RESOLVED THAT: ALL FORMER POLICIES AND PRACTICES RELATING TO THIS MATTER BE RESCINDED AND THE FOLLOWING POLICY ADOPTED: TABLE OF CONTENTS

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1 POLICY MANUAL DEPARTMENT: SUBJECT: FINANCE RESERVES AND SURPLUS DATE OF RESOLUTION: JANUARY 14, 2013 RESOLVED THAT: ALL FORMER POLICIES AND PRACTICES RELATING TO THIS MATTER BE RESCINDED AND THE FOLLOWING POLICY ADOPTED: TABLE OF CONTENTS SECTION 1 - OBJECTIVES AND GUIDING PRINCIPLES.. 2 SECTION 2 - RESERVE ACCOUNTS (APPROPRIATED SURPLUS)... 3 SECTION 3 - UNAPPROPRIATED SURPLUSES. 4 SECTION 4 - STATUTORY RESERVE FUNDS. 4 SECTION 5 - CEMETERY TRUST FUNDS. 5 SECTION 6 - ADMINISTRATION.. 6 SECTION 7 - GLOSSARY... 7 APPENDIX "A" - RESERVE/SURPLUS SUMMARY 9 District of Sparwood Reserve and Surplus Policy Page 1

2 SECTION 1 - OBJECTIVES AND GUIDING PRINCIPLES 1.1 Objectives The District s objectives in terms of its various reserves and surpluses are set out in this Reserves and Surplus Policy (Policy). By reaching a clear understanding of its reserve and surplus objectives, and by continually measuring progress towards achieving those objectives, the District can attain greater fiscal stability and prosperity. 1.2 Guiding Principles The following principles form the basis for this Policy: Healthy reserve/surplus levels are important in achieving community goals including financial health and stability; The District will strive to be a leader, among local governments, in terms of financial health and stability; Actual reserve/surplus balances need to be benchmarked with other jurisdictions and with pre-determined targets on an ongoing basis to gauge whether financial health is being achieved; Reserve/surplus goals need to be consistent with and supportive of realistic longerterm financial plans; Reserve/surplus appropriations need to conform to the statutory/legal requirements of the Local Government Act and the Community Charter, generally accepted accounting principles (GAAP) and public sector accounting board (PSAB) recommendations. District of Sparwood Reserve and Surplus Policy Page 2

3 SECTION 2 - RESERVE ACCOUNTS (APPROPRIATED SURPLUS) Also called Appropriated Surplus, reserve accounts are discretionary in that they can be utilized as determined by management and Council. The following reserve accounts have been established for the purpose(s) so identified: 2.1 Economic Emergency Reserve Account The Economic Emergency Reserve has been established for unforeseen economic impacts such as unrealized revenues. Some of the District s revenue sources, e.g. development fees, building permits and inspection fees are cyclical in nature and thus are subject to downturns in the economy. The District tries to anticipate economic downturns by budgeting for a base dollar amount of these revenues in its general operations. The District is also at risk of major reassessments of industrial property values which can substantially impact property tax revenues. Despite its best efforts, the District is exposed to the possibility of unrealized revenues and/or uncontrollable declines in base revenues from year to year. One cannot always count on budgetary savings or other revenues to offset these shortfalls. 2.2 Forest Health Reserve Account The Forest Health Reserve has been established to set aside the net funds from the logging of pine beetle trees exclusively for the purpose of reforestation. Note for information (not part of policy) previously we used the funds to cover costs of consultants, logging and pine beetle removal. However, these costs will deplete the fund too fast to accomplish maximum reforestation, resulting in the recommended change. 2.3 Regional Requisition Reserve Account When setting tax rates for collecting regional requisitions, the Collector provides for excess funds to cover potential tax refunds through reassessments. The balance remaining after refunds must be applied to the following year s taxes as per Community Charter Section 197(5). 2.4 Future Expenditure Reserve Account The Future Expenditure Reserve has been established to provide for general contingency, nonrecurring strategic projects major studies and disaster relief. The District is exposed to major non-reoccurring costs related to various emergency events or situations (e.g. inclement weather, environmental hazards etc). These emergent situations cannot be anticipated and budgeted for and it is not feasible to absorb the cost of such events in other budget areas in any given year. The District also undertakes certain one-time or intermittent projects that are larger in terms of costs. If these projects were funded only from property taxation, annual spikes and subsequent declines in taxation would result. We budget in advance of such projects over several years to set aside revenue to fund the entire project. In addition, budget from projects not completed in any year are reserved in this account to provide funding to complete the project in the following year. This reserve account is also used to manage fluctuations in the Strategic Community Investment Grant which was higher than normal in 2011 and 2012 will be lower than normal in 2013 and Landfill Closure Reserve Account The Landfill Closure Reserve has been established to fund the ongoing costs of closing the Sparwood Landfill. Because this closure is being handled through the Regional District, the fund is being depleted to offset fluctuations in taxation for Elk Valley waste. District of Sparwood Reserve and Surplus Policy Page 3

4 2.6 Policing Reserve Account A Policing Reserve needs to be established before the District reaches a population of 5,000. Once a census determines a population higher than 5,000 for a local government, it is no longer subject to the Small Community Policing taxation administered by the Province but must pay a significantly larger amount by requisition directly to the RCMP. The purpose of the reserve is to phase in the initial increase in taxation that the change requires. Once under the new police funding model, the District will require the reserve to accommodate fluctuations in the requisitions, which are difficult to anticipate. Currently the population is under 4,000. With the current growth resulting from the Whiskey Jack subdivision and the growth anticipated in light industrial businesses, a population increase is anticipated. Establishing a reserve at an early date will allow the annual contributions to be more modest than if it is established closer to the date of change. For 2013, staff is directed to research the most appropriate method to create this reserve, with a recommendation to be brought forward to the 2014 budget cycle. SECTION 3 - UNAPPROPRIATED SURPLUSES The District needs to maintain Unappropriated Surplus balances in its three operating funds (the General Operating Fund, the Sewer Operating Fund and the Water Operating Fund) for working capital purposes, i.e. to provide for operating expenditures before property taxes and/or user fees are collected. Maintaining minimum working capital levels eliminates or reduces the need to borrow externally and/or internally for operations. The District may also require emergency funds from time to time, from any one of its Unappropriated Surplus balances, for unforeseen costs. When this occurs the District needs to rely upon sufficient balances being available in the applicable Unappropriated Surplus area (general operating, water or sewer). SECTION 4 - STATUTORY RESERVE FUNDS Statutory Reserve Funds are established by bylaw in accordance with Section 188 of the Community Charter. Certain monies received from specific sources, as detailed in Section 188 (2), must be placed in specific named Reserve Funds, while other funds may be established as Council determines the need. Use of these funds is not discretionary, but limited by the Community Charter and the establishing Bylaw. 4.1 Land Sale Reserve Fund Per subsection 188 (2) (e) of the Community Charter, funds received from the sale of land and improvements must be set aside for paying any debt remaining in relation to the property and for acquiring land, improvements and other assets of a capital nature. The Land Sale Reserve has been established for accumulating and expending monies as per this requirement. Land development projects funded out of this reserve must be undertaken to produce a profit to fund community development. 4.2 Capital Works, Machinery and Equipment Reserve Fund The Capital Works, Machinery and Equipment Reserve is established for the replacement of municipal vehicles and equipment and fund general capital projects not specifically funded from other established Reserves. Annual expenditures are approved by Council through the annual budgeting process. 4.3 Street Repaving Reserve Fund The Street Repaving Reserve is established for the repaving of streets within the District including lanes, roads and alleys, public walkways, municipally owned public parking lots or other public places or parts of any of them. Annual expenditures are approved by Council through the annual budgeting process. District of Sparwood Reserve and Surplus Policy Page 4

5 4.4 Recreational and Cultural Reserve Fund The Recreational and Cultural Reserve is established for new and replacement capital costs for Recreational and Cultural facilities approved by Council through the annual budgeting process. 4.5 Local Improvement Financing Reserve Fund The Local Improvement Financing Reserve is established to fund small local improvement projects as designated by Council and thus eliminate borrowing for these projects. This existing reserve fund was used for Industrial Road 3 Water Servicing and Rendle Water Servicing. It is not considered appropriate to use reserves developed by the entire tax base for the benefit of only a portion of the District, so the normal source of funding for a Local Service Area would be borrowing. However, borrowing adds additional costs to a project and requires a substantial amount of administration. For very small local improvements the monetary and administrative cost of borrowing is not justified. 4.6 Waterworks Reserve Fund The Waterworks Reserve is established for Water Utility capital projects including water treatment, conveyance and storage projects, water distribution system projects, any water equipment that is not part of the fleet and also for water debt retirement. 4.7 Sewer System Reserve Fund The Sewer System Reserve is established for Sewer Utility capital projects including sewer treatment projects, sewer conveyance system projects, any sewer equipment that is not part of the fleet and also for sewer debt retirement. 4.8 Parks Acquisition Reserve Fund Per subsection 188 (2) (b) of the Community Charter, funds received from the sale or disposal of parkland as well as funds received pursuant to section 941 of the Local Government Act (parkland funds received upon subdivision) must be set aside in a Reserve and be used exclusively to purchase parkland. The Parkland Acquisition Reserve has been established for accumulating and expending monies as per this requirement. 4.9 Carbon Neutral Reserve Fund The Carbon Neutral Reserve has been established as a step toward meeting the District s Climate Action Charter commitments. This reserve will fund emission reduction projects which will benefit the District by reducing the future cost of carbon offsets Michel Creek Water Extension Local Service Area Reserve Fund The Michel Creek Water Extension Local Service Area Reserve is established to assist in retiring debt related to the Michel Creek Water Extension project. Borrowing will be over a period of 25 years, however the Municipal Finance Authority will borrow only for ten years and then renegotiate the debt. The parcel tax for this project will be set at a level using 25 year borrowing rates. Funds in excess of actual loan repayments will be placed in this reserve to be used at the loan renegotiation dates to reduce the debt and thereby offset the effect of interest rate increases. SECTION 5 CEMETERY TRUST FUNDS 5.1 Cemetery Care Trust The Cemetery Care Reserves are established in accordance with the Cemeteries Act, to upkeep the cemetery grounds/facilities upon closure of the cemetery. As per this legislation, current interest income earned on the Reserve balance may be used to offset cemetery operating and capital No expenditures shall be made from this fund until the balance is sufficient to provide interest earnings that can fund annual maintenance costs. Annual cemetery operating and capital expenditures are approved by Council through the annual budgeting process. District of Sparwood Reserve and Surplus Policy Page 5

6 The District administers cemetery trust funds for the perpetual care and maintenance of the two District owned cemeteries, Rivercrest Cemetery and Elk Valley (Michel) Cemetery. SECTION 6 - ADMINISTRATION 6.1 Reserve Contributions Annual and/or periodic contributions to Reserve Funds shall be specific to each Reserve, as approved by Council through the District s annual financial planning/budgeting process. 6.2 Minimum and Optimal Reserve Balances Minimum and optimal fund balance guidelines have been set for some of the District s Reserve Accounts and Unappropriated Surpluses and Statutory Reserve Funds as shown in attached Appendix A. The purpose and source(s) of funding applicable to each Fund are also shown in this Appendix. The minimum balances ensure that the respective balances are not depleted to the degree that those balances are no longer able to serve their intended purpose(s). The optimal balances ensure that the District s guiding principles are achieved and that the respective balances do not grow beyond their intended purpose(s) and thus create idle assets that could be otherwise utilized for other corporate priorities. A formal comparative review of actual, minimum and optimal fund balances shall be undertaken annually. 6.3 Internal Borrowing Internal borrowing from specific Reserve Accounts, Unappropriated Surplus, and Statutory Reserve Fund balances shall be permissible as allowed for by legislation, if a clearly defined and attainable payback plan, including payment of foregone interest, is in place, as internal borrowing allows for more flexibility in terms of payback amounts and loan duration than that of external borrowing. Paybacks shall be executed according to plan. 6.4 Responsibilities The District s Financial Officer shall be responsible for Recommending the necessary contributions and transfers so that the District s Reserve Accounts, Unappropriated Surpluses, and Statutory Reserve Funds are maintained in accordance with this Policy; Conducting an annual review of all Operating/Capital Reserve Fund, Unappropriated Surplus, and Statutory Reserve Fund balances including comparing actual levels with the established minimum and optimal levels within this Policy and with other jurisdiction benchmarks, and reporting the results of such a review to Council; Recommending changes to the minimum and optimal balance guidelines shown in this Policy; and, Recommending any revisions or amendments to this Policy, as may be required from time to time, as a result of changes in applicable statutes, accounting standards, economic conditions, etc. 6.5 Interest Statutory Reserve Funds shall be paid and allocated interest based on actual interest earned on the District s pooled investments. 6.6 Guide and Transition The minimum and optimal fund balance guidelines shown in this Policy serve as a guide in moving the District towards the goals or targets it wishes to attain, in terms of individual fund balances. It is recognized that the District s fund balances are not at the minimum or optimal levels at the time of enacting this Policy, however, the District is transitioning towards its optimal targets. District of Sparwood Reserve and Surplus Policy Page 6

7 SECTION 7 - GLOSSARY The following terms used in this Policy are defined as follows: 1. "Accumulated Surplus" means the accumulated excess of revenues over expenditures from prior years which has not been set aside for specific purposes. 2. Annual Surplus means the accumulated excess of revenues over expenditures for the current year. 3. Reserve accounts means funds that are set aside of surplus for a specified purpose. Also called Appropriated Surplus, reserve accounts are discretionary in that they can be utilized as determined by management and Council. 4. Reserves means all of the District s Reserve Accounts and Statutory Reserve Funds. 5. Statutory Reserve Funds" means funds set aside for specified purposes by bylaw as required by Section 188 of the Community Charter and pursuant to specific legislation. These Reserves are established via District bylaws and are non-discretionary on the part of Council. 6. Unappropriated Surplus" means the accumulated surplus built up in the District s various operating funds that has not been designated for specific uses. District of Sparwood Reserve and Surplus Policy Page 7

8 District of Sparwood - Reserves and Surplus Policy Appendix A Reserve/Surplus Summary RESERVE ACCOUNTS Fund(s) Purpose Funding Source(s) Minimum Optimum Dec 31/11 Balance Rationale for $ Levels Established Economic Emergency Reserve For major unanticipated economic emergencies such as unrealized revenues. In particular, this reserve is critical in the case of major tax reassessments. Annual allocation from general operating budget as provided for in Financial Plan. $254,000 1% of General Operating Fund revenues plus $100,000. $485, % of General Operating Fund revenues plus $100,000. $400,000 Level is consistent with other municipalities and with the level of risk of unrealized revenues for the District. Forest Health Reserve This account was established to reserve net funds from the logging of pine beetle trees for the purpose of reforestation. Proceeds from forestry operations. N/A N/A $375,125 Dependent on reforestation levels offset by proceeds from logging. Regional Requisition Reserve To reduce future taxes collected by regional requisitions. Reserve created to provide allowance for refunds through reassessments $20,000 $30,000 $30,959 Section 197(5) of Community Charter. Future Expenditure Reserve To provide for general contingency, non-recurring strategic projects, disaster relief major studies and projects spanning more than one budget cycle. Annual budgeted allocation from General Operating Fund (property taxes). $275,000 $275,000 $951,700 Historic requirements, the higher amounts are work in progress carried from prior years. (Strategic Community Investment Grant was higher than normal in Higher balance in reserve account to provide for lower payments in future Landfill Closure Reserve Account This account was set up to prepare for cost of closing the Sparwood Landfill No further annual allocations are required. N/A N/A $82,980 To cover closing costs and is currently being depleted. Policing Reserve Account Established to offset major tax increase when District is required to pay policing directly to RCMP and to offset major fluctuations in requisition amounts. Phased funding via annual budgeted allocation from General Operating Fund (property taxes). N/A N/A N/A Staff to research to make recommendation to 2014 budget cycle District of Sparwood Reserve and Surplus Policy Page 8

9 District of Sparwood - Reserve and Surplus Policy Appendix A Reserve/Surplus Summary UNAPPROPRIATED SURPLUSES Fund(s) Purpose Funding Source(s) General Operating For working capital purposes within the general operating fund and for unforeseen general operating emergency Any excess general operating fund revenues (including property taxes) over expenditures and transfers at the end of each fiscal year. Minimum $ Level Optimum Target Dec 31/11 Balance Rationale for $ Levels Established $730,000 $1,460,000 $508,945 Minimum: one month of general fund operating Optimum: two months of general fund operating Sewer Operating For working capital purposes within the sewer operating fund and for unforeseen sewer operating emergency Any excess sewer operating fund revenues (including user fees) over expenditures and transfers (including capital transfers) at the end of each fiscal year. $70,000 $140,000 $75,763 Minimum: two months of sewer fund operating Optimum: four months of sewer fund operating Water Operating For working capital purposes within the water operating fund and for unforeseen water operating emergency Any excess water operating fund revenues (including user fees) over expenditures and transfers (including capital transfers) at the end of each fiscal year. $65,000 $130,000 $342,214 Minimum: two months of water fund operating Optimum: four months of water fund operating District of Sparwood Reserve and Surplus Policy Page 9

10 STATUTORY RESERVE FUNDS District of Sparwood - Reserves and Surplus Policy Appendix A Reserve/Surplus Summary Fund(s) Purpose Funding Source(s) Land Sale Reserve To acquire land, improvements & other assets of a capital nature. Funds received from the sale of land & improvements. Minimum N/A Optimum Adequate balance to fund strategic land acquisitions, per the long-term capital plan. Dec 31/11 Rationale for $ Balance Levels Established $3,718,626 Fund balance is dependent upon land/property sales. Capital Works, Machinery & Equipment To replace municipal vehicles & equipment & fund general capital projects not specifically funded from other established Reserves. Annual budgeted allocation from General Operating Fund (property taxes). Vehicle & equipment charges recovered from usage rates less vehicle/equipment operating expenditures Proceeds from the sale of fleet vehicles & equipment N/A Based on fully funded equipment capital plan. $2,882,967 The intent is to use these funds for major capital projects as designated by Council & thus reduce borrowing for these projects. Street Repaving For repaving of streets within the District including lanes, roads and alleys, public walkways, municipally owned public parking lots or other public places or parts of any of them. Annual budgeted allocation from General Operating Fund (property taxes). N/A N/A $1,129,781 Borrowing should be avoided for replacement of existing infrastructure. Recreational & Cultural For new & replacement capital costs for Recreational & Cultural facilities. Annual budgeted allocated from General Operating Fund (property taxes). N/A N/A $305,778 Borrowing should be avoided for replacement of existing infrastructure. District of Sparwood Reserve and Surplus Policy Page 10

11 STATUTORY RESERVE FUNDS (CONT D) District of Sparwood - Reserve and Surplus Policy Appendix A Reserve/Surplus Summary Fund(s) Purpose Funding Source(s) Local Improvement Financing Waterworks Sewer System Parks Acquisition Reserve Carbon Neutral Reserve Michel Creek Water Extension Local Service Area Reserve To fund for small local improvement projects as designated by Council & thus reduce excessive administration costs. For Water Utility capital projects & also for water debt retirement. For Sewer Utility capital projects & for sewer debt retirement. For accumulation of funds exclusively for the acquisition of park land. Established to fund emission reduction projects to reduce the cost of future carbon offsets. To assist in retiring debt related to the Michel Creek Water Extension Project Annual budgeted allocation from General Operating Fund (parcel taxes from earlier projects). Annual transfer for water operations plus designated parcel tax proceeds. Annual transfer for sewer operations plus designated parcel tax proceeds. Per subsection 188 (2) (b) of the Community Charter, funds from sale or disposal of parkland as well as pursuant to section 941 of the Local Government Act (parkland funds received upon Annual CARIP grants Annual cost of carbon offset of municipal operations. Interest rate differential on borrowing. BC Hydro grants in lieu of taxes. Minimum Optimum Dec 31/11 Balance Rationale for $ Levels Established N/A N/A $186,080 Borrowing should be avoided for small projects due to excessive cost. Fully funded water capital program, based on existing capital plan. Fully funded sewer capital program, based on existing capital plan. Fully funded sewer capital infrastructure replacement program, based on projected replacement costs for all assets. Fully funded sewer capital infrastructure replacement program, based on projected replacement costs for all assets. $628,285 Borrowing should be avoided for replacement of existing infrastructure. $731,990 Borrowing should be avoided for replacement of existing infrastructure. N/A N/A $33,994 The reserve balance will vary depending upon the disposal and acquisition of park land. N/A N/A N/A TBD N/A N/A N/A TBD District of Sparwood Reserve and Surplus Policy Page 11

12 District of Sparwood - Reserves and Surplus Policy Appendix A Reserve/Surplus Summary TRUST FUNDS Fund(s) Purpose Funding Source(s) Minimum Optimum Dec 31/11 Balance Rationale for $ Levels Established Rivercrest Cemetery Care Trust For the perpetual care and maintenance of the Rivercrest Cemetery. Cemetery care contributions N/A Adequate balance to provide perpetual care of the cemetery. $44,519 Requirement is legislated. No expenditures shall be made from this fund until the balance is sufficient to provide interest earnings that can fund annual maintenance costs. Elk Valley (Michel) Cemetery Care Trust For the perpetual care and maintenance of the Elk Valley (Michel) Cemetery. Cemetery care contributions N/A Adequate balance to provide perpetual care of the cemetery. $13,574 Requirement is legislated. No expenditures shall be made from this fund until the balance is sufficient to provide interest earnings that can fund annual maintenance costs. District of Sparwood Reserve and Surplus Policy Page 12