Alberta's municipalities are relied upon to provide a wide range of services to their residents and businesses.
To provide such services, municipalities are responsible for purchasing, constructing, operating and maintaining infrastructure. This can range from relatively small pieces of equipment to multimillion-dollar roads, bridges, water/wastewater systems, and recreation facilities.
Municipalities are not permitted to run deficit budgets, so restricted surplus (previously referred to as financial reserves) allow municipalities to save money for major infrastructure projects while adhering to financial management requirements. While municipalities can finance capital projects through debt, the amount of debt municipalities may incur is limited. Debt also results in higher costs for municipalities and less efficient use of tax dollars.
Restricted surplus can be compared to a “savings account” for municipalities. A municipality will direct a small portion of their annual revenues to various reserves each year, which are usually “restricted” for specific purposes, such as large capital projects or for ongoing management of municipal infrastructure such as roads, bridges, and wastewater systems. Reserves can also be “unrestricted” and used as a contingency in the event of an unforeseen expense during emergencies.
In general, municipalities have three options to pay for such infrastructure and service delivery responsibilities:
- Taking on debt
- Spending as revenue is gathered
- Setting aside a portion of revenue to save for large projects
As a result of these financial limitations, a common approach for municipalities to finance large-scale projects is to gradually set aside a small portion of their revenues over multiple years to pay for major infrastructure projects. This approach allows municipalities to stay within debt limits and saves municipal taxpayers money by reducing interest costs.
In a municipal context, funds set aside for such projects are known as restricted surplus (previously referred to as financial reserves). Essentially, restricted surplus is a means to pay for the construction or purchase of assets in the future. In addition to allowing municipalities to accumulate the funds needed to support large-scale infrastructure projects, the use of restricted surplus is an effective tool to support municipal planning.
However, financial reserve funding also presents challenges. It requires discipline to slowly accumulate funds that will not be used for several years. It also means that municipalities must develop long-term plans for infrastructure and assess the lifespan of assets.
Aging infrastructure demands that municipalities save for future needs ahead of time to avoid major budgetary shortfalls. Municipal restricted surplus are better understood as an essential planning tool for large-scale assets rather than a measure of a municipality’s wealth.
The assumption that a high level of restricted surplus equals a high level of municipal wealth is an oversimplification and typically not accurate. They are an indication of a council’s commitment to a future project.
In other words, restricted surplus is not a source of no-strings-attached wealth for a municipality. Rather, every dollar placed into a financial reserve is a dollar not being spent on infrastructure or service delivery in the year it was collected in order to allow for the payment of a big-ticket item in a future year.
Critics of municipal spending often use restricted surplus to argue that rural communities are wealthier than their urban neighbours due to higher levels of restricted surplus. However, a closer look at publicly-available data indicates that restricted surplus is a financial tool used by all municipal types.
Instead of being forced to make sudden financial decisions, municipalities can think ahead when replacing, expanding or constructing infrastructure. Reserve funding also enables a municipality to be ready in case unforeseen grant funding from senior levels of government becomes available and requires matching funding to access.
In 2018, the overall accumulated reserves for Alberta’s rural municipalities were 1.30 times their collective expenses incurred in the calendar year. The ratio for urban municipalities (summer villages, villages, town and cities) was a nearly identical 1.24. (See: Rural Municipalities of Alberta, "Understanding Municipal Financial Reserves").
An important consideration of restricted surplus is that they are an alternative to debt. Taking on debt to finance major projects has always been a viable tool for Alberta’s municipalities. However, it also carries risk, especially if large amounts of debt are assumed, resulting in very high debt-servicing costs.
Rural municipalities dedicate much of their budgets to the construction and maintenance of roads and bridges, which provide access to industrial property scattered throughout a large area, as well as to residents living on farms and rural acreages. Around 42 per cent of Clearwater County’s restricted surplus are dedicated to the maintenance and construction of roads and bridges.
Clearwater County is responsible for maintaining: 350 km of paved roads, 1,872 km of gravel roads and 173 bridges. The construction of 1 kilometre of road costs approximately $1 million. With a large inventory of roads and a heavy reliance on unpredictable linear tax revenue, building restricted surplus allows for a consistent source of funding to be available for infrastructure projects.
Public Works Costs associated with facilities, roads and road structures, bridges and vehicles and equipment comprise the largest source of capital expenditures for rural municipalities. The County is responsible for 350 kilometres of paved roads, 1,872 kilometres of gravel roads and 173 bridges.
Paved Roads Reserve: The Paved Roads Reserve is intended to pay for critical intersection upgrades as well as any expansion of or enhancements to the existing paved network, which spans 350 kilometres. The construction of one kilometre of new road costs approximately $1M and has an expected life span of 15 years. After 15 years an asphalt overlay is likely required at approximately $200,000 per kilometre.
Bridge Deficit Reserve: The Bridge Deficit Reserve provides funding for bridge projects, including the rehabilitation and replacement of the County’s 173 bridges. It also allows the County to qualify for the provincial Local Road Bridge component of Alberta Transportation’s Strategic Transportation Infrastructure Program (STIP), which provides a 75% contribution on eligible costs.
Resource Roads Reserve: The Resource Roads Reserve provides funding for the construction and maintenance of roads used by local industries. It also allows the County to qualify for the provincial Resources Roads component of Alberta Transportation’s Strategic Transportation Infrastructure Program (STIP), which provides a 50% contribution on eligible costs.
Gravel Reclamation Reserve: Clearwater County, like many municipalities, benefits from having aggregate resources available within the community, as these products can be costly to bring in. However, all sand and gravel pit owners are responsible for conserving and reclaiming land. The costs of reclamation along with regulatory requirements create a substantial expense once gravel pit operations have ceased. The County currently operates 13 municipally-owned gravel pits that require funding to reclaim the land. Rather than funding the entire cost in a single year, the Gravel Reclamation Reserve allows the County to spread out the obligation across the duration of gravel pit operations. This helps stabilize tax rates for residents and businesses while permitting the County to benefit from locally-sourced sand and gravel. The County currently owns and operates 13 gravel pits, of which seven are located on private land and six are located on Crown land.
Emergency & Legislative Services
Emergency & Legislative Services reserve accounts ensure that the County is financially prepared to protect its residents and businesses in the event of an emergency.
Fire – Capital Reserve: The Fire – Capital Reserve is used to maintain a fleet of fire trucks, engines, water haulers, rescue vehicles and pickup trucks, which are essential to providing fire and rescue services in Clearwater County, the Town of Rocky Mountain House and the Village of Caroline. Significant capital investment is required for apparatus and equipment ranging between $500,000 and $1.5M and restricted surplus ensure that equipment is funded over the lifetime of the equipment (in some instances 20 years) instead of the equipment being funded from municipal taxes in the years they are scheduled to be replaced.
Disaster Reserve: The Disaster Reserve is set aside to fund immediate emergency management and recovery operations in the event of floods, wildfires or other emergencies.
Tax Rate Stabilization Reserve: The Tax Rate Stabilization Reserve is designed to provide funding when unexpected expenditures arise or changing assessment conditions cause significant drops in revenue. By drawing upon the reserve in such circumstances, abrupt increases in tax rates for County residents and businesses can be avoided. In the event of an economic downturn or infrastructure failure, Council has the option of accessing this funding to alleviate the short-term impacts of budget shortfalls. The County is exposed to major non-recurring costs related to various emergency events or situations, e.g. inclement weather, environmental hazards, etc. These emergent situations cannot be anticipated and budgeted for and it is not feasible to absorb the cost of such events in other budget areas in any given year. The County also undertakes certain one-time or intermittent projects that have significant costs. If these projects were funded from property taxation, County residents and businesses would face annual spikes and subsequent declines in tax bills. The Tax Rate Stabilization Reserve minimizes this volatility.
High-Speed Internet Reserve: There are numerous obstacles to increasing and improving broadband Internet access in rural and remote areas. Licensed incumbents tend to only invest in high density areas that are more economically profitable. However, small providers, non-profit providers or non-incumbent providers could deploy broadband Internet in rural and remote areas in an economically profitable manner if key infrastructure is in place. The High-Speed Internet Reserve is designed to fund a comprehensive broadband Internet project that will provide high-speed Internet connectivity to a majority of residents and businesses in the County.
- Rural Municipalities of Alberta, "Understanding Municipal Financial Reserves."
- Rural Municipalities of Alberta, "Apples to Apples: Rural Municipal Finance in Alberta."