ADMINISTRATIVE REPORT

Date: January 10, 2002
Author/Local: Ken Bayne / 7223

RTS No: 02492

CC File No: 1611

Council: January 22, 2002

TO: Vancouver City Council

FROM: General Manager of Corporate Services / Director of Finance

SUBJECT: 2002 Debenture Program

RECOMMENDATION

A. THAT, under the authority provided in Section 242 of the Vancouver Charter, Council approve the following borrowing authorities in advance of the 2002 Capital Budget:

- Sewers (Vancouver Charter, s. 242) $12,985,000
- Waterworks (Vancouver Charter, s. 242) $9,950,000
- Public Works and Fire (plebiscite authority) 10,573,600
- Parks and Recreation (plebiscite authority) 4,015,700

Total $37,524,300

B. THAT the City proceed to market a City of Vancouver debenture issue of up to $100 million.

C. 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.

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 one debenture issue in 2001. In February, 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 early in 2002. 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 during the first half of 2002, the Capital Fund will have expended the proceeds of the previous borrowing and will befinancing expenditures from interim sources. The cash-flow projections indicate that a debenture issue in the range of $80 million to $100 million would be appropriate to carry the Capital Fund for a period of up to 12 to 14 months, into 2003.

Staff have also been tracking interest rates and market conditions. Both short term and long term interest rates continue at their lowest levels in many years as a result of a weak economy which leads to dramatic rate reductions by the central banks in both the United States and Canada. Analysts are suggesting that rates at or below current levels will be experienced over the next few months. As a result, it is important that the City be positioned to proceed to market a debenture issue, including having the necessary approvals in place.

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, Europe) 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 to vest the authority to conduct the sale with the Director of Finance and a 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 2002 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.

The 2002 debenture issue will be for $80 million to $100 million Canadian, the final decision being based on the timing of the issue and market conditions. Based on a review of cash requirements, it is anticipated that the borrowing will be comprised of the following authorities associated with recent Capital Plans:

	2000 - 2002 Plan
Category	Existing Authority	New Authority	Proposed Borrowing
Sewers	17,015,000	12,985,000	30,000,000
Waterworks	20,050,000	9,950,000	30,000,000
Public Works & Fire Facilities	22,426,400	10,573,600	33,000,000
Park & Recreation	2,984,300	4,015,700	7,000,000
Totals	$62,475,700	$37,524,300	$100,000,000

The proposed issue is expected to involve up to $60,000,000 in borrowing for Sewer and Water projects. This borrowing authority has been provided by Council as part of recent Capital Budgets ($37,065,000) and additional authority ($22,935,000) is recommended in this report, in advance of the 2002 Capital Budget. The balance of the issue ($40,000,000) has been approved by the electorate for Public Works and Fire Facilities and for Parks and Recreation.

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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(c) 1998 City of Vancouver