GENERAL COMMITTEE

 

 

 

 

 

TO:

Mayor and Members of Council

 

 

 

 

FROM:

Andy Taylor, Commissioner, Corporate Services Commission

Barb Cribbett, Treasurer

Joel Lustig, Director of Financial and Client Services

 

 

 

 

PREPARED BY:

Fuwing Wong, Manager, Financial Planning

 

 

 

 

DATE OF MEETING:

2005-February-28

 

 

 

 

SUBJECT:

Town of Markham Reserve Study – Recommendations from 2005 Council Retreat

 

 

 

 

RECOMMENDATION:

THAT the report dated February 28, 2005 entitled “Town of Markham Reserve Study – Recommendations from 2005 Council Retreat” be received;

 

AND THAT the balance of the Corporate Rate Stabilization reserve be established at 15% of the local tax revenue, $11,650,000 for 2004;

 

AND THAT the Major Capital Repairs and Replacement Reserve be renamed to an interest earning Life Cycle Replacement and Capital Reserve Fund the purpose of which is to fund asset life cycle replacements and other major capital investments in future years;

 

AND THAT the balance of funds in the Corporate Rate Stabilization Reserve be transferred to the Life Cycle Replacement and Capital Reserve Fund;

 

AND THAT future year-end operating surpluses, if any, be used first to top-up the Corporate Rate Stabilization Reserve to a level equivalent to 15% of local tax revenues and secondly to replenish the expenditures in the Environmental Land Acquisition Reserve Fund, and finally transferred to the Life Cycle Replacement and Capital Reserve Fund;

 

AND THAT should the year-end operating surplus not be sufficient to top-up the Corporate Rate Stabilization Reserve or replenish the Environmental Land Acquisition Reserve Fund, funding for both should be included in the following year’s capital budget discussions;

 

AND THAT the General Capital Reserve and Planning Studies reserve be consolidated to an interest earning “10% Non-DC Growth” Reserve Fund to be funded from the sale of land;

 

AND THAT $500,000 of the Hydro Interest Income be used to fund the interest earning Environment Land Acquisition Reserve Fund on an annual basis;

 

AND THAT an interest earning Land Acquisition Reserve Fund be established to finance the purchase of strategic land acquisitions that are non-growth and that are not environmentally sensitive;

 

AND THAT $500,000 of the Hydro Interest Income be used to fund the interest earning Land Acquisition Reserve Fund on an annual basis;

 

AND THAT the balance of the annual Hydro Interest Income and future Hydro Dividend Income be used to fund the interest earning Life Cycle Replacement and Capital Reserve Fund on an annual basis;

 

AND THAT the Hydro Equity Reserve be closed with the balance transferred to the Life Cycle Replacement and Capital Reserve Fund;

 

AND FURTHER THAT Council consider alternate funding sources for asset Life Cycle replacement requirements, such as debt-financing or a tax-rate increase, in future operating budgets.

 

 

PURPOSE:

To finalize outstanding recommendations from the November 22nd, 2004 Reserve Study report by incorporating discussions from the January 4th, 2005 Council Retreat meeting.

 

 

BACKGROUND:

At the November 8th, 2004 Finance and Administrative Committee (now known as General Committee), a Reserve Study presentation was made by staff.  Feedback from the November 8th Committee presentation was incorporated into a presentation and report tabled at the November 22nd Finance and Administrative Committee meeting.

 

The November 22nd report on the Reserve Study contained 15 recommendations, of which five were approved.  The remainder of the recommendations were brought forward for further discussion at a Council Retreat, held February 4th, 2005.  The recommendations and options included in this report are based upon discussions at the Council Retreat.

 

Recommendations previously approved by Council in 2004 with respect to the Reserve Study are as follows:

 

  • THAT Working Capital, Corporate Rate Stabilization, Winter Maintenance, Contingencies, Special Corporate Rate Stabilization, and Debt Charge Payment reserves be consolidated into one Corporate Rate Stabilization Reserve;

 

 

  • THAT the City Centre Infrastructure, Raymerville Park Construction, Valleylands Revitalization, Peace Garden, Parks Vaughan/Gallanou, Fred Varley Art Centre, Elson Park, Tennis Court Repairs, Walden Pond Maintenance reserves and reserve funds be closed and the balance of funds, in the amount of $52,060, be transferred to the Major Capital Repairs and Replacement Reserve;

 

  • THAT the Tree Replacement reserve be closed and balance of funds, in the amount of $7,030, be transferred to an existing capital project, project # 6197 – Replacement of Boulevard/Park Trees;

 

  • THAT the Facility Ramp-up reserve be used to fund 2005 Capital Projects for Centennial Community Centre Renovations ($3,100,000), Centennial Community Centre – Second Floor Accessibility Improvements ($100,000), Museum Reception Centre ($490,000);

 

  • AND THAT the Firefighter Bunker Gear, Major Capital Repairs/Replacement, Recreation and Culture Capital Replacement reserves be consolidated into an interest earning Major Capital Repairs and Replacement Reserve.

 

Recommendations deferred to the Council Retreat and addressed in this report are as follows:

  • THAT the balance of the Corporate Rate Stabilization reserve be established at 15% of the local tax revenue, $11,650,000 for 2004;

 

  • THAT the balance of funds in the Corporate Rate Stabilization Reserve be transferred to the Major Capital Repairs and Replacement Reserve;

 

  • THAT the General Capital Reserve and Planning Studies reserve be consolidated to an interest earning “10% Non-DC Growth” reserve to be funded from the sale of land;

 

  • THAT $500,000 of the Hydro Interest Income be used to fund the interest earning Environment Land Acquisition Reserve Fund on an annual basis;

 

  • THAT an interest earning Land Acquisition Reserve Fund be established to finance the purchase of strategic land acquisitions that are non-growth and that are not environmentally sensitive;

 

  • THAT $500,000 of the Hydro Interest Income be used to fund the interest earning Land Acquisition Reserve Fund on an annual basis;

 

  • THAT $3,000,000 of the Hydro Interest Income be used to fund the interest earning Major Capital Repairs and Replacement reserve on an annual basis;

 

  • THAT the Hydro Equity Reserve be closed with the balance transferred to the Major Capital Repairs and Replacement reserve;

 

  • THAT future year-end operating surpluses, if any, be used first to top-up the Corporate Rate Stabilization Reserve to a level equivalent to 15% of local tax revenues and secondly to replenish the expenditures in the Environmental Land Acquisition Reserve Fund, and finally transferred to the Major Capital Repairs and Replacement Reserve;

 

  • AND FURTHER THAT should the year-end operating surplus not be sufficient to top-up the Corporate Rate Stabilization Reserve or replenish the Environmental Land Acquisition Reserve Fund, funding for both should be included in the following year’s capital budget discussions.

 

 

DISCUSSION:

Recommendations deferred from the November 22nd, 2004 Reserve Report and issues discussed at the January 4th, 2005 Council Retreat can be grouped into the following sections:

 

1)      Corporate Rate Stabilization Reserve

2)      10% Non-DC Growth Reserve Fund

3)      Environmental Land Acquisition and Land Acquisition Reserve Funds

4)      Life Cycle Replacement and Capital Reserve Fund

 

1)  CORPORATE RATE STABILIZATION RESERVE

 

The purpose of the Corporate Rate Stabilization Reserve include the following:

·        to maintain the Town’s cash flow;

·        minimize the need for short-term borrowing;

·        fund urgent expenditure requirements;

·        minimize changes in the tax or rate levy; and to

·        smooth out fluctuations due to one-time expenditures.

 

The Corporate Rate Stabilization reserve is a non-interest earning reserve.  As with all other reserves, the use of funds from the Rate Stabilization reserve will require Council authorization.

 

The Government Finance Officers Association’s (GFOA’s) recommended “best practices” level of funding for the rate stabilization reserve is between 5% to 15% of local annual tax revenue.  The lower range (5%) of the GFOA best practice assumes other reserves exist for specific contingencies such as winter maintenance.  With the consolidation of various reserves into the Corporate Rate Stabilization reserve, approved in 2004, it is recommended that the Corporate Rate Stabilization reserve balance be established at 15% (upper range of the GFOA recommendation) of the local annual tax revenue.  For 2004, 15% of the local annual tax revenue is $11.7M. 

 

With a balance of $31.2M in the Corporate Rate Stabilization reserve at the end of 2004, it is further recommended that funds in excess of 15% of the local annual tax revenue, in the amount of $19.5M ($31.2M – $11.7M) be transferred to the Lifecycle Replacement and Capital Reserve Fund (formerly the Major Capital Repair and Replacement Reserve – discussion on name change is addressed in the Life Cycle Replacement and Capital Reserve Fund section of this report).

 

Replenishment and topping-up of the Rate Stabilization reserve to 15% of the local annual tax revenue amount is based upon available year-end operating surpluses in future years.  Future operating budget surpluses, if any, will be used first to top-up the Rate Stabilization reserve to a maximum of 15% of the local annual tax revenue for that year.  The balance of the operating surpluses, if any, will be used to replenish the Environmental Land Acquisition Fund with the remainder, if any, to be allocated to the Life Cycle Replacement and Capital Reserve Fund.

 

Should the year-end operating surplus not be sufficient to top-up the Corporate Rate Stabilization Reserve or replenish the Environmental Land Acquisition Reserve Fund, funding should be considered in the following year’s capital budget discussions. 

 

 

2)  10% NON-DC GROWTH RESERVE FUND

 

New Town facilities (Recreational and Libraries) related to growth is primarily funded from developers through Development Charges (DC’s).  Development Charges fund 90% of the total capital expenditure with the remaining 10% funded from non-development charge sources.

 

Currently, the Town has two reserves, (General Capital $5.2M and the Planning Studies Reserve - under six hundred dollars) for the 10% Non-DC component of growth-related capital projects.  It is recommended that the General Capital and Planning Studies reserves be consolidated into an interest earning 10% Non-DC Growth Reserve Fund for the purpose of funding the 10% non-DC component of growth-related recreational facilities and libraries.  The reserve will be funded from proceeds of land sales.  The purpose and use of the funds will not change after the consolidation.

 

Based upon the 10-year building program in the Development Charges Background Study (adopted by Council in 2004), the current reserve balance, allocation of interest to the reserve, and an assumption on future land sale proceeds (based upon history of approximately $0.2M per year), the 10% Non-DC Growth Reserve Fund is projected to be sufficient to fund the Town’s portion of growth-related recreational facilities and libraries to 2013.  A major assumption supporting this projection is that the timing of the new facilities is consistent with the Development Charges Background Study.  If facilities are accelerated, borrowing may be required to supplement the 10% Non-DC Growth Reserve Fund in order to fund the Town’s portion of the growth-related Recreational & Library facilities.

 

 

3)  ENVIRONMENTAL LAND ACQUISITION AND LAND ACQUISITION RESERVES

 

The Environmental Land Acquisition Reserve Fund is an interest-earning reserve established to provide a source of financing for the Town to acquire/protect environmentally sensitive land.  For land acquisitions that are strategic in nature, non-growth (and thus cannot be DC-funded), and not environmentally sensitive, a separate interest-earning, Land Acquisition reserve fund is recommended.

 

It is recommended that $0.5M of the Town’s projected (annual $4.6M) Hydro Interest Income be used to fund the Environmental Land Acquisition reserve fund and that the reserve be replenished on an annual basis from operating surpluses, if any following the top-up of the Corporate Rate Stabilization Reserve, for purchases made in the year.  Annual requests to top-up the reserve will be included in the following year’s Capital Budget for discussion should the previous year’s operating surplus not be sufficient to fully replenish the fund for purchases made in the year.

 

Similarly, it is recommended that $0.5M of the Town’s projected Hydro Interest Income be used to fund the Land Acquisition reserve fund.  The Land Acquisition reserve fund will not be replenished as strategic land purchases are made but will continue to grow each year with the $0.5M Hydro Interest Income allocation to the reserve fund.

 

 

4)  LIFE CYCLE REPLACEMENT AND CAPITAL RESERVE FUND

 

The Town’s three reserves established for the major repair and replacement of Town assets, the  Firefighter Bunker Gear ($0.3M), Major Capital Repairs and Replacement ($17.2M), and the Recreation and Culture Capital Replacement reserve ($0.8M), were consolidated to one Major Capital Repairs and Replacement reserve.  The reserve study reviewed major assets at the Town (excluding Waterworks) and made recommendations on the replacement of assets based on factors such as estimated replacement cost and useful life of the asset.  Based on the reserve study and feedback from Council, this reserve should be an interest-earning reserve to primarily fund the replacement of the Town’s aging infrastructure and for major capital expenditures approved by Council.  With this clarification of the purpose of the reserve and to be consistent with the wording of the reserve study, it is recommended that the Major Capital Repairs and Replacement reserve be renamed to the Life Cycle Replacement and Capital Reserve Fund. 

 

The financial model for this reserve fund will be updated annually to reflect new assets added to the Town’s inventory, updates based on conditional assessments performed on assets identified to be replaced, and approved life cycle replacement-related capital budgets. 

 

As shown in previous reserve study presentations, the Town’s expected future replacement costs, for assets such as Recreational Facilities and roads, is expected to fully deplete Town reserves.  Options to manage and fund the life cycle replacement of assets are:

·        PROPERTY TAX RATE INCREASE – special tax rate increase(s) to be allocated to the Life Cycle Replacement and Capital Reserve Fund.  Although this option was voted on and not passed by the Budget Sub-Committee (for the 2005 Budget), it is an option that should be considered, in the future, as the Life Cycle Replacement and Capital Reserve Fund model is updated (annually).

 

·        DEBT FINANCING – short-falls between reserve balance and the required cost of replacement of assets in the future may require debt financing to fully fund.  The impact of the debt financing will be interest charges incorporated into future years’ operating budgets.

 

·        CONSOLIDATION OF RESERVES AND USE OF HYDRO INCOME – This option recommends the transfer of excess Corporate Rate Stabilization reserves (outlined earlier in this report) and the Hydro Equity Reserve into the Life Cycle Replacement Reserve Fund.  Combined with the use of Hydro Interest Income, and future Hydro Dividend Income this option will provide both an immediate increase to the balance of the Life Cycle Replacement and Capital Reserve Fund as well as provide for on-going funding.

 

Based upon current projections, the estimated $19.5M transfer from the Corporate Rate Stabilization Reserve (discussed earlier in this report) and the transfer of the balance in the Hydro Equity Reserve ($12.5M at the end of 2004) will provide the Life Cycle Replacement and Capital Reserve Fund a healthy starting balance to meet future asset replacement and capital acquisition obligations.  Further, interest will be allocated to this reserve fund and future Hydro Interest and Dividend Income will also be allocated.  Based upon current assets and projections, these recommendations will result in a Life Cycle Replacement and Capital reserve sufficient to fund life cycle asset replacements for the next 20 years while providing flexibility to fund other capital acquisitions during the same period.

 

The other options mentioned above, will be considered during the annual updates to the Life Cycle Replacement and Capital reserve.

 

 

FINANCIAL CONSIDERATIONS:

Currently, all Hydro Interest Income received is transferred to the Hydro Equity Reserve.  Recommendations in this report support directing the annual Hydro Interest Income, projected to be $4.6M per year, to the following:

                                                                                                                       $ Millions

  • Environmental Land Acquisition Reserve Fund                                          $0.5
  • Land Acquisition Reserve Fund                                                                $0.5
  • Life Cycle Replacement & capital Reserve (interest earning)                      $3.6

Total                                                                                                       $4.6

 

The recommendations from the reserve study results in more reserve funds earning interest where no interest was allocated to the funds in the past.  Interest income earned on reserves that previously were not allocated interest benefited the Operating Budget and helped to achieve the Interest Revenue operating budget amount of $6.7M, in previous years.  Finance staff have reviewed the impact of allocating interest to the above reserves, starting in 2005, and believe that the operating budget amount of $6.7M of interest revenue will not be negatively impacted. 

 

Currently, the Town does not receive Hydro Dividend Income.  As regular dividend payments are received, the dividend income will be included in the operating budget with a transfer to the Life Cycle Replacement and Capital Reserve Fund.

 

Future year-end surpluses, if any, in the operating budget will be allocated to top-up the Working Funds/Stabilization reserve to 15% of local tax revenues first.  Year-end surpluses remaining, if any, after topping up the stabilization reserve will be used to replenish expenditures in the Environmental Land Acquisition Reserve Fund (second priority) and the Life Cycle Reserve Fund (third priority).  Should future year-end surpluses not be sufficient to top-up the Stabilization and replenish the Environmental Land Acquisition reserve fund, the funding requirements should be included for discussion in the following year’s Capital Budget discussions.

 

 

 

 

 

 

 

 

 

 

 

 

 

Barb Cribbett,

Treasurer

 

Andy Taylor,

Commissioner of Corporate Services

 

 

 

 

 

 

Joel Lustig

Director, Client and Financial Services

 

Q:\Finance and Administration\Finance\SHARED\2005 General Committee Finance\0507 Town of Markham Reserve Study - Recommendations from 2005 Council Retreat .doc