Reserve/Reserve Fund Procedure

Purpose statement

Under the authority of Council, reserves and reserve funds (R&RFs) are appropriations from the Town’s net revenues designated for purposes that may extend beyond the current fiscal year. External funding sources, which include legislated growth funding tools (GFTs) and funding programs from other levels of governments, are used for prescribed purposes and are required to be segregated from the general reserves of the Town. R&RFs form an integral part of the municipal budget planning process and long-term financing plan that contributes to the municipality’s sound financial position. The primary purposes are:

• To provide stabilization in the face of variable and uncontrollable factors (e.g. growth, interest rates, changes in macro-economic trends) and to ensure adequate and sustainable cash flows to the organization;
• To provide financing for one-time or short-term requirements without permanently impacting tax and other rates;
• Provide a source of internal financing;
• To make provisions for replacement of capital assets to sustain infrastructure;
• To provide funding sources for infrastructure needs attributed to growth;
• To provide funding for program initiatives to achieve Council’s strategic goals;
• To provide flexibility to manage debt levels and protect the Town’s financial position; and
• To provide for future liabilities incurred in the current year but paid for in the future.

Scope

This procedure provides guiding principles for the establishment, continuance and use of R&RFs and summarizes the Town’s legal authority and standards of care in relation to those financial provisions.

Reserves are used to offset fluctuations and stabilize the operating and capital budgets. They typically cushion the impact of major expenditures on the tax rate in any one-year period and also provide a stable funding source for costs to maintain assets in a state of good repair as guided by the Asset Management Plan (AMP).

Reserve Funds are typically established through a by-law of Council, or by a requirement of Federal or Provincial legislation, or by a funding agreement (e.g. Development Charges Act, Gas Tax). Reserve Funds are for a specific purpose and segregated from general revenues of a municipality to meet the financial requirements of a future event. Reserve Funds are further sub-divided into discretionary and obligatory reserve funds.

Procedure

Guiding principles

R&RFs are governed by the provisions and requirements of the Municipal Act, 2001 and its regulations as well as Public Sector Accounting Standards (PSAS) and Generally Accepted Accounting Principles (GAAP).
All R&RFs shall be established, maintained, and used for a specified purpose authorized by Council direction, this procedure, statute, or by-law. 
They are established and utilized by the Town to assist the municipality in maintaining a strong financial position by:

• Buffering the impact of unusual or unplanned cost increases or revenue curtailment; assisting with stable and predictable tax rates year over year;
• Providing financial flexibility to respond to extraordinary environmental, economic, or other events; and
• Providing financing for capital projects and program operations, ensuring that capital assets/infrastructure are properly maintained in a state of good repair as guided by the AMP.

Town’s R&RFs shall be supported by the Financial Control Policy, the Financial Control Procedure, guidelines and, where required by-laws that support financial planning by:

• Identifying contribution sources and projected disbursements required to meet planned future obligations to be funded;
• Ensuring disbursements from R&RFs are used for their intended purpose and have Council approval; and
• Ensuring the sustainability of Town programs by providing planned annual contributions for the maintenance of R&RFs at target levels. 

Appendix A of this procedure, the Reserves/Reserve Funds list, includes a list of all R&RFs including the purpose, revenue source, and target balance.

In accordance with the Corporate Debt Policy, debt to non-obligatory R&RFs should not exceed the ratio of 1:1 as recommended by the credit review agencies. This is a key financial indicator of the financial sustainability of the Town and contributes to the credit rating of Halton Region, securing a low cost of borrowing for the Town. 

Types of funds

Reserves and discretionary reserve funds

• Operating
  • To address expenditure variations which result from cyclical spending/revenues or for contingencies for major expenditure events 
• Stabilization
  • To offset in-year revenue shortfalls;
  • To offset in-year expenditure overages due to unforeseen or emergency situations;
  • Are restricted to extraordinary or unforeseen one-time events and may not be used to balance operating budgets
• Asset specific
  • To support on-going life cycle requirements, including replacement of assets, to maintain equipment and buildings in a state of good repair
• Capital 
  • To minimize risk, support future initiatives, and provide for unknown contingencies;
  • To provide for infrastructure replacement and renewal 
• Program specific
  • To fund self-supported program operations and capital requirements (e.g. Cemetery, Harbours, Parking, Stormwater)

Obligatory reserve funds
Legislated funds that must be segregated from other funds and used only for their prescribed purpose

Establishment of reserves and reserves funds

• Council, on the recommendation of the Treasurer, may establish a reserve or discretionary reserve fund, where advisable, and shall establish an obligatory reserve fund where required pursuant to legislation or agreement.
• The authorizing report which recommends the establishment of a reserve or reserve fund must include the following:
  • Statement of purpose;
  • Rationale for appropriate funding level and target, if any;
  • Initial contribution, if any; and
  • Contribution policy.

Use and administration of reserve and reserve funds

• Finance staff, and any applicable department staff, shall review reserve and reserve fund balances on an ongoing basis to ensure the Town is well positioned to meet its long-term financial commitments and take advantage of financial opportunities that may arise.
• All appropriations to or from reserves or reserve funds must be in accordance with Town policies and procedures (i.e. Financial Control Policy and Procedure, Annual Budget policy, and this procedure) and/or authorized by a Council resolution or adopted budget document.
• The Treasurer, or their designate, shall, in consultation with program staff and subject to compliance with legislative and procedure restrictions, determine if:
  • The use of a reserve or reserve fund is an appropriate funding source for a program in the operating or capital budget;
  • Funds should be contributed to a reserve or reserve fund, and if so, the funding source;
  • An increase in contributions is required through the budget process to achieve target levels.
• If funds are withdrawn from a reserve or reserve fund and not required, they shall be returned to their original source. If the original source cannot be traced or has been closed the funds shall be transferred to the general capital reserve.
• The Treasurer, or their designate, subject to any legislative restriction, is authorized to make contributions to any tax supported reserve or reserve fund to:
  • Reduce or eliminate unanticipated changes in future years’ tax rates that may otherwise occur due to changes in the surplus from year to year; or
  • In accordance with the Financial Control Procedure, any difference between actual assessment growth and budgeted assessment growth will be balanced with the Tax Rate Stabilization reserve in order to keep the tax levy increase at the level in the Council adopted budget. 
• Year to date inflows to and outflows from each reserve and reserve fund shall be reported to Council quarterly through the financial progress report.
  • Reserve funds with specific legislated reporting requirements shall also be reported to Council annually on their transactions in accordance with the requirements of the legislation (e.g. Development Charges Act, Planning Act).
• The use of monies in R&RFs is subject to compliance with this procedure. 

Internal borrowing

Internal borrowing to cover interim servicing requirements or internal financing is permissible, subject to any legislative restrictions, Council authorization, and the following requirements:

• Establishing and documenting a repayment plan, not to exceed a reasonable term or the life of the need;
• Applying interest, equivalent to the Town’s cost of borrowing at time of internal borrowing, or as prescribed by legislation governing specific reserve funds to the outstanding amount borrowed.

Closing reserves and reserve funds

If the purpose for which the reserve or reserve fund was created has been accomplished, the Treasurer, in consultation with program area staff and, subject to any legislative restrictions, shall report quarterly with recommendations on:

• The closure of the reserve or reserve fund; and
• The disposition of any remaining funds.

Investment interest allocation

• R&RFs monies shall be invested in accordance with the Town’s Investment policy and procedure.
• Earnings from combined investments shall be credited to each fund in proportion to the balance of the fund. 
• Where a fund is in a negative position, interest will be charged to the fund.
• Unless directed by Council, operational and stabilization reserves do not earn interest and capital related reserves do earn interest.
• Interest shall be applied to Reserve Funds as directed by Council or if required by legislation.
• All R&RFs that are eligible to receive interest through this process will be budgeted investment earnings based on an estimated rate of return and average balance of the individual R&RFs for the year.
• At year end, the actual interest earned will be determined based on actual average balances of the R&RFs and the actual rate of return on the portfolio.

Capital gains/losses on investment, including distributions from investments in equities, will be allocated to the tax rate stabilization reserve at year end.

Annual review

R&RFs shall be reviewed annually to ensure they are still meeting the needs of the Town. The review also encompasses an evaluation of the alignment of the Town’s existing R&RFs to current strategic goals and evolving program pressures, achievement of target balances, and examining opportunities to consolidate similar funds to improve financial flexibility. The results of the review shall be reported in the year-end financial progress report or Annual Budget to Council and shall include recommendations, subject to legislative restrictions on:

• Closure of those R&RFs that have accomplished their purpose, 
• Opportunities for consolidation,
• Opportunities for reallocation between reserves based on target balance, 
• To fund an otherwise unfunded reserve or reserve fund to an appropriate level,
• The disposition of any remaining funds, and
• Any necessary changes to this policy.

Definitions

Asset specific reserves – means reserves used to fund the various vehicle and equipment replacement across the Town and to maintain buildings in a state of good repair. Contributions from the operating budget into these reserves are reviewed in order to ensure future replacements are sustainable.

Capital reserves – are utilized to assist in the financing of program initiatives, supplement capital levy funding for infrastructure renewal, provide Town share of financing for growth projects, and provide for unknown capital contingencies.


Council – means the Council of the Town of Oakville.

Discretionary reserve funds – means reserve funds created at the discretion of Council pursuant to the Municipal Act.

GAAP – Generally accepted accounting principles

Growth Funding Tools – are the financial tools to recover costs from development due to growth. As the Town grows through population and jobs, additional land and infrastructure is needed to sustain continuous delivery of quality services. Three major financial tools that recover these costs include: 1) Development Charges (DCs); 2) Community Benefits Charges (CBCs); 3) Parkland Dedication. 

Obligatory reserve funds – means reserve funds comprised of any of development charge contributions, payments in lieu of parkland dedication, Building Services operations, or external funding sources levied or received under the authority of Federal and Provincial legislation. These amounts have been collected but the related services have yet to be performed. These amounts will be recognized as revenue as per PSAS.

Program – means a service area of the Town.

Provincial and Federal Contribution reserve funds - are used to support various initiatives across the Town. Currently, the Provincial gas tax is dedicated to Transit, and the Canada Community-Building Fund is allocated to projects that meet the guidelines per agreement.

PSAS – Public Sector Accounting Standards

Reserve – an appropriation of net revenues set aside at the discretion of Council to assist the maintenance of its financial position. It does not require the segregation of assets, and may be established for any municipal purpose. 

Reserve fund – established through a by-law of Council, or by a requirement of Provincial or Federal legislation for a specific purpose and segregated from the general revenues of a municipality to meet the financial requirements of a future event. Reserve Funds may be discretionary (funds authorized by Council) or obligatory (legislated funds that may only be used for their prescribed purpose). 

Stabilization reserves – to offset extraordinary and unforeseen expenditure requirements, revenue shortfalls and the management of cash flows. This includes reserves to address volatility such as storm events, tax rate stabilization, fluctuations in planning and development services, litigation and insurance costs. 

Town – means the Corporation of the Town of Oakville.

Treasurer – means the Treasurer of the Town of Oakville.

Responsibilities

The Treasurer or their designate shall be responsible to:

• Ensure R&RFs are established, maintained and used in compliance with this procedure, PSAS and GAAP guidelines, and governing legislation;
• Conduct an annual review of R&RFs and report the results to Council as a component of the year-end Financial Progress Report or Annual Budget process including recommendations for revisions or amendments to this procedure.