Role of Reserves in Township Financial Position



At the December 4th Council meeting, Council received audited financial Statements for the township for the year ending 2016 from auditors Collins Barrow who assumed responsibility for the audit function for the township last year.  Also on the agenda was a report outlining the Reserves & Development Charges for 2016 prepared by Director of Finance Kimberley Pope along with a request for approval of reserve transfers for that year as outlined in the financial statements.

Reserves are funds set aside by the township for future use and operate like a giant savings account to help the township manage large future expenditures, stabilize uneven revenues and protect against external financial shocks.  They allow the township to strengthen its financial position, provide flexibility in financial decision making.  The funds accumulating in these reserves stem from a variety of sources.  In the past, reserve contributions have been raised primarily from OLG revenues but have increasingly been sourced from ratepayer revenues.  Township reserves are administered by the Director of Finance in accordance with municipal policies, professional accounting standards through the annual budget process.

At the end of 2016, the township had more than $20 million in a variety of reserve accounts.  This represents actual cash in the bank, that is earmarked for specific purposes.   Contributions to and withdrawals from reserves for permitted expenditures are authorized during the annual budget process which is currently underway.

Accounts in the Committed Reserve section of Ms. Pope’s report are strictly controlled, either by legislation or through a financial agreement, and are sometimes referred to as Obligatory Reserves.  Among these accounts are reserves for water and wastewater management expenditures, and for the Springville and Ebenezer Cemetery which is administered by the township.  Other obligatory funds are identified by their source of cash, such as the Federal gas tax funds.

Another group of reserve funds are considered discretionary: the funds remain segregated from the general operating revenues of the municipality, and are used to finance expenditures that are authorized by Council.  Transfers from these accounts can be used for specific purchases or to build some protection against future liabilities, such as the Legal reserve funds.

At the end of 2016, the township had more than $10 million in a discretionary account called Asset Replacement Reserves.  These are funds set aside to pay for the replacement and renewal of existing capital assets including roads, municipal buildings and facilities to keep them in good repair.  Cavan Monaghan’s contributions towards the renovation of the Millbrook Dam come from this account, including the 2018 scheduled payment of $607,040.

There are also specific reserves earmarked for capital purchases such as emergency equipment including our new pumper truck purchased in 2017.  Other funds are used to smooth out periodic and predictable expenses such as municipal election expenses to spread out this expense over the term of council instead of absorbing the entire expense during election years.

There is also a category of reserves funded by development charges collected on residential and commercial development projects.  These charges are collected from the developers and are used to recover the capital costs of providing infrastructure associated with growth and are collected under legislative authority.

Most tiers of government are facing challenges in maintaining their infrastructure.  Cavan Monaghan contributes more than $1 million each year to the Asset Replacement Reserves to help maintain core municipal assets, and the net capital expenditure requests totalled more than $5.2 million in the first draft of the 2018 capital budget.  The elimination of revenue from the Casino later this year will eliminate this source of reserve funding and will make it more challenging to ensure reserve contributions to fund future renewal and replacement of assets are adequate.  One measure used to evaluate reserves is to compare their value to the total asset value of the township.  The value of reserves to tangible assets not including land is 44% for Cavan Monaghan, putting the township in a strong position relative to neighbouring municipalities.  Across Rural Eastern Ontario, the ratio of total reserves to tangible assets in 2011 was only 7.9%.

Municipal governments in Ontario have experienced a dramatic shift in responsibility for infrastructure, with their share of ownership of infrastructure assets across the province rising from the 1961 level of 38% to more than 67%. Their financial stability depends on their ability to manage and finance these assets effectively.

To learn more about the township’s financial plans, come to the Public Budget Meeting on Monday, January 15th at 7 pm at the township office at 988 County Rd. 10. KG

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