FINANCE AND ADMINISTRATIVE 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:	2004-November-22
	SUBJECT:	Town of Markham Reserve Study

RECOMMENDATION:

THAT the report dated November 22, 2004 entitled “Town of Markham Reserve Study” be received;

AND 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;

AND THAT the balance of the Corporate Rate Stabilization reserve be established at 15% of the local tax revenue, $11,650,000 for 2005;

AND THAT the balance of funds in the Corporate Rate Stabilization Reserve, in the amount of $18,959,307, be transferred to the Major Capital Repairs and Replacement Reserve;

AND 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;

AND 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;

AND 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;

AND 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 $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 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;

AND 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;

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

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 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.

PURPOSE:

To review and adopt recommendations for the Town’s reserves and reserve funds.

EXECUTIVE SUMMARY:

The Town of Markham has several reserves and reserve funds established for future known expenditures or for contingent purposes. The consulting firm, CN Watson and Associates was hired to review the Town of Markham’s reserves and reserve funds and to make recommendations mainly on adequacy and consolidation of the reserves.

CN Watson and staff recommend the following:

· Categorize the reserves between Working Funds/Stabilization Reserve and Capital Reserves;

· Establish targets for the Working Funds/Stabilization Reserve based on best practices;

· Establish a process for topping up the Working Funds/Stabilization Reserve;

· Allocate interest to reserves such as the Life Cycle Replacement Reserve and the 10% Non-DC Growth Reserve.

· Establish a process for funding and replenishing of the Environmental Land Acquisition Reserve on an annual basis;

· Establish a new Land Acquisition Reserve;

· Consolidate and transfer of unused (Specific Capital reserves), excess reserve (Stabilization reserve) balances to build up the Life Cycle Replacement (a reserve to fund the repair/replacement of the Town’s aging infrastructure);

· Allocate the projected annual $4M of Hydro Interest Income to fund the Environmental Land Acquisition Reserve ($0.5M), the Land Acquisition Reserve ($0.5M) and the Life Cycle Replacement Reserve ($3.0M)

· Use of the Facility Ramp-up reserve to fund one-time capital expenditures such as the 2005 capital projects for Centennial Community Centre and Museum Reception Centre.

Details on all recommendations, summarized above, are included in the Discussion section of this report.

BACKGROUND:

The consulting firm, CN Watson and Associates, was retained by the Town to review the Town of Markham’s reserves and reserve funds and to make recommendations mainly on adequacy and consolidation of the reserves. The full CN Watson Reserve Study is attached to this report, Exhibit D.

The Reserve Study was presented to the Finance and Administrative Committee on November 8^th (attached as Exhibit C). This report incorporates feedback received from the Finance and Administrative Committee.

DISCUSSION:

The Town of Markham has several reserves and reserve funds established for future known expenditures or for contingent purposes. While some reserves are legislated and required for specific purposes, other reserves are discretionary and were established as a contingency to mitigate potential future unanticipated one-time expenditures.

The consulting group, CN Watson and Associates Ltd., was retained by the Town of Markham to perform a review of the Town’s Reserves and Reserve Funds. The purpose of the reserve study was to:

· determine the adequacy of the Town's Reserves to meet known future expenditures (Infrastructure/Capital Asset rehabilitation/replacements);

· assess and benchmark the Town of Markham's Reserves with those of other Municipalities & "Best Practices" to determine an adequate level for rate stabilization/contingency reserves; and to

· review, consolidate, and refine policies surrounding the various reserves and reserve funds at the Town.

Currently the Town reserves total approximately $219M (see Exhibit A). The Reserve Study included a review of 26 Reserve/Reserve Funds listed in “Section 1 – Reserves included in the Study” of Exhibit A. The Town’s waterworks reserve was excluded from CN Watson’s analysis as regulations for Bill 175-The Sustainable Water and Sewage Systems Act are pending and a separate study on full cost accounting and recovery of providing drinking water, to be approved by the Minister of the Environment, will be required once regulations are passed. A list of reserves not included in the study, total $156M, is provided in “Section 2 – Reserves Not included in the Study” of Exhibit A. With exception of the Hydro Equity Reserve, the reserves not included in the study are generally non-discretionary (i.e. DCA reserve is a legislated reserve and WSIB/LTD reserves are required since the Town is self-insured in these areas).

One of the first recommendations from CN Watson is that the various Reserves and Reserve Funds included in the study be consolidated and grouped into two main categories:

A) Working Funds/Stabilization Reserve

B) Capital Reserves

A) WORKING FUNDS/STABILIZATION RESERVE

The purpose of the Working Funds/Stabilization Reserve is to:

• maintain the Town's cash flow;

• minimize 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 Town currently has six reserves that serve this purpose with a total balance of approximately $30.6M (see Exhibit A). It is recommended that the six reserves be consolidated into one Corporate Rate Stabilization Reserve with a balance equivalent to 15% of the local annual tax revenue for the Town. For the Town of Markham, 15% equates to $11.7M in 2005. The 15% is based upon the Government Finance Officer’s Association’s (GFOA’s) recommended Best Practices of 5% to 15%. According to GFOA recommendations, 5% of local annual tax revenue may be considered for municipalities that have many other reserves that serve this purpose (i.e. separate reserves for winter maintenance, legal, etc. in addition to a corporate rate stabilization reserve).

The balance of funds, $18.9M ($30.6M - $11.7) will be transferred to Capital Reserves (Life Cycle Replacement) as shown on Exhibit B. The Corporate Rate Stabilization Reserve will be topped-up annually from the Town’s Operating Surplus, if any, in order to maintain a balance of 15% of the local annual tax revenue. Should future year-end operating surpluses not be sufficient to top-up this reserve to 15% of local annual tax revenue, it is recommended that the funds required for the top-up be discussed during the following year’s capital budget process.

Currently the rate working funds/stabilization reserves do not earn interest and it is not recommended that the stabilization reserve start to earn interest as it will be topped up each year.

B) CAPITAL RESERVES

The reserves included in this category were established primarily to fund capital expenditures. The Capital Reserves may be further grouped into the following:

B-1) 10% Non-DC Growth Reserve

B-2) Specific Capital Reserves

B-3) Life Cycle Replacement Reserves

B-1) 10% Non-DC Growth Reserve

Currently there are two reserves within this group, total balance of $5.2M (Exhibit A), used to fund the non-growth component of development-related projects (i.e. new recreational facilities and libraries). Based upon the 10-year building program in recreation and library, outlined in the recently adopted Development Charges Background Study (August, 2004), CN Watson made the following recommendations to ensure the Town had sufficient reserves to fund the 10% non-growth component of the building program:

· Start allocating interest income to the reserve;

· Continue to fund the reserve from the sale of land; and

· Consolidate the two reserves into one “10% Non-DC Growth Reserve”.

The 10% Non-DC Growth Reserve is projected to meet the Town’s portion of growth related projects per the DC Study’s 10-year building program based on the recommendations above and assumptions of 2.5% inflation, 3.5% interest, and an annual average proceeds from the sale of lands of $200,000 per year. Further details on assumptions and 10-year DC building program capital requirements are included in the CN Watson report (Exhibit D).

B-2) Specific Capital Reserves

Over the years, the Town has established 15 reserves and reserve funds that have been set aside for a specific purpose (see Exhibit A). CN Watson reviewed the history and purpose of the 15 reserves and made recommendations to close all specific capital reserves with the exception of: Facility Ramp-up, Heritage Preservation, Markham Heritage Loans, Environmental Land Acquisition, Environmental Sustainability. The balance in the closed reserves, in the amount of $52,060 (Exhibit B), will be transferred to Life Cycle Replacement Reserves (a reserve described in section B-3 below). The Tree Replacement Specific Capital Reserve, balance of $7,030, listed on Exhibit B, will be transferred to a capital project with the same objective, such as 2004 capital project #6197 – Replacement of Boulevard/Park Trees.

As outlined in the attached CN Watson Study, many of the Specific Capital reserves to be consolidated were established a number of years ago and have nominal balances. Documentation on the Specific Capital reserves will be retained by the Town and future claims related to the Specific Capital reserves included in the consolidation/transfer will be funded from the Life Cycle Replacement Reserve and/or that year’s capital/operating budget.

The Town’s Facility Ramp-up (projected $4.8M balance by year-end ) contains surplus operating budget funds that resulted when the Town planned a multi-year ramp-up or phase-in of the impact of personnel costs related to the opening of new facilities (i.e. Angus Glen Community Centre & Library, East Community Centre, Bur Oak Fire Station, Cornell Fire Station). The on-going operating costs exceed $1M per facility and funds were included in the budget each year to build the base operating budget to that level. It is recommended that the Town’s Facility Ramp-up reserve be used to fund one-time capital projects that are non-growth (and thus cannot be DC funded). The Budget Sub-Committee is currently considering funding the following projects from the Facility Ramp-up Reserve:

· Centennial Community Centre Renovations $3.100M

· Centennial C.C. – Second Floor Accessibility Improvements $0.100M

· Museum Reception Centre $0.490M

Total $3.690M

There are no recommendations to replenish the expenditures in the Facility Ramp-up Reserve or to allocate interest to the reserve. The reserve will continue to accumulate funds as the Town continues its practice of ramping up personnel costs for new facilities.

The Town’s (interest earning) Environmental Land Acquisition Reserve Fund (balance of $3M) is intended to provide a source of financing for the Town to acquire/protect environmentally sensitive land. It is recommended that $0.5M of the Town’s projected (annual $4M) Hydro Interest Income be used the 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 the 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.

It is further recommended that an (interest earning) Land Acquisition Reserve Fund be established to finance the purchase of strategic land acquisitions that are non-growth (and thus cannot be DC-funded) and that are not environmentally sensitive. The funding of this new reserve fund, recommended at $0.5M per year, will also come from annual Hydro Interest Income.

B-3) Life Cycle Replacement Reserve

Life Cycle Replacement (LCR) reserves address the funding requirements for on-going capital replacement and preventative maintenance of capital assets over their useful life. Capital Assets that the Town owns and maintains include its facilities (i.e. Civic Centre, Community Centres, Libraries, Fire Stations, Cultural venues), bridges, roads, park amenities, vehicles, information technology infrastructure, storm sewers, streetlights, and fire fighting equipment. As the Town’s infrastructure ages, capital expenditures are projected to increase to repair/maintain and eventually replace the assets.

Using statistical construction data and other financial models, CN Watson consolidated the Town’s asset inventory and projected major rehabilitation and replacement costs for the Town’s infrastructure.

Based on CN Watson’s financial projections for the Town’s capital infrastructure cost projections for the next 60 years, it is recommended that the Town set aside $12.1M a year above it’s annual capital program ($16.7M for 2005) in order to fund life cycle replacement requirements and to keep the reserve balance in the same positive cash position 60 years from now. An annual $12.1M contribution equates to approximately a 15.5% tax rate increase and is not recommended as the $12.1M assumes the rate of expenditures will occur exactly as projected, regardless of condition of asset, and further makes assumptions on inflation (2.5%) and interest (3.5%) over the full 60 year period.

Staff reviewed other revenue sources and recommend that $3M of the projected annual $4M Hydro Interest Income be directed to Life Cycle Reserve on an annual basis. It is further recommended that the approximately $12M balance in the Hydro Equity Reserve be transferred to the Life Cycle Replacement reserve and that this reserve start earning interest.

It is anticipated that the Life Cycle Replacement reserve will be used to supplement the Town’s current capital program, when required, above the $16.7M base, with an annual increase of $0.5M from assessment growth. The Life Cycle Replacement reserve will supplement capital expenditures for repair/maintenance and replacement related for Town capital infrastructure. While the $12.1M of annual contribution (15.5% tax rate increase) to the LCR reserve is projected to keep the reserve in the same positive balance in 60 years (2065), the CN Watson/staff recommendation (i.e. a $3M annual contribution from Hydro Interest Income, transfer the $12M balance in the Hydro Interest Reserve into the LCR reserve, and start allocating interest to the LCR reserve) is projected to keep the Life Cycle Replacement reserve in a positive balance until 2024 (approximately 20 years). Assumptions on yearly expenditures, interest rates, and inflation are included in the CN Watson report (Exhibit D).

Currently there are three LCR reserves (Firefighter Bunker Gear, Recreation & Culture Capital Replacement, Major Capital Repairs & Replacement Reserve) with a combined balance of $18.1M (Exhibit A). CN Watson recommends that all LCR reserves be consolidated into the Major Capital Repairs & Replacement Reserve. Following the consolidation and the transfer in from the Hydro Equity Reserve, the Working Funds/Rate Stabilization reserve (Section A) and from the Specific Capital Reserves (Section B-2), the Major Capital Repairs & Replacement Reserve balance is projected to be $49.5M as summarized below:

Summary Of Recommended Transfers To The Major Repair & Replacement 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 $4M per year, to the following:

$ Millions

• Environmental Land Acquisition Reserve Fund $0.5
• Land Acquisition Reserve Fund $0.5
• Life Cycle Replacement Reserves (interest earning) $3.0

Total $4.0

It is further recommended that the estimated December 2004 balance of $12.4M in the Hydro Equity reserve (see Exhibit A) be consolidated to the interest earning Life Cycle Replacement Reserve.

The recommendations to close/consolidate/transfer reserves are outlined in Exhibit B. As shown on the exhibit, all but $7,030 of the transfers will be directed to the Life Cycle Replacement reserve, bringing the total of the LCR reserve to $49.5M

If all recommendations are approved, there will be a total of $55.3M in reserves and reserve funds earning interest where no interest was allocated to the reserve in the past:

$ Millions

• Environmental Land Acquisition Reserve Fund (new funding) $0.5
• Land Acquisition Reserve Fund (new reserve fund) $0.5
• Life Cycle Replacement Reserves (interest earning to start ’05) $49.5
• 10% Non-DC Growth Reserve (interest earning to start ’05) $5.2

Total $55.7

In the past, interest income earned on the above funds benefited the Operating Budget and helped to achieve the Interest Revenue operating budget amount of $6.7M. 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. Further increases to the $6.7M budgeted revenues is not advised at this time.

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 Reserves (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.

ATTACHMENTS:

Exhibit A – Town of Markham – Reserve Balances Projected to 12/31/04

Exhibit B- Summary of Reserve Consolidations/Transfers

Exhibit C – November 8 Finance and Administrative Committee Presentation

Exhibit D – CN Watson and Associtate’s “Review of Reserves and Reserve Funds”

Barb Cribbett, Treasurer

Andy Taylor, Commissioner of Corporate Services

Joel Lustig

Director, Client and Financial Services

Q:\Finance and Administration\Finance\SHARED\2004FinAdminCtteeReports\0479 Town of Markham Reserve Study.doc