At the November 4th meeting, the township’s accounting firm Baker Tilly provided the 2023 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 indicated that their review resulted in no comments or recommendations for change.
Near the end of the Financial Statements is a section summarizing the municipal reserve funds, which provide an indication of the municipality’s long term financial sustainability.
Reserves are funds 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 and are subject to strict rules on how they can be spent.
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 2023, the township had a net reserve balance of more than $22 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 use of funds in the Development Charge Reserves is also tightly controlled and are used to help municipalities finance growth-related costs in municipal infrastructure. At the end of 2023, these accounts had a negative balance of $3.9 million, as some growth-related capital expenditures have occurred prior to the receipt of anticipated development charge revenue. In essence this represents a temporary internal loan where the funds were used to help finance the Public Works Operations Centre and the Millbrook Depot. This will be resolved through a combination of new development charge revenue and the eventual issue of new debenture debt.
Most of the municipal savings sits in Designated Reserve accounts. Valued at $27 million, they represent funds set aside by Council for specific future expenditures, such as the Fire Hall, Public Works equipment or Legal expenses. The most significant account in this category is the Asset Replacement Reserves, representing a value of $18 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 has been growing as Council is strengthening the municipality’s ability to maintain and replace critical municipal infrastructure through contributions determined during the annual budget process. The municipality has been increasing the contribution to this reserve, with a $2.4 million transfer in 2023 and $2.6 million in 2024. 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 $2.7 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.
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%. The transfer of ownership has been followed by a shift in the funding sources to maintain it. Seventy percent of the funding for municipal infrastructure comes from municipal sources, with another 18% from federal and provincial transfers and the rest from grants and donations. Let’s just say the provincial gift of infrastructure is the gift that keeps on giving.
A new regulations are forcing municipalities to examine and quantify those gifts. Last July, was the deadline for 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. Next July, that plan must include a strategy to fund the maintenance of those service levels.
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. Tough economic times makes putting cash into savings for the future a difficult pill to swallow, even when you can do the math. It’s time for clear minds and sharp pencils. KG