Municipalities may wish to establish internal policies and procedures on debt. In greater detail, when a municipality proposes to undertake long-term borrowing (or other long-term financial obligation), the treasurer is generally responsible for updating the limit issued by the ministry and for determining whether there is capacity for the proposed additional annual debt carrying costs within the municipality’s ARL to undertake the planned borrowing. The ARL is updated by a municipality for each proposed borrowing.For most municipalities, the ARL is set at 25% of their annual “own-source” revenues (a ministry-determined amount which includes property taxes, user fees and investment income) less their annual long-term debt servicing costs and annual payments for other long-term financial obligations. The Ministry of Municipal Affairs determines each municipality’s limit annually using a formula in the regulation based on the financial information supplied to the ministry by the municipality through a Financial Information Return ( FIR).The ARL can be described as a 2 step process: The ARL calculation is prescribed by Ontario Regulation 403/02 (Debt and Financial Obligation Limits) under the Municipal Act, 2001. The ARL may be summarized as the maximum amount that a municipality can pay in principal and interest payments in the year for new long-term debt (and in annual payments for other financial commitments) without first obtaining approval from the Ontario Municipal Board. This framework assists municipalities by maintaining their long-term financial health while maintaining public services. However, a municipality may temporarily borrow money to pay for operating expenses while they are waiting to receive taxes and other revenues for the year. They must balance their budgets in accordance with legislation and generally can’t borrow money over the long term to fund current operating expenses. Municipalities can only incur long-term debt for capital projects. Rules include: Long-term borrowing for capital projects Ontario’s regulatory framework for municipal borrowing helps municipalities to use debt responsibly while regulating their overall ability to borrow. Long-term debt can be used to fund things like capital projects for example, rehabilitating a bridge or constructing a water treatment facility. Municipal debt is not a revenue tool, but it can be an important capital financing tool. Debt is borrowed money that needs to be paid back (usually with interest) later.
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