Local Government Interfund Borrowing
Interfund borrowing provides municipalities and regional districts the flexibility to internally finance capital projects by temporarily lending funds from one statutory reserve fund to another.
Establishing Reserve Funds
In order to finance long-term capital projects, local governments can establish and incrementally build up statutory reserve funds using their revenue from sources such as taxes, fees, grants and developer contributions. The statutory reserve fund must be established through bylaw.
Often, reserve funds are established for a specific capital project, such as a sewage treatment plant, or a service category, such as fire protection capital works. Because the timing priorities of capital projects may change, local governments may start a capital project before an associated reserve fund has adequate investments to fully fund that project.
Supplementing Financial Shortfalls
Local governments may supplement a capital project financial shortfall by either external borrowing or interfund borrowing. Interfund borrowing is the temporary loan from one reserve fund (where its investments are not currently required to fund capital projects) to a different reserve fund (which has a funding shortfall). Both reserve funds must be established for capital purposes.
Interfund borrowing cannot be used for operating purposes such as revenue anticipation borrowing or other similar forms of liquidity management.
Statutory Interfund Borrowing Requirements
Local governments require good infrastructure and financial planning when borrowing between reserve funds. Prior to interfund borrowing, the local government must consider the timing and amount of the capital spending related to both the lending and borrowing funds. This is to ensure reserve fund money is available when needed by the lending fund.
There are statutory requirement that must be met before a local government may undertake interfund borrowing:
- The money in the lending fund must not be currently required for the purpose of the fund
- The borrowing (or receiving) fund must repay the lending fund (with the interest that the amount would have earned if it had not been loaned) before the lending fund requires the money
- While elector approval is not required for interfund borrowing, the proposed interfund borrowing must be included in the financial plan, which requires public consultation
Long-Term Interfund Borrowing
For long-term borrowing, the local government may wish to backstop the interfund borrowing with an approved loan authorization bylaw, which may be exercised when the lending fund requires repayment. However, there is an underlying risk that the loan authorization bylaw may lapse within five years. To mitigate this risk, interfund borrowing should either be done within the five year time frame or done with an associated temporary borrowing bylaw.
Short-Term Interfund Borrowing
Local governments may also use interfund borrowing strictly as a form of temporary borrowing to finance capital works under an approved loan authorization bylaw. This would be for interim financing during the construction period only, not long-term borrowing.
Regional District Interfund Borrowing
Regional districts should exercise caution when using interfund borrowing because their reserve funds are often associated with vastly different services located in different geographical areas funded by different tax or ratepayers. For this reason, regional districts should do significant internal financial planning before considering interfund borrowing.