A3

ADMINISTRATIVE REPORT

Date: October 16, 2000
Author/Local: Ken Bayne / 7223

RTS No: 01714

CC File No:

TO: Vancouver City Council

FROM: General Manager of Corporate Services / Director of Finance

SUBJECT: 2000 Debenture Program

RECOMMENDATION

A. THAT the City proceed to market a City of Vancouver debenture issue of up to $80 million.

B. THAT the Director of Finance be empowered to act and instruct the City's Fiscal Agent to proceed with the issue, after consultation with the Mayor, the Chair of the City Services and Budgets Committee, and the City Manager, or a majority of them, and to set the rate, price, and other terms on which the debentures will be marketed.

It should be noted that once the City has agreed to issue the debenture, Council will be required to pass the appropriate borrowing by-law prepared by the Director of Legal Services as part of the standard documentation package for the debenture issue.

C. THAT, if the debenture issue is sold in Europe, the appropriate officials, as determined by the City Manager, be authorized to travel to London, England to prepare and sign the necessary legal agreements.

COUNCIL POLICY

Council gets its authority to issue debentures from two sources. Under provisions of the Vancouver Charter, Council has the authority to approve borrowing authority for water and sewer purposes. For all other purposes, Council's authority to approve borrowing authority and to issue debentures follows from approval of the electors to specific borrowing questions normally associated with the City's capital planning process.

The requirement to borrow funds to finance capital expenditures is established by Council at the time of the approval of the annual Capital Budgets.

As a pre-condition to an external debenture issue, City Council authorizes the Director of Finance to set the rate, price and other terms and conditions on which the debenture issue will be marketed, including the power to instruct the City's Fiscal Agent to proceed with the issue. In doing so, Council commits itself to follow through with the debenture issue and to pass the appropriate borrowing by-law after the debentures are sold.

PURPOSE

The purpose of this report is to seek Council authority to market an external debenture issue in order to raise the funds required to undertake certain capital works.

BACKGROUND

The City has an on-going program of borrowing by debentures to finance capital expenditures. This program is tied to the City's capital expenditure planning process. Under normal circumstances, debenture borrowing is paid off over a ten year period, so that, the cost of the capital works is spread out over that period of time. The City is required to make full provision in its annual budget for the principal and interests costs associated with its borrowing program.

The City completed two debenture issues in 1999. In July, a $60 million issue was sold internally to the City's Sinking Fund. In October, an $80 million issue was sold in the Canadian market. The financing plan associated with the 2000 - 2002 Capital Plan contemplates a further debenture issue of up to $80 million in the fall of 2000 or early 2001.

The timing for an issue is influenced by both the cash flow considerations (ie. when the funds are required to finance capital expenditures) as well as the trends for market acceptance of an issue and prevailing interest rates. The City utilizes RBC-Dominion Securities as its fiscal agent to provide advice on how to structure the debenture issue to make it attractive in the market and as to when to enter the market to ensure a successful issue.

DISCUSSION

Staff have been monitoring cash balances and anticipate that, by the end of October 2000, the Capital Fund will have expended the proceeds of the previous borrowings and will be financing expenditures from interim sources. The cashflow projections indicate that a debenture issue in the range of $80 million would be appropriate to carry the Capital Fund to the fall of 2001 when the City would again be looking to issue debt.

Staff have also been tracking interest rates and market conditions. Despite increases in short term rates over the last few months, rates on longer term issues remain historically low. Analysts are divided on the direction for rates during the next six or so months so that it is important that the City be positioned to proceed to market, including having the necessary approvals in place. With that in mind, staff have begun preparations for an issue. Should we not proceed to market before the end of the year, staff would return to Council in the new year to confirm our authority to proceed.

In marketing a debenture issue, the borrower needs to have complete flexibility to decide on the timing of the sale, the structure of the issue, the market into which the issue will be offered (public, private, domestic, Euro) and the interest rate and price of the issue, right up to the point of sale. The time frames for obtaining Council approval do not support this degree of flexibility. It has been Council practice for many years to vest the authority to conduct the sale with the Director of Finance and a small group consisting of the Mayor, the Chair of the City Services and Budgets Committee and the City Manager. Essentially, this group is empowered to make the final decisions leading to the sale of the debentures. Once this group approves the sale, Council is committed to pass the necessary by-law as part of the debenture documentation package. This arrangement has worked very well in the past and is again recommended for the 2000 issue.

The City has an excellent credit rating, with the three main agencies setting the City's bond rating at triple A. This credit rating not only makes City debentures an attractive investment in domestic markets but opens the door to issues in other markets as well. On five previous occasions, most recently in 1996, the City issued debentures in the Euro-Canadian market at a lower cost than would be available in the Canadian market. Although both present market conditions and the size of the issue indicate that the Euromarket is not a realistic option for the upcoming issue, that option should remain open should the situation change. If the 2000 debenture issue is sold in Europe, it may be necessary for City officials to travel to London, England to close the sale and execute the required documentation.

The 2000 debenture issue will be for up to $80 million Canadian. Based on a review of our cash requirements, it is anticipated that the borrowing will be comprised of the following authorities associated with four recent Capital Plans:

	Capital Plan
Category	1991 - 1993	1994 - 1996	1997 - 1999	2000 - 2002	Proposed Borrowing
	($000)	($000)	($000)	($000)	($000)
Sewers				17,015.0	17,015.0
Waterworks				18,350.0	18,350.0
Streets & Other Public Works	1,038.5		7,728.1	18,453.6	27,220.2
Public Safety		857.0		2,700.0	3,557.0
Park & Recreation				13,857.8	13,857.8
Totals	1,038.5	857.0	7,728.1	70,376.4	80,000.0

The proposed issue involves $35,365,000 in borrowing authority approved by Council for Sewer and Water projects and $44,635,000 approved by the electorate for general purposes. The issue would complete the borrowing for the 1991 - 1993 and 1997 - 1999 Capital Plans and begin the borrowing program for the 2000 - 2002 Capital Plan. Outstanding borrowing authority related to the 1994-1996 Capital Plan will be $226,000 and will not be utilized until this amount is budgetted.

The 1991 - 1993 borrowing authority will have to be utilized before year-end or it will lapse. If the City does not proceed to issue a debenture this year, staff will return to Council before the end of the year for authority to issue a small internal debenture in order to utilize that authority before it lapses.

CONCLUSION

From time to time the City needs to borrow capital funds by issuing debentures in the capital markets. The City's borrowing requirements and current market conditions suggest that it would be appropriate to proceed to market a City debenture issue in the near future.

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____________________________________________________________________________

City Manager___________________ Date___________________________ This report has been prepared in consultation with the departments listed to the right, and they concur with its contents. General Manager ________________ Date___________________________

Report dated__October 16, 2000 Author__Ken Bayne__ Phone_7223_ Concurring Departments ______________________________ ______________________________ ______________________________

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(c) 1998 City of Vancouver