Municipal Liability Servicing Limits
Municipalities may incur liabilities, such as leases and debt, to fund services; however, the maximum amount of liabilities a municipality may undertake is subject to the liability servicing limit. A municipality may not incur a liability if the total annual servicing cost of the aggregate liabilities is greater than 25 percent of annual revenues.
Municipal Liability Servicing Limit Calculation
The Municipal Liabilities Regulation sets the liability service limit at 25% of specific municipal revenues. The revenues used in the calculation relate to those that are primarily within the municipality’s control, such as taxes and fees, unconditional grants and payments in place of taxes.
The limitation applies to the cost to service all borrowing, leases, loan guarantees and general capital commitments that are of a capital nature. Servicing, in this context, means principal and interest on debt, lease payments or other commitments to repay the liability and related financing charges. Contractual payments under a partnering agreement would also be captured by the limitation if the payments relate to items of a capital nature.
The liability service limit, revenue and annual servicing cost are calculated in accordance with the Municipal Liabilities Regulation, Part 1 - Liability limit.
Only revenues considered both controllable by the municipality and sustainable for long periods of time are used to calculate the liability servicing limit. This is considered a good indicator of a municipality’s ability to pay. Revenue used in calculating the limit includes:
- Municipal property taxes*, parcel taxes, local service taxes, 1 percent utility tax
- Payments in place of taxes (also called grants-in-lieu of taxes)
- Fees and charges, except for development cost charges
- Provincial unconditional transfers (small community grants, traffic fine revenue sharing grants and ports competitiveness grants)
- Gaming revenues
- Tax sharing revenue received
- Interest on investments
- Rent, building permits, franchise fees, fines and other revenue earned in the usual course of business
*Adjustments are made for revenue from taxation of Class 4 properties (major industry) in some cases where a municipality is heavily dependent on this source of revenue.
Annual Cost of Servicing Liabilities
The annual cost of servicing liabilities is the total actual principal and interest charges on defined liabilities currently being made, the total of the average implied costs for all defined liabilities that are not yet realized (authorized debt not yet borrowed), and estimates for amounts that would be paid if unrealized obligations (contingencies, guarantees) were realized.
In calculating the annual debt servicing costs the following defined liabilities are included:
- General capital commitments (capital leases)
- Contingent capital commitments (qualified as material in the financial statements)
- Debt under a loan authorization bylaw (debt borrowed under a loan authorization bylaw or short term capital borrowing bylaw)
- Unused borrowing under a loan bylaw (amount authorized under a loan bylaw but not yet borrowed debt)
- Loan guarantees
Exceeding Liability Service Limit
A municipality may exceed the liability service limit with the approval of the Inspector of Municipalities. Approval to exceed the limit only occurs in extreme circumstances, for example when a municipality must address a health or safety concern.
Consultation with the Ministry of Municipal Affairs is recommended if a municipality needs to exceed the liability service limit.
Approval Free Liability Zone
Some liabilities are exempt from the requirement to seek elector approval, including the establishment of an approval-free zone.
The approval-free liability zone is five percent of controllable and sustainable municipal revenue. Once the total annual cost of servicing liabilities exceeds the five percent approval free limit, all subsequent borrowing must receive elector approval.