Accumulated Operating Fund Surplus January 14, 2013

 THAT Council confirm its existing policy to retain Accumulated Surplus (up to 4% of operating expenditures).  THAT Council authorize the annual transfer of accumulated surplus exceeding Council’s policy to the Capital Works Reserve to help address future projected capital shortfalls. Recommendations 2

 Accumulated Surplus:  Consists of Annual Surpluses, accumulated over the years.  Is reported in the Audited Financial Statements annually: Background Accumulated Surplus$4.369 M$4.893 M$4.752 M  For 2013, a modest Annual Surplus is expected, increasing Accumulated Surplus marginally.

 In 2001, Council confirmed their policy pertaining to Accumulated Surplus: “A minimum General Revenue Fund surplus retention of 4.0% of total annual expenditures based on the average of the last three years actual expenses is established….”  Current Accumulated Surplus balance $4.746 million  Preliminary estimates on minimum required balance for 2014 is $3.895 million  Identifies $851,000 excess recommended for Capital Works Reserve Current Council Policy 4

 There are 4 reasons why the 4% retention policy can be considered a sound, sustainable financial practice: 1.Provides cash flow 2.Sets aside funds for anticipated future expenditures 3.Maintains a ‘rainy day’ fund for unanticipated emergency expenditures 4.Provides a reserve for budget miscalculations or unforeseen drops in revenues Rationale for Current Council Policy 5

 Tax and User Fee collections occur in July of each year  Total levy is approximately $34 Million  Require $17 Million “in the bank” to cover operating expenses from Jan-Jul each year  Current reserve levels are projected to shrink below $17M over the course of the 5-year plan  Retention of Accumulated Surplus critical to eliminate need for short-term borrowing to sustain operations. Cash Flow 6

 $8 Million annual amortization on Tangible Capital Assets  This amortization expense is currently unfunded  Tangible Capital Assets continue to age with little provision currently being made to address future capital shortfall  Recommendation to place any excess Accumulated Surplus above the 4% retention into the Capital Works Reserve to address this shortfall Anticipated Future Expenditures 7

 Emergency situations are unplanned but can have major financial implications  Unusual weather events  Earthquake  Police incidents  Accumulated Surplus acts as a contingency for such unplanned expenditures  “Rainy day” funds can be used for emergent strategic priorities  Downtown Revitalization  Emergent land acquisitions Emergency & “Rainy Day” Funds 8

 Budget consists of many assumptions & estimates  Sometimes errors occur  2013 Yard Waste budget error  This error was corrected through use of Annual Surplus (due to other department underages) and not Accumulated Surplus  Staff do not use Accumulated Surplus to balance or offset unbudgeted costs without Council approval  Accumulated Surplus provides a cushion to offset any such errors should they be beyond the amount that can be absorbed within any Annual Surplus (budget amendment would be required) Budget Miscalculations 9

 Any transfers from Accumulated Surplus for ongoing items (including lowering taxes) must continue every year thereafter to prevent a larger tax increase in each year Use of Accumulated Surplus for One-Time Tax Relief Increase2015Increase Operating Budget25,000,000 25,417,000 Current Yr. Increase417,000 Total Op. Budget25,000,00025,417, %25,834,0004.5% Use of Acc. Surplus(417,000)(2.25%)00% Required Tax Levy25,000, %25,834,0004.5%

 No governing legislation specific to Accumulated Surplus  City’s revenues and expenditures must be balanced  Debt may be incurred only under specific circumstances  City must comply with PSAB reporting principles  TCA & Amortization Legislation 11

 District of Mission Reserve and Surplus policy recognized by GFOABC as “Best Practices”  Mission’s Accumulated Surplus retention policy is based on minimum & optimum thresholds:  Accumulated Surplus - 1 to 2 month operating expenditures  Financial Stabilization – 1 to 2.5% operating revenues  Using Mission’s policy, City’s Accumulated Surplus is above minimum but below optimum levels Other Municipalities 12 Op Expenses (2013) Op Revenues (2013) MinimumOptimum Accumulated Surplus $33,229,000$2,769,000$5,538,000 Stabilization Reserve $19,958,000$200,000$499,000 Total$2,969,000$6,037,000

 Activity per Appendix A of Council Report:  Annual Surplus of each fiscal year accumulates  Budget Carryforward items  Reserve transfers  Accumulated Surplus not used to balance budget without Council approval  Unbudgeted items require budget amendment unless absorbed by current year Annual Surplus Accumulated Surplus Use in Past Three Years 13

Questions? 14