Bill C-530 (Historical)

Chris Forbes Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, Department of Finance

Thank you, Mr. Chair.

Thank you to the members of the committee for the invitation to speak before you this morning.

I would like to use my time to explain what the territorial borrowing limits are, the history behind our current policy, the Department of Finance's role in its administration, and to provide some remarks on the Bill before you today.

Under the Northwest Territories Act, Yukon Act and Nunavut Act, Parliament authorizes territorial governments to borrow money. This general authority is restricted by the condition that any such borrowing must be approved by the Governor in Council. The Governor in Council approves territorial borrowing up to a preestablished amount set through Order in Council. This ceiling on the territorial borrowing authority is known as the borrowing limit.

For the Northwest Territories, as my colleague mentioned, this limit is currently $575 million. Orders in Council for Yukon and Nunavut set their borrowing limits at $300 million and $200 million, respectively.

A quick history of the borrowing limits illustrates how the administration of the territorial borrowing authorities has evolved. Originally, the federal government loaned territorial governments money for their capital requirements. Territorial governments were first granted the authority to borrow on the open market in 1983. The federal government has increased the territorial borrowing limits from time to time, in response to territorial requests.

The Department of Finance is responsible for the administration of the three territorial borrowing limits. The administration of these limits is guided by a number of considerations, and I’ll go through three of them now.

The first consideration I'll cover is the capacity of territorial governments to carry debt. The federal government, as you know, makes a significant contribution to support the provision of programs and services in the territories. For example, major transfers from Canada currently account for 76% of the Government of the Northwest Territories' budget, of which the territorial formula financing grant is the major component. The borrowing limits ensure that this funding is not unduly consumed by interest and debt repayment costs. The government reviews the size of the limits when requested by a territorial government. The government then evaluates the territory's economic and fiscal outlook and current borrowings on the basis of the information provided by the territorial government itself. Increases are recommended to the Governor in Council when a request for an increase is supported by economic circumstances.

A second consideration in the administration of the limits is that the territories are responsible for their own decisions. The structure of pre-established limits balances the federal government's statutory responsibility to approve the amounts borrowed by territorial governments with the need to respect territorial authority to make borrowing decisions, individual borrowing decisions, as authorized by the territorial acts. The federal government does not review individual territorial decisions taken within their limits. Territorial governments are then responsible for the exercise of their own authorities.

A final consideration I'll mention now about the administration of the limits is that they support fiscal planning. The borrowing limits described in order in council are fixed until such a time as a territory requests an increase and the government approves one. This structure provides predictability to territorial governments when making long-term fiscal plans.

Last May, again, as Ms. Melhorn indicated, Minister Flaherty indicated to the three territories that there would be a general review of their borrowing limits to ensure that accounting practices within the borrowing limit align with general accounting practices. This review is not the same as the limit assessments that have been done in the past at the request of the territories. This is a review of the operation of the borrowing limits for all three territories to ensure clarity in the treatment of all borrowing instruments available to governments. Territorial officials are being consulted during the review.

I'll conclude with some remarks about Bill C-530. This is the bill that current borrowing authority for the Government of the Northwest Territories be changed to equal 70% of the revenues it projects for the upcoming year. Based on my understanding, this would move the Government of the Northwest Territories' borrowing limit from $575 million to about $950 million and would change the structure from a fixed limit to one with a potential to move or change annually.

My first observation is that the introduction of a variation in the proposed structure doesn't make it clear what the limit will be in future years. A limit that varies from year to year could create challenges for territorial fiscal planners.

My second observation is that Bill C-530 retains the authority for the territorial government to request an additional increase from the federal government. While this could be helpful in a situation where the borrowing limit ends up being lower than projected, it does also put the federal government in a difficult situation if refusing to approve an increase in the borrowing limit could cause the Government of the Northwest Territories to be in breach of its borrowing authority since the approval could potentially be requested after the borrowing terms have been signed.

That ends my remarks. I'd like to thank the committee for the opportunity to speak to you today, and I’d be happy to take any questions you have.

Margaret Melhorn

One other significant anomaly in our government's authority is the inability to borrow without federal cabinet approval. Section 20 of the Northwest Territories Act requires the GNWT to obtain Governor in Council approval to borrow. The most recent order in council approved last April authorizes the GNWT to borrow up to $575 million until March 31, 2015, and up to $500 million thereafter. This requirement for federal approval to borrow is a shortcoming in the NWT Act. We would prefer either to eliminate the requirement altogether or to base it on provisions similar to our fiscal responsibility policy.

Governments must be able to borrow to adequately plan for and deliver program services and infrastructure to their residents. The imposition of a borrowing limit has long been an issue for the GNWT. The Northwest Territories has a significant infrastructure deficit. The territories lack of transportation and energy infrastructure is a barrier to economic development and to the well-being of our residents. Other governments are able to borrow to finance large capital investments and to service that debt either from tax revenues or from revenues generated by the project, such as tolls or power sales.

The GNWT borrowing limit is inadequate to allow for the investment in the infrastructure we require. In the absence of an adequate borrowing limit or additional funding to meet infrastructure needs, the GNWT has two options: reduce spending on core programs and services or not make necessary investments. This means that NWT residents are not able to take advantage of economic opportunities and the GNWT is not able to make investments that will create long-term benefits.

The borrowing limit is part of a continuing dialogue between the GNWT and the federal government. In 2006 we requested that the borrowing limit be changed to reflect the approach to debt and borrowing that we have adopted in our fiscal responsibility policy. In 2007 the limit was increased from $300 million to a more adequate $500 million. In April 2010 the limit was temporarily increased to $575 million to allow the GNWT to assume $165 million in debt associated with the Deh Cho Bridge project.

In May 2010 Minister Flaherty asked his territorial counterparts to participate in a general review of the territorial borrowing limits to clarify the definitions used by all three territories with respect to what constitutes borrowing for the purposes of the limits. The NWT Department of Finance is working with Finance Canada and the other territories to complete this review. The review, however, has created uncertainty for the GNWT. One of its potential consequences is a change in the treatment of some debt. Some changes might give us more room, but other changes might require the GNWT to request an increase in the limit. Currently, the review does not include discussions about the adequacy of the limit.

Any discussion about the borrowing limit should be twofold. It should address both the adequacy of the limit and the definition of borrowing included in the limit. Neither the NWT Act nor the federal order in council defines borrowing for the purposes of section 20 of the act. The GNWT has relied on advice from our own legal counsel as well as that from the Auditor General of Canada to establish our definition.

For the purposes of the limit, the GNWT defines borrowing as bank lines of credit to the extent that they're actually used, other short-term debt, long-term debentures, bond issues, and mortgages. This applies to direct GNWT borrowing as well as to the borrowing of GNWT agencies, including territorial corporations. The GNWT's fiscal responsibility policy provides clear guidelines for responsible spending, borrowing, and debt repayment, and it defines affordable borrowing limits. The policy has played an important role in maintaining Moody's Investors Service's favourable ratings on GNWT debt since it began rating our debt in 2005. Moody's currently rates GNWT debt as Aa1, one of the highest available ratings.

Under the policy, the GNWT only borrows for infrastructure investments, self-liquidating investments, and repayable loan programs. Total debt is considered affordable as long as the debt servicing payments, both principal and interest, are no greater than 5% of our total revenues. If that threshold is exceeded, operating surpluses must be generated in the following two years to permit principal repayments that will bring debt servicing costs to 5% by the third year. The GNWT is accountable for its management of borrowings through performance criteria, thereby ensuring that total borrowing does not exceed our ability to repay it.

The federal order in council limiting the amount the GNWT may borrow sets an arbitrary amount not explicitly linked to the GNWT's capacity to finance debt.

Our 2006 proposal to Finance Canada requested a blanket authority to borrow for the following reasons.

First, the limit is contrary to the principle of territorial autonomy and decision-making.

Second, the limit is too restrictive, especially since approximately two-thirds of the GNWT's debt is self-liquidating--that is, the cost of servicing the debt is financed by a dedicated stream of revenues from tolls and customers, and not by other government revenues.

Third, the GNWT has demonstrated prudent fiscal management and has a fiscal responsibility policy with clear guidelines and a responsible definition of affordable borrowing limits.

Bill C-530 is one approach to increasing the ability of the GNWT to borrow. The bill would somewhat reduce the arbitrariness of the borrowing limit by linking it to the government's revenues. It would also result in a higher borrowing limit. However, the bill does not define what types of borrowing are to be included in the limit. While the GNWT would welcome a higher borrowing limit, if it means other potential liabilities such as unused portions of bank credit or guaranteed debt that is not a draw on general government revenues are included in the definition, then we may be in the same position we are in now.

The GNWT has not performed any rigorous analysis of the bill. Our preferred approach would be to eliminate the borrowing limit completely. As a responsible government, the GNWT would continue to exercise prudent debt management strategies and adhere to the limits within the fiscal responsibility policy.

The GNWT is committed to the current review process under way with Canada and the other territories. The review will create certainty with respect to the treatment of borrowing and debt for the purposes of the limit. However, this review is not considering the adequacy of the borrowing limit to permit the territories to borrow for large-scale resource development, front-end investment for economic growth, and the capital infrastructure investment required for the normal delivery of government programs.

The GNWT would like to change the question from “What is an appropriate limit?” to “Why should a responsible government be subject to an externally imposed limit on the amount it can borrow?” We are committed to our fiscal responsibility policy, which is based on the principle of living within our means and avoiding unaffordable levels of debt. If there must be a legislated borrowing limit, a formula-based approach mirroring the requirements of the fiscal responsibility policy is preferable to an arbitrary amount.

Canada needs to consider its role in the long-term development of the NWT. The size and definition of the borrowing limit have a very real impact on our government's ability to support needed investments in infrastructure that will grow the NWT economy and improve the lives of our residents. A longer-term perspective on the borrowing limit, one that enables the GNWT to make large, financially sustainable investments would be a win for both governments in our efforts to create a sustainable future for the NWT.

Thank you.