TOWNSHIP OF ESQUIMALT STAFF REPORT
MEETING DATE: July 13, 2026 Report No. FIN-26-015
TO: Committee of the Whole
FROM: Ian Irvine, Director of Financial Services
SUBJECT: Reserve Funds and Surplus
RECOMMENDATION:
Recommendation
That the Committee of the Whole provides direction to staff about changes to the reserve funds policy and treatment of annual and accumulated surplus.
Body
EXECUTIVE SUMMARY:
During budget discussions, Council directed staff to provide more details regarding the Township’s reserves and accumulated surplus to facilitate a policy discussion. This report discusses the Township’s reserve fund policy as well as details about current reserves and potential options for the treatment of annual and accumulated surplus.
BACKGROUND:
In April 2024, Council approved the Township’s Reserve Fund Policy. This document was created to provide guidelines regarding the establishment and maintenance of reserves to meet the Township’s short-term and long-term financial goals. The Policy includes relevant financial and non-financial details about each statutory and non-statutory reserve held by the Township. However, while all reserves are discussed in the policy, other topics such as accumulated surplus and interfund borrowing are not mentioned.
During the process of drafting the 2026-2030 financial plan, Council asked about accumulated operating surpluses and their treatment by the Township. At its March 16, 2026 meeting, Council directed staff to prepare a report to enable a comprehensive policy discussion about reserve funds and accumulated surplus.
ANALYSIS:
Reserve funds are an important tool for maintaining financial resources sufficient to protect against reducing service levels or raising taxes as a result of temporary revenue shortfalls or unpredicted one-time expenditures. The maintenance of adequate reserve balances is essential for local governments to mitigate current and future risks, ensure financial stability and demonstrate financial commitment to long range infrastructure and master plans.
Reserve funds can be established for a specific purpose as required by legislation, bylaw, or agreement and they can be obligatory (externally restricted) and discretionary (internally restricted) in nature. The list of all Township reserves and their related December 31, 2025, balances have been provided as Appendix A to this report.
The Reserve Fund Policy provides guidance regarding the oversight and use of reserves to support the goal of providing adequate infrastructure, services, and resources to meet community requirements, and to aid in the financial sustainability of the Township. In addition to the approved objectives, the Policy includes descriptions of each reserve, allowable uses, treatment of interest earned, and, in some instances, recommended minimum balances. The Township’s Reserve Fund Policy has been provided as Appendix B to this report.
Accumulated Surplus
Each year, the Township’s unappropriated surplus amount is approximately 3% of the operating budget. This is typically due to variables such as an annual unspent budget contingency, additional recreation revenue generated, vacant staff positions and operational projects and plans not fully expended in the year. It is important that the size of unappropriated surplus remain within expected bounds, otherwise it potentially represents an over taxation of residents. When compared with other municipalities given the size of the operating budget, the annual amount and percentage in Esquimalt are considered reasonable. For 2025, the Township reported a $1.3M surplus on a $52.2M operating budget and there is currently an $11.7M balance in the accumulated surplus account.
The annual surplus amounts accumulate until an allocation is made by Council. These balances are typically utilized for working capital purposes as it reduces the need for external borrowing or internal reallocations to fund operations. While this is an effective use, these amounts can also be used to support significant capital projects or mitigate tax rate volatility. In recent years, these amounts have been used to establish the Infrastructure Reserve Fund and provide funding for the new public safety building construction.
The Reserve Fund Policy does not currently discuss the treatment of annual surplus amounts. As a result, without policy guidance, the amounts are transferred into an accumulated surplus account until their use is approved by Council. With an amended Policy, the decision around the treatment of annual amounts could be standardized. This could include the continuation of the current approach, the regular transfer to a capital reserve or the transfer to a new reserve created by Council for a specific purpose.
While it is prudent to maintain a healthy minimum balance to ensure adequate working capital and cash flow, opportunities exist to strategically utilize a portion of the Township’s accumulated surplus balance. Currently, the ongoing accumulation of unappropriated surplus is held for future use. Potential alternatives could be the transfer to the capital reserve funds to support long-term infrastructure renewal or the creation of a new financial sustainability reserve fund to protect against economic volatility or lower than anticipated PILT revenues.
Consolidation of Reserves and Repeal of Bylaws
The Township has reserve funds which accumulate annual interest but from which no recent expenditures have been made. In some instances, these reserves can be closed but each of them represent an additional funding capacity option for the Township. When permitted by legislation, such closures would require Council approval, with determination about where the funds would be reallocated. Currently, the Township’s Tax Sale Land Reserve and Local Improvement Reserve could be considered for closure and consolidation. There are also reserves held by the Township where no expenditures have been incurred but are not eligible for consolidation.
In March 2023, the provincial government provided the Township with a one-time Growing Communities grant of $4.7M to support the delivery of infrastructure projects to address growth and increased demand. At the end of 2025, the balance in this statutory reserve was almost $5.3M and while no expenditures have yet been made, there is a March 2028 deadline for committing the funds to specific capital projects.
A Community Impact Mitigation Fee was negotiated as part of the waste water treatment plant project at McLoughlin Point. In 2017, the Township received an initial payment of $55,000 and as part of the agreement, will continue to receive an indexed annual amount until the plant is replaced or decommissioned. The balance in the reserve at the end of 2025 is $620k and continues to earn annual interest. There are no restrictions regarding how the funds can be used and no specific expenditures have been identified.
While there is no requirement to take any action, the opportunity exists to close these reserves and transfer the balances for another purpose such as capital infrastructure funding. Similar to accumulated surplus, this approach is not discussed in the current Reserve Fund Policy. In an amended policy, information would be added to outline the process for reviewing and approving any fund consolidations.
Interfund Borrowing
Rather than permanently closing reserve funds, the potential exists to temporarily utilize funds in a reserve through interfund borrowing. This involves recording a transfer from one statutory reserve to another for the purposes of internally financing capital projects. These transactions are permissible by legislation, if a clearly defined and attainable payback plan, including payment of foregone interest, is in place. While this practice is not common, inclusion in the reserve fund policy would be appropriate to outline the process and the need for these transactions to be reflected in the financial plan during the term covering the borrowing and the repayment.
OPTIONS:
That the Committee of the Whole provide direction to staff about changes to the reserve funds policy and the treatment of annual and accumulated surplus
COUNCIL PRIORITY:
Good Governance
FINANCIAL IMPACT:
There are no financial implications associated with this report
COMMUNICATIONS/ENGAGEMENT:
There are no communications or engagement activities that are requirements associated with this report.
TIMELINES & NEXT STEPS:
If significant changes are recommended by the Committee, a revised Debt Management Policy would be presented for review and consideration at a Council meeting in September 2026.
REPORT REVIEWED BY:
1. Deb Hopkins, Director of Corporate Services, Reviewed
2. Dan Horan, Chief Administrative Officer, Concurrence
LIST OF ATTACHMENTS:
1. Council Policy FIN-22 Reserve Funds
2. Reserve Fund Balances, December 31, 2025