Reserves Policy

Moncton, New Brunswick

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Page 1 of 6 POLICY Owner Department: Finance Reserves Policy Effective Date: October 18, 2010 Last Reviewed Date: March 1, 2021 Approving Authority: Moncton City Council Replaces No.: Policy 0221 1. Purpose Statement A Reserves Policy is required to establish, maintain, and manage reserve funds that: 1. provide for unanticipated fluctuations in operating and capital activities; 2. set aside funds for the replacement of existing equipment and facilities, as well as for future projects; 3. provide for future operating and capital requirements. The purpose of this policy is to establish consistent standards and guidelines for the establishment and management of reserves. 2. Policy Reserves are a crucial consideration in long-term financial planning and good financial management. The Government Financial Officers of America (GFOA) states that it is essential that governments maintain adequate levels of fund balances to mitigate current and future risks (e.g. revenue shortfalls and unanticipated expenditures) and to maintain a stable tax rate. It is recommended that reserves never be used to pay for ongoing expenses as this would indicate a structural deficit position, which then eliminates the financial protection required by a government. To meet the objectives of this policy, a commitment of funds dedicated to specific reserves will be recommended on an annual basis. The annual budget document to be approved by City Council shall include separate documents for reserves and their accounts and provide estimated additions and uses for the budget period. Reserves Policy Page 2 of 6 3. Benefits The City's objectives in terms of its various reserves are set out in this Policy. By reaching a clear understanding of its reserve objectives, and by continually measuring progress towards achieving those objectives, the City can attain greater long-term fiscal stability and prosperity, and maintain a stable tax rate. Reserves provide stability and protection to a municipality in terms of unusual or unexpected events, unforeseen economic impacts and is used as a tool to fund major capital projects. 4. Authority The establishment of, contributions to, and withdrawals from an operating or capital reserve shall be approved by City Council through resolution or by-law in accordance with the Local Governance Act and/or the Community Planning Act as applicable. 5. Legal and Regulatory Constraints Section 101 of the Local Governance Act of New Brunswick confers power on City Council to create a: 1. General Operating Reserve Fund - This fund balance cannot exceed 5% of the previous year's total general operating budget and it can only be used towards general operating expenses. 2. General Capital Reserve Fund - This fund balance can solely be used for General Fund capital expenses incurred by the municipality. Section 117(7) of the Local Governance Act of New Brunswick confers power on City Council to create a: 1. Utility Operating Reserve Fund - This fund balance cannot exceed 5% of the previous year's total utility operating budget and it can only be used towards general operating expenses of the service or utility. 2. Utility Capital Reserve Fund - This fund balance can solely be used for Utility Fund capital expenses incurred by the municipality. Under the Community Planning Act, there is a statutory requirement to establish and maintain a Land Reserve for the purchase and sale of all lands held for public purposes. 1. Land Reserve Fund - This fund balance can solely be used to acquire and develop land held for public purposes. These are the only reserves the Province of New Brunswick will authorize. Reserves Policy Page 3 of 6 6. Accounts within the Reserve Funds To further manage the funds within these Reserves, specific accounts have been created to aid the City in achieving financial strength and flexibility, as well as improve cash flow management. This policy makes the distinction between these internal accounts, which are managed and reported within these reserves and the actual reserve funds themselves. 1. General Operating Reserve Fund a. Stabilization Account Purpose: The City is exposed to non-recurring costs related to various emergency events or situations: e.g. inclement weather, pandemic. These emergent situations cannot be anticipated and budgeted; consequently, it is not feasible to absorb the cost of such events in other budget areas in any given year, and they may result in an overall deficit for the City. GFOA indicates that the unrestricted fund balance in the general fund should take into account each government's own circumstances. Items that should be considered include, but are not limited to, weather events, volatile revenue sources, and cuts in provincial or federal funding. Nevertheless, GFOA recommends, at a minimum, that governments maintain no less than two months of general fund operating revenues or expenditures. For the City, that would mean close to 17% of the annual budget, which represents $27.2 million of a $160 million budget. In New Brunswick, since this fund balance cannot exceed 5% of previous year's total budget which is significantly lower than best practice, the City will compensate within its Capital Reserves to meet the minimum balances recommended by GFOA. b. Specific Purpose or One-time Account Purpose: The City occasionally undertakes specific purpose or one-time projects that have significant operating costs. If these projects were funded from property taxation, annual spikes and subsequent declines in taxation would result; therefore, it is not prudent to fund these projects from ongoing property taxation revenue (e.g. Université de Moncton Stadium operating contribution, downtown events centre or a large-scale event). This reserve can also be used when there is an unanticipated delay to an approved budgeted item that cannot be completed within its budget year. 2. General Capital Reserve Fund Well-designed capital reserve policies support proactive financial management given the many demands on a government's resources. A well-established policy will help the City manage its substantial investments in capital improvements and provide the City with a strategic tool to use and optimize asset repair and replacement. Reserves Policy Page 4 of 6 The majority of governments around the world have an infrastructure deficit and the City of Moncton is no different. As of 2019, the City has an estimated $200 million infrastructure deficit between the general and utility assets. Maintaining strong capital reserves is essential in protecting the City's long-term financial sustainability, and will serve as the main tool to ensure the City is able to support an acceptable level of debt in its operations. a. Facilities Deferred Maintenance Account Purpose: To fund deferred maintenance for existing facility infrastructure. (e.g. Carpeting, repairs to shingles, floor tiles, and painting repairs). b. Fleet (Lifecycle) Account Purpose: To fund, based on lifecycle analysis, the replacement of municipal vehicles and equipment included in the City's fleet. (e.g. includes the purchase of all City-owned vehicles). c. Unrestricted General Capital Project Account Purpose: To fund future capital projects not specifically identified or funded from other established accounts. This reserve provides financial sustainability protection for project overages and to cover unanticipated costs. It can provide flexibility to the City in a rising interest rate environment or even cover shortfalls in projected "other government funding". Lastly, it can also be used for strategic purposes. d. Capital Replacement (Lifecycle) Account Purpose: To fund future betterments and replacements of existing facility infrastructure. A required contribution has been established through our Capital Maintenance Policy for recent infrastructure acquisitions on a asset-by-asset basis. There is an additional expectation that a blanket annual contribution will be made for infrastructure that existed before the policy was established. (e.g. contribution on asset-by-asset basis for Botsford Fire Station and Crossman Community Centre-Kay Arena, and a general contribution to cover such assets as the farmers market, Coliseum and Thomas Williams House). e. Major Capital Project Account(s) Purpose: To fund or partially fund large construction projects that have been designated as being major capital priorities by Council. (e.g. downtown events centre, new police station, Resurgo Place) Reserves Policy Page 5 of 6 3. Utility Operating Reserve Fund a. Financial Stabilization Account Purpose: The City is exposed to non-recurring costs related to various water operating emergency situations (e.g. high volume of water main breaks). These situations cannot be anticipated and budgeted; consequently, it is not desirable to make major water rate adjustments to absorb the cost of such events. 4. Utility Capital Reserve Fund a. Water General Capital Account Purpose: To provide funds for the expansion, refurbishment, or replacement of the City's utility infrastructure including water treatment, water conveyance and storage projects, water distribution system projects, and water equipment. (e.g. funding to cover project overages of unanticipated costs - items out of scope of original project - such as water main construction, water treatment plant contributions, and construction of water storage facilities) b. Wastewater General Capital Account Purpose: To provide funds for the expansion, refurbishment, or replacement of the City's wastewater infrastructure and equipment. (e.g. funding to cover project overages of unanticipated costs - items out of scope of original project - such as construction of sewer mains or sewer lift stations) c. Meter & Meter Transmitting Unit Replacement Account Purpose: To provide funds for the scheduled replacement of existing meter equipment. This account will permit the City to remain current with technological improvements. (e.g. major overhaul in residential metering system) 5. Land Reserve Fund Per the Community Planning Act, funds received from the sale of land held for public purposes or cash in lieu from developers are to be paid into a special account, and the money in that account is to be used by City Council to acquire or develop land for public purposes. 7. Administration of Reserves Reserve Account Contributions Annual contributions to reserves shall be specific to each account within a given reserve as approved by Council through the annual budgeting process. Periodically, the City's Chief Financial Officer/City Treasurer may recommend appropriations to/from reserves to Council for their consideration and Reserves Policy Page 6 of 6 approval, to further contribute to improving long term financial planning and good financial management. Reserve Account Withdrawals All withdrawals from reserves shall be specific to each account within a reserve and must be approved through a Council Resolution, with the exception of withdrawals from land reserve. Withdrawals from accounts within a reserve must not exceed the account reserve fund balance. Responsibilities The City's Chief Financial Officer shall be responsible for: a. recommending the necessary contributions and transfers so that the City's Accounts within the Reserve Funds are maintained in accordance with this policy; b. conducting an annual review of all designated accounts within the reserve funds; and c. recommending any revisions or amendments to this Policy, as a result of changes in applicable statutes, accounting standards, economic conditions, etc. Interest Reserve funds shall be paid and allocated interest based on prime less 1 basis point on a monthly basis. Closing Accounts within Reserves Funds If the purpose or purposes for which the accounts within a reserve fund was created have been accomplished or the accounts within a reserve funds are determined to be no longer necessary, the Chief Financial Officer shall report to the Leadership Team and Council with a recommendation on both the closure of the accounts within a reserve and the change of intended use of these remaining funds within the reserve. Per the Local Governance Act, no funds can be transferred between reserve funds. Therefore, upon the abolishment of a selected account within a reserve, the funds must be applied to another account within the same reserve fund. New Accounts with Reserve Funds Departments may submit a report that recommends the establishment of a new account within a reserve which must be signed by the Chief Financial Officer and the City Manager and include the following: statement of purpose, funding source, and rationale for establishing funding level. This recommended addition would then be brought forth at the next annual budget deliberation for approval by Council. 8. Administration and Contact City Hall 655 Main St., Moncton, NB E1C 1E8 Telephone: 506.853.3550 Email: [email protected]