major objective of the work plan was to compile and analyze sufficient financial data for each municipality in order to provide recommendations to allow the municipality to become more self-reliant and less dependent on Government. Our review indicated that as at January 1999, Departmental reviews had commenced for 112 municipalities, with negotiations being finalized for only 47 municipalities. Of these 47, the Department determined that 15 required some assistance. The Department indicated that the revised estimate for completing the remaining reviews is March Auditor General of Newfoundland

6 The draft guidelines indicated that The municipalities that will be targeted are those that spend more than 30% of their municipal revenues on debt. As well, it is indicated that Order of priority will be given to municipalities with the highest debt to revenue ratio but priority may change to accommodate special circumstances. Our review indicated that the municipalities were not reviewed in this order. For example, of the 20 municipalities with the highest debt to revenue ratio, only 16 had been reviewed as at January 1999 while reviews for the remaining 4 had not commenced. One of the first reviews undertaken was for the Town of Harbour Grace, which did not have a debt to revenue ratio of 30% and was listed as number 153 on the June 1997 priority list. Action plans The draft guidelines provide for negotiation and...acceptance of an Action Plan that will permit the municipality to operate in a manageable financial environment that will provide stability in its financial affairs. There were to be signed agreements between the Department and the municipalities receiving funding as to the course of action necessary to strengthen the financial position of the municipality. Our review indicated that future infrastructure requirements of the municipalities were not addressed in these action plans. As a result, significant related financial commitments, which could impact the future financial stability of the municipality, have not been factored into these action plans. Municipalities which were reviewed but did not receive funding under the Program were advised by the Department as to how their financial position could be improved. Program monitoring and reporting strategy Although the draft guidelines indicated a need to monitor the action plans of the individual municipalities, and to periodically provide overview reports on the progress of the program, there was no related monitoring or reporting strategy in place. Auditor General of Newfoundland 433

7 3. Program Administration and Funding Allocation (a) Program Testing To test the consistent application of the Debt Relief Program, we reviewed all 13 municipalities which had received funding under the program as at 31 March 1999 and 4 municipalities which had been assessed by the Department as requiring no funding. Our review of these 17 municipalities, indicated the following: with the exception of Harbour Grace, the financial analysis of the remaining 16 municipalities did not address future capital works and funding requirements. In order for restructuring to be viable on a long term basis, it would be expected that future capital work requirements and related financing would be taken into account; detailed financial reviews were not completed for all municipalities considered; many municipalities did not receive funding even though their debt to revenue ratio exceeded 30%; many municipalities that did receive funding were left with debt to revenue ratios exceeding 30%; many municipalities which received funding are required to increase property, water and sewer, business and poll taxes. In addition, many municipalities which did not receive funding were advised to increase their taxes to improve their debt to revenue ratios. However, the tax rates established by the Department are not consistent and vary by municipality; and although the debt relief fund is the responsibility of the Newfoundland Municipal Financing Corporation, the Department entered into agreements with the 13 municipalities for debt relief funding before it was actually approved by the Newfoundland Municipal Financing Corporation. 434 Auditor General of Newfoundland

8 Figure 2 Figure 2 provides a summary of significant dates and related funding amounts for the 13 municipalities which were allocated funding under the Program, as well as an indication of whether the 30% debt to revenue threshold was met. As noted above, and as Figure 2 shows, both the Town of Harbour Grace and the Town of Flatrock were allocated funding under the Program; however, each had a debt to revenue ratio of less than the 30% targeted under the draft guidelines. Debt Relief Program Debt Relief Approval Process 31 March 1999 Municipality Name Financial Review Completed Agreement Signed NMFC Approval Agreement Amount Allocated Amount Debt to Revenue Threshold Met (Yes/No) Burnt Islands 08 Apr Oct Apr 99 $ 194,553 $ 258,297 Yes Fox Cove - Mortier N/A 08 Oct Jan , ,172 Yes Harbour Grace 25 Sep Dec Jan , ,195 No Flatrock N/A 19 Dec Jan 98 36,662 36,662 No Humber Arm South 19 Nov Oct Apr ,197 1,140,168 Yes Norman Cove - Long Cove 22 Jan Mar Apr 99 1,025,000 1,024,871 Yes Campbellton 2Feb98 08 Oct Apr , ,714 Yes New Perlican 25 Mar Oct Apr , ,307 Yes Whiteway 31 Mar Jul Apr , ,946 Yes Summerford 16 Jun Jun Apr , ,420 Yes Trepassy 16 Jun May Jun , ,793 Yes Joebatt s Arm 09 Nov 98 Not Signed Not yet approved Seldom 16 Nov Jul 99 Not yet approved 396, ,318 Yes 296, ,670 Yes $ 5,767,471 $6,061,533 Auditor General of Newfoundland 435

9 Our testing also identified two municipalities which had debt outstanding relating to infrastructure which was only partially completed in the past and therefore not servicing the communities, and for which the Department indicated the municipalities had no intention of completing. The Department entered into agreements with these municipalities to pay amounts from the Debt Relief Fund to offset the related NMFC debt. Details relating to each of these municipalities are as follows. In 1988, funds were approved under the Municipal Capital Works Program for the Town of Flatrock to install a water system, with related debentures totaling $472,995 being issued. Since then, no further funding has been allocated to the system and it remains a dry line. The Department considered there was no need to complete a detailed financial analysis under the Debt Relief Program as it felt the town was in good financial position. Our review indicated that the debt to revenue ratio was less than 30% and therefore the municipality did not meet the targeted criteria for funding under the Program. However, the Department has agreed to allocate $36,662 from the Debt Relief Fund to meet the Council s portion of debt installments to the year In the years 2001 to 2004, the Department is to provide $36,662 of its annual budget to meet installments that become due. The municipality has agreed not to apply for water and sewer capital funding for a 10- year period. The Department s decision to assume the Council s share of the debt appears to based on principle rather than the financial position of the town as would be expected based on the draft Program guidelines and on the review of other agreements under the Program. Funding was approved in 1990 under the Municipal Capital Works Program to install a water and sewer system for the Town of Fox Cove-Mortier. This water and sewer system was capped at the entrance of the municipality. Debentures totaling $455,635 were issued and the town had been required to pay $47,996 annually on a long term basis. The Department agreed to allocate a total of $358,523 under the Debt Relief Program to meet arrears on long term debt and installments to the year In the years 2001 to 2008, the Department is to provide $47,996 of its annual budget to meet installments that become due. The municipality agreed not to apply for water and sewer capital funding for a 15-year period. There was no detailed financial analysis completed relating to this agreement. 436 Auditor General of Newfoundland

10 (b) Program Agreement Approvals As noted above, the final debt restructuring allocation at NMFC often differs from the amount included in the agreements signed between the Department and individual municipalities. This is due to such factors as increases in arrears and interest from the time the agreements are signed until final approval and allocation. In reviewing agreements, it was noted that they were signed by the Department and the municipalities involved prior to receiving approval from the Department of Finance for allocation from the NMFC reserve fund. The Deputy Minister of Finance expressed concerns in this area in a letter to the Deputy Minister of Municipal and Provincial Affairs. The letter states that...we have concerns with the process being followed in these circumstances, since the Minister of Finance is required to give final approval with respect to allocations from the Reserve Fund. To enable the Minister to discharge his responsibilities in a timely manner, I am once again requesting that, in the case of municipal refinancings where it is proposed that some portion of payout amounts be covered through the Reserve Fund, the Debt Management Division be informed beforehand so that the prior approval of the Minister may be obtained. 4. Program Monitoring and Reporting Our review disclosed that monitoring and reporting mechanisms established to measure success towards achieving Program objectives have not been complied with. As noted above, the draft guidelines provide that a Debt Relief Program Review Committee was to be in place to ensure the Program objectives are met, issues resolved, progress reviewed, and guidance and direction given. Our review disclosed there were no regular meetings held or minutes kept relating to this Committee. As well, although the Program Manager did prepare some reports on the status of the Program, there was no evidence that reports on the objectives of the Program were required by or presented to the Committee. We were informed by officials of the Department that the Executive met with the Program Manager on an ad hoc basis. We were further advised that an interdepartmental committee which did exist at the time of our review, had not been established until January The objective of this committee is to coordinate and maintain an awareness of initiatives with respect to municipal financing issues; however, at the time of our review there were no specific terms of reference approved for the Committee with respect to the Debt Relief Program. Auditor General of Newfoundland 437

11 Although not contemplated in the draft guidelines, the Department s Finance Committee has reviewed reports from the Program Manager on municipalities which have been considered and reviewed under the Program; however, the Committee does not regularly review and discuss the Debt Relief Program and again there are no specific terms of reference in place defining its role in relation to the Program. As well, although the draft guidelines indicated a need to monitor the action plans of the individual municipalities, there was no related monitoring strategy in place. The draft guidelines also indicate that overview reports would be periodically provided to the Minister of Municipal and Provincial Affairs to inform the House of Assembly, the Newfoundland and Labrador Federation of Municipalities and other stakeholders of the progress of the Debt Relief Program. Our review disclosed that, as at 31 March 1999, there had been no formal report made to the House of Assembly on progress made on the Program objectives as outlined in Figure 1. It was noted that ministerial statements were periodically made on the status of the Program. Recommendation The Department should ensure that programs developed to address municipal debt issues, such as the Debt Relief Program contain the following elements: well defined and formally approved program objectives and funding criteria; approved guidelines defining program objectives, organizational structure, processes, and expected outcomes; and a process to adequately monitor and report progress towards program objectives. Department s Response The Department has revised its Charter and developed Program Guidelines to ensure that the objectives of the Program are met. The main objective of the Program is to analyze the financial position of those municipalities which have been identified as being in financial difficulty. It will focus on negotiating agreements that will restructure their debt, where necessary, and increase taxes to reasonable minimum levels to improve their financial strength and viability as local governments while meeting current operating requirements and debt obligations. 438 Auditor General of Newfoundland

12 The Department recognizes that the Debt Relief Program will not resolve all of the problems of municipal finance and that other initiatives will be required. To achieve strong financial independence, stability and accountability among municipalities will involve a number of strategies. Some strategies will include training of municipal staff and elected officials; innovative ways of providing infrastructure needs; effective accountability mechanisms; a more effective municipal financing framework; and municipal restructuring and sharing of services. The development initiatives that support these strategies will be a challenge for the Department as it endeavors to develop a local government regime that is self sufficient and provides for healthy and safe sustainable communities. Auditor General of Newfoundland 439