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HomeMy WebLinkAboutFIN-2024-222 - Reserve Fund Policy Update Financial Services Department www.kitchener.ca REPORT TO: Finance and Corporate Services Committee DATE OF MEETING: May 13, 2024 SUBMITTED BY: Jonathan Lautenbach, Chief Financial Officer, 519-741-2600 ext. 7334 PREPARED BY: Katie Fischer, Director of Financial Reporting & ERP Solutions, 519-741- 2600 ext. 4630 WARD(S) INVOLVED: All Wards DATE OF REPORT: May 13, 2024 REPORT NO.: FIN-2024-222 SUBJECT: Reserve Fund Policy Update RECOMMENDATION: That Policy FIN-RES-770 Reserve Funds be amended as identified in report FIN-2024-222; and, That funds in the amount of $400,863 be transferred from the Tax Stabilization Reserve Fund to the Investment Stabilization Reserve Fund; and further, That funds in the amount of $4,488,866 be transferred from the Tax Stabilization Reserve Fund to the Tax Capital Reserve Fund. REPORT HIGHLIGHTS: The purpose of this report is by staff. The key finding of this report is to balance the risk and funding needs across the operating program (stabilization reserve funds) and capital program (capital reserve funds), supporting while maintaining reserve fund balances within their minimum and maximum ranges according to best practices as defined by the Government Finance Officers Association (GFOA). The financial implications result in a transfer of funds from the Tax Stabilization Reserve Fund to the Investment Stabilization Reserve Fund ($0.4M) and to the Tax Capital Reserve Fund ($4.5M). Funds will be factored into the 2025 budget to move forward with additional capital project work. This report supports the delivery of core services. *** This information is available in accessible formats upon request. *** Please call 519-741-2345 or TTY 1-866-969-9994 for assistance. BACKGROUND: Reserve Funds policy, FIN-RES-770, was approved in 2012 and was last reviewed in 2016. taff have completed a review of the policy with a particular focus on stabilization reserve fund targets and how annual surpluses are allocated to reserve funds. With the exception of the COVID-19 pandemic impacts, the City has traditionally realized modest operating surpluses within approximately 1% of budget, demonstrating effective budget control practices. Reviewing the policy of how these surpluses are allocated supports sustainability and asset management plan. REPORT: Allocation of Surplus Under the existing Reserve Funds policy, surpluses resulting from the Operating and Enterprise budgets are allocated first to their associated stabilization reserve funds; once the stabilization reserve fund maximum target balance is reached, any additional funds are allocated to the associated capital reserve fund. a contingency for unforeseen events and stabilize fluctuations caused by one-time expenditures or revenue shortfalls. Capital reserve funds are used to assist in financing the capital program. Officers Association (GFOA), in identifying minimum and maximum funding target levels for reserve funds. The City aims to maintain reserve fund balances within this minimum and maximum range, as part of its risk management strategy and financial plan. The proposed changes to the reserve fund policy aims to balance the risk and funding needs across the operating program (stabilization reserve funds) and capital program (capital reserve funds). Similar policies are in place at other municipalities. As the stabilization reserve funds achieve their minimum funding target level, the balance would continue to grow should there be an annual surplus, while at the same time allowing the City to use funds for capital purposes. The proposed new approach to the allocation of potential annual surpluses is as follows: (1) 100% of any surplus is allocated to the associated Stabilization reserve fund until its minimum funding target is achieved, recognizing that minimum thresholds are desired to mitigate operational risk. (2) After its minimum funding target is achieved, then 50% of the surplus would be allocated to the associated Stabilization reserve fund and 50% to the associated Capital reserve fund. (3) Once the Stabilization reserve fund has reached its maximum funding target, all remaining funding surplus would be allocated to the associated Capital reserve fund. Before allocating funds for capital needs, the policy ensures the funding balance in the stabilization reserve fund remains within the best practices recommended by the GFOA. This approach would apply to the tax operations and all enterprises, with the exception of the Building Enterprise as it is governed by the Building Code Act, 1992, S.O. 1992, c. 23. are treated similarly, but are proposed to be directed first to the Investment Stabilization reserve fund until its maximum funding target is met, after which they would be allocated to reserve funds using the same approach as a tax-supported operating surplus. Other Proposed Changes While the above represents the most significant changes to the draft Reserve Funds policy, staff additionally reviewed the overall policy. Proposed changes to the policy are highlighted in yellow in Attachment A, with strikethrough text being proposed deletions. The proposed Reserve Funds policy changes contain many of the same elements of the existing policy, with updated language in some areas following a review of policies from other municipalities. The following is a summary of changes proposed to the policy. The Investment Stabilization reserve fundis proposed to increase from $2.0 million to $2.5 million, representing approximately 50% of the annual budget in investment income in the operating fund. The previous target of $2.0 million was estimated as the impact if interest rates decreased by 1 percentage point. As the budget is determined based on historical average investment income, it is proposed instead to base the stabilization reserve fund on the budget, to assist with smoothing budgetary impacts resulting from the running three-year average. Policy Purpose: No changes to the language is proposed; this section consolidates the Definitions: Language was refined to make definitions clearer and more concise. Reserve Fund Classifications: It is proposed to replace the classification of Reserve Funds, but also other obligatory reserve funds such as Building Enterprise, Recreational Land, and Canada Community-Building Fund (formerly Gas Tax). This classification segregates reserve funds that Council does not have control to repurpose for any use other use than what the fund was prescribed for. The classification also aligns with the mandatory reporting to the Ministry of Municipal Affairs and Housing as part of the Financial Information Return. cing the Municipal Act, as well as a for the City. has been updated; in particular, the policy approved, their purpose, funding source, intended use, and funding target. duced. This section introduces a policy statement on how the City will allocate its annual surpluses as outlined above. Building Enterprise Capital reserve funds be Building Code Act, 1992, S.O. 1992, c. 23 does not require more than one reserve fund to be established, and the capital needs of the Building Enterprise are not material relative to the Building Enterprise operations. Having one single reserve fund for the Building Enterprise will streamline the financial reporting and financial planning of this enterprise, and is consistent with other municipalities reviewed. STRATEGIC PLAN ALIGNMENT: This report supports the delivery of core services. FINANCIAL IMPLICATIONS: The 2023 books have been closed out, with the financial results reported to the Committee of the Whole on April 8, 2024 (FIN-2024-153). To support moving into the 2025 budget process, staff recommend the proposed reserve fund policy be applied to the 2023 year-end surpluses, resulting in transfers between reserve funds as identified in the following table. The change in reserve fund policy did not have an impact to funding transfers resulting from 2023 financial results for any of the Enterprises. Investment Tax Tax Capital Stabilization Stabilization Reserve Fund Reserve Fund Reserve Fund Current balance following $2.1M $16.7M $1.7M 2023 year-end Redistribute 2023 Investment $0.4M ($3.4M) $3.0M Income Surplus Redistribute 2023 Operating $0 ($1.5M) $1.5M Surplus Revised balance $2.5M $11.8M $6.2M Funding Target Min & Max $0-$2.5M $7.3M-$22.0M $0.8-$2.25M (Note 1) (Note 2) Additional (less) funds $0.4M ($4.9M) $4.5M compared to existing policy Note 1: The funding target max for the Investment Stabilization reserve fund is currently $2.0M and is proposed to be increased to $2.5M. Note 2: Tax Capital funds will be factored into the 2025 budget to move forward with additional capital project work. The Tax Stabilization reserve fund balance remains within the funding target range and best practices as identified by the GFOA. Tax Stabilization Reserve Fund Balance COMMUNITY ENGAGEMENT: INFORM council / committee meeting. PREVIOUS REPORTS/AUTHORITIES: Municipal Act, 2001 APPROVED BY: Jonathan Lautenbach, Chief Financial Officer ATTACHMENTS: Attachment A Reserve Fund Policy Attachment A FIN-RES-770 POLICY Category Sub-category Reserve Fund Policy FIN - RES - FinanceReserve Approval Type Department/DivisionAuthor and Position COUNCIL Financial Services Jonathan Lautenbach, Chief Financial Officer Date ApprovedReview Date Last Amended June 11, 2012 Click here to enter a date. June 16, 2016 Related Policies or Procedures N/A Policy Purpose It is the policy of the City of Kitchener (the City) to establish and manage reserve funds for planned future capital expenditures, unexpected or unpredicted events or extraordinary expenditures, which would otherwise cause fluctuations in the operating or capital budgets. A reserve fund will only be used for the specific or intended purpose for which it was established. Reserve funds form a critical component of the longer-term financial planning and funding strategies for the City and support sound financial and cash management for the ongoing financial stability of the Corporation. A clear policy provides the appropriate guidance for responsible stewardship and management of reserve funds. This policy should be considered in conjunction with investment and capital financing and debt, and budget control policies. Definitions Reserve Fund – means a fund with assets which are segregated and restricted to meet the purpose of the reserve fund. There are two types of reserve funds: obligatory reserve funds and discretionary reserve funds. funds that have been set aside by Council for a specific purpose (discretionary) or as required by legislation (obligatory) Attachment A Reserve Fund Types: Discretionary Reserve Fund – means a reserve fund created under Section 290 of the Municipal Act, at the discretion of Council, to finance future expenditures of a purpose designated by Council for which it has the authority to spend money, and to set aside a certain portion of any year’s revenues so that the funds are available as required. Discretionary reserve funds are established through a by-law of Council. a reserve fund created under Section 290 of the Municipal Act, at the discretion of Council, to finance future expenditures of a purpose designated by Council Obligatory Reserve Fund – means a reserve fund created when a provincial statute requires that revenue received for special purposes be segregated from the general revenues of the municipality. Obligatory reserve funds are to be used solely for the purpose prescribed for them by statute.a reserve fund that is required by legislation or agreement to be segregated from the general revenue of the municipality Reserve Fund Classifications: Capital Reserve Funds – means reserve funds used to assist in financing the capital program. They provide flexibility and liquidity as well as enhance the City’s capacity to address current and future capital infrastructure and asset replacement needs. Corporate Reserve Funds – means reserve funds available for corporate programs to protect the City against the consequences ofcertain risks and liabilities. Program Specific Reserve Funds – means reserve funds set aside for specific purposes to be used for their identified purpose. Stabilization Reserve Funds – means reserve funds used to provide a contingency for unforeseen or extraordinary events and stabilize fluctuations caused by one-time expenditures or revenue shortfalls.They are also used to maintain the City’s cash flow and minimize the need for short term borrowing. They are not intended to be an ongoing funding source for the operating budget. Development Charge Reserve Funds – means reserve funds used to pay for growth related net capital costs of servicing new development. The City’s Development Charges by-law imposes development charges on new development in the City. Attachment A Obligatory Reserve Funds – reserve funds segregated as required by legislation or agreement and to be used solely for the purpose prescribed for them by legislation or agreement. Policy Scope The Reserve Fund Policy applies to all departments of the Corporation of the City of Kitchener. Employees (All) Unions Choose an item. Council Specified Positions Other Choose an item. Policy Content Authority Under section 417(1) of the Municipal Act, municipalities have the authority to provide for Reserve Funds in annual budgets for any purpose for which it has the authority to spend money. Responsibilities Council Under section 224(e) of the Municipal Act 2001, Council is responsible “to maintain the financial integrity of the municipality.” Unforeseen events or extraordinary expenditures can have significant financial implications if reserve funds are not managed properly. Council is required to make decisions that adhere to the financial policies and procedures that have been put in place to provide financial governance for the municipality. Chief Administrative Officer (CAO) Under section 229(a) of the Municipal Act 2001, the Chief Administrative Officer is responsible for “exercising general control and management of the affairs of the municipality for the purpose of ensuring the efficient and effective operation of the municipality.” This includes providing strategic advice to Council regarding creation of, use of, and funding of reserve funds and ensuring that processes are in place that support the effective administration of reserve funds. Chief Financial Officer (CFO) / Treasurer Attachment A Under section 286(1) of the Municipal Act 2001, the Treasurer is responsible for “handling all of the financial affairs of the municipality on behalf of and in the manner directed by the council.” For the purpose of this policy this includes: -monitoring existing reserve fund levels and the impacts of transfers to and from the reserve funds within the annual operating and capital budgets -advising Council accordingly of any concerns related to overall reserve fund levels -promoting the appropriate use of reserve funds as a potential funding option as identified through the budget process and as applicable throughout the year Policy/Guidelines 1.The general guiding principles with respect to reserve fund management are: to ensure all City reserve funds are supported by a financial plan identifying contribution sources and projected disbursements required to meet planned future obligations to be funded by the reserve funds; to ensure that all disbursements from reserve funds relate only to the intended use of the fund and have Council approval; to ensure that reserve funds do not enter into a negative position at any point, and; to ensure the sustainability of the City’s programs and infrastructure by providing annual contributions from the operating budget for the maintenance of reserve funds at target levels. For the purpose of this policy and reserve fund management, the City will categorize all funds as reserve funds under the following classification: Capital Reserve Funds Stabilization Reserve Funds Program Specific Reserve Funds Corporate Reserve Funds Development Charge Reserve Funds Objectives The guiding principles for reserve funds are listed below and ordered in priority. The order of the priorities will be considered in managing the City’s reserve funds. a)To adhere to statutory requirements; b)To protect against known risks and unforeseen events; c)To promote financial stability and flexibility; d)To provide for life cycle replacement of capital assets; e)To meet specific liabilities; Attachment A f)To smooth out expenditures which would otherwise cause fluctuations in operating or capital budgets; g)To provide for planned future expenditures; h)To provide a source of internal financing; and i)To promote intergenerational equity 2.Cr eation All proposals to establish a new reserve fund, whether for capital or operating purposes, will be in the form of a report approved by the CFO/Treasurerand forwarded to Council for approval, including the following elements: Name of the fund Intended purpose of the fund Classification Funding Source(s) Intended use or allocation of funds Minimum and maximum target balances to be maintained Rationale for minimum and maximum target balances Allocation of excess funding Reporting requirements Allocation of interest Expiry date for the fund, if applicable Review cycle for the fund For a reserve fund that is time limited, the report shall also include a request for pre-approval to wind up the reserve fund upon the expiry date. Any reserve fund that is created is to be added to Schedule A of this policy. ending or Closing 3.Am Amendments may be undertaken as a response to the periodic review process or proactively by the originating City department. The process for amending or closing for any purpose should follow the same process as approving a new reserve fund. Any change to the purpose for which a reserve fund is designated must be permitted by provincial statute legislation and approved by Council. Before creating a new reserve fund, the option of adding an incremental contribution to an existing reserve fund of a like nature will be considered. Reserve funds for different purposes shall be separate, but each may include a group of services in the same category. Any amendment or closure of a reserve fund should be reflected in Schedule A of this policy. Attachment A Reserve funds must be invested in accordance with the City’s approved investment policy. Earnings from the combined cash and investment portfolio will be credited to each separate fund in proportion to the amount invested from it. 7. Inter-Reserve Fund Borrowing Temporary inter-fund borrowing to cover a reserve fund shortfall is permitted and encouraged to avoid external debt charges. However, borrowing from a reserve fund may occur only when an analysis of the reserve fund has determined that excess funds are available and that the use of these funds will not adversely affect the intended purpose of the reserve fund. 8. Internal Borrowing From Reserves Borrowing from reserves for the purpose of addressing capital financing needs is permitted under the following conditions: A reserve providing funding will not be adversely affected as result of providing funding for a purpose other than what it was originally intended The reserve should have a balance that is above its mid-level target The amount borrowed will be repaid with interest over a term not to exceed 5 years Interest to be repaid will reflect annual interest that the reserve would have earned if the funding hadn’t been provided Funding provided under this scenario will be transferred to the Internal Borrowing Reserve Fund to support better tracking and transparency 9. Reserve Fund External Debt The City does not issue external debt financed through reserve funds. 10. Reporting Reserve fund balances, projected contributions, planned withdrawals and target levels will be reported to Council on an annual basis. Any additional reporting requirements for obligatory reserve funds will be reported according to the applicable legislation. 11. Target Reserve Fund Levels A summary listing of reserve funds and target levels are included in Schedule A. The adequacy of an individual reserve fund will be determined on a case-by-case basis using an estimate of the timing and magnitude of the costs to be incurred and a projection of expected contributions and interest earned. Updated Attachment A forecasts of reserve fund balances, including minimum and maximum target levels, will be prepared annually to assist with the evaluation. A review of reserve fund levels will be evaluated annually to determine: a. The adequacy of each individual reserve fund taking into consideration: The purpose for which the reserve fund has been established and whether the balance is sufficient to achieve that purpose Any anticipated forecasted expenditures or commitments that could impact the overall balance within the next 5 years The minimum and maximum target levels and whether they have been achieved In addition to reviewing the target levels of individual reserve funds, the consolidated balance of all reserve funds will also be evaluated by comparing the aggregate minimum and maximum target levels to municipal benchmarks, provincial guidelines and credit rating agency standards. b. The adequacy of the consolidated balance of all reserve funds considering: The aggregate minimum and maximum target levels compared to municipal benchmarks, provincial guidelines and credit rating agency standards 12. Specific Policies a. When revenues exceed expenses for a fiscal year leading to an annual surplus in the tax-supported operations, the Gas Utility (Delivery), the Water Utility, the Golf Enterprise, the Parking Enterprise, the Sanitary Sewer Utility, and the Stormwater Utility, the surplus will be contributed to reserve funds as follows: i.100% of the surplus will be contributed to the corresponding stabilization reserve fund, up to its minimum funding target. ii.Once the minimum funding target has been met, 50% of the surplus will be contributed to the corresponding stabilization reserve fund up to its maximum funding target, and the remaining 50% will be contributed to the corresponding capital reserve fund. iii. Any funds in excess of the maximum funding target for the stabilization reserve funds will be transferred to the corresponding capital reserve fund. Attachment A Results of Review No Edits Required Housekeeping Edits X Substantial Edits Repeal/Replace Policy History DateNature of Change 2016-06-01 I-770 policy template re-formatted to new numbering system and given number FIN-RES-770. DateCouncil/CLT Directive Attachment A A Schedule Attachment A A Schedule Attachment A A Schedule Attachment A A Schedule Attachment A A Schedule Attachment A A Schedule