report for city council september 2, 2009...

Financial Stabilization Reserve Review

Recommendation:That Executive Committee recommend to City Council:1. That policy C217B – Reserve and

Equity Accounts, as revised in Attachment 5, be approved.

2. That excess Sinking Fund earnings of $25 million be removed from the Sinking Fund, with $16 million as a one-time replenishment to the unappropriated Financial Stabilization Reserve balance and $9 million appropriated in the Financial Stabilization Reserve, as outlined in Attachment 1 of the May 26, 2009, Finance and Treasury Department report 2009FTF009.

Report SummaryThis report provides the results of the review of the Financial Stabilization Reserve (“the Reserve”) and recommended changes to policy C217A – Reserve and Operating Equity Accounts as it relates to the Financial Stabilization Reserve. A review of the remaining reserve accounts will take place and recommendations will be presented to City Council later in 2009.

Previous Council/Committee Action At the June 3, 2009, Executive

Committee meeting, the May 26, 2009, Finance and Treasury Department report 2009FTF009 was postponed to the August 26, 2009, Executive Committee meeting.

ReportThe focus of this review was to outline strategies to fund the Reserve as well as review the appropriateness of the current 7% target level and cap of $85 million. This review included a survey of other municipalities, review of guideline information from the Government Finance Officers Association (GFOA), and internal review of potential funding opportunities and strategies.

Background InformationThe Reserve was established in 1997 to provide flexibility in addressing financial risks associated with revenue instability and unforeseen costs on a transitional basis, and to ensure the orderly provision of services to citizens. As per policy, C217A – Reserve and Operating Equity Accounts, a target balance of 7% of general government operating expenditures to a maximum balance of $85 million has been established. The source of funding for the Reserve has generally been tax-supported operating surplus. Therefore, it is primarily in positive economic times that the reserve has increased.

Current Reserve Fund BalanceAs of December 31, 2008, the balance of the unappropriated Reserve was $85.4 million and the appropriated balance was $31.8 million, for a total Reserve balance of $117.2 million. The appropriated balance represents approved projects or agreements where commitments have been made and expenditures are expected to be incurred in the future.

A draw of $24.5 million has been made from the unappropriated Reserve in 2009 to fund the 2008 tax-supported operating deficit ($20.3 million) and to

ROUTING – Executive Committee, City Council | DELEGATION – C. Warnock/C. EngelkingWRITTEN BY – S. McDougald | May 26, 2009 – Finance and Treasury Department 2009FTF009 of 4


fund operating expenditures carried forward from 2008 ($4.2 million). Overall, these adjustments result in an unappropriated reserve fund balance of $62.4 million, which is significantly lower than the current target balance.

In addition, $4 million from the Reserve has been built into the 2009 operating budget on a one-time basis to partially offset the anticipated reduction to investment earnings. This draw is anticipated to be replenished at the beginning of 2010 from one-time hiring controls implemented for 2009.

Attachment 1 includes information on the Reserve balance and items funded from 2006 through 2008.

GFOA Guidelines and Target Balance AnalysisThe GFOA continues to recommend that the following stabilization reserve target balances be established and maintained:

5% to 15% of regular general fund operating revenues; or

1 to 2 months (8.3% to 16.7%) of regular general fund operating expenditures.

Attachment 2 provides a detailed analysis of the City’s current target balance of 7% of general government operating expenditures in comparison to the GFOA recommended targets and targets established by other municipalities.

The current City policy falls just within the range suggested for revenues but below the range of 8.3% to 16.7% suggested for expenditures. Given the uncertainty in some of the City’s revenues, the guideline based on

operating expenditures is considered more prudent for the City of Edmonton.

General government operating expenditures has included consolidated tax-supported expenditures and debt servicing costs (principal and interest). Going forward, as a result of the accounting model change, general government expenses for the purposes of the Reserve calculation will include consolidated tax-supported expenses (excluding amortization) and debt servicing interest costs.

Survey of MunicipalitiesConsistent with the reserve review completed in 2006, the City of Calgary and City of Winnipeg continue to have similar stabilization reserve policies to the City of Edmonton. The City of Winnipeg continues to have an established minimum balance of 5% of tax-supported expenditures and a target balance of 10% of tax-supported expenditures.

Upon Calgary’s 2007 review, the city established a minimum balance of 5% of tax-supported expenditures (previously $20 million), and increased the target balance from 8% to 15% of tax-supported expenditures. As well, the maximum cap of $120 million was removed, and the wording of their policy was changed to include previously committed one-time contingent funds that are no longer required as a possible funding source to their stability reserve. Attachment 3 includes a summary of the survey responses received from other municipalities. Recommended Policy ChangesCity Council could choose to allocate a portion of the tax-supported budget to replenish or build the Reserve on an on-

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going basis. However, with the pressure on the tax-levy and the current downturn in the economy, this is not being recommended.

Administration recommends that the following policy changes be made:

The target level of the Reserve be increased to be consistent with the GFOA guidelines of one month of expenditures (8.3%);

The maximum cap of $85 million be removed; and

If the Reserve balance falls below a minimum threshold level of 5% of general government expenses, that a strategy be adopted to achieve the minimum level over a period not to exceed three years, including:

Allocating any unplanned one-time revenues (e.g. WCB Special Dividend), previously committed one-time contingent funds (e.g. allowance for tax appeals) or appropriated items that are no longer required for their original purpose to replenish the Reserve; and

Reassessing other reserve and equity account balances and where appropriate, amounts be reapplied to replenish the Reserve.

These changes will reduce the risk associated with only operating surpluses funding the Reserve, while still providing flexibility to deal with unforeseen costs.

Attachment 4 includes a summary of the recommended policy and procedure changes.

Attachment 5 provides a copy of the recommended policy C217B – Reserve and Equity Accounts.

Sinking FundThe Sinking Fund was established to meet future obligations to the purchasers of certain City of Edmonton debentures. As part of the strategies to replenish the Reserve, a review of the excess Sinking Fund earnings was completed by the City’s investment staff. As at December 31, 2008 the City’s share of the excess earnings was $30.2 million.

Based upon review and prudent fiscal management, Administration recommends that $25 million of excess earnings be withdrawn from the Sinking Fund, with $9 million appropriated within the Reserve to be available to fund any shortfall incurred upon maturity of the last debenture issue in 2018, and the remaining $16 million be used as a one-time replenishment of the Reserve. These excess earnings would be transferred from the Sinking Fund to the Balanced Fund and invested, with an expectation of a higher rate of return.

Administration will continue to monitor the level of funds that will be required upon the maturity of the last debenture to ensure that the appropriate level of funding has been appropriated within the Reserve.

Attachment 6 includes a table which displays the earnings, excess earnings and amounts withdrawn from the Sinking Fund as approved by City Council for the years 2003 – 2008.

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PolicyFinance & Treasury Department report 2009FTF009 contributes to meeting reporting requirements outlined in the Municipal Government Act.

Focus AreaThis report contributes to the building organizational capacity focus area of the governance outcome area. The intent of this report and revised policy is to assist the City to effectively manage unforeseen costs and to support decision making.

Justification of Recommendation1. The changes to the reserve and

equity accounts (Attachment 4) will provide a target level consistent with GFOA guidelines and with practices of other municipalities. This will reduce the risk associated with only operating surpluses funding the Financial Stabilization Reserve, while providing flexibility to deal with unforeseen costs and emergent needs. Revised policy C217B – Reserve and Equity Accounts appropriately integrates the changes being recommended.

2. Approval to withdraw excess Sinking Fund earnings of $25 million will increase investment earnings to support municipal operations and provide a one-time replenishment to the unappropriated Financial Stabilization Reserve balance. Sufficient funds will be set aside to fund any shortfall upon maturity of the last debenture issue in 2018.

Attachments1. Financial Stabilization Reserve 2. Target Balance Analysis 3. Survey of Municipalities

4. Summary of Recommended Policy Changes – C217A

5. Recommended Policy – C217B – Reserve and Equity Accounts

6. Sinking Fund

Others Reviewing this Report Senior Management Team

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Attachment 1

Financial Stabilization Reserve ($ millions)

Financial Stabilization Reserve Balance

Unappropriated Appropriated Total

FSR Closing Balance at December 31, 2008 85.4$ 31.8$ 117.2$

(20.3) (20.3)

2008 Carry-forward Council Approved Items (4.2) 4.2 -

EEDC Film Agreement - Lionsgate 1.5 (1.5) -

Net FSR Balance 62.4$ 34.5$ 96.9$

Investment Earnings Strategy - 2009 (4.0) 4.0 -

Excess Sinking Fund Earnings - Recommendation 3 16.0 9.0 25.0

Remaining FSR Balance (after recommendations) 74.4$ 47.5$ 121.9$

2008 Operating Deficit

2006 – 2008 Items Funded from the Financial Stabilization Reserve

2008 2007 2006

Unappropriated Appropriated Unappropriated Appropriated Unappropriated Appropriated

Opening Balance 84.0$ 27.4$ 79.4$ 32.9$ 75.2$ 7.0$

Surplus/(Deficit) 35.1 11.2 41.7 Transfer between Reserves (33.9) 33.9 (9.8) 9.8 (41.6) 41.6 2008 Tax Strategy (7.0) Affordable Housing (1.8) (3.0) (3.0) AMHC Loan Repayment 0.2 3.0 0.1 Art Gallery (4.0) Capital Contingency Fund (16.4) (5.2) (0.8) Champ Car/Grant Prix (2.3) Citadel Theatre (3.6) Ed Tel Dividend 4.0 Education Tax Room 6.0 EEDC Lions Gate Film (0.6) Election (1.3) Humane Society (0.8) Police Grant (1.9) (0.3) (0.7) Police Whyte Ave Overtime (1.3) Social Enterprise Fund (1.5) Transfer to capital (0.9) Other * (0.1) (2.5) 0.2 (1.6) 0.1 (5.9)

Closing Balance 85.4$ 31.8$ 84.0$ 27.4$ 79.4$ 32.9$

* Other includes various miscellaneous items, including items carried forward from Council Contingency.

Page 1 of 1 Report: 2009FTF009 Attachment 1

MIN TARGET MAXYear 5.0% 8.3% 10% 15% 16.7%2009* 71.0 118.3 142.0 213.0 236.72008 68.7 114.6 137.5 206.2 229.12007 59.2 98.7 118.4 177.6 197.32006 55.1 91.9 110.3 165.4 183.82005 50.9 84.9 101.9 152.8 169.82004 46.5 77.6 93.1 139.6 155.12003 43.3 72.2 86.7 130.0 144.5

GFOA GUIDELINES & OTHER MUNICIPALITIESExpenditure Based

Attachment 2

Target Balance Analysis($ millions)

Comparison 1 - The City of Edmonton’s current target compared to GFOA guidelines

Expenditure Based

Year FSR @7%Min @ 8.3% (one month)

Max @ 16.7% (two months) Min @ 5% Max @ 15%

2009* 99.4 118.3 236.7 77.7 233.12008 96.2 114.6 229.1 66.7 200.22007 82.9 98.7 197.3 60.8 182.52006 77.2 91.9 183.8 55.1 165.32005 71.3 84.9 169.8 52.3 156.92004 65.2 77.6 155.1 46.8 140.32003 60.7 72.2 144.5 42.4 127.1

Expenditure Based

GFOA GUIDELINES

Revenue Based

The current target of 7% of general government expenditures without consideration of the $85 million cap falls just within the range of the GFOA revenue based calculation, but below the expenditure calculation based on one or two months of operating expenditures.

Comparison 2 – The City of Edmonton proposed target compared to GFOA expenditure guidelines and targets used by other municipalities

Given the uncertainty in some of the City’s revenues, the guideline based on operating expenditures is considered more appropriate for the City of Edmonton. An increase to the minimum target of one month of expenditures or 8.3% as recommended by GFOA and the establishment of a minimum balance is considered appropriate for the City given the economic environment. * 2009 based on projected results at April 30, 2009. Prior year comparisons have been restated to reflect a similar basis of calculation.


Attachment 3

Survey of Municipalities

Municipality

Does the City have a stabilization reserve? If so, is there a target for

the stabilization reserve and what is the basis for the target?

What is the source of funding for the stabilization reserve? Does the City have a formal mechanisms to

replenish the reserve besides operating surplus?

What is the City’s balance

in the stabilization reserve as at December 31,

2008?

Calgary Yes. The City of Calgary has a Fiscal Stability Reserve (FSR). Minimum balance is 5% of tax-supported gross expenditures (net of recoveries) and there is no maximum level. The target is 15% of the City's tax-supported gross expenditures (net of recoveries).

Besides operating surplus, the FSR is funded from previously committed one-time contingent funds that are no longer required for their original purposes (e.g. recoveries from provisions for tax losses, legal claims, environmental issues).

$148 M

Winnipeg Yes. The City has the Fiscal and Mill Rate Stabilization Reserves. The minimum level for each reserve is 5% of the General Revenue Fund's budgeted expenses with a target of 10%.

Reserves are funded mostly from surpluses and interest revenues. If the reserve balance is below target or the pace of the increase in the stabilization funds are not being met, a replenishment plan is adopted by City Council, which may include using net added taxes in addition to surplus and interest to achieve the 10% target.

$84.6 M

Toronto The City does not have one general stabilization reserve. Instead, the City has established several special purpose reserves (e.g. Extreme Weather, Public Transit, Water Services) to smooth out fluctuations in the operations of various programs.

Each reserve has its own guidelines on sources of funding. For example, the Extreme Weather Reserve is funded from city operations, based on an analysis of the risk and history of expenses. The Public Transit Reserve is funded from operating surplus.

Not applicable

Portland Yes, the City has a General Reserve comprising of an Emergency Reserve for unanticipated events and a Countercyclical Reserve for economic downturns. The target is 10% of general fund revenues less short-term borrowing receipts, intrafund and grant revenues.

The reserve is funded from general fund revenues and must begin to be replenished within 24 months after the first use.

$50.6 M split evenly between the Emergency Reserve and the Countercyclical Reserve.


Attachment 4

Summary of Recommended Policy Changes - C217A

Current Policy and Procedures Proposed Policy and Procedures Policy Title and ReferenceReserve and Operating Equity Accounts

Reserve and Equity Accounts (removal of the reference to Operating equity)

Policy Statement2. That the financial stabilization reserve have a target balance of 7% of current general government operating expenditures. That 100% of any annual general government operating surplus be placed in the financial stabilization reserve. Any balance above the target will be applied evenly to the three subsequent years’ operating budgets.

2. That the financial stabilization reserve have a minimum balance of 5% and a target balance of 8.3% of current general government operating expenses. That 100% of any annual general government surplus be placed in the financial stabilization reserve. Any balance above the target will be applied evenly to the three subsequent years’ operating budgets or applied to significant one-time operating expenses or capital priorities. In the event of a balance below the minimum level, a strategy will be adopted to achieve the minimum level over a period not to exceed three years, including replenishing the reserve with any unplanned one-time revenues, previously committed one-time contingent funds or appropriated items that are no longer required for their original purpose, and reassessing other reserve and equity account balances and where appropriate, transferring amounts to the financial stabilization reserve.

Definitions1.01 Annual General Government Operating Surplus is the excess of revenue over expenditures, for general government activities, as consistent with the City’s audited financial statements.

1.01 Annual General Government Surplus is the excess of revenue over expenses (excluding amortization), for general government activities, as consistent with the City’s audited financial statements.

1.03 Operating Equity Accounts represent the accumulated earnings (accumulated surplus) within the operating fund of the City of Edmonton.

1.03 Operating Equity Accounts represent the accumulated earnings (accumulated surplus) within the City of Edmonton (removal of within the operating fund).

1.05 General Government Operating Expenditures are the general government operating expenditures consistent with the City’s annual audited financial

1.05 General Government Operating Expenses are the general government operating expenses (excluding amortization) consistent with the City’s annual audited financial statements for the most recent year.


Attachment 4

statements for the most recent year.Responsibilities2.03 City Manager to: 2.03 City Manager to:

d) Recommend to City Council a strategy to replenish the Financial Stabilization Reserve if the reserve balance falls below the minimum target level.

Procedures3.02 The Finance Manager will undertake a detailed review of reserve requirements every three years.

3.02 The Chief Financial Officer will undertake a detailed review of reserve requirements every three years.

3.04 The Financial Stabilization Reserve shall have a target balance of 7% of current general government operating expenditures up to but not exceeding $85 million.

3.04 The Financial Stabilization Reserve shall have a minimum target of 5% and a target balance of 8.3% of current general government operating expenses (removal of $85 million cap).

3.06 Any Annual General Government Operating Surplus will be applied to the Financial Stabilization Reserve. Any balance above the target will be amortized evenly over three years, starting with the subsequent year operating budget or applied to significant one-time operating or capital projects.

3.06 Any Annual General Government Surplus will be applied to the Financial Stabilization Reserve. Any balance above the target will be amortized evenly over three years, starting with the subsequent year operating budget or applied to significant one-time operating expenses or capital priorities (removal of the reference to Operating surplus).


Attachment 5

Recommended Policy – C217B – Reserve and Equity Accounts

POLICY NUMBER: C217B

REFERENCE: ADOPTED BY:

City Council 2009 xx xx

City Council 2006 11 28


City Council


City Council 1986 11 25 SUPERSEDES:

Municipal Government Act, R.S.A. 2000, C.M-26, as amended C217A

PREPARED BY: Finance & Treasury DATE: 2009 xx xx

TITLE: Reserve and Equity Accounts

Policy Statement:

1. In compliance with this policy and the Municipal Government Act, the establishment of all reserve and equity accounts and the transfers to and from these accounts require Council approval through the budget.

2. That the financial stabilization reserve have a minimum balance of 5% and a target balance of 8.3% of current general government operating expenses (excluding amortization). That 100% of any annual general government surplus be placed in the financial stabilization reserve. Any balance above the target will be applied evenly to the three subsequent years’ operating budgets or applied to significant one-time operating expenses or capital priorities. In the event of a balance below the minimum level, a strategy will be adopted to achieve the minimum level over a period not to exceed three years, including replenishing the reserve with any unplanned one-time revenues, previously committed one-time contingent funds or appropriated items that are no longer required for their original purpose, and reassessing other reserve and equity account balances and where appropriate, transferring amounts to the financial stabilization reserve.

3. Reserve and equity accounts balances will be reviewed on a periodic basis, with recommendations made to City Council.


CITY POLICY

Attachment 5


AUTHORITY: City Council EFFECTIVE DATE: 2009 xx xx


PAGE: 2 of 3

1. DEFINITIONS

1.01 Annual General Government Surplus is the excess of revenue over expenses, for general government activities, as consistent with the City’s audited financial statements (excluding amortization).

1.02 Reserve Accounts represent amounts appropriated from surpluses for designated requirements.

1.03 Equity Accounts represent the accumulated earnings (accumulated surplus) within the City of Edmonton.

1.04 Financial Stabilization Reserve is an uncommitted reserve account established for the purpose of providing funding to address significant emergent financial issues. The Reserve is not intended to be used to stabilize future tax rate increases.

1.05 General Government Operating Expenses are the general government operating expenses consistent with the City’s annual audited financial statements for the most recent year (excluding amortization).

2. RESPONSIBILITIES

2.01 City Council to:

a) Approve this Policy and amendments thereto.

b) Approve the establishment of and changes to Reserve and Equity Accounts.

c) Approve transfers to or from Reserve and Equity Accounts through the budget.

2.02 Executive Committee to:

a) Recommend to City Council approval of this Policy, amendments thereto.

2.03 City Manager to:

a) Recommend, to the Executive Committee of City Council, approval of this Policy and amendments thereto.

b) Recommend to City Council approval of the establishment of and changes to Reserve and Equity Accounts.

c) Recommend transfers to or from Reserve and Equity Accounts through the budget.


CITY PROCEDURE

Attachment 5

d) Recommend to City Council a strategy to replenish the Financial Stabilization Reserve if the reserve balance falls below the minimum target level.

CITY PROCEDURE


AUTHORITY: City Council EFFECTIVE DATE: 2009 xx xx


PAGE: 3 of 3

3. PROCEDURES

3.01 Reserve and Equity Accounts and transfers will be reported and approved through the budget.

3.02 The Chief Financial Officer will undertake a detailed review of reserve requirements every three years.

3.03 Interest earnings are intended to be applied to a reserve only if there are external requirements based on legislation or agreements. Interest will normally be applied at the City’s short-term investment earnings rate.

3.04 The Financial Stabilization Reserve shall have a minimum target of 5% and a target balance of 8.3% of current general government operating expenses.

3.05 The target level of the Financial Stabilization Reserve will be reviewed and revised with the completion of each audited annual financial statement.

3.06 Any Annual General Government Surplus will be applied to the Financial Stabilization Reserve. Any balance above the target will be amortized evenly over three years, starting with the subsequent year operating budget or applied to significant one-time operating expenses or capital priorities.

3.07 Use of the Financial Stabilization Reserve will be determined by City Council based on recommendation from the City Manager, after considering the general financial position of the organization.

3.08 Fund levels in the Equity Accounts will be reviewed every five years.


Attachment 6

Sinking Fund

The Sinking Fund was established to meet future obligations to the purchasers of certain City of Edmonton debentures. As of December 31, 2008 there were seven outstanding debenture issues for which the Sinking Fund is accumulating assets. These debenture issues mature between 2009 and 2018. Under an agreement, excess earnings within the Sinking Fund are shared between the City and EPCOR. Any ultimate shortfall in the Sinking Fund must be covered solely by the City of Edmonton. EPCOR withdrew their balance of excess earnings in mid-2008. The balance of accumulated excess earnings attributable to the City at December 31, 2008 was $30.2 million.

Removal of excess earnings does increase the risk that the return will be less than required within the Sinking Fund. However, overall earnings to the City can be increased and held solely by the City by moving the City share of excess earnings to a higher earning portfolio (Balanced Fund). The increased risk is addressed through the recommendation of appropriating the estimated $9 million shortfall and by ongoing monitoring.

The following table displays the earnings, excess earnings and amounts withdrawn from the Sinking Fund as approved by City Council for the years 2003 – 2008 ($ millions).

Amounts withdrawn have been used to support the capital priorities plan. As well, the 2003 amount withdrawn included a transfer of $7.0 million to the Financial Stabilization Reserve.

Year EarningsRequired Earnings

Excess Earnings

City's Share of Excess

EarningsAmounts

Withdrawn

City's Share of Accumulated

Excess Earnings

2008 26.1 22.5 3.6 2.4 (1.2) 30.2 2007 25.7 25.9 (0.2) (0.1) (1.2) 29.0 2006 30.0 25.6 4.4 2.3 (1.2) 30.3 2005 36.9 25.8 11.0 5.6 (1.2) 29.2 2004 33.8 26.5 7.3 3.9 (7.0) 24.8 2003 41.9 25.2 16.7 8.9 (11.8) 27.8


report for city council september 2, 2009...

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