At the December 1st Council meeting, the township’s accounting firm Baker Tilly provided the 2024 Consolidated Financial Statements for final approval by Council.
In her presentation, Baker Tilly representative Joanna Park acknowledged the strong controls built into financial procedures at the municipality and explained some of the procedures used to verify the financial records. These include sample testing, procedure reviews, cross-checking meeting minutes and other reports. The auditor review concluded that the municipality maintains a strong, internal control system and provided a clean report, meaning they had no comments or recommendations for change.
Near the end of the Financial Statements is a section detailing the municipal reserve funds. These funds provide an indication of the municipality’s long term financial sustainability.
Reserves represent money set aside by the township for future use and operate like savings accounts. They provide flexibility in financial decision-making, help fund large capital projects, stabilize uneven revenues and protect against external financial shocks stemming from events like a pandemic or a prolonged recession. Funds accumulating in these accounts flow from a variety of sources. Two in the Obligatory Reserve category come from provincial and federal sources: the Ontario Community Infrastructure Fund and the Canada Community Building Fund and must be spent on roads. Reserves classified as Development Charges flow to the municipality through fees charged to developers. However, the vast majority of reserve funding comes from municipal tax revenues. Contributions to and withdrawals from reserves for permitted expenditures are authorized by Council during the annual budget process which is currently underway.
At the end of 2024, the township had a net reserve balance of more than $25.1 million. This represents cash in the bank, which is held separately from general operating revenue.
Reserve accounts fall into a number of classifications based on how they can be utilized. Accounts in the Committed Reserve section are strictly controlled, either by legislation or through a financial agreement. They include roll overs for projects currently underway, building permit funds which cover building department operations, and funds reserved for water and wastewater management expenditures. The value of the Committed Reserve account at the end of 2024 was $6.2 million.
Development Charge Reserves are governed by specific provincial legislation. Expenditures qualifying for this funding source are clearly defined and must cover infrastructure expenditures that can be directly attributed to residential growth. For example, development charges provided much of the funding for the new Fire Hall and the new public works buildings, because the existing facilities were insufficient to serve the growing community. At the end of 2024, the Development Charge accounts had a negative balance of $5.4 million, as some growth-related capital expenditures have been incurred prior to the collection of anticipated development charge revenue. For example, water service infrastructure must be built before new residents can be occupied. In essence this represents a temporary internal loan which will eventually be resolved with the collection of new development charge revenue and if that is inadequate, the township will have to issue new debenture debt.
The bulk of the reserves fall into Designated Reserve accounts. Valued at $23 million, they represent funds set aside by Council for specific future expenditures, such as emergency and public works equipment, contingency and legal expenses and an annual allocation for expenses related to the development of the Official Plan. The most significant account in this category is the Asset Replacement Reserves, which has grown to almost $20.8 million. These are funds set aside to pay for the replacement and renewal of existing capital assets including roads, bridges, municipal buildings and facilities to keep them in good repair.
This account continues to grow as Council sets aside funds every year in the budget process to strengthen the municipality’s ability to maintain and replace critical municipal infrastructure. The municipality has been increasing the contribution to this reserve, with a $2.6 million transfer in 2023 and $2.7 million in 2024. In the current budget proposal, the proposed transfer is $3.275K. Even these amounts are lower than the auditor recommended levels that represent 100% of the depreciation value of the previous year, which in 2023 would have been $2.9 million. This is the minimum because depreciation is based on the historical cost of the assets rather than the cost to purchase them today which is significantly higher.
A new regulations are forcing municipalities to develop an asset management plan including an inventory of all their infrastructure assets, the current levels of service provided and the cost of maintaining those service levels. Cavan Monaghan approved an updated Asset Management Plan last fall and received a report that indicated that the value of our tax-funded infrastructure assets have a replacement cost estimated at $155.2 million based on 2024 estimates. These assets include municipal roads, buildings and facilities, vehicles, equipment and stormwater systems. In its assessment of the condition of those assets, the externally-prepared report concluded that 86% of these assets are in fair or better condition.
The financial stability of municipalities depends on their ability to manage their infrastructure effectively. This requires timely investment in roads, buildings, water systems and equipment. It’s not getting any easier to take the long view and put cash into savings for the future, even when you can do the math. It’s time for clear heads and sharp pencils. KG