Finance
Telephone (905) 468-3266
Facsimile (905) 468-2959

1593 Four Mile Creek Road
P.O. Box 190
Virgil, Ontario
L0S 1T0
Submitted on:
April 10, 2017
Report:FC-17-003
Report To:Finance Advisory Committee
Subject:2016 Operating Budget Surplus Allocation

1. RECOMMENDATION
It is respectfully recommended that:

1.1 Council receive report FC-17- quantifying the 2016 Operating Budget Surplus of $2,175,202; and

1.2 The surplus funds be allocated in the following manner: 1.3 That $60,000 be transferred from the Capital Levy Reserve in 2017 to fund the Ash Borer remediation program.

2. PURPOSE / PROPOSAL

The purpose of this report is to update Council on the 2016 year-end Operating Budget Surplus and to seek approval for the recommended transfers.

3. BACKGROUND

The 2016 year-end has been completed and the Town's auditors, KPMG, have completed their field work. The 2016 financial statements have been completed and will be presented to Council for approval. Prior to approval of the financial statements, staff are requesting approval of the recommended transfers.

4. DISCUSSION / ANALYSIS
The 2016 Operating Budget Surplus has been quantified and has been generated as follows:


Department
2016 Budget
2016 Actual
Surplus / (Deficit)
% (over) / under Budget
Municipal Purposes
(8,595,475)
(11,229,340)
2,633,865
(31%)
Council and Administration
532,235
738,087
(205,852)
(39%)
Corporate Services
1,940,515
1,706,707
233,808
12%
Fire & Emergency Services
1,291,631
1,272,669
18,962
1%
Operations - Roads
2,275,548
2,588,887
(311,339)
(14%)
Operations - Parks & Recreation
1,997,295
2,612,852
(615,557)
(31%)
Public Transit
64,375
(12,540)
76,915
119%
Community & Development
493,876
149,476
344,400
70%
Total Surplus
$0
($2,175,202)
$2,175,202
Major surpluses/(deficits) greater than 5% are explained as follows:

Municipal Purposes: Surplus is due to the sale of the former Niagara District Secondary School, 1875 Niagara Stone Road. The Town purchased the property not expecting the sale to take place so quickly, therefore the funds were debentured with the Region for 15 years.

Council and Administration: Deficit due to turnover in staffing and contract obligations.

Corporate Services: Surplus due to salary gapping.

Operations - Roads: Deficit can be attributed to higher then expected costs in the Ash Borer Remediation Program, repairs to buildings and sidewalks, utility costs, and insurance expenses.

Operations - Parks & Recreation: Deficit can be attributed to increased utility costs for Town Facilities, higher then normal building maintenance costs, and lower then expected user fees.

Public Transit: Surplus due to higher then expected revenues and lower costs then budgeted.

Community & Development: Surplus relates to higher than budgeted fee revenue.

4.2 Allocation of Operating Budget Surplus
It is important to note that while the surplus is much higher then normal, the additional funds were expected with the sale of the former Niagara District Secondary School property. A projected surplus of $1.5 million was allocated to the Capital Levy reserve during the 2017 budget process. The budgeted reserve projections forecasted the Capital Levy reserve in a deficit position in 2018 and 2020. With the slightly higher then expected surplus of $2,175,202 and the allocation of $1.82 million to the Capital Levy, the reserve is forecasted to no longer be in a deficit position. The Capital Levy Reserve is also in a position to provide additional funding to the Ash Borer remediation program in 2017 of $60,000.

The Corporate Studies reserve was forecasted to be in a deficit position by 2018. A $250,000 transfer will top up the reserve and leave funds available for future studies.
The Fleet Replacement reserve was also forecasted to be in a deficit position by 2018, with a transfer of $100,000 this is deferred to 2019. Vehicle rates should be examined in order to ensure there are enough capital dollars for future replacements.

4.3 Reconciliation of the Financial Statement's Annual Surplus to the Operating Budget Surplus
Financial statements are intended to report on the financial condition of an organization, ensure accountability and transparency, and assist with long-term strategic planning. Financial statements are an important tool to report to taxpayers the municipal services provided and the resources at their disposal.

Requirements for municipal financial reporting are standardized across Canada and are based on the Public Sector Accounting Handbook. As of 2009, municipal financial statements are to be prepared using the net financial assets model and must now include items such as tangible capital assets, amortization, and post-employment benefit costs. This new approach provides for a more complete picture of a municipality's financial condition.

The Town's operating budget is not prepared on the same basis as it's financial statements. The operating budget looks at the total cash requirements for different programs and how they will be funded. This leads to different treatment of revenue and expense items between the Town's operating budget and financial statements. The chart below reconciles the difference between the 2016 operating surplus of $2,175,202 and it's annual surplus of $4,176,461 contained in the Consolidated Statement of Operations.

$3,976,775
Financial Statement Annual Surplus - See Financial Statements
($1,010,879)
Hydro Surplus: The investment in Niagara-on-the-Lake Energy Inc. is consolidated for financial statement purposes but is not part of the Town's Operation Budget.
($1,700,308)
Deferred Revenue Recognized - Deferred revenue, such as development charges, used to fund capital projects is not included in the operating budget process but must be included as revenue for financial statement purposes when the funds are used/spent.
($569,978)
Debt Principle Payments - The Town budgets for debt charges to ensure there is enough cash to cover principal payments. For statement purposes principal debt payments decrease liabilities and cash, no expense is recognized.
$1,492,162
Reserves Utilized for Operations - From time to time the Town utilizes reserves to support operations. These amounts must be added back to calculate the operating surplus/(deficit) amount.
($7,607,680)
Revenues Allocated to Reserves - The Town Operating Budget includes transfer to reserves to support future capital projects.
($6,176)
Investment Income Earned on Discretionary Reserves and Reserve Funds - Investment income earned on these reserves are added to the reserve but must be included as revenue for financial statement purposes
$789,813
Hydro Receipts - For statement purposes these amounts reduce NOTL Hydro's receivable to the Town and increase cash but are treated as revenue when preparing the operating budget.
$5,110,260
Amortization - Amortization is a non-cash expense and is not considered during the operating budget process.
$1,620,943
Gain/Loss of Tangible Capital Assets - When calculating the gain or loss from the sale of TCA's the Net Book Value of assets are subtracted from the proceeds of the assets. This is a non cash transaction and is added back to recognize the full value of the cash proceeds received.
$58,049
Employee Benefits and Other Liabilities - New accounting standards require the Town estimate future benefit costs and expense them.
$22,221
Niagara District Airport Commission (NDAC) - The NDAC is consolidated on a 6% basis into the Town's financial statements but is not part of the operating budget.
$2,175,202
Operating Budget Surplus - As stated in this report


5. STRATEGIC PLAN
N/A

6. OPTIONS

Option 1 – Council approve the proposed operating budget surplus transfers (as recommended).

Option 2 – Council recommend or request alterations to the allocation of the operating budget surplus.

7. FINANCIAL IMPLICATIONS
Now that the 2016 year-end has been finalized staff have a clearer picture of where reserve balances sit and can continue to monitor the 2017 budget to actual results to ensure that programs remain on target.


8. COMMUNICATIONS
There are no communications required as a result of this report.


9. CONCLUSION
The recommended allocation of the 2016 Operating Budget Surplus will ensure that some of the most used reserves for capital financing will remain in a surplus position during 2017 and future years.





Respectfully submitted,

Kyle Freeborn, CPA, CMA
Manager of Finance / Treasurer



Holly Dowd
Chief Administrative Officer/Director of Corporate Services


ATTACHMENTS



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