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For Information Only

Consolidated Reserves and Reserve Funds Balances as of December 31, 2015



Presented To: Audit Committee
Presented: Tuesday, Jun 21, 2016
Report Date: Tuesday, Jun 07, 2016
Type: Correspondence for Information Only



Ce rapport est disponible en anglais seulement conformément aux exigences de la Politique sur les services en français de la Ville du Grand Sudbury.
Signed By

Report Prepared By
Apryl Lukezic
Co-ordinator of Budgets
Digitally Signed Jun 7, 16

Recommended by the Department
Ed Stankiewicz
Acting Chief Financial Officer/City Treasurer
Digitally Signed Jun 7, 16

Recommended by the C.A.O.
Ed Archer
Chief Administrative Officer
Digitally Signed Jun 7, 16

Resolution

For Information Only

EXECUTIVE SUMMARY:

The purpose of this report is to provide Council with a snapshot of the balances in the reserve and reserve funds at December 31, 2015.

Overall, the consolidated reserve and reserve funds have increased $8.7 million from $157.3 million to $166 million during 2015.

In summary, the following are the highlights:

 

(in millions)
2015
 Balance: January 1, 2015 ( non consolidated)
$156.2
Add: Interest
3.0
 Less: Net transfers from Operating
8.7
         Net transfers to Capital
(3.0)
Balance: December 31, 2015
164.9
 
 
Add: Reserves of Consolidated Entities
1.1
 
 
 Balance: December 31, 2015
$166.0

 

 
 
 
 
 
 
                                                                       
The non consolidated balances consist of:
 
(in millions)
2014
2015
Reserves
5.6
8.2
General Reserve Funds
53.2
58.1
Capital Financing and other Capital Reserve Funds
97.4
98.6
Total Reserve and Reserve Funds
$156.2
$164.9
 
BACKGROUND:
 
Please see Appendix A for tables illustrating the trends in reserve and reserve funds over the past five years.
 
Please see Appendix B and C which provides a more detailed explanation of each of the City’s reserves and reserve funds as well as examples of projects within the committed balances at the end of 2015.
 
Reserves and reserve funds are generally set aside for significant future purchases, to replace major capital infrastructure, are accumulated to meet a growing future liability, or are simply accumulated to provide a buffer for significant unanticipated expenditures beyond the control of Council.
 
The main difference between a reserve and a reserve fund is that a reserve does not earn interest, whereas a reserve fund is in a separate fund and is credited, on a monthly basis, with the interest it has earned.
 
As outlined in the BMA study, reserves and reserve funds are a critical component of a municipality’s long-term financing plan. The purpose for maintaining reserves, as outlined in the report, is to:
 
  • Provide stability of tax rates in the face of variable and uncontrollable factors (consumption, interest rates, unemployment rates, changes in subsidies)
  • Provide financing for one-time or short term requirements without permanently impacting tax and utility rates        
  • Make provisions for replacements/acquisitions of assets/infrastructure that are currently being consumed and depreciated
  • Avoid spikes in funding requirements of the capital budget by reducing their reliance on long-term debt borrowings
  • Provide a source of internal financing
  • Ensure adequate cash flows
  • Provide flexibility to manage debt levels and protect the municipality’s financial position
  • Provide for future liabilities incurred in the current year but paid for in the future
 
Reserves offer liquidity which enhances the municipality’s flexibility, both in addressing unplanned operating requirements and in permitting the municipality to temporarily fund capital projects internally. The level of reserves and reserve funds is a key measure of the financial health of a municipality. Compared to other municipalities in Ontario, the City is below the median as it pertains to reserves and reserve funds as a percentage of total taxation, as identified in the 2015 BMA municipal study which is based on statistics for 2014. The ratio used is total reserve and reserves funds (excluding water/wastewater) as a percentage of taxation revenues. In 2014, 35 of 103 participants in the study have a lower percentage than Sudbury. The results across the survey range from a low of -12% to a high of 193% in 2014. For 2014, the City remained at the same level of 54%. 
 
2015 Reserves and Reserve Fund Balances
 
The reserve balance as of December 31, 2015 of $164.9 million includes $8.2 million in reserves, $58.1 million in general reserve funds and $98.6 million in capital financing reserve funds. The 2015 forecasted reserve and reserve fund balances presented to Finance and Administration Committee on March 4, 2015 included $2.3 million in reserves, $43.8 million in general reserve funds and $83.1 million in capital financing reserve funds. The primary difference between the 2015 forecast and actual yearend results are the delay in spending funds set aside for capital projects as these are completed over several years and estimated spending was based on the budgeted amounts.
 
Of the total balance of $164.9 million, there are reserves and reserve funds which are included in a “committed” reserve funds for a specific project or program which accounts for approximately $77 million. Refer to Appendix B and C which provides additional information on these committed reserve funds.   
 
The annual operating and capital budgets as approved by Council include draws from reserves and reserve funds in order to fund various expenses such as capital projects which are completed over several years or funds set aside for significant capital projects to be completed in the future, or deductibles for insurance claims, sick leave payouts and so on. 
 
The funds remain in committed reserve funds as approved by Council in the annual budgets (or supplemental Council reports throughout the year) until the expenses have been paid, which may occur over several years. Any capital projects that have reserve funds identified as a funding source that are cancelled at a later time, would be uncommitted in order to use for future capital projects/expenses or used to fund over-expenditures in other capital projects in accordance with the Capital Budget Policy.
 
By-law
 
By-law 2015-9, being the by-law to establish and continue reserves, reserve funds and trust funds, is reviewed on a periodic basis and recommendations to establish, discontinue or consolidate reserves are brought to Council for approval, and for authority to amend the By-law. 
 
Trust Funds
 
Trust funds are not included in this report. Trust funds are monies of others, being held in trust by the City, for specific purposes. The money is spent on the intended purpose or returned to the original source. Examples of trusts are the cemetery trust where money has been received and is held in trust to ensure perpetual care and maintenance of the cemeteries, or the funds belonging to residents of Pioneer Manor being held in trust for them.
  
Deferred Revenue - Obligatory Reserve Funds
 
Obligatory Reserve Funds are not included in this report as they represent deferred revenues. The balance as at December 31, 2015 was $36.6 million, down from $38 million in 2014. Deferred Revenue-Obligatory Reserve Funds, that by nature of the revenues received, involve restrictions on their use and are not available for the discretionary use of Council. The Obligatory Reserve Funds includes Federal and Provincial Gas Tax Revenues, various deposits (ie. parks, asphalt, etc) relating to subdivisions and site plan agreements, Building Permit Revenues and Development Charges collected but not earned. The decrease mainly relates to spending on capital projects funded from Provincial Gas Tax revenues due to timing of capital expenditures (transit buses).  In addition, there are development charges collected but not earned due to the timing of the capital projects such as the Fire/EMS Station Development and the Police Headquarters Expansion.
 
Long Term Financial Plan
 
The Long Term Financial Plan, adopted by Council, references reserves in a number of its recommendations:
 
1.6        Plan for the replacement of infrastructure through the use of life cycle costing and the development of replacement reserves.
 
5.2        Undertake regular reviews of remaining life and condition of assets and determine required annual reserve contributions sufficient to ensure that 90% of approved infrastructure rehabilitation / replacement schedules can be met at the required time.
 
8.1        Facility, equipment and infrastructure replacement reserves should be established and
funded to ensure that 90% of approved infrastructure rehabilitation / replacement schedules are met (long-term), as determined in point 5.2
 
8.2        Establish a Stabilization Reserve for programs that are susceptible to significant annual expenditure fluctuations (eg. Winter Maintenance). Program budgets should be based on a moving five year historical average of program spending. In years when surplus funds occur in these programs, surpluses should be reserved, provided an overall City surplus exists. Where the City’s overall surplus is less than the program surplus, funds should only be reserved up to the level of the overall City surplus.
 
8.3        Establish reserves to provide funding for future liabilities (eg. sick leave). Contributions to these reserves should be set, at a minimum, at an amount sufficient to ensure the liability does not increase.
 
The City needs to address these recommendations through the establishment of and continuation of increased funding for reserves. 
 
CONCLUSION:
 
It is recommended that the City continue to implement and foster prudent reserve and reserve fund policies, especially in light of the intense capital financing pressures which it faces over the next five to ten years. 
 
In addition, it is important that reserves and reserve funds are maintained in the event that unanticipated expenditures are incurred or if revenues are not received in order to minimize impact on future property tax levy rates.