TOWNSHIP OF ESQUIMALT STAFF REPORT
MEETING DATE: July 13, 2026 Report No. FIN-26-014
TO: Committee of the Whole
FROM: Ian Irvine, Director of Financial Services
SUBJECT: Debt Analysis
RECOMMENDATION:
Recommendation
That the Committee of the Whole: (i) receives this report for information and (ii) recommends that Council approve the Debt Management Policy FIN-25 as attached to Staff Report FIN-26-014.
Body
EXECUTIVE SUMMARY:
Council directed staff to provide an analysis of available municipal debt options and information regarding the existing Township debt issues. This report provides these details and discusses the related legislation as well as the potential benefits of a formal debt management policy.
BACKGROUND:
The Township's current long term borrowing approach is intended to optimize financial capacity to advance sustainable service delivery. The Township is developing a long-term capital plan that is aimed at achieving sustainable service delivery over time which includes commencing work on deferred replacement plans and targeting sustainable service delivery for aging assets. Infrastructure for roads, linear systems, and public facilities represents the Township’s most significant long-term service responsibilities. As previously reported to Council, many core capital assets are approaching end of life and the scale of renewal required exceeds the existing reserve contributions.
As Township revenues are calculated and generated annually, any fluctuations directly impact residents. Attempting to fund capital asset replacement solely through reserves would require significant tax increases, reduce flexibility to complete other projects, and risk escalating capital costs while waiting for reserves to accumulate. While capital asset replacement is critical, it requires a structured approach to planning and managing these pressures. In addition to reserves, debt acquisition may be used within a broader financial strategy to fund needed capital infrastructure and maintain stable and predictable tax rates. While there are benefits to accessing debt, it comes with increased overall costs.
Long-term debt allows governments to acquire or build capital assets sooner by borrowing up front, but it increases the total cost of the asset through semi-annual interest payments. Issuing debt can also be a useful mechanism for local governments to smooth out their expenditures and create a more predictable cash flow by spreading out the debt servicing repayments over multiple generations. At the same time, it allows municipalities to finance infrastructure development seen as crucial to the overall economic development of the community.
ANALYSIS:
Debt is a deliberate tool that may be used within a broader financial strategy to fund needed capital infrastructure. Used responsibly, debt enables municipalities to align the cost of long-life assets with the period over which it is used, maintain more stable and predictable tax rates, and deliver projects when they are needed rather than facing escalated capital costs in a future year while waiting for reserve funds to accumulate. For municipalities, there are a few options available for capital project funding.
Borrowing Options
While short term and internal borrowing options can provide some capacity and flexibility to municipalities, most of the borrowing for capital asset infrastructure would be secured through long-term debt. The Township’s borrowing process for long term debt issuances is stipulated by provincial legislation, including the need for approvals by Council, the regional district, the provincial government and, in some instances, the public.
Short Term
Municipalities can finance smaller capital undertakings through short-term borrowing without electoral approval. This borrowing must be repaid within five years from the date of issue and the maximum amount of total short-term capital borrowing for municipalities is limited to $150 per capita. Using an estimated population of 18,000, the Township’s total short-term limit would be $2.7M and any short-term borrowing would be considered against the total allowable debt limit.
Interfund Borrowing
Interfund borrowing provides municipalities the flexibility to internally finance capital projects by temporarily lending funds from one statutory reserve fund to another. Both reserve funds must be established for capital purposes and all amounts, plus interest, must be repaid over time to the initial reserve fund.
Long Term
Municipalities in BC are legislated to borrow from the Municipal Finance Authority (MFA), The MFA is an independent body that pools the borrowing and investment needs of communities and provides a range of low-cost and flexible financial services. These significant savings on interest costs are ultimately passed on to the local taxpayers.
New long term debt issues are often funded by MFA through 10-year bonds and while the borrowing term may be up to 30 years, loans longer than 10 years are typically refinanced at the current market rate every 5 years, following the initial 10-year period. Interest is paid semi-annually on the loan and principal payments are made once per year.
To obtain long-term capital borrowing, most governments draft a loan authorization bylaw. This bylaw must include the purpose for the borrowing, the maximum amount and the maximum duration of the borrowing. After three readings and Ministerial approval by the province, the bylaw may then be subject to an electoral approval process before it is adopted.
Township’s Liability Servicing
The provincial government mitigates borrowing risk by capping the annual liability servicing costs (interest and principal payments) for each municipality. Under legislation, liability servicing costs cannot exceed 25 percent of eligible municipal revenue. For the Township, eligible 2025 revenue was $51,453,912 which resulted in an annual liability servicing limit of $12,863,478. For 2025, the Township’s total annual servicing costs are $2,228,269, or approximately 17% of the allowable amount. Of this amount, the public safety building servicing costs are $1,732,477, and assuming rates remain unchanged over the term, total repayment costs for the $35,000,000 loan would be $41,858,620, net of the actuarial adjustment.
While the Community Charter requires elector approval for some loan authorization bylaws, Section 180 affords exemptions when this approval is not required. One such exemption relates to the “approval free liability zone”. Under the legislation, if a municipality’s annual servicing costs (after new issuances) do not exceed 10% of annual eligible revenue, the requirement to obtain electoral approval would not be mandatory. This limit was previously 5% until the provincial government approved an increase in June 2025. Under the previous limit, the Township could have taken on only $344,391 in additional servicing costs before needing to obtain electoral approval. Currently, this amount has increased substantially to $2,917,050.
Debt Policy
The topic of debt is discussed in the Township’s Financial Sustainability, Tax and Revenue policy however there is no separate debt management policy that currently exists. A formal debt management policy has been drafted and attached to this staff report. This policy is intended to allow for increased governance around the use of debt funding for high priority infrastructure spending and defines the rules, authorities and limits for borrowing. Additionally, it outlines the guiding principles and objectives to assist staff and Council in decision making with a focus on providing the Township with greater financial stability.
OPTIONS:
1. Recommendation:
That the Committee of the Whole: (i) receives this report for information and (ii) recommends that Council approve the Debt Management Policy FIN-25 as attached to Staff Report FIN-26-014.
2. If the Committee wants to change the Debt Management Policy, it could provide that information and direct staff to amend the draft policy and present that to Council for review and approval.
That the Committee of the Whole recommend that Council direct staff to amend the draft Debt Management Policy FIN-25 and return to Council for approval.
COUNCIL PRIORITY:
Good Governance and Organizational Excellence
FINANCIAL IMPACT:
There are no financial implications as a result of this report.
COMMUNICATIONS/ENGAGEMENT:
There are no communications or engagement requirements associated with this report.
TIMELINES & NEXT STEPS:
If significant changes are recommended by the Committee, a revised Debt Management Policy would be presented for review and consideration at a Council meeting in September 2026.
REPORT REVIEWED BY:
1. Sarah Holloway, Manager of Corporate Services, Reviewed
2. Dan Horan, Chief Administrative Officer, Concurrence
LIST OF ATTACHMENTS:
1. Debt Management Policy FIN-25