Reserve/Reserve Fund Procedure

Purpose statement

Under the authority of Council, reserves and reserve funds are appropriations from the town’s net revenues designated for purposes that may extend beyond the current fiscal year.  They are 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 (growth, interest rates, changes in subsidies) 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 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 reserves and reserve funds and summarizes the town’s legal authority and standards of care in relation to those financial provisions.

Reserves are set up for specific purposes.  They are used to offset impacts and stabilize the operating and capital budgets.  They typically cushion the impact of major expenditures on the tax rate in any one-year period.

Reserve Funds are typically established through a by-law of council, or by a requirement of federal or provincial legislation i.e. Development Charges Act, 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

Reserves and reserve funds are governed by the provisions and requirements of the Municipal Act, 2001 and its regulations; Public Sector Accounting Board (PSAB) and Generally Accepted Accounting Principles (GAAP).

All reserves and reserve funds shall be established, maintained and used for a specified purpose authorized by town policy, this procedure, statute or by-law.

They are established and utilized by the town to assist the municipality maintain its strong financial position by;

  • Buffering the impact of unusual or unplanned cost increases or revenue curtailment; ensuring stable and predictable tax rates year over year;
  • Providing financial flexibility to respond to extraordinary environmental or other events;
  • Providing non-tax levy financing for capital projects and program operations, ensuring that capital assets/infrastructure are properly maintained, and replaced; and
  • Replacement of equipment.

Town reserves and reserve funds shall be supported by Council approved procedures, guidelines and where required by-laws that support financial planning of the fund by;

  • Identifying contribution sources and projected disbursements required to meet planned future obligations to be funded;
  • Ensuring disbursements from reserves/reserve funds 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 stability reserves at target levels and for the future replacement of the town’s assets and infrastructure.

The overall balances of self-supporting reserves to debt will be maintained at a ratio not to exceed 1:1.

Types of funds

Reserves and discretionary reserve funds

  • Operating and program specific
    • 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
  • Equipment
    • To support on-going life cycle equipment replacement
  • Capital
    • To minimize risk, support future initiatives and provide for unknown contingencies;
    • To provide for infrastructure replacement and renewal

Obligatory Reserve Funds

  • legislated funds that must be segregated from other funds and used only for their prescribed purpose, such as;
    • Development charges
    • Cash In Lieu of Parkland
    • Gas tax reserve funds

Establishment of reserves and reserves funds

  • Council, on the recommendation of the deputy treasurer and director, Financial Planning, or their designate, may establish a reserve or discretionary reserve fund, where advisable, and shall establish an obligatory reserve fund where required pursuant to legislation or contract.
  • 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;
    • Initial contribution, if any;
    • Contribution and withdrawal policy; and
    • Criteria for review.

Use and administration of reserve and reserve funds

  • Designated 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 policy (Financial Control and Annual Budget policies) and this procedure and authorized by a council resolution or approved budget document.
  • The deputy treasurer and director of Financial Planning, 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.
  • 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 chief administration officer (CAO) is authorized to exercise discretion in the use of reserve monies for any purpose in matters less than $200,000.
  • The deputy treasurer and director of Financial Planning, 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
    • To fund an otherwise unfunded reserve or reserve fund to an appropriate level.
  • 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 i.e. Development Charges Act/Planning Act.
  • The use of monies in reserves and reserve funds is subject to compliance with this procedure.

Transfers to and from reserves

Approval of funding to and from the reserves and reserve funds will be in accordance with the town’s established Financial Control and Annual Budget policies and procedures or by Council resolution.

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 interest earnings on its investment portfolio 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 at year-end with recommendations on:

  • The closure of the reserve or reserve fund;
  • The disposition of any remaining funds; and
  • Any necessary changes to this policy.

Investment interest allocation

  • Reserves and reserve funds 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.
  • Interest shall be applied to reserves and reserve funds in accordance with Appendix A and B of this procedure; summarized herein as;
    • All equipment reserves as set out in Appendix A
    • The general capital reserve
    • The Pine Glen maintenance reserve
    • Oakville Little League reserve
    • Pine Glen capital reserve
    • Bronte Tennis Club reserve
    • All reserve funds – as set out in Appendix A
  • All reserves and reserve funds 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 portfolio for the year.
  •  At year end, the actual rate of return on the portfolio will be determined based on actual average balances of the portfolio.
  • Interest and investment income will be distributed to the eligible funds based on the proportionate share of the fund to the total average balance of the portfolio at year end.
  • Capital gains/losses on investment will be allocated to the tax rate stabilization reserve at year end.

Annual review

Reserves and reserve funds 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 reserves and reserve funds to current strategic goals and evolving program pressures, looking at opportunities to consolidate similar funds to improve financial flexibility.  The results of the review shall be reported in the yearend financial progress report to Council and shall include recommendations, subject to legislative restrictions on;

  • Closure of those reserves and reserve funds that have accomplished their purpose;
  • Opportunities for consolidation;
  • The disposition of any remaining funds; and
  • Any necessary changes to this policy.

Definitions

Capital reserves: are utilized to assist in the financing of community enhancements, supplement capital levy funding for infrastructure renewal and provide for unknown capital contingencies

Chief Administrative Officer (C.A.O.): means the Chief Administrative Officer of the Town of Oakville.

Council: means the Council of the Town of Oakville.

Deferred revenue, obligatory reserve funds: are development charge contributions, payments in lieu of parkland and gas tax, levied or received under the authority of federal and provincial legislation and town by-laws.  These amounts have been collected but the related services have yet to be performed.  These amounts will be recognized as revenue in the fiscal year the services are performed.

Discretionary reserve funds: means Reserve Funds created at the discretion of Council pursuant to the Municipal Act.

Equipment reserves: used to fund the various vehicle and equipment replacement across the town. Contributions from the operating budget into these reserves are managed in order to ensure future replacements are sustainable.

GAAP: generally accepted accounting principles.

Gas Tax reserves: is used to support various initiatives across the town. Provincial gas tax is dedicated to Transit and has been used primarily to support service expansion as the town grows. Federal Gas Tax funds are allocated to projects that meet the guidelines per the Federal Gas Tax Agreement.

Obligatory reserve funds: means Reserve Funds that are required by legislation which stipulates that certain revenue received for special purposes be segregated from the general reserves of the Town.

Program: means a service area of the Town.

PSAB: Public Sector Accounting Board.

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.  Reserves typically do not earn interest unless specified by council.

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). Reserve Funds typically earn interest.

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 stabilization, fluctuations in planning and development services, litigation and insurance costs.

Town: means the Corporation of the Town of Oakville.

Treasurer: means the Commissioner, Corporate Services and Treasurer of the Town of Oakville.

Responsibilities

The deputy treasurer and director Financial Planning or their designate shall be responsible to:

  • Ensure reserves and reserve funds are established, maintained and used in compliance with this procedure, PSAB and GAAP guidelines, and governing legislation.
  • Conduct an annual review of reserves and reserve funds and report the results to Council as a component of the yearend Financial Progress Report including recommendations for revisions or amendments to this procedure.

Procedure details

Procedure Number: F-FPC-004-001
Parent Policy: F-FPC-004
Section: Financial Planning
Sub-Section: Financial Planning Controls
Author: Financial Planning department
Authority: Council
Effective Date: 2016 Nov 14
Review by Date: 2021

References

Appendix A – Reserves/Reserve Funds
Appendix B – Reserve interest allocation
The Municipal Act provides municipalities with broad powers to manage financial matters, which includes power to establish reserves and reserve funds for services under their jurisdiction where they have the authority to spend money (s. 10 and s. 11).
Development Charges Act
Planning Act
Building Code Act

Federal/Provincial Transfer Payments
Gas Tax