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                                       AC2009-74
                                      Attachment 1




Financial Reserves Compliance Audit

         Report: AR09-02

         2009 October 29




          Tracy McTaggart, C.A.
               City Auditor
             City of Calgary
Financial Reserves Compliance Audit
Report: AR09-02



Table of Contents

Executive Summary                                                                    3

Detailed Audit Report

        1.0     Audit Objectives                                                     5

                1.1 Scope and Approach                                               5
                1.2 Background                                                       6

        2.0     Audit Conclusion and General Management Response                     7

                2.1 Audit Conclusion                                                 7
                2.2 General Management Response                                      8

        3.0     Observations, Recommendations and Management
                Responses                                                            8

        4.0     Sufficient and Accurate Disclosure of Reserves                       9

                4.1   Reserves are appropriately accounted for                       9
                4.2   Disclosure of reserve funds in the Reserve Report             10
                4.3   Disclosure of current activity                                11
                4.4   Review and approval of the Reserves Report                    12

        5.0     Compliance with City Policies                                       13

                5.1 Authorization to establish specific reserves                    13
                5.2 Council policies establishing each reserve                      15
                5.3 Policies and procedures                                         19
                5.4 Investment income allocation                                    23
                5.5 Reserves and The City’s operating budget                        24
                5.6 Administrative procedures                                       25
                5.7 Monitoring for authorized purpose                               29
                5.8 Monitoring for relevance                                        32
                5.9 Contributions to reserves                                       36
                5.10 Transaction compliance                                         38

        6.0     Appropriate Level of Funding of Reserves                            41

                6.1 Establishing appropriate reserve amounts                        41
                6.2 Identifying and addressing inadequate and/or excess funding     46

        7.0     About the Audit                                                     50

Appendices

        Appendix 1: Details of Reserve Balances                                     51
        Appendix 2: Management Action Plan – Additional Details                     53




Report Date: 29 October 2009                                                      Page 2 of 56
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                                          EXECUTIVE SUMMARY

                               Setting aside funds in reserves is a key management tool to
Why we did the Audit
                               financially plan for current and future needs while promoting long-
                               term financial stability. Cities use reserve funds to carry forward
                               specifically designated funds to finance particular expenditures in
                               a future fiscal year, to have sufficient funds available for major
                               capital projects, to provide for contingency funds to offset future
                               tax rate increases, or to have funds available to address major
                               disaster and emergency response costs that may be incurred in
                               the future. The prudent administration of reserves represents an
                               important component of sound financial management and is
                               essential in demonstrating effective stewardship of public funds.

                               Reserves represent a significant financial asset for The City of
                               Calgary. At the end of December, 2007 there were 55 reserves
                               totaling approximately $818 million (2006 - $615 million).

                               We conducted an audit of financial reserves because:

                                      •   Reserves represent a significant financial asset; and
                                      •   We believe reserves are of particular interest to Council
                                          and many citizens, especially given the current
                                          environment of growth-related financial pressures.


What we looked at              The objectives of our audit were to determine whether:

                                      •   Reserves were appropriately accounted for and disclosed
                                          in accordance with Canadian generally accepted
                                          accounting principles in The City’s annual financial
                                          statements;
                                      •   Reserves were sufficiently and accurately reported to
                                          Council and the public;
                                      •   Reserves were authorized and administered in compliance
                                          with City policies; and
                                      •   Reserves were funded at an appropriate level.


 Audit Results                 Overall, we found that The City’s reserves were appropriately
                               accounted for and disclosed in accordance with Canadian
                               generally accepted accounting principles established by the Public
                               Sector Accounting Board (PSAB).

                               However, we also concluded that there is a need for improvement
                               in a number of areas to ensure that reserves are managed on a
                               consistent basis and to demonstrate effective stewardship of this
                               important financial asset:




       Report Date: 29 October 2009                                                        Page 3 of 56
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                               •   although the Annual Report on Reserves and Long Term
                                   Liabilities (the Reserves Report) provides detailed
                                   disclosure by individual reserve, several improvements are
                                   required to ensure that the information in this report is
                                   sufficiently and accurately disclosed to meet user needs
                                   and support informed decision-making;
                               •   policies and procedures for the administration of reserves
                                   are outdated and do not provide comprehensive guidance
                                   to staff responsible for individual reserves;
                               •   the level of documentation maintained for individual
                                   reserves varied between business units and we concluded
                                   that improved record keeping practices are needed. For
                                   five reserves, the authorizing reports approving their
                                   purpose, conditions/restrictions and funding sources could
                                   not be located; and
                               •   The City has not complied with the policy requirement to
                                   review each reserve at least every three years for
                                   appropriateness, effectiveness, efficiency and the correct
                                   level of funding.

                                   Our audit report makes 20 recommendations to address
                                   these areas. Management has provided a general
                                   response to the audit report; an action plan for each
                                   recommendation (throughout the report); and additional
                                   information (see Appendix 2).




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                                     DETAILED AUDIT REPORT

1.0   Audit Objectives
      The objectives of our audit were to determine whether:

            •   Reserves were appropriately accounted for and disclosed in accordance with
                Canadian generally accepted accounting principles in The City’s annual financial
                statements; (Section 4.0)
            •   Reserves were sufficiently and accurately reported to Council and the public;
                (Section 4.0)
            •   Reserves were authorized and administered in compliance with City policies;
                (Section 5.0) and
            •   Reserves were funded at an appropriate level. (Section 6.0)

      1.1       Scope and Approach

                Our audit scope encompassed all open reserves disclosed in The City of Calgary
                Reserves Report as at December 31, 2006. We focused our review on activities
                conducted primarily during the period January 1, 2005 to December 31, 2006.
                When warranted, we reviewed reserve activities in the 2007 fiscal year. The
                audit also focused on the policies and processes in place for the creation,
                amendment and ongoing administration of financial reserves.

                Our audit included reviewing and analyzing relevant policies, reports, files,
                financial records, and other supporting documentation. In addition, we
                conducted numerous interviews with Finance & Supply staff and staff from
                several other business units across The City.

                For the majority of the audit procedures performed in Section 4.0 we
                judgmentally selected a sample of 38 reserves. For the majority of the audit
                procedures performed in Sections 5.0 and 6.0 we selected 19 reserves from the
                38 reserves selected for Section 4.0. We selected the 19 reserves for detailed
                review based on the following criteria:

                  •    size of the reserve balance;
                  •    category of reserve coverage;
                  •    business unit coverage;
                  •    extent of judgment involved related to approving expenditures; and
                  •    original creation date of the reserve.

                Since our samples were judgmentally selected, we were unable to extrapolate
                our findings to the entire value of all reserve funds. However, many of our audit
                findings were noted in a number of reserves which is indicative that there are
                issues that need to be addressed across all reserves.




      Report Date: 29 October 2009                                                       Page 5 of 56
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1.2     Background

        Establishing and maintaining reserves is a key management tool to financially
        plan for current and future needs while promoting long-term financial stability.
        Cities use reserve funds to carry forward specifically designated funds from one
        fiscal year to the next to finance particular expenditures in a future fiscal year; to
        have sufficient funds available for major capital projects; to provide for
        contingency funds to offset future tax rate increases; or to have funds available to
        address major disaster and emergency response costs that may be incurred in
        the future. The prudent administration of reserves represents an important
        component of sound financial management; is essential in demonstrating
        effective stewardship of public funds; and is a key component when The City’s
        credit rating is reviewed.

        Reserves represent a significant financial asset for The City of Calgary. The City
        classifies reserves into three categories:

            •   Operating Reserves – to fund operating expenditures for one-time
                projects/pilot programs; to stabilize operating budgets for unanticipated
                fluctuations in revenue or expenditures; to comply with a contractual
                agreement; or for contingency funds for operational emergencies;
            •   Capital Reserves – to fund capital expenditures; and
            •   Sustainment Reserves – to fund both operating and capital expenditures
                for activities that are treated as self-sustaining. Surpluses from these
                activities are retained in these reserves to offset any future deficits.

        .At the end of 2007, there were 55 reserves with a total balance of $817,516,000
        (2006 - $615,410,000). Table 1 identifies the total dollar value held in the three
        categories of reserves for the years 2005 to 2007 (in thousands of dollars). A
        listing of the individual reserves by category is provided in Appendix 1.

Table 1: Reserve Balances by Category ($000’s)

     Type of Reserve                  2007                 2006                   2005
 Operating                             $227,862             $138,322              $118,905
 Capital                                540,370              383,705               326,226
 Sustainment                             49,284               93,383                52,244
           Total                       $817,516             $615,410              $497,375

        Council approval is required to create, amend or close a reserve. This approval
        includes establishing the purpose of the reserve, the funding sources, and any
        conditions/restrictions placed on the reserve. Responsibility for specific reserves
        resides with the operational Director or Manager of the affected business unit
        and the assigned Finance Lead for that business unit. The Operations Lead
        approves all transactions affecting the reserve, while the Finance Lead ensures
        they are processed and recorded appropriately.




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2.0   Audit Conclusion and General Management Response
      2.1     Audit Conclusion

              Overall, we found that The City’s reserves were appropriately accounted for and
              disclosed in accordance with Canadian generally accepted accounting principles
              established by the PSAB.

              However, we also concluded that, although the Annual Report on Reserves and
              Long Term Liabilities (the Reserves Report) provides detailed disclosure by
              individual reserve, several improvements are required to ensure that the
              information in this report is sufficiently and accurately disclosed to meet user
              needs and support informed decision-making.

              Further, there is a need for improvement in a number of areas to ensure reserves
              are managed on a consistent basis and to demonstrate effective stewardship of
              this important financial asset.

              Policies and procedures for the administration of reserves are outdated and do
              not provide comprehensive guidance to staff responsible for individual reserves.
              This has led to a number of instances of non-compliance with the policies and
              procedures and inconsistent processing of reserve transactions. Of note is that
              the current practice for creating or closing a reserve, in most of the cases
              reviewed, did not comply with the policy for approval by the CFO, the ALT and
              the SPC on Finance and Corporate Services recommending Council approval.
              Current practice in recent years has been for these reports to be prepared by the
              operational business unit and recommended for Council approval by the related
              SPC. While this practice may meet the needs of the business unit, it may not
              result in adequate consideration of corporate priorities and this practice should
              be reviewed.

              We found the level of documentation maintained for individual reserves varied
              between business units and concluded that improved record keeping practices
              are needed. For five reserves, the authorizing reports approving their purpose,
              conditions/restrictions and funding sources could not be located. Further, for a
              number of reserves in our sample, we could not determine whether the reserves
              were being used for their authorized purpose or whether contributions to the
              reserves were in compliance with the authorized funding sources due to a lack of
              supporting documentation for the transactions incurred.

              Lastly, we concluded that The City has not complied with the policy requirement
              to review each reserve at least every three years for appropriateness,
              effectiveness, efficiency and the correct level of funding. Further, The City did not
              have an appropriate process in place to ensure that a targeted amount of funds
              to be held in each reserve had been established or to assess whether a reserve
              was over-funded or under-funded. We determined that seven reserves should
              be reviewed to assess whether the purpose of the reserves continues to be
              relevant or whether all of the funds are needed to fulfill the purpose of the
              reserve. We also concluded that four of the seven reserves, with a total balance
              as at December 31, 2007 of $6,461,000, should potentially be closed.



      Report Date: 29 October 2009                                                      Page 7 of 56
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              Our audit report makes 20 recommendations to address these areas.

      2.2     General Management Response

              Management has reviewed and agreed with the audit report and has prepared an
              action plan to address each recommendation.

              Administration’s approach is to, wherein so far as possible, avoid duplication of
              work and reports between the existing policy and the policy anticipated for Q3
              2010.

              Administration’s approach is to:

                  •   implement improved internal controls, review processes, changes and
                      enhancements for the final 2009 financial statements;
                  •   address those changes with the 2009 Reserves Report;
                  •   develop a new policy in Q3 2010, following the 2009 year-end process
                      and prior to the completion of 2010 year-end;
                  •   address any additional changes with the 2010 Reserves Report; and
                  •   begin the triennial review process in 2010. For the first triennial review,
                      an initial review will be conducted in 2010-2011 to address the areas
                      raised in the audit report as part of the 2010 Reserves Report in Q2 2011.
                      A second review will be conducted in 2011-2012 to confirm the status of
                      all Reserves.

              Once the policies described in recommendation 4 have been approved, training
              and support will be provided to ensure clarity of understanding for reserve
              policies, including roles and responsibilities. This clarity by those responsible will
              improve the information at year-end.

              The action plans will see the recommendations within the Administration’s
              authority addressed to the extent possible for the final financial statements and
              given effect in the 2009 Reserves Report, which will be presented to
              Committee/Council in Q2 2010. The policy recommendations that require
              Council approval and related work will be addressed prior to the end of 2010 with
              the changes incorporated into the 2010 Reserves Report presented to
              Committee/Council in Q2 2011.


3.0   Observations, Recommendations and Management Responses
      This report presents the detailed audit observations and recommendations, organized by
      audit objective. Management’s response and action plan have been provided for each
      recommendation.




      Report Date: 29 October 2009                                                       Page 8 of 56
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4.0   Sufficient and Accurate Disclosure of Reserves
      Our objectives were to determine whether reserves were:

            •   appropriately accounted for and disclosed in accordance with Canadian generally
                accepted accounting principles in The City’s annual financial statements; and
            •   sufficiently and accurately reported to Council and the public.

      Information on individual reserve balances, transactions, purpose, funding sources, and
      conditions/restrictions are provided through The City’s annual consolidated financial
      statements and the Reserves Report. It is important that key stakeholders are provided
      with sufficient and accurate information that they can use to make decisions and assess
      stewardship. In addition, it is important for a government organization to provide
      complete and accurate financial information to citizens so that they are aware that
      reserve funds are being sourced and used in an appropriate and transparent manner.

                                        WHAT WE CONCLUDED

      We concluded that The City’s reserves were appropriately accounted for and disclosed
      in accordance with Canadian generally accepted accounting principles established by
      the PSAB. We also concluded that, although the Reserves Report provides detailed
      disclosure by individual reserve, several improvements are required to ensure that
      reserves are sufficiently and accurately disclosed in this report.

                                            WHAT WE FOUND

      4.1       Reserves are appropriately accounted for in accordance with
                Canadian generally accepted accounting standards

                Reserves are funds authorized by Council to be set aside for the funding of future
                operating or capital expenditures or amounts set aside to comply with legislation
                or contractual agreements. Reserves do not require the physical segregation of
                assets. To be classified as a reserve these funds cannot meet the definition of a
                liability as defined by the PSAB. The PSAB provides minimal guidance on the
                financial statement presentation and disclosure of reserve funds. Section 1800
                of the PSAB handbook requires that reserve fund balances at the end of the
                accounting period be disclosed and that changes in reserve fund balances in the
                accounting period be disclosed. The PSAB’s Accounting Guideline recommends
                that information about any funds or reserves should be disclosed in notes and
                schedules accompanying the financial statements and not on the statement of
                financial position.

                We found that reserves were properly accounted for, in compliance with PSAB
                Standards and Guidance. Further, no discrepancies were noted in our
                reconciliation of reserve amounts in the Reserves Report to The City’s detailed
                financial records and to the annual consolidated financial statements for 2005
                and 2006, including the detailed note disclosure on reserves. For 2006, we did
                find inaccurately recorded transactions in five reserves; however, these errors
                are not material to the Reserves Fund balance in The City’s financial statements.
                These errors are discussed further in section 5.6.1 of this report.



      Report Date: 29 October 2009                                                     Page 9 of 56
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4.2     There is a need to strengthen the sufficiency and accuracy of the
        disclosure of reserve funds in the Reserves Report

        The Reserves Report is compiled in conjunction with preparing the annual
        consolidated financial statements. There are many users of the information
        reported in the Reserves Report throughout the Administration and Council.

        The Financial Planning, Budget and Reporting Division (Finance and Supply) co-
        ordinates the preparation of the Reserves Report and, as part of this process,
        distributes a template with the prior year data for each reserve to the responsible
        business unit in February. The Finance Leads and Operations Leads are asked
        to provide current information in the following categories:

            •   authorizing documents;
            •   purpose of the reserve;
            •   conditions/restrictions of the reserve;
            •   funding sources for the reserve;
            •   related budget programs – operating and capital; and
            •   current activity (financial transactions).

        The templates are collected for each reserve and the Financial Reporting Officer
        compares the current financial activity on the template to the detailed financial
        records for each reserve and follows up any differences.

        The Finance Leads and Operations Leads are required to sign a declaration for
        each reserve attesting to the accuracy of the reserve balances, transactions, and
        the other categories of information as noted above. In addition, they are
        declaring that all transactions for the current year are consistent with the
        purpose, funding sources and restrictions for the reserve.

        To determine whether information by individual reserve, including the sources
        and uses of funds, were adequately disclosed, we compared The City of
        Calgary’s disclosure practices on reserve funds to five other Canadian cities –
        Edmonton, Winnipeg, Hamilton, Ottawa and Toronto.

        We found that The City of Calgary provided more detailed disclosure on
        information by individual reserve than four of the referenced cities, and one city
        (Winnipeg) provided considerably more disclosure than Calgary on the history,
        purpose, conditions and funding sources by individual reserve.

        Our detailed review of information disclosed for our sample of 38 reserves
        identified that improvements are required to ensure that reserves are sufficiently
        and accurately disclosed in the 2006 Reserves Report. Specifically, we found
        that for:

            •   13 reserves, the description of their purpose was either inaccurate or
                incomplete.
            •   20 reserves, the conditions and/or restrictions were not accurately, clearly
                or completely described.




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            •   14 reserves, the related operating or capital budget program was either
                inaccurately disclosed or was not disclosed.
            •   3 reserves, the Operations Lead was either inappropriately assigned or
                there should have been an additional Operations Lead disclosed for the
                reserve.
            •   15 reserves, the authorizing documents disclosed were either inaccurate
                or incomplete.
            •   10 reserves, the funding sources were either not accurately or completely
                disclosed.

4.3     Current activity should be more accurately and consistently
        disclosed in the Reserves Report

        The current activity is a summary of the annual financial transactions within a
        reserve. Five years of activity is disclosed on a comparative basis for each
        reserve.

        We compared the current activity disclosed for 2005 and 2006 for a sample of 24
        reserves to The City’s detailed financial records, and found the following
        inaccurate disclosures:

            •   Children’s Reserve Fund – In 2005:
                o an incorrect transfer of $134,000 from the Emerging Social Issues
                    Reserve was disclosed,
                o a transfer to the Economically Disadvantaged Reserve of $100,000
                    was not disclosed,
                o investment income was overstated by $65,000, and
                o contributions to operations were overstated by $15,000;

            •   Corporate Housing – In 2005, contributions to operations should be
                $250,000 with a reduction to contributions to capital of $250,000. In 2006,
                contributions from operations were understated by $101,000 and
                contributions to operations were understated by $101,000;
            •   Parks Maintenance Reserve and DBA Sustainment Fund – In 2005, both
                of these reserves had investment income included in the contributions
                from operations;
            •   Downtown Improvement Fund – In 2006:
                o contributions from capital of $194,000 were not disclosed,
                o contributions to capital were understated by $130,000, and
                    contributions from operations were overstated by $64,000;
            •   Landfill Revenue – In 2006, user surcharges were understated by
                $95,000 and investment income was overstated by $95,000; and
            •   Reserve for Future Capital – In 2006, the unexpended pay-as-you-go
                balance was understated by $3,224,000 and the capital contingency was
                overstated by $3,224,000.

        In addition, we found that the Wastewater and Waterworks Reserves were
        disclosed as if there were no transactions in these reserves for the years 2002 to
        2006. However, there were contributions from operations and contributions to
        capital for the same amount each year in both of these reserves. The Finance


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        Lead and Operations Lead for these reserves could not provide us with an
        explanation for the disclosure errors in 2006 and prior years. As a result of our
        audit, these transactions have now been disclosed in the 2007 Reserves Report
        for the years 2003 to 2007.

        We also noted that the current activity for the Miscellaneous Capital Reserve did
        not follow the disclosure of the other reserves. The contributions from
        operations, investment income and contributions to capital were not disclosed;
        only the ending balances pertaining to each business unit that are combined into
        this one reserve were disclosed. This disclosure does not provide the readers of
        the report with adequate useful information.

4.4     The review and approval of the Reserves Report could be more
        effective

        The Reserves Report is prepared by the Financial Reporting Officer for the
        review and approval of the Manager of Financial Reporting and Budgeting, the
        City Treasurer and the CFO. The 2005 and 2006 reports were reviewed by the
        Standing Policy Committee (SPC) on Finance and Corporate Services and were
        forwarded to Council, who received the reports for information. However, the
        management review process has not been effective as evidenced by our findings
        noted in Sections 4.2 and 4.3.

                Recommendation

                1.       We recommend that the Chief Financial Officer (CFO) ensures
                         that the review process is strengthened over the sufficiency and
                         accuracy of information disclosed on individual reserves, including
                         the current activity, in the Reserves Report.

                Management Response

                Agree.

                                    Action Plan                Responsibility
                All the specific items addressed in            Lead:
                section 4.3 have been addressed by the           City Treasurer
                Finance Leads and all corrections will         Support:
                appear prospectively in the 2009                 Manager Financial
                Reserves Report.                                 Planning, Budget &
                                                                 Reporting
                The review process over sufficiency and
                accuracy of information disclosed will be      Completion Date:
                strengthened by the establishment and            Q2, 2010
                communication of clear guidance on the           (presentation of 2009
                roles and responsibilities for reserve           Reserves Report).
                transactions (as per recommendation 4),
                as well as an increase in the amount of
                information, support and analysis done
                for the year-end review.


Report Date: 29 October 2009                                                    Page 12 of 56
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                      This enhanced process will increase the
                      oversight by Finance including reporting
                      detail to Council and include additional
                      organizational training and support,
                      detailed disclosure and attestation.



5.0   Compliance with City Policies
      Our objective was to determine whether reserves were authorized and administered in
      compliance with The City’s policies.

                                      WHAT WE CONCLUDED

      We concluded that the majority of reserves were appropriately authorized by Council.
      However, we found that for five reserves, the authorizing reports approving their
      purpose, conditions/restrictions and funding sources could not be located. We also
      concluded that there was a lack of policies and procedures guiding the creation and
      administration of reserves and that there were numerous instances of non-compliance to
      existing policies and procedures.

      In addition, we determined that seven reserves should be reviewed to assess whether
      the purpose of the reserves continues to be relevant or whether all of the funds are
      needed to fulfill the purpose of the reserve. We concluded that four of the seven
      reserves should potentially be closed. The total balance of these four reserves as at
      December 31, 2007 is $6,461,000.

      Further, for four of the reserves in our sample, we could not determine whether the
      reserves were being used for their authorized purpose or whether contributions to two
      reserves were in compliance with the authorized funding sources due to a lack of
      supporting documentation for the transactions incurred.

                                      WHAT WE FOUND

      5.1     Reports authorizing the establishment of specific reserves could not
              be located

              It is important that reserves and their terms and conditions are appropriately
              authorized by Council. The authorizing reports and any supporting documents
              establishing or amending the purpose, conditions/restrictions and funding source
              of a reserve should be readily available for all reserves in existence.

              Of the 54 open reserves as at December 31, 2006, we were able to review
              supporting documentation to verify that 49 reserves were authorized by Council.
              However, for the five remaining reserves (Livery Transport Services,
              Miscellaneous Capital, Real Estate Services, Wastewater and Waterworks) there
              were no authorizing reports describing the purpose, conditions/restrictions, and
              funding sources. The 2006 Reserves Report states that the Livery Transport
              Services Reserve was created from the combination of two other reserves in


      Report Date: 29 October 2009                                                 Page 13 of 56
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        1997. However, Council approval of this new reserve could not be found in the
        1997 Council minutes by City Clerk’s staff. The other four reserves had been
        established between 1969 and 1989 and Administration advised us that Council
        approved these reserves but that the authorizing documents could not be
        located.

        We also found that the report which authorized the Investment Income
        Stabilization Reserve in 1996 actually approved the establishment of two
        reserves to hold and distribute investment income on a planned basis. However,
        only one reserve was established. As described in the authorizing report and
        based on our discussions with Treasury staff, the reserve holding pool is the
        Investment Income Stabilization Reserve and the reserve referred to as the
        Working Capital Reserve is the reserve that was not established. We were
        advised by Treasury staff that this reserve was not established because these
        funds were to be invested in the money market which would most likely result in
        little volatility in investment earnings as opposed to the funds invested in the
        bond pools which would most likely have significantly more volatility in
        investment earnings. Therefore, it was assumed that since the funds invested in
        the money market would earn investment income very close to the budgeted
        investment income, a reserve was not needed. However, Finance & Supply
        should have presented a report with their rationale for why the second reserve
        was considered unnecessary to the SPC on Finance and Corporate Services and
        to Council to obtain their approval not to set up the second reserve.

                Recommendations

                2.       We recommend that, for the five reserves for which no authorizing
                         documents can be found, the CFO ensures that a report is
                         prepared to clearly describe the purpose, conditions/restrictions
                         and funding source of each reserve for Council approval.

                Management Response

                Agree.

                               Action Plan                    Responsibility
                Reports for each of these reserves will be    Lead:
                submitted to Committee/Council to              CFO
                approve the authority for each of these       Support:
                reserves to continue and to outline the        City Treasurer, BU
                ongoing mandates for each reserve.             Directors and the
                                                               relevant Finance
                                                               Lead and Operations
                These reports, with the exception of the       Lead
                Waterworks and Wastewater reserves, will
                be submitted before 2009 financial            Completion Date:
                statement finalization and changes will be     Q2, 2010 (2009
                addressed with the 2009 Reserves Report.       Reserves Report)

                A review of the Waterworks and                  Q4 2010



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                Wastewater reserves will be done during
                the financial policy review for Water
                Services/Resources in 2010. Any required
                reports will be brought forward as a result.

                3.       We recommend that the CFO requests Council to formally rescind
                         the authority to establish a working capital reserve as defined in
                         the report authorizing the Investment Income Stabilization
                         Reserve (FB96-83).

                Management Response

                Agree.

                               Action Plan                      Responsibility
                Report to Committee/Council requesting          Lead:
                the rescinding of the authority to create the    City Treasurer
                Working Capital Reserve will be submitted       Support:
                to Committee/Council with the 2009               Manager, Treasury
                Reserves Report.
                                                                Completion Date:
                                                                 Q2, 2010


5.2     The Council Policy establishing each reserve should more clearly
        and accurately define the purpose, funding source, and
        conditions/restrictions of the reserve

        It is important that the purpose, funding source, and conditions/restrictions of
        reserves are clearly defined by Council Policy documents and that the Policy is
        updated to reflect any changes to the reserve. A lack of clarity could result in
        different interpretations of what the reserve is to be used for, how the reserve is
        to be funded and when the reserve can be used to fund an operating or capital
        program.

        We reviewed the authorizing reports and supporting documents for a sample of
        20 reserves and identified the following concerns with four reserves:

            •   Health, Safety and Wellness – We noted that the authorizing report,
                FB98-64, very broadly defines the purpose of the reserve as “to support
                health, safety, and wellness initiatives through prevention and proactive
                programs”. The specific programs defined in FB98-64 are mainly pilot
                programs, one-time initiatives or programs with a limited time frame. We
                were advised by the Operations Leads (Human Resources and Safety)
                and the Finance Lead for this reserve that the reserve should only be
                funding pilot programs and one-time projects. However, the reserve has
                for a number of years been funding ongoing programs such as the Active
                Living subsidy and the health promotion clinics. The Operations Lead for
                the safety portion of the reserve advised that there were no criteria for



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                determining at what point a project/program should be funded from the
                Operating Fund versus this reserve fund.

                In addition, no formal guidance or criteria for the allocation of funds
                between safety and health/wellness were defined in the authorizing report
                for this reserve. The Operations Leads advised that there was an
                informal 50/50 split of the reserve funding between safety and
                health/wellness but that this was flexible and depends upon the safety
                and health/wellness priorities in a given year. For 2005 and 2006, the two
                responsible Directors decided how to use the funds from the reserve with
                input from the Administrative Leadership Team (ALT) acting as an
                Advisory Committee. However, there was no documentation to support
                this decision-making process. A more formal governance process is
                needed for this reserve, including criteria for allocating funds between
                safety and health/wellness. The Operations Leads advised that a
                governance committee was formed in 2008 to address the programs the
                reserve will fund going forward and to establish a formal governance
                process for this reserve.

            •   Investment Income Stabilization – The authorizing report states that the
                reserve holding pool (which is the reserve where the funds are invested in
                bond pools described in Section 5.1) “would contain the income earned
                on unfunded reserves, liability reserves, capital deposits, etc”. We noted
                that this reserve did not include the income earned on unfunded reserves
                that were held in the money market investment pool, and were advised by
                Treasury staff that this was because the actual income would be close to
                budget so there would be little effect on the reserve. However, it is not
                clear from the authorizing report whether or not reserve funds invested in
                the money market investment pool should be included in the calculation
                of the contribution from operations to this reserve.

            •   911 Communications Centre Capital Financing – Report GP98-21 called
                for revenue from the monthly fee charged to Calgarians per phone line for
                911 services to be contributed to the reserve and used to finance the
                operation of the 911 Centre. The report did not specify a maximum yearly
                amount for contributions from this source. However, the 2006 Reserves
                Report described this reserve’s purpose as “to fund future capital
                improvements/upgrades to the 911 Communications Centre”. We could
                not find evidence of Council authorization of this change in purpose.

                This reserve was reviewed for changes to the reserve by the Financial
                Planning and Policy Review Sub-committee and the SPC on Finance and
                Corporate Services during the period March 2003 to February 2004. No
                changes were recommended but Committee directed that the reserve be
                reviewed again in November 2004 and an update report prepared.
                However, the update report was only received for information. In our
                opinion, Council has not approved the purpose and condition of this
                reserve.

            •   Innovative Technology – In the 2006 Reserves Report, the funding
                sources for this reserve are defined as “replenished on an ongoing basis


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                by annual operating budget contributions and from potential operating
                cost savings obtained through the implementing of the new systems”.
                However, we found that the second funding source was approved by
                Council and the first funding source was not. The funding source that
                was approved by Council was never acted upon, which will be discussed
                in section 5.10 of this report. We noted that in the body of report C98-74
                there is a statement that "a portion of existing operating funds currently
                budgeted for the Data Processing Systems Development pool could be
                transferred to the reserve each year". As a result, since 1998 the reserve
                has been funded by a portion of the Application Centre’s Development
                Pool staff budgeted salaries and benefits. Nevertheless, this method of
                funding the reserve has not been approved by Council.

                In addition, we found that the Innovative Technology Reserve was being
                used for purposes other than those authorized in the December 16, 1996
                Council Minutes and in report C98-74 as follows:

                •    Telecommunication projects which started in 2001;
                •    PC replacement contributions which started in 2004; and
                •    Contribution of proceeds from sale of replaced computer equipment
                     which started in 2005.

                We noted that Finance & Supply reviewed this in 2007 and that Council
                approved FCS2007-45 which recommended clarification of the
                description of funding sources to reflect these activities. In our opinion,
                the wording of this report is ambiguous and the revised description of the
                purpose, conditions and funding sources for this reserve should be set
                out in a Council Policy.

                Recommendations

                4.       We recommend that the CFO obtains from the operational
                         business units, the necessary clarification to clearly define the
                         purpose, funding sources and conditions/restrictions of each of
                         these reserves and recommends the necessary Council Policy for
                         approval.

                Management Response

                Agree.

                                Action Plan                   Responsibility
                For the four reserves identified in section   Lead:
                5.2 of the report, Administration will         CFO
                provide information and request Council       Support:
                approval of the necessary clarification on     City Treasurer,
                the purpose, funding sources and               BU Directors,
                conditions and/or restrictions before 2009     Finance Leads,
                financial statement finalization and           Operations Leads
                changes will be addressed with the 2009


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                Reserves Report.                                Completion Date:
                                                                 Council Policy approval
                Administration will obtain Council approval      estimated to be Q3, 2010.
                for a policy to replace FB98-27 reflecting
                the current reporting structure and current      Four reserves identified:
                needs of the City as they relate to reserves     Q2, 2010 (2009 Reserves
                and as they relate to the findings of this       Report).
                report. This Council Policy will then
                provide the framework for a new
                comprehensive Administrative Policy suite
                for which all reserves, including those
                listed above, will clearly define the purpose
                funding sources, and conditions and
                restrictions.

                5.       We recommend that the City Treasurer determines whether the
                         reserve funds invested in the money market investment pool
                         should be included in the calculation of the contribution from
                         operations to the Investment Income Stabilization Reserve and
                         recommends any policy amendments required.

                 Management Response

                Agree.

                                 Action Plan                    Responsibility
                The money market investment pool will be        Lead:
                reviewed to determine the best approach,         City Treasurer
                including whether it should continue to exist   Support:
                or should be closed, and to confirm whether      Manager, Treasury
                all funds held in the reserve are needed.
                This review will be undertaken as part of       Completion Date:
                the first phase of the triennial review          Part of first triennial
                process. A report will be submitted to           review, 2010-2011
                Committee/Council seeking approval for
                any changes required and any changes will
                be addressed with the 2009 Reserves
                Report.

                In addition, since this audit was performed,
                The City has undertaken equity investing;
                the equity investment pool will require
                similar consideration.




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5.3     Policies and procedures for reserves are outdated, incomplete and
        should be updated

        It is important for The City to have formalized policies and procedures so that
        reserves are created, amended and administered on a consistent basis. Policies
        and procedures should be reviewed periodically to ensure they continue to reflect
        the corporate priorities, provide adequate guidance to staff responsible for
        administering reserves and reflect current best practices.

        Administration last completed a full review of the policy framework for reserves in
        April 1998. As a result of this review, revised policies and procedures to guide
        the administration of reserves were approved in May 1998 by the SPC on
        Finance and Budget (report FB98-27) and were adopted by Council on May 25,
        1998.

        We noted that this policy was not updated for the change from the Board of
        Commissioners’ organizational structure to the Administrative Leadership Team
        (ALT), which occurred in 2001, and the change from the SPC on Finance and
        Budget to the SPC on Finance and Corporate Services.

        We also noted a number of areas where current practice does not conform to the
        1998 reserve policy. These areas are discussed in the following sub-sections.

        5.3.1 Creation of new reserves

                According to the 1998 policy, a new reserve will only be put in place by a
                report prepared by a department, with recommendations through the
                Finance Department and the Board of Commissioners (now the ALT),
                then through the SPC on Finance and Budget (now SPC on Finance and
                Corporate Services) and on to Council.

                For our sample of 19 reserves, we reviewed the original authorizing
                documents for reserves established after the policy for creating new
                reserves was approved in 1998. This pertained to 10 of the 19 reserves
                in our sample. We found that for:

                •   8 of the 10 reserves, the report recommending the creation of the
                    reserve was prepared by the business unit proposing the reserve;
                •   3 of the 10 reserves, the report was approved by the CFO;
                •   3 of the 10 reserves, established prior to the organizational change to
                    an ALT from a Board of Commissioners, the authorizing report was
                    approved by the Board of Commissioners;
                •   4 of the 10 reserves, the authorizing report was presented to the SPC
                    on Finance and Budget. Of note is that these reserves were all
                    established in 2004 and earlier, prior to the change to Finance and
                    Corporate Services.




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                Based on our review of our sample of reserves, we concluded that:

                •   Reports recommending the creation of a reserve are usually prepared
                    by the particular business unit proposing the reserve and are
                    approved by the Director and General Manager for that business unit
                    which complies with the policy;
                •   There was a lack of compliance, in most cases, with the policy
                    requirement for review and approval by the CFO and the ALT;
                •   Reports, in most cases, were not being presented to the SPC on
                    Finance and Corporate Services as required by policy. Usually we
                    found the report was presented to the applicable SPC for that
                    business unit, although for reserves established in 2004 and earlier,
                    many of these reserves were presented to the SPC on Finance and
                    Budget for approval.

                In our view, all new reserves should be reviewed and approved by the
                CFO and the ALT prior to the submission for Council approval. We
                believe that this would support the prudent administration of reserves by
                ensuring that the new reserve is considered from a corporate perspective,
                is in compliance with The City’s accounting policies and is in alignment
                with The City’s Long Range Financial Plan.

                It is also our view that the current practice of routing reports requesting
                reserves to the SPC that oversees the business unit should be reviewed
                by the CFO as it represents a major shift in the governance of reserves
                and limits the effectiveness of the oversight of this significant financial
                asset. The CFO should recommend an appropriate process for the
                approval of requests to create new reserves.

        5.3.2 Reserves should be reviewed at least every three years

                The 1998 reserve policy (FB98-27) establishes a requirement that each
                reserve be reviewed at least every three years for appropriateness,
                effectiveness, efficiency, and the correct level of funding.

                Since the 1998 policy was approved, two reviews of reserves have taken
                place. First, the Financial Planning and Policy Review Sub-committee
                and the SPC on Finance and Corporate Services completed a detailed
                review of the majority of The City’s financial reserves in 2003-2004.
                Second, in 2007 Finance & Supply conducted a review that addressed
                the appropriateness, effectiveness, efficiency and the correct level of
                funding for selected reserves.

                We reviewed the process followed by Finance & Supply in 2007, including
                assessing the information gathered for 12 of the 18 reserves that were
                reviewed. We determined that for the most part, the process was
                adequate. However, we identified concerns with three of the reserves
                that, in our opinion, should have been addressed by this review and are
                discussed later in this report.




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                We found that the 2007 review conducted by Finance & Supply was not in
                compliance with the 1998 policy that each reserve be reviewed at least
                every three years. The 2007 review was limited to all reserves greater
                than $10 million and all reserves with no activity in 2006. Finance and
                Supply advised that this approach was approved by Council in FCS2007-
                26. However, we noted that FCS2007-26 recommended that Committee
                “Receive this report for information” and therefore, in our opinion, does
                not constitute Council approval to focus the reserves review on the top
                ten reserves. Finance and Supply management could not explain why
                they believe that focusing on high dollar value reserves and reserves with
                no activity in the past year ensures compliance with this policy.

                In our opinion, based on the results of our audit, the periodic review of
                each reserve should be expanded to include other matters relating to the
                ongoing administration of reserves, such as reviewing the accuracy and
                completeness of reserve reporting and ensuring that reserve funds are
                being used for the authorized purpose. Given that there are 55 reserves
                as at December 31, 2007, it may be more effective to adopt a cyclical
                approach such that a portion of the reserves are reviewed each year to
                balance the workload associated with the detailed reviews.

                We also noted that the 2007 reserves review conducted by Finance and
                Supply included a review of all reserves with no activity in 2006. There
                were eight reserves that met this criterion. However, report FCS2007-45
                only reported the results of the review for three of these reserves. We
                were advised by the Financial Reporting Officer that the other five
                reserves were excluded from the report as no changes were
                recommended and management decided that there was little value added
                to include these five reserves in the report. We noted that in Attachment
                5 to report FCS2007-45 it states that in addition to the top ten reserves
                Administration also reviewed any reserves with no activity in 2006. Since
                Finance & Supply disclosed the scope of their review, in our opinion, they
                should have reported on the results of all reserves that they reviewed.

        5.3.3    Closure of Reserves

                The 1998 reserve policy states that reserves that have expired or are no
                longer required will be closed with the recommendation of the responsible
                Director and the Director of Finance to the Board of Commissioners (now
                the ALT). The closure will be recommended in the annual Reserves
                Report, which will be reviewed annually by the SPC on Finance and
                Budget.

                We reviewed the reserves closed in 2005 and 2006, and found that the
                closure process did not comply with the policy:

                •   The Regulated Utility Capital Investments Reserve was recommended
                    for closure in the 2006 Reserves Report. We verified that this reserve
                    was closed in The City’s system; however, we noted that the
                    recommendation for closure does not appear to have been reviewed
                    by the ALT.


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                •    The Operating Initiatives reserve was recommended for closure in
                     report C2005-44 titled “Recommended 2006-2008 Business Plan and
                     Budget Guidelines”. This is not in compliance with the policy
                     approved by FB98-27 for the closure of reserves because the policy
                     states that the closure of a reserve will be recommended in the
                     Reserves Report.

                Although report C2005-44 recommended that the Operating Initiatives
                Reserve be closed at the end of 2005 and its balance transferred to the
                Fiscal Stability Reserve, the reserve was not closed until December 31,
                2006. As a result, the Fiscal Stability Reserve was not allocated
                investment income on the balance of $8,556,000 for all of 2006. Based
                on the average blended yield rate for the year calculated by Treasury,
                $370,646 of investment income was not allocated to the Fiscal Stability
                Reserve and therefore, the Reserves Fund was understated by this
                amount in 2006.

                Recommendations

                6.       We recommend that the CFO recommends for approval by
                         Council an updated, comprehensive Council Policy for the
                         effective administration of all aspects of reserves.

                Management Response

                Agree.

                                  Action Plan                     Responsibility
                Administration will obtain Council approval       Lead:
                for a new policy to replace FB98-27                CFO
                reflecting the current reporting structure and    Support:
                current needs of the City as they relate to all    City Treasurer,
                reserves. This policy will provide the             Manager, Financial
                framework for a new comprehensive                  Planning Budget &
                Administrative Policy suite to address the         Reporting
                findings of this report.
                                                                  Completion Date:
                                                                   Q3, 2010


                7.       We recommend that the City Treasurer strengthens the controls
                         over reserves to ensure that they are administered in compliance
                         with the approved policy.

                Management Response

                Agree.




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                                Action Plan                       Responsibility
                As discussed in recommendations 4 and 6           Lead:
                the Council Policy and the comprehensive           City Treasurer
                Administrative Policy suite will strengthen       Support:
                the controls and administration of reserves.       BU Directors for
                                                                   reserves,
                Monitoring compliance with the new policies        Finance Leads,
                will act as a control for the administration of    Operations Leads,
                reserves.                                          Manager, Financial
                                                                   Planning Budget &
                                                                   Reporting

                                                                  Completion Date:
                                                                   December 2010



5.4     Investment income should be allocated to reserves in compliance
        with the policy

        According to the 1998 policy, investment income will be added to reserves in the
        following circumstances only:

                •   endowments, legacy funds and funds involving agreements specifying
                    that the reserve will receive investment income;
                •   reserves that contain funds set aside from a surcharge on user fees
                    that accumulate for future expenditures; or
                •   Council mandates that the reserves will receive investment income.

        We reviewed all open reserves as at December 31, 2006 to determine whether
        The City was in compliance with the policy. We found that eight reserves were
        not allocated investment income in compliance with the policy approved in report
        FB98-27.

        Five of these eight reserves are being allocated investment income when none of
        the criteria exist that allows the reserve to earn investment income. The other
        three reserves are not being allocated investment income when at least one of
        the criteria exists as stated in the policy. We noted that seven of these eight
        reserves were in existence prior to this policy being approved.

        We were advised by Financial Planning, Budget and Reporting staff that the
        1998 policy should be the practice followed for all reserves. However, Treasury
        staff does not agree that the 1998 policy was intended to apply to all reserves
        and Treasury staff process the investment income allocations to reserves.
        According to Treasury staff, reserves established prior to the policy being
        approved in 1998 were grandfathered and the policy would not apply to those
        reserves. However, this practice has not been consistently applied by Treasury.

        In addition, for five reserves we cannot conclude whether the reserve is
        compliant with this policy because Finance and Supply staff could not provide us



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        with authorizing documents for these reserves - Livery Transport Services,
        Miscellaneous Capital, Real Estate Services, Wastewater and Waterworks.


                Recommendation

                8.       We recommend that the CFO reviews the policy with regard to
                         investment income and recommends the necessary amendments
                         to clearly describe the treatment of all reserves for Council
                         approval and subsequently ensures that all reserves are compliant
                         with policy.

                Management Response

                Agree.

                                 Action Plan                    Responsibility
                As included in recommendation 4 and 6, the      Lead:
                Council Policy and the comprehensive             CFO
                Administrative Policy suite are expected to     Support:
                include the appropriate treatment for            Controls:
                investment income.                               City Treasurer,
                                                                 Manager, Treasury
                The policy will be reviewed with regard to       Compliance:
                investment income. Once determined, the          Manager, Financial
                review responsibility can be assigned and        Planning, Budget &
                controls implemented to ensure compliance        Reporting
                with policy.
                                                                Completion Date:
                                                                 December 2010


5.5     Revenue sources for reserves and expenditures from reserves
        should be budgeted in The City’s operating budget

        Section 243(1) of the Municipal Government Act of Alberta states that an
        operating budget must include the estimated amount of the amount to be
        transferred to reserves and section 243(2) states that an operating budget must
        include the estimated amount of transfers from the municipality’s accumulated
        surplus fund or reserves.

        This requirement was reiterated in the 1998 reserve policies, which requires that
        revenue sources for reserves and expenditures from reserves are to be budgeted
        in departmental budget programs.

        For our sample of 19 reserves, we found seven reserves where either the
        contribution to operations from the reserve and/or the contribution from
        operations to the reserve were not included in the Operating Fund budget in
        2006. The City operates under provisions of the Municipal Government Act and
        is required to be in compliance with all sections of the Act. We were not provided


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        any plausible explanations for why the transfers to/from these reserves were not
        budgeted.


                Recommendation

                9.       We recommend that the City Treasurer develops and implements
                         a control procedure to ensure that all revenue sources for
                         reserves and expenditures from reserves are budgeted in The
                         City’s operating budget.

                Management Response

                Agree.

                                 Action Plan                    Responsibility
                Budget information has been added to the        Lead:
                Business Plans & Budget draft policy, and        City Treasurer
                will be added to the Guidelines and             Support:
                procedures documents in time for the next        Manager, Financial
                budget cycle. It has been standard practice      Planning, Budget &
                to budget all revenue sources for reserves       Reporting
                and expenditures from reserves.
                                                                Completion Date:
                Budget information has been added to the         Business Plans &
                revised reserve template requirements.           Budget policy:
                                                                 Q3, 2010
                Upon review of the completed annual
                reserve template, the reviewer will ensure       Revised template:
                the budget information is provided prior to      Q2, 2010 (2009
                publication of the Reserves Report.              Reserves Report)



5.6     Administrative procedures should be further developed and updated

        We found that the Finance procedure manual had a very brief section on
        accounting and reporting for reserves which was outdated. The Financial
        Reporting Officer advised us that she was currently revising the policies and
        procedures manual related to the financial accounting and reporting of reserves.

        In our view, as part of the revised manual, more detailed guidance should be
        provided on the following areas:

            •   the information that should be included in the report to Committee and
                Council recommending the creation of a new reserve;
            •   defining what constitutes an amendment to a reserve to ensure all
                changes are approved by Committee and Council, and
            •   defining the roles and responsibilities for the Operations Lead and the
                Finance Lead for a reserve.



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        In addition, there is a lack of procedures relating to the accuracy and timelines of
        recording reserve transactions in reserve accounts that are discussed in the next
        three sub-sections.

        5.6.1 Individual transactions should be accurately recorded in the
              reserve accounts

                We judgmentally selected a sample of reserve transactions from each of
                the 20 reserves in our sample. We found inaccurately recorded
                transactions in four of the reserves as follows:

                •   Lifecycle Maintenance and Upgrade – the contributions from
                    operations of 1.5% of the sum of previous year’s annual property
                    taxes plus assessment growth was not accurately calculated. A
                    budgeted amount was being recorded in this reserve, with no
                    adjustment to actual for the years 2002 to 2007. As a result of our
                    audit, an adjustment was made in 2008, prior to the closing of the
                    2007 financial records, increasing the contribution from operations by
                    $662,113. Of this amount, $251,243 related to the years 2002 to
                    2006 and $410,870 related to 2007.

                •   Parks Maintenance – contributions from operations were overstated
                    due to two accounting errors in 2006. One error was for $150,000 of
                    funding received that related to 2007 that should have been recorded
                    as deferred contributions and the other error was an overstatement of
                    $44,472 from the sale of trees to Heritage Park.

                •   Investment Income Stabilization – we were unable to substantiate the
                    contributions from operations for 2005 and 2006. For 2005, we were
                    unable to verify several of the balances used for individual reserves
                    and long term liabilities in the budgeted investment income portion of
                    the calculation. We were advised by Treasury staff that the budgeted
                    balances used for 2005 were based on the ending balances in the
                    2003 Reserves Report. For 2006, we were unable to verify several of
                    the balances used for individual reserves and long-term liabilities in
                    the calculation of the budgeted and actual investment income earned.
                    The 2006 balances were based on the ending balances in the 2004
                    Reserves Report and, as a result, we found two reserves that were
                    closed in 2005 used in the calculation of budgeted and actual
                    investment income. In addition, we found an overstatement of
                    $396,006 in 2006 due to certain balances of reserves and long term
                    liabilities being included in the actual income portion of the calculation
                    but not being included in the budgeted income portion of the
                    calculation.

                •   Landfill Revenue Reserve - in 2006, we found that $250,253 of capital
                    expenditures funded by the Landfill Closure Fund should have been
                    funded by the Landfill Revenue Reserve. The Finance Lead stated
                    that this amount will be corrected in 2008.




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                Numerous errors were also noted in the other reserves reviewed that
                were either corrected during the fiscal year the error was made or were
                corrected in the subsequent year. Two examples of such errors were in
                the Innovative Technology Reserve and the Downtown Improvement
                Fund. In 2005, an error was corrected for $908,227 that was funded by
                the Innovative Technology Reserve in 2004 and was supposed to be
                funded from the Reserve for Future Capital. In 2006, an error was
                corrected for $194,000 of over funding for contributions to capital from the
                Downtown Improvement Fund in 2005.

                These errors are occurring because journal entries that are posted to
                reserve accounts are not reviewed and approved by the Finance Leads.
                This is not required in The City's automated financial system. Although
                Finance Leads review periodic financial statements (May, September,
                and December) to ensure that reserve transactions are recorded
                accurately, journal entries and supporting documentation should be
                reviewed and approved prior to being posted to The City’s automated
                financial system.

                Errors in recording reserve transactions result in administrative
                inefficiencies and in financial records that are inaccurate over the period
                of time it takes to detect the error and correct it.

        5.6.2   Procedures should exist to ensure accurate and timely
                allocation of investment income

                We reviewed the financial records provided by Treasury staff and the
                various business units for documentation supporting the allocation of
                investment income to reserves for the 11 reserves in our sample of 19
                that were allocated investment income.

                We found that Treasury had not developed any formal procedures to
                ensure the accurate calculation and recording of investment income
                allocated to reserves in accordance with the investment income allocation
                policy established in report FB98-27. As a result, there were inconsistent
                practices followed in the calculation and recording of investment income
                allocated to reserves.

                We noted that for some reserves the business unit calculated and
                recorded the investment income allocated to the reserve based on the
                general ledger balance while, for other reserves, Treasury calculated and
                recorded the investment income allocated to the reserve based on a
                balance provided by the business unit to Treasury. However, in the latter
                situation, Treasury used the closing balance from the prior year's
                Reserves Report and only changed the balance when the business unit
                reported a significant change in the balance. Treasury did not maintain
                any supporting documentation for changes made to balances used in
                calculating investment income and they did not define a significant
                change in balance.




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                While the reserves in our sample were allocated investment income
                based on the appropriate rate calculated by Treasury, some of the
                business units did not use the reserve's cash balance, as directed by
                Treasury, to calculate the allocation of investment income. We found that
                for five of the 11 reserves, either the prior month-end's general ledger
                balance or the current general ledger balance was used to calculate the
                allocation of investment income.

                For the 11 reserves that were being allocated investment income in our
                sample of 19 reserves, we reviewed the accuracy of the calculation of the
                investment income for 2005 and 2006. We found errors in the calculation
                of investment income for six of the 11 reserves, five of which were
                calculated by Treasury staff. In our opinion, an investment income
                calculation error in six of 11 reserves is significant and warrants Finance
                & Supply to review the adequacy of controls in place to ensure that all
                reserves are accurately allocated investment income.

                We also reviewed the timeliness of the recording of investment income in
                our sample of reserves for 2006. The City’s policy is to calculate
                investment income allocated to reserves on a monthly basis. Therefore,
                in order to reflect the actual activity in a reserve fund the investment
                income should be recorded in the reserve fund on a monthly basis.

                We found that investment income was not recorded in seven of the 11
                reserve funds on a monthly basis. For four of these reserve funds
                investment income was recorded periodically during the year and for
                three of these reserve funds investment income was only recorded at
                year-end.

        5.6.3 Reserve fund transactions should be recorded on a timely
              basis

                We noted that the Finance procedure manual contained no guidance
                relating to the timeliness of recording transactions in reserves. We would
                expect that budgeted contributions to/from operations and contributions to
                capital should be recorded in reserve funds monthly or at least quarterly
                with an adjustment at year-end for the actual surplus/deficit of a program
                or business unit where applicable.

                We reviewed a sample of 19 reserves to determine if transactions within
                each reserve were recorded on a timely basis for 2006. For two of the 19
                reserves there were no transactions other than investment income being
                allocated to the reserve.

                For the remaining 17 reserves tested, we found that transactions were not
                recorded on a timely basis for 12 of the 17 reserves. The Finance Leads
                advised us that reserve transactions are usually recorded for the periodic
                financial statements (May 31st and September 30th), and at a minimum are
                recorded for the December 31st year-end financial statements. However,
                this limits the accuracy of the quarterly financial reporting.



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                Recommendation

                10.      We recommend that the City Treasurer develops and implements
                         procedures and guidance to ensure that:

                         •     Administrative roles, responsibilities and approval
                               requirements are clearly defined to ensure consistency across
                               reserves;
                         •     Journal entries and appropriate supporting documentation are
                               reviewed and authorized by the Finance Lead prior to being
                               posted to a reserve account;
                         •     Investment income is accurately calculated and allocated to
                               reserves on a timely basis; and
                         •     All transactions are recorded on a timely and consistent basis.

                Management Response

                Agree.

                                Action Plan                       Responsibility
                As discussed in recommendation 4, the             Lead:
                comprehensive Administrative Policy suite          City Treasurer
                is expected to provide guidance for all           Support:
                administrative aspects of all reserves.            Manager, Financial
                                                                   Planning, Budget &
                The City Treasurer will develop and                Reporting, BU Finance
                implement procedures based upon the                Managers
                policies addressed above.
                                                                  Completion Date:
                                                                   Commence in 2010 with
                                                                   full completion in 2011


5.7     There is a need for improved monitoring to ensure that reserve funds
        are being used for the authorized purpose

        Reserve funds should only be used for the purpose approved by Council. We
        were advised by the Financial Reporting Officer that the responsibility for
        ensuring that funds are used in compliance with the purpose of the reserve
        resides with the Operations Lead for the reserve. However, some of the Finance
        Leads for reserves believe that it is also their responsibility to ensure that reserve
        funds are being used in compliance with the authorized purpose. As noted in
        section 5.6 of this report, the roles and responsibilities of the Operations Leads
        and Finance Leads for reserves need to be clearly defined.

        We reviewed a sample of 20 reserves to determine if reserve funds are being
        used for the authorized purpose. For three reserves in our sample there were no
        transactions relating to the use of funds. For each of the 17 remaining reserves
        in our sample, for 2005 and 2006, we judgmentally selected a sample of
        transactions for review.


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        We found that there was a lack of supporting documentation for the transactions
        reviewed for three reserves (Lifecycle Assistance and Energy, Parks
        Maintenance, and Downtown Improvement Fund) totaling $382,759 (see
        Recommendation #10).
        We found that existing processes were not effective in ensuring reserve funds
        were only used for their authorized purpose and improved controls are needed in
        this area. We identified the following concerns with four reserves:

        •   Innovative Technology - Contributions to capital from this reserve are based
            on the hours charged by the staff in the Applications Development Pool for
            time worked on IT development projects. IT management could not provide
            supporting documentation from their time and billing system that reconciled to
            the $3,506,000 for 2005 and $2,472,000 for 2006 of contributions to capital
            from the reserve.

        •   Major Regional Facilities – From 2001 to 2006 there were no expenditures in
            this reserve. In 2007 the reserve funded a capital expenditure of $38,824.
            The purpose of the reserve which was approved by Council in 1997 was to
            fund front-end expenditures associated with the planning phases of three
            regional recreation sites. The Finance Lead advised us that this expenditure
            was funded by the reserve because the Finance Lead and Operations Lead
            believed that the reserve could be used for phase two planning costs for the
            three regional recreational sites. The expenditure funded by the reserve in
            2007 was for a fundraising study being conducted for South Fish Creek
            Recreation Association by a company that manages fundraising campaigns
            for not-for-profit clients. Of note is that the contract fee for the fundraising
            study was $354,000 for the period June 2007 to December 2008. The
            portion funded by the reserve was for the period August 1, 2007 to
            September 30, 2007. Although the budget adjustment form stated that the
            capital budget adjustment amount would be financed from this reserve and
            was approved by the appropriate City employees, in our opinion, this
            expenditure did not comply with the authorized purpose of this reserve.

        •   Lifecycle Maintenance and Upgrade - Funding was provided to the Parks
            business unit for two projects in 2006 totaling $149,849 that were not
            authorized to be funded by this reserve. In addition, we found that funding of
            $328,938 was provided to the Fire business unit in 2005 that was not
            authorized to be funded from this reserve.

        Based on discussions with Finance & Supply staff, we found that there were no
        written guidelines regarding the allocation of funding from this reserve and the
        Reserve for Future Capital to the various programs in the business units that
        have been budgeted funding from these reserves. They advised us that the
        Process Accountants usually allocate funds to the programs in the business units
        based on the budgeted proportion of funding approved for the program from the
        particular reserve. However, Finance & Supply staff noted that on occasion one
        reserve may take precedence over another in terms of funding a specific
        program and this is at the discretion of the Finance Lead for the Business Unit.




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        An example of this discretion being exercised in 2006 was in the capital budget
        for a specific program within the Parks business unit, where 50% of the funding
        was to come from the Reserve for Future Capital and 50% of the funding was to
        come from this reserve after funding from the Operating Fund and private
        contributions. Funding was provided from this reserve but no funding was
        allocated from the Reserve for Future Capital. Finance & Supply staff could not
        provide an explanation of why the funding was allocated on this basis. We are
        concerned that without clear guidelines for Finance & Supply staff to allocate
        funding from these reserves, the funding will not be allocated on a consistent
        basis and in accordance with capital budget approvals.

    •   Development & Building Approvals Sustainment Fund (DBA) - Council approved
        the use of $3,100,000 from this reserve for the purchase of 124 vehicles in 2005.
        In 2006, this funding was increased to $3,500,000. In 2005/2006, DBA
        purchased 154 vehicles at a total cost of $3,170,000 using reserve funding.
        While the total cost of vehicles purchased was under budget, the total number of
        vehicles purchased exceeded the number approved by Council in September,
        2005. DBA management advised us that the vehicles were needed for field staff
        and that additional field staff hired in 2006 accounted for the increased number of
        vehicles purchased. However, we found that the total number of field staff as at
        December 31, 2006 was 135 based on information provided by DBA, which does
        not support the number of vehicles purchased.

                Recommendation

                11.      We recommend that the City Treasurer implements improved
                         controls and monitoring to ensure that:

                         •     Transfers from reserves are adequately supported, including
                               accurate actual costs where applicable;
                         •     Allocation of funding from the Lifecycle Maintenance and
                               Upgrade Reserve and the Reserve for Future Capital to the
                               various programs is aligned with the approved budget.

                Management Response

                Agree.

                                Action Plan                      Responsibility
                As discussed in recommendations 4 and 6,         Lead:
                the comprehensive Administrative Policy           City Treasurer
                suite is expected to provide improved            Support:
                controls and monitoring of all reserves.          Manager, Financial
                                                                  Planning, Budget &
                The reserves identified above will be             Reporting
                reviewed during the first triennial cycle         BU Finance Managers
                proposed in the new Council document.
                This triennial review process will be started    Completion Date:
                in 2010.                                          Part of first triennial
                                                                  review, 2010-2011.


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5.8     There is a need for improved monitoring to ensure that the purpose
        of the reserve continues to be relevant

        A reserve’s purpose is justified at the time the reserve is established and
        approved by Council. As a number of factors affect the reason reserves are
        created, it is important that Administration review and ensure that the purpose of
        the reserve continues to be relevant. Circumstances that were in place at the
        time the reserve was established may have changed, as well as the goals and
        priorities related to the program or project funded by the reserve. As a result, the
        Operations Leads and Finance Leads for the reserve should review the reserves
        on an ongoing basis to ensure that the purpose of the reserve does not need to
        be amended or the reserve closed as a result of these changes in circumstances.

        We reviewed a sample of 38 reserves to determine whether the purpose of the
        reserve continues to be relevant. Seven reserves were identified as requiring, in
        our opinion, a review to confirm their continuing relevancy:

        •   Extended Health/Dental - The reserve is required based on a contractual
            agreement with MEBAC established January 1, 1995. We were advised by
            the Finance Lead that this reserve is no longer necessary. When this reserve
            was established in 1995, benefit claims were submitted manually on paper
            some time after the employee had received their service. Currently, most
            claims for prescription drugs and dental benefits are processed electronically
            at the time the service takes place, so they are paid on a timely basis. Other
            benefits such as vision care, massage therapy and chiropractic expenses are
            not paid as quickly but can be reasonably estimated and are accrued in the
            year-end financial statements. Therefore, we concur with the Finance Lead
            that a reserve, with a balance of $1,643,000 at the end of 2007, does not
            seem necessary for extended health/dental benefits.

        •   Heritage Incentive – Council approved the Heritage Incentive Program in
            2003 to facilitate the preservation and economic re-use of eligible heritage
            buildings. We noted there has been no use of funds from this reserve for this
            purpose since its inception. From 2003 to December 31, 2007, total
            expenditures from the reserve were $82,000, which relates to a one-time
            exception to the criteria for funding from the reserve approved by Council in
            FCS2004-15.

            Take-up of this program was projected to be $3.5 million over ten years
            beginning in 2003 as stated in report FB2002-27. Based on discussions with
            the Operations Leads and Finance Leads for this reserve and our review of
            the Calgary Heritage Strategy 2007, there was a lack of staff resources to
            promote this program to the public and to administer the program. Thus,
            there had been no take-up of the program as it was designed and the
            balance in the reserve as at December 31, 2007 was $893,000.

        •   Human Resources Investment - In September 2004, Council approved that
            this reserve would continue until all projects are complete (FSC2004-51).
            The Director of Human Resources advised us that the only uncompleted
            project was the retiree benefits review which was started in 2007 and had



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            costs in 2007 of $8,230 that were funded by the Operating Fund. At the time
            of our audit, there was no budget prepared for the retiree benefits review;
            however, the Director of Human Resources advised us that the remaining
            costs to complete the review were about $100,000. As a result, there
            appears to be excess funding of $116,000 in this reserve that could be re-
            allocated for other purposes.

        •   Universal Low-Income Transit Pass (ULITP) – Based on our discussions with
            the Finance Lead, the revenue losses and expenditures related to the
            administration of the ULITP program will consistently be more than $2 million.
            As a result, in 2007 and going forward, the activity recorded in this reserve
            will be $2 million transferred to operations and $2 million transferred from
            operations annually. We were advised by the Finance Lead that this program
            was likely to become an ongoing program and would therefore need a source
            of permanent operating funding. Although Transit was required to report back
            to the SPC on Land Use Planning & Transportation by September, 2007
            regarding the future funding source for the ULITP program, this had not been
            done as of January 2008. In our opinion, the use of a reserve for funding the
            ULITP program, even as a short-term mechanism, results in administrative
            inefficiencies and therefore should be closed. The balance in this reserve is
            $2,000,000 at the end of 2007.

        •   Major Regional Facilities – This reserve was established in 1997 (report C97-
            22) to fund front-end expenditures associated with the planning phases of the
            three regional recreation sites. We noted that there were no contributions to
            capital for 2001 through 2006 from this reserve. Further, as noted previously,
            this reserve funded a capital expenditure of about $39,000 in 2007 that we
            believe was not in compliance with the purpose of this reserve. In our opinion,
            this reserve should have been closed in 2002 and the funds made available
            for other programs. We noted that Administration did review this reserve,
            with a balance of $156,000 at the end of 2007, in their 2007 reserves review
            and that the recommendation was to further review and bring forward any
            recommendations for change to the SPC on Community & Protective
            Services in a report on the mandate and levels of funding required.

        •   Civic Partners Review – When this reserve was established in 2004 the
            original intent was that the funds were needed over the next four years to
            conduct reviews of civic partners to assess strategic alignment with the City
            and to conduct research on the City’s support of partners within a sector. No
            funds were utilized from this reserve during the period 2004 to 2007.

            We noted that research was conducted on two major sectors, Arts and
            Sports, from 2003 to 2007 and new partnership models were developed
            which directly relate to the purpose of this reserve. However, this research
            was funded through the Operating budget. We were advised that, due to the
            reorganization of the Civic Partners Division in Recreation through 2005 to
            2007 and the additional work related to the funding of capital projects through
            the Community Investment Reserve, the performing of regular cyclical
            reviews of civic partners was delayed. The Director of Recreation expects
            that the funds in this reserve will be utilized by the end of 2011.



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            We are concerned that some of the planned expenditures to be funded from
            this reserve may not be in compliance with the purpose of the reserve as it
            was established in 2004, that the funds may not all be needed to fulfill the
            purpose of the reserve and that the life of the reserve is being extended past
            the 4-year period originally envisioned.

        •   Investment Income Stabilization - Based on our discussions with Treasury
            staff, our review of the calculations that are necessary for this reserve, and
            the impact on the Operating budget, we are concerned that the cost to
            administer this reserve exceeds the benefit. If this reserve did not exist, the
            two years with the most significant impact on the Operating Fund, over the
            time period 2003 to 2007, were 2004 and 2007. In 2004, the impact would
            have been a decrease to the Operating Fund of $2,971,000 and, in 2007; the
            impact would have been a decrease to the Operating Fund of $3,098,000
            with equivalent increases to the Reserves Fund in both of these years.

        Lifecycle Assistance and Energy Reserve – The intended purpose of the reserve
        no longer appeared relevant based on our interviews with the Finance Lead and
        Operations Lead and the limited activity in this reserve for 2005 and 2006. The
        reserves review completed in 2004 recommended that the reserve be closed in
        2004 should the mandate and/or funds no longer exist based on the expectation
        that both programs funded by the reserve were expected to be completed in
        2004 and any residual funds were to be considered for reallocation at that time.
        We noted that a proposal (report CPS2008-39) to dissolve this reserve and
        transfer the remaining balance to the new Community Sustainability Reserve was
        presented and approved at the June 4, 2008 SPC on Community & Protective
        Services. However, we are concerned that Administration took over two years to
        recommend a use for almost $600,000 of funds held in this reserve.

                Recommendations

                12.      We recommend that the City Treasurer performs a review on the
                         following reserves to determine whether they should continue to
                         exist or should be closed, and to confirm whether all of the funds
                         held in the reserve are needed:

                         •     Universal Low-Income Transit Pass;
                         •     Extended Health/Dental benefits;
                         •     Heritage Incentive;
                         •     Human Resources Investment;
                         •     Civic Partners Review;
                         •     Major Regional Facilities; and
                         •     Investment Income Stabilization.

                Management Response

                Agree.




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                                 Action Plan                    Responsibility
                A review has been initiated into the 7          Lead:
                reserves identified in this recommendation       City Treasurer
                and will be completed prior to the end of       Support:
                2010. Reports will be brought to                 BU Directors,
                Committee/Council as required throughout         Finance Leads,
                the review. Preliminary results for each of      Operations Leads
                the seven reserves is as follows:
                                                                Completion Date:

                    •   Universal Low-Income Transit
                        Pass

                   Permanent funding has been found -           Q2, 2010, as part of
                   Council documents to be prepared for         annual Reserves Report
                   approval to close by Q2 2010.

                    •   Extended Health/Dental Benefits

                   Contractually required by MEBAC and          Reviewed with target for
                   Unions – MEBEC Board must provide            completion of Q2, 2010.
                   the authority to close this reserve based
                   on recommendations from the MEBEC
                   Finance Committee’s review currently
                   underway. If not closed, this reserve will
                   be monitored through the triennial review
                   process.

                    •   Heritage Incentive

                   This reserve is ongoing, with projects
                                                                Reviewed with target for
                   identified, no further investigation
                                                                completion of 2010.
                   required. This reserve will be monitored
                   through the triennial review process.

                    •   Human Resources Investment

                   This reserve is to be closed when the
                                                                Q2, 2010 as part of annual
                   final project funded by the reserve is
                                                                Reserves Report
                   complete in 2009. Council documents to
                   be prepared recommending closure.

                    •   Civic Partners Review

                   This reserve is ongoing; its purpose is to
                   assess strategic alignment between the       Reviewed with target for
                   City and current and potential new civic     completion of Q2, 2010.
                   partners. Report will be brought to
                   Committee/Council requesting an
                   extension to the term of the reserve as
                   required. This reserve will be monitored


Report Date: 29 October 2009                                                   Page 35 of 56
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                   through the triennial review process.


                      •   Major Regional Facilities

                   Review of this reserve is underway within
                   the Business unit to determine whether       Reviewed with target for
                   the reserve will be closed or its mandate    completion of Q1, 2010.
                   changed. Finance Lead to prepare
                   Council documents required.

                      •   Investment Income Stabilization

                   This reserve will be reviewed, using the     Reviewed with target for
                   revised review criteria per                  completion of Q2, 2010.
                   recommendation 4.

                13.       We recommend that the CFO ensures that adequate processes
                          are in place to monitor the continued relevance of reserves.

                Management Response

                Agree.


                                  Action Plan                   Responsibility
                As discussed in recommendations 4 and 6,        Lead:
                a Council Policy and a comprehensive             CFO
                Administrative Policy suite will be drafted     Support:
                and implemented which will clearly define        Manager, Financial
                the triennial review process, which is           Planning, Budget &
                anticipated to include the monitoring of         Reporting
                reserves for relevance. This will include the
                establishment of an administrative review       Completion Date:
                committee and the review criteria for all        Q4, 2010
                reserves.



5.9     Contributions to reserves should only be from approved funding
        sources

        We reviewed a sample of 19 reserves to determine if contributions to the reserve
        during 2005 and 2006 were in compliance with the authorized funding sources.
        We identified the following concerns with four reserves:

        •   Landfill Revenue - Finance & Supply staff could not provide us with
            supporting documentation for adjustments totaling $582,358 that decreased
            the user surcharges contributed to this reserve in 2005. In addition, for 2006,
            Finance & Supply staff could not provide us with supporting documentation



Report Date: 29 October 2009                                                   Page 36 of 56
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            for $2,320,000 of the total $4,402,000 in user surcharges contributed to this
            reserve.

        •   Parks Maintenance - Finance & Supply staff could not provide us with
            supporting documentation for $49,689 in contributions from operations in
            2005.

        Without supporting documentation, we could not determine whether contributions
        to these reserves were from authorized sources. For both reserves there had
        been turnover in the Finance Lead positions since 2006. However, supporting
        documentation should still be readily accessible as part of the City’s financial
        records. The lack of supporting documentation for reserve transactions such as
        we found in these two reserves is addressed by recommendation 10.

        •   Health, Safety and Wellness - In 2006 and 2007, approximately $5,453,000 in
            special dividends from the Workers’ Compensation Board (WCB) were
            contributed to this reserve in addition to the annual rebate received from the
            WCB. However, based on our review of the authorizing report for this
            reserve (FB98-64) and discussions with one of the Operations Leads, it is
            unclear whether these special dividends should have been contributed to this
            reserve. When the authorized funding sources were approved in 1998,
            Administration did not anticipate that these special dividends would be
            dispersed by the WCB. In our opinion, the contribution of these special
            dividends to the reserve should have been approved by the ALT and Council.

        •   Economically Disadvantaged - The one-time 1% incremental revenue in
            recreational programs as a result of the decrease in the GST in 2006 was
            approved by The City Treasurer to be allocated to the Fee Assistance
            Program in 2006. However, since the Fee Assistance Program was fully
            funded from other sources in 2006, the Director of Recreation, the Operations
            Lead and the Finance Lead for this reserve decided that the incremental
            revenue of $124,835 would be contributed to this reserve. We were advised
            that this was done because this reserve funds the Fee Assistance Program
            when the Program requires additional funds. However over the period 2001
            to 2007, this reserve has only funded the Fee Assistance Program for
            $12,000 in 2005. In our opinion, the Director of Recreation, Operational and
            Finance Leads for this reserve did not have the authority to contribute these
            funds to this reserve because the approval of the incremental revenue to be
            allocated to the Fee Assistance Program is not the same as approval to
            contribute these additional funds to this reserve.

                Recommendation

                14.      We recommend that the CFO develops policy guidance to ensure
                         one-time or unanticipated revenues to reserves are properly
                         reviewed from a corporate perspective and the allocation of these
                         funds is approved by the ALT or Council as required.

                Management Response

                Agree.


Report Date: 29 October 2009                                                   Page 37 of 56
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                                  Action Plan                 Responsibility
                As discussed in recommendation 4, the         Lead:
                policy will identify guidance and threshold    CFO
                values for Operations Leads and Finance       Support:
                leads where the ALT and Council need to        City Treasurer,
                be made aware of any one-time or               BU Directors
                unanticipated revenues or other exceptional
                circumstances, and where a BU Director        Completion Date:
                can make decisions without seeking higher      Q4, 2010
                level approvals.


5.10    The need to ensure that reserve fund transactions are in compliance
        with conditions/restrictions

        We reviewed a sample of 19 reserves to determine if the reserve fund
        transactions and balances were in compliance with any conditions and/or
        restrictions applicable to each reserve. We identified the following concerns with
        five reserves:

        •   Health, Safety and Wellness – a condition of this reserve, approved in report
            FB98-64, is to provide an annual report to the SPC on Finance and Budget
            (now Finance and Corporate Services) on the use and status of the reserve.
            In 2006, this requirement was met through an annual report for 2005 titled
            “Health, Safety and Wellness” presented to the SPC on Finance and
            Corporate Services. However, we noted that a report was not done for 2006
            for Health and Wellness. We were advised by the Director of HR that an
            annual report on the use and status of the reserve was no longer required
            based on the approval of the recommendation in report FCS2006-32 titled
            “2005 Health, Safety and Wellness Annual Report”. This report stated that
            Administration in the future was to report annually on safety compliance and
            performance through the SPC on Utilities & Environment which was done in
            2006. However, in our opinion, the approval of this recommendation did not
            eliminate the requirement for an annual report on the use and status of this
            reserve, specifically pertaining to the success of the health and wellness
            initiatives, as was stated in the conclusion of report FB98-64.

        •   Corporate Housing – This reserve funded expenditures for the CFB West
            housing project as approved by the Land Committee. However, this resulted
            in this project being over-funded from the reserve by a total of $215,000 over
            the years 2001 to 2005. The Finance Lead for the reserve could not provide
            any explanation for why this occurred.

        •   Downtown Improvement – Report FB94-93 approved a maximum of
            $60,000/year in funding from the reserve for improvement projects in the
            downtown area. However, in 2005 the reserve funded $415,000 and in 2006
            it funded $130,000. This restriction on annual funding from the reserve was
            not disclosed in the Reserves Report and the Coordinator, Strategic Projects
            – Land Use Planning & Policy advised us that he believed that the maximum


Report Date: 29 October 2009                                                   Page 38 of 56
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            annual funding from the reserve was the amount that was approved in the
            capital budget to be funded from this reserve. However, in 2005 the capital
            budget was $194,000 and the total funding from the reserve was $415,000.
            The Operations Lead and the Finance Lead provided no explanation for why
            the reserve over-funded the capital budget in 2005 and why they believed the
            maximum annual funding condition approved by Council was not adhered to
            in the capital budget.

        •   Innovative Technology – The condition approved in report C98-74 states that
            “for system projects that generate identifiable cost savings, 50% of the cost
            savings will be contributed to the reserve from the benefiting operating
            budget(s) annually until the cost of each new system has been recovered or
            five years, whichever is less”. This condition was never complied with
            because IT management decided not to penalize any business unit for taking
            the initiative to save money by implementing a new IT system. In addition,
            the Finance Lead advised us that the amounts related to cost savings from IT
            system projects would have been very difficult to calculate accurately.

            We also noted that the funding of some IT development projects costing
            $50,000 or less had been capitalized in The City's financial statements in
            2005 and 2006. This was not in compliance with the policy approved by
            Council in report C98-74 and was acknowledged by the Finance Lead for this
            reserve.

        •   Development & Building Approvals Sustainment Fund (DBA) – Council has
            established a condition that the funding held in this reserve is limited to a
            guideline maximum balance. Funding in excess of the guideline maximum is
            to be contributed to operations in the next year to soften the impact on fee
            increases.

            This reserve did not meet the condition for the guideline maximum balance to
            be held in this reserve in 2005, 2006 and 2007 as illustrated in Figure 1. We
            noted that since 2005 the guideline maximum has been significantly
            exceeded each year even though the reserve contributed $3,104,000 to
            operations in 2006 and $2,294,000 to operations in 2007.


        FIGURE 1

            YEAR           GUIDELINE MAXIMUM               EXCESS             RESERVE
                                                                              BALANCE
             2005                $15 million               $5 million         $20 million
             2006                $20 million              $12 million         $32 million
             2007                $30 million               $9 million         $39 million


                Recommendations

                15.     We recommend that the CFO, in collaboration with the Director
                        with operational responsibility for 5 reserves, reviews and updates



Report Date: 29 October 2009                                                   Page 39 of 56
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                         the conditions and restrictions and recommends necessary
                         revisions for Council approval.

                Management Response

                Agree.

                                 Action Plan                      Responsibility
                As discussed in recommendation 4, a               Lead:
                complete Administrative Policy suite will be       City Treasurer
                drafted and implemented which will clearly        Support:
                define the triennial review criteria, including    BU Directors,
                the establishment of an administrative             Finance Leads,
                review committee, for all reserves.                Operations Leads

                The five reserves specifically identified will    Completion Date:
                be examined, which will include an                 Q2, 2010
                assessment of compliance with conditions
                and restrictions.
                Reports are to be submitted to
                Committee/Council before 2009 financial
                statement finalization and changes will be
                addressed with the 2009 Reserves Report.


                16.      We recommend that the City Treasurer develops and implements
                         adequate controls to monitor compliance with the conditions and
                         restrictions of a reserve and reports non-compliance to the CFO
                         and the ALT for remediation.

                Management Response

                Agree.

                                 Action Plan                      Responsibility
                As discussed in recommendations 4 and             Lead:
                15, the drafting and implementing of                City Treasurer
                comprehensive administrative policies will        Support:
                strengthen the control environment for all        Development:
                reserves.                                           Manager, Financial
                                                                    Planning Budget &
                A policy compliance checklist will be part of       Reporting
                the triennial review process. The City            Implementation:
                Manager/Chief Financial Officer will                BU Directors,
                determine consequences of non-                      Finance Managers
                compliance based upon the individual
                circumstances of the non-compliance.              Completion Date:
                                                                   Q3, 2010




Report Date: 29 October 2009                                                     Page 40 of 56
      Financial Reserves Compliance Audit
      Report: AR09-02


                      17.      We recommend that the City Treasurer develops and implements
                               effective controls to ensure compliance with the capitalization
                               policy for IT system development costs.

                      Management Response

                      Agree.

                                       Action Plan                   Responsibility
                      A report recommending a change to the          Lead:
                      Innovative Technology reserve to be in          City Treasurer
                      compliance with the capitalization policies    Support:
                      articulated by the Tangible Capital Assets      Finance Lead,
                      policies is being prepared.                     Operations Lead

                                                                     Completion Date:
                                                                      Q2, 2010



6.0   Appropriate Level of Funding of Reserves
      Our objective was to determine whether reserves were funded at an appropriate level.

      Reserves are generally established to provide funding for a specific purpose and the use
      of funds is restricted to the identified purpose. Effective management of a reserve
      should therefore include measures to ensure the reserve has sufficient funds to meet the
      intended purpose, including plans, where required, to address funding shortfalls and
      guidelines for addressing excess funds held in a reserve.

      The audit assessed the processes in place and the level of funding of a sample of
      reserves.

                                       WHAT WE CONCLUDED

      We concluded that while some reserves were funded at an appropriate level, The City
      did not have appropriate processes in place to ensure that a targeted amount of funds to
      be held in each reserve had been established and to identify whether a reserve was
      over-funded or under-funded and initiate corrective action.


                                            WHAT WE FOUND

      6.1     The need to establish an appropriate amount of funds to be held in
              each reserve

              It is important for The City to establish a range or an appropriate amount of funds
              to be held in a reserve to sufficiently meet the intended purpose of that reserve or
              comply with legislated or third-party contract requirements where applicable.


      Report Date: 29 October 2009                                                    Page 41 of 56
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        This would help ensure that funds which could be available for other purposes
        are not being unnecessarily tied up in reserves.

        For 11 reserves in our sample of 19 reserves, we were able to satisfy ourselves
        that a mechanism was in place to establish the appropriate amount of funds to be
        held by the reserve. However, we have concerns regarding the appropriateness
        of the amount of funds held in the reserve for the following 8 reserves:

        •   Children's Reserve Fund – The Operations Lead and Finance Lead advised
            us that they believe that an appropriate amount of funds was being held in
            the reserve. However, we noted that none of the principal of $3,804,000 had
            been spent from 2004 to 2007. During this time period, $357,000 (74%) of
            the $480,000 in investment income allocated to the reserve had been
            contributed to operations mainly to fund the Fee Assistance Program
            administered by the Recreation business unit. We found that there was no
            defined plan for using the principal amount so we could not determine
            whether an appropriate amount of funds was being held in this reserve.

        •   Economically Disadvantaged - The CPS97-79 report that authorized the
            creation of this reserve states that the interest earnings will be used on an
            ongoing basis to make Calgary Parks & Recreation programs more
            affordable to economically disadvantaged Calgarians. From 2001 to 2007
            only $12,000 had been contributed to operations from the reserve to offset
            costs of the Fee Assistance Program even though report CPS97-79 stated
            that a need exists to ensure there is an ongoing source of funding for the Fee
            Assistance Program. We noted that the Children’s Reserve Fund was
            approved to fund the Fee Assistance Program for $100,000 per year in 2004.
            As a result, we do not believe that this reserve is needed to fund the Fee
            Assistance Program.

            Although report CPS97-79 states that “new initiatives are required to address
            the constraints and barriers which currently inhibit participation by those in
            economic need such as lack of resources to address the issues of
            transportation, childcare, equipment and leisure opportunity awareness and
            values”, this reserve had not been used to fund any new initiatives. We were
            advised by the Operations Lead that, because the amount of the principal
            was small, the intent was to grow it to a sufficient point where the interest
            could then fund specific annual projects or offset costs related to funding
            services for low income Calgarians. However, as we found that there was no
            defined plan for what the reserve funds will be used for, we could not
            determine whether an appropriate amount of funds was being held in this
            reserve.

            Given that this reserve may not be needed to fund the Fee Assistance
            Program and has not funded any new initiatives as defined in the authorizing
            report, in our opinion, the need for this reserve should be re-assessed.

        •   Health, Safety and Wellness Reserve - This reserve was historically funded
            by the Workers’ Compensation Board (WCB) annual rebate and
            $600,000/year from the employee benefit program. In 2006 and 2007, The
            City received a special dividend from the WCB which resulted in the reserve


Report Date: 29 October 2009                                                  Page 42 of 56
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            balance increasing to $6,813,000 by the end of 2007. We found that there
            was no strategic plan for the use of the special dividends and the Operations
            Leads advised us that the reserve had significantly more funds than planned
            expenditures. In our opinion, the appropriate balance of funds to be held in
            this reserve should be re-assessed.

        •   911 Communications Centre Financing - This reserve was intended to fund
            future capital improvements/upgrades to the 911 Communications Centre.
            We found that there was no capital lifecycle plan in place to demonstrate the
            future capital improvements/upgrades required for the next five years to the
            911 communications centre. In our opinion, the appropriate balance of funds
            to be held in this reserve should be re-assessed.

        •   Corporate Housing – We were advised by the Operations Leads and Finance
            Leads that it would be difficult to establish a maximum limit for this reserve
            because the reserve is only one of the many components that fund the
            development of affordable rental, social and special-needs housing projects
            and the funds in the reserve are used to leverage other sources of funding.
            Given the huge demand in affordable housing currently in Calgary the
            reserve balance of $3,427,000 as at December 31, 2006 did not appear to be
            adequate. We noted that the Province of Alberta had provided an affordable
            housing grant of $63 million to The City in 2007 which was contributed to this
            reserve. As a result, the reserve balance at the end of 2007 was
            $67,316,000. The Finance Lead and Operations Lead advised us that this
            funding will still not meet the needs of affordable housing in Calgary in the
            near future. Nonetheless, in our view, an appropriate range of funds to be
            held in this reserve should be established.

        •   Downtown Improvement Fund - The Operations Lead advised us that the
            strategy for the reserve is to continue for many years into the future and be
            coordinated with the City Centre Plan. Nevertheless, we were not provided
            with any documentation to support what would be an appropriate amount of
            funds to be held in this reserve.

        •   Innovative Technology - The reserve balance related to IT Development
            Projects was $5,310,000 as at December 31, 2007. It included funds carried
            forward from prior year projects to be completed in future years along with
            funds that were not allocated to any projects. Figure 2 presents a breakdown
            for the total funds held in the reserve from 2005 to 2007. The Operations
            Leads and Finance Leads did not provide us with any supporting
            documentation to demonstrate that the ending balance in the reserve each
            year was the appropriate amount of reserve funds to be held for IT
            Development Projects. Given that a significant portion of the ending balance
            for the reserve in 2006 and 2007 consisted of funds that were not allocated to
            specific projects, in our opinion the appropriate level of funds to be held in
            this reserve should be re-assessed.




Report Date: 29 October 2009                                                   Page 43 of 56
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        FIGURE 2
                                      As at December      As at December      As at December
                                         31, 2005            31, 2006            31, 2007
         Total funds allocated to
         projects                          $3,113,000           $3,414,000         $3,064,000
         Total funds unallocated
         to projects                         $687,000           $2,162,000         $2,246,000
         Ending balance in
         reserve                           $3,800,000           $5,576,000         $5,310,000

    •   Lifecycle Maintenance and Upgrade - We found that an appropriate amount of
        funds to be held in this reserve had not been established. However, beginning in
        2007, additional funding of $10 million per year was being allocated to this
        reserve from the Debt Servicing Reserve to address critical lifecycle needs. The
        Manager of Financial Planning, Budget and Reporting advised us that it would be
        difficult to establish an appropriate range or amount of funds to be held in this
        reserve to meet the intended benefit. Nevertheless, in our view, a targeted
        range of funds to be held in this reserve should be established.

        6.1.1 DBA Sustainment Reserve

                Although we did find that the level of funds to be held in the DBA
                Sustainment Fund had been established, we are concerned with the
                methodology used and the lack of support for the capital component
                when the new guideline maximum was established in December 2007.

                The original maximum approved for the reserve in 2003 was $15 million
                which was based on providing funding for operational stabilization of $6
                million and capital expenditures of $9 million. The operational stabilization
                portion of the reserve was based on a 20-year historical analysis of
                average yearly revenue fluctuations which were determined to be 15-to-
                20%. The capital portion of the reserve was originally based on historical
                capital expenditures.

                In December 2007, a revised maximum reserve guideline was approved,
                which was based on 50% of projected 2007 revenues. This maximum
                was based on providing 20% of projected revenues for the operating
                component and maintaining the capital portion at 60% of the reserve
                balance.

                We noted that the operating component of the reserve maximum was
                calculated based on 20% of the projected revenues for 2007 which is
                consistent with the methodology used in 2003 and in 2006. However, in
                our opinion, given the recent significant fluctuations in the development
                and building industry activity, and that not enough time has elapsed to
                validate whether 20% of revenues is an appropriate basis for the
                operating component of the reserve, we believe that DBA management
                should continue to evaluate whether this is an appropriate basis for
                calculating the operating component of the reserve.




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                The balance in the reserve earmarked for capital should either be based
                on historical capital expenditures, which was the original basis for this
                component of the reserve established in 2003, or projected capital
                expenditures. Although the 2003 calculation resulted in 60% of the
                reserve balance for capital expenditures, it is not appropriate to maintain
                this ratio when the guideline maximum was being increased in 2006.
                DBA management could not provide us with any supporting
                documentation for the resulting projected capital expenditure component
                of $18 million. In report FCS2007-45 it stated that the capital budget was
                required for two permanent depots for DBA field staff. However, no detail
                of these projected costs was provided in this report which was the basis
                for approving the increase in the capital component of the reserve. We
                also noted that the capital expenditures for the period 2004 to 2007
                funded from the reserve totaled $4,991,000 which is significantly lower
                than the projected capital expenditures of $18 million.

                The two components of the reserve, operational stabilization and capital
                expenditures, should be calculated independently of each other and the
                total of these two components should not be equated to a percentage of
                projected revenues.

                Recommendation

                18.      We recommend that the CFO develops and implements policies to
                         ensure that, for all new and existing reserves, an appropriate
                         range or maximum guideline for the amount of funds to be held in
                         the reserve is established and approved by Council.

                Management Response

                Agree.

                                  Action Plan                  Responsibility
                As discussed in recommendations 1, 4 and       Lead:
                6, for existing reserves, an appropriate         CFO
                funding range or maximum guideline             Support:
                amount, where applicable, will be              Development:
                established at the triennial review process.     Manager, Financial
                Once established, the year-end reserve           Planning, Budget &
                review will ensure compliance with this          Reporting
                standard.                                      Implementation:
                                                                 City Treasurer,
                Administration’s approach is to develop a        General Managers,
                new policy in Q3 2010, address those             BU Directors
                changes with the 2010 Reserves Report
                where appropriate, and to begin the next       Completion Date:
                triennial review process in 2010.               December 2010




Report Date: 29 October 2009                                                   Page 45 of 56
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6.2     There is a need for processes to ensure that inadequate funding or
        excess funding for each reserve is identified and addressed

        It is important for The City to ensure that all reserve funds are reviewed on a
        regular basis to identify whether the reserve is inadequately funded or whether
        there are excess funds in the reserve to fulfill its intended purpose. If a reserve is
        inadequately funded, then a plan should be developed to ensure that the reserve
        will either be adequately funded to meet projected needs or that projected needs
        will be adjusted to match available funding. If a reserve has excess funds then
        appropriate actions should be taken to ensure that the excess funds are
        withdrawn from the reserve on a timely basis to make these funds available for
        other critical City needs.

        We found, in our sample of 19 reserves, that nine reserves were funded at an
        appropriate level. For the other 10 reserves in our sample, we concluded the
        adequacy of the funding levels should be reviewed. We noted the following
        concerns:

        •   For six reserves, there was no process in place to determine whether the
            reserve was over-funded or under-funded. We also noted that there were no
            long-term plans describing how the reserve funds would be used to fulfill the
            reserve’s purpose. The following reserves should be reviewed:

            o   Two reserves may be inadequately funded based on the information we
                obtained through our review and because of the additional funding that
                these reserves received in 2007:
                 Corporate Housing;
                 Lifecycle Maintenance and Upgrade.

            o   Four reserves may be over-funded based on the information obtained
                through our review and as discussed in the previous section of this report:
                 Children’s Reserve Fund;
                 Economically Disadvantaged;
                 Health, Safety and Wellness;
                 Downtown Improvement Fund.

        •   911 Communications Centre Capital Financing – Current funding to this
            reserve is $150,000 per year. The Operations Lead believes that the reserve
            is under-funded and the annual contribution should be increased from
            $150,000 to $300,000 to fund the planned capital expenditures for the Public
            Safety Communications Centre. However, as noted in the previous section of
            this report, there is no capital lifecycle plan in place for the next five years for
            the Public Safety Communications Centre, so we could not conclude whether
            or not an annual contribution from operations of $300,000 to this reserve
            would be an appropriate level of funding.

        •   Landfill Revenue - This reserve was to be funded from a portion of the user
            surcharges obtained through the landfill disposal rate per tonne. This fee was
            established to fund the three Landfill reserves and the non-tax-supported
            share of actual landfill operating costs. Although a budget rate per tonne was



Report Date: 29 October 2009                                                        Page 46 of 56
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            established to allocate the revenue to the three reserves, the Landfill
            Revenue Reserve was actually funded by the remainder of the total landfill
            user surcharges after funding the non-tax supported share of actual landfill
            operating costs and the budged contribution rate per tonne of landfill disposal
            for the Landfill Capital Financing Fund and the Landfill Closure Fund. As a
            result, the Landfill Revenue Reserve was not adequately funded in 2005 and
            2006 to provide sufficient funding for recycling and diversion operating
            programs, for the operating expenses of the strategic planning unit within
            Waste and Recycling Services and for capital projects related to recycling
            and inactive landfill sites.

            Management of the Waste & Recycling Services business unit had advised
            the SPC on Utilities and Environment in October 2005 that the ongoing
            dependency on the Landfill Revenue Reserve to support recycling and
            diversion operations was not financially or strategically sustainable. This risk
            was again reported in November 2007 and the report stated that the long-
            term sustainable financial plan for Waste and Recycling Services will be
            included in the 2009 to 2011 business planning and budget cycle. The
            financial sustainability of Waste & Recycling Services, including this reserve,
            was addressed by the recommendations approved by the SPC on Utilities
            and Environment on October 15, 2008. These recommendations were
            adopted by Council on November 17, 2008.

        •   Innovative Technology - For the IT Development Projects portion of this
            reserve, the reserve receives a contribution from operations. The contribution
            to the reserve is from the Application Centre - Development Pool and each
            year is based on available staff hours multiplied by a predetermined rate for
            salaries and benefits. IT Development Pool projects are charged for the
            actual hours worked on the project and these costs are recovered through a
            contribution from the reserve to the capital project. Any excess of
            contributions from operations over contributions to the Capital Fund in a given
            year remain in the reserve.

            As noted in the previous section, in 2006 there were about $687,000 of funds
            unallocated to projects carried forward from 2005 and in 2007 the unallocated
            amount carried forward from 2006 was about $2,162,000. Therefore, we
            concluded that this reserve was over-funded by about $2,162,000 as at
            December 31, 2006, and that the funding methodology for this portion of the
            reserve should be revised. In addition, the 10-year projections prepared for
            Administration’s review of reserves in 2007 indicated that this portion of the
            reserve balance will continue to grow to about $9,917,000 by 2017 if the
            current funding methodology continues.

        •   Development & Building Approvals Sustainment Fund - As noted in section
            5.10 of this report, the maximum reserve guideline was exceeded for 2005,
            2006 and 2007. In addition, as described in the previous section of this
            report, we do not believe that there was adequate support for a $30 million
            maximum guideline for this reserve. Therefore, it appears that this reserve
            may have been over-funded.




Report Date: 29 October 2009                                                    Page 47 of 56
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                Recommendations

                19.      We recommend that the CFO develops and implements a policy
                         and guidelines to ensure that reserves are reviewed annually to
                         determine whether they are over-funded or under-funded.

                Management Response

                Partially Agree.

                                 Action Plan                     Responsibility
                As discussed in recommendation 6,                Lead:
                Administration will obtain Council approval       CFO
                for a new policy to replace FB98-27              Support:
                reflecting the current reporting structure and   Development:
                current needs of the City as they relate to       Manager, Financial
                all reserves.                                     Planning, Budget &
                                                                  Reporting
                The new Council Policy proposes to
                remove the requirement for an "omnibus"          Implementation:
                review of all reserves every three years and       City Treasurer,
                replace it with a three year revolving review      General Managers,
                process such that each reserve is reviewed         BU Directors
                every three years but only one third of the
                reserves are reviewed annually - the             Completion Date:
                triennial review process. The triennial           Policy: Q3, 2010
                review process will strive to create an equal
                burden of work each year based upon               Triennial Review:
                selected criteria including dollar values,        2010 to 2011
                number of reserves to be reviewed and
                considering any overlap between programs.

                Administration expects to present the
                revised Council Policy for approval in Q3
                2010, address those changes with the 2010
                Reserves Report where appropriate, and to
                begin the triennial review process in 2010.


                20.      We recommend that the CFO ensures that, where a reserve is
                         over-funded or under-funded, the responsible Director, in
                         conjunction with the City Treasurer, addresses the funding issue,
                         including the development of forecasts and plans to support the
                         appropriate level of funding for the reserve.

                Management Response

                Agree.




Report Date: 29 October 2009                                                    Page 48 of 56
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                                 Action Plan                    Responsibility
                As discussed in recommendations 1, 4, 6         Lead:
                and 18, for existing reserves, an                CFO
                appropriate funding range or maximum            Support:
                guideline amount where applicable will be       Development:
                established at the triennial review process.     Manager, Financial
                Once established, the year-end reserve           Planning, Budget &
                review will ensure compliance with this          Reporting
                standard.
                                                                Implementation:
                Once the comprehensive administrative             City Treasurer,
                policies have been approved, training and         General Managers,
                support will be provided to ensure clarity of     BU Directors
                understanding for reserve policies,
                including roles and responsibilities in the     Completion Date:
                event of over-funding or under-funding of a      Policy: Q3, 2010
                reserve. This clarity by those responsible
                will naturally improve the information at        Triennial Review:
                year-end.                                        2010-2011

                Reserve template (the template) will be
                revised to include additional fields to be
                completed as detailed in response to
                recommendation 1.

                Administration’s approach is to develop a
                new policy in Q3 2010, address those
                changes with the 2010 Reserves Report
                where appropriate, and to begin the
                triennial review process in 2010.




Report Date: 29 October 2009                                                   Page 49 of 56
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7.0   About the Audit

      The audit work for this project was substantially completed on 2009 February 20.

      Audit Team

      Deputy City auditor:     T. McBeth
      Audit Associate:         T. Flannagan
      Auditor:                 J. Norris

      Report Milestones

      Preliminary audit report issued:        2009 June 1
      Final audit report issued:              2009 October 29

      Audit Report issued to:        E. Sawyer, Chief Financial Officer,

                             cc:     O. Tobert, City Manager
                                     B. Koay, Acting City Treasurer/ Director, Finance & Supply




      Report Date: 29 October 2009                                                  Page 50 of 56
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Appendix 1: Details of Reserve Balances
                                       City of Calgary Reserves
                                     As at December 31, 2005-2007
                                                ($000’s)

                                                        Business Unit             2007        2006          2005


              Operating Reserves
 Annexation                                Land Use, Planning, & Policy           -           14,762             304
 Calgary Police Service Helicopter
 Maintenance                               Calgary Police Service                 1,373        1,688         1,294
 Children's Reserve Fund                   Community & Neighbourhood Services     3,945        3,906         3,843
 Civic Partners Review Reserve             Recreation                                 251          251           251
 Economically Disadvantaged                Recreation                                 490          348           333
 Extended Health/Dental                    Finance & Supply                       1,643        1,407         1,389
 FCSS Stabilization Fund                   Community & Neighbourhood Services     2,865        3,016         3,508
 Fiscal Stability Reserve                  Finance & Supply                     148,125       80,997        74,435
 Group Life                                Finance & Supply                       1,288        1,191         1,095
                                           Human Resources and Environmental
 Health, Safety and Wellness               & Safety Management                    6,813        5,039         1,906
 Heritage Incentive                        Land Use, Planning & Policy                893          593           368
 Historical Preservation                   Land Use, Planning & Policy                561          58            56
 Human Resources Investment                Human Resources                            216          216           216
 imagineCALGARY                            Land Use, Planning & Policy                32           372           684
 Investment Income Stabilization           Finance & Supply                       2,662        5,334         4,051
 Lifecycle Assistance & Energy             Community & Neighbourhood Services         580          552           592
 Livery Transport Services                 Calgary Transit                            667          297           92
 Mall Programming                          Land Use, Policy & Planning                923          933           893
 Operating Initiatives                     Finance & Supply                       -            -             8,556
 Parks Foundation                          Parks                                  2,142        1,861         1,841
 Parks Maintenance                         Parks                                  2,033        1,919             868
 Perpetual Care                            Parks                                  4,953        4,582         3,536
 Tax Loss Provision                        Finance & Supply                      27,000        -             -
 Self-Insurance                            Law                                    7,000        7,000         7,000
 Unappropriated Surplus                    Finance & Supply                       9,407        -             1,794
 Universal Low-Income Transit Pass         Calgary Transit                        2,000        2,000         -
                                                                                227,862     138,322      118,905




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                                                          Business Unit              2007         2006          2005


            Capital Reserves
 911 Communications Centre Capital
 Financing                                   Public Safety Communications                 450          300           150
 Calgary Police Service Capital Financing    Calgary Police Service                   7,203        5,348         3,454
 Calgary Police Service Pay-As-You-Go        Calgary Police Service                   2,591        3,851         2,382
 Community Investment Reserve                Recreation                              34,789       26,753        19,473
 Container Capital                           Waste & Recycling Services                   91           259           180
 Corporate Housing                           Corporate Properties & Buildings        67,316        3,427         2,610
 Debt Servicing                              Finance & Supply                       105,740     100,476         79,575
 Downtown Improvement                        Land Use, Planning & Policy              3,378        1,687         1,278
 Golf Course Levy                            Recreation                               1,644        1,164             653
 Greater Forest Lawn Enhancement             Roads                                        12           12            248
 Innovative Technology                       Information Technology                  12,867       11,114         8,148
 Landfill Capital Financing                  Waste & Recycling Services               6,508        5,132         1,091
 Landfill Closure                            Waste & Recycling Services               8,449        2,224         2,446
 Landfill Revenue                            Waste & Recycling Services               4,069        7,171         8,688
 LED (Traffic Signal Display)                Roads                                    2,219        1,505             969
 Legacy Parks                                Parks                                   53,112       52,206        43,331
 Lifecycle Maintenance and Upgrade           Finance & Supply                        23,393        7,819         6,542
 Major Regional Facilities                   Recreation                                   156          187           179

 Miscellaneous Capital                       Roads                                    8,452        6,920         6,828
                                             Calgary Transit                          1,324        1,258         1,964
                                             Calgary Fire Department                      335          335           304
                                             Fleet Services                               128          32        1,354
                                             Corporate Properties & Buildings             57           182           352

 Parking Land Acquisition Reserve            Transportation                           5,199        -             -
 Regulated Utility Capital Investments       Utilities & Environmental Protection     -            -            33,200
 Reserve for Future Capital                  Finance & Supply                       176,038     120,961         91,995
 Revolving Fund for General Land Purchases   Corporate Properties & Buildings             880      6,655         2,108
 Storm Sewer Upgrade                         Water Resources                         12,301       14,942         4,946
 TELUS Convention Centre                     Recreation                                   360          517           491
 YMCA                                        Recreation                               1,309        1,268         1,287
                                                                                    540,370     383,705      326,226

            Sustainment Reserves
  (combined Operating & Capital reserves)
 Cemetery Reserve                            Parks                                    -                172           152
 Development & Building Approvals (DBA)
 Sustainment Fund                            Development & Building Approvals        38,999       32,079        20,187
 Millican-Ogden Community Enhancement        Land Use, Planning & Policy                  285          285       -
 Real Estate Services                        Corporate Properties & Buildings         -           50,847        21,905
 Wastewater                                  Water Resources                          5,000        5,000         5,000
 Waterworks                                  Water Services                           5,000        5,000         5,000
                                                                                     49,284       93,383        52,244

 Total Reserves                                                                     817,516     615,410      497,375




Report Date: 29 October 2009                                                                    Page 52 of 56
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Appendix 2: Management Action Plan – Additional Details

The Management responses and action plans presented in the body of the audit report
provide a summarized action plan for each recommendation. The following additional
information is provided to assist the reader in understanding the detailed approach to
addressing this audit.

Action Plan General Approach

Administration’s approach is to, wherein so far as possible, avoid duplication of work and
reports between the existing policy and the policy anticipated for Q3 2010.

Administration’s approach is to:

    •   implement improved internal controls, review processes, changes and
        enhancements for the final 2009 financial statements where necessary and
        appropriate;
    •   address those changes with the 2009 Reserves Report;
    •   develop a new policy in Q3 2010, following the 2009 year-end process and prior
        to the completion of 2010 year-end;
    •   address any additional changes with the 2010 Reserves Report; and
    •   begin the triennial review process in 2010. For the first triennial review, an initial
        review will be conducted in 2010-2011 to address the issues in the audit report
        as part of the 2010 Reserves Report in Q2 2011. A second review will be
        conducted in 2011-2012 to confirm the status of all reserves.

Once the policies described in recommendation 4 have been approved, training and
support will be provided to ensure clarity of understanding for reserve policies, including
roles and responsibilities. This clarity by those responsible will improve the information
at year-end.

Policy Framework

The action plan will establish an updated policy framework for reserves to include both
Council Policy and Administrative Policy elements as required.

Council Policy

Administration will obtain Council approval for a policy to replace FB98-27 reflecting the
current reporting structure and current needs of The City as they relate to all reserves.
This new Council Policy will provide the framework for a new comprehensive
Administrative Policy suite to address the findings of this report and the requirements of
the new Council Policy. (The Administrative Policy is discussed further in the next
section of this appendix.)

The new Council Policy is expected to remove the requirement for an "omnibus" review
of all reserves every three years and replace it with a three-year revolving review
process such that each reserve is reviewed every three years but only one third of the
reserves are reviewed annually - the triennial review process.



Report Date: 29 October 2009                                                     Page 53 of 56
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The triennial review process will strive to create an equal burden of work each year
based upon selected criteria, including dollar values, number of reserves to be reviewed
and considering any overlap between programs. This schedule will be confirmed in the
policy as well as provisions for how new reserves will be added to the rotation and
closed reserves will be eliminated, as well as a policy compliance checklist.

The new Council Policy is expected to provide the framework for clear guidance on the
ongoing administration required for all reserves which will be entrenched in the
comprehensive Administrative Policy suite.

The new Council Policy is expected to clearly document the following criteria:
   • the circumstances which must exist for a reserve to earn investment income;
   • what investment income streams will be included in the income calculation;
   • how the income will be calculated;
   • which currently open reserves will earn investment income; and
   • which reserves will not earn investment income.

The new Council Policy is expected to provide clarity on what reserves information is
appropriate to present to Council "for information only" and what information should be
presented to Council for approval.

Administrative Policy

A comprehensive Administrative Policy suite will be developed to provide guidance for
all administrative aspects of reserves. It is expected that guidance will be provided in
the following areas to amplify the Council Policy and ensure compliance.

The Administrative Policy suite is expected to include guidance on:

    •   Creation of reserves, which will be required to clearly outline the anticipated
            o purpose;
            o relevance;
            o conditions;
            o restrictions;
            o related budget programs;
            o funding sources; and
            o financial activity levels
    •   The approval process required prior to a reserve being created;
    •   The amendment process required if any of the reserve information requires
        changing in any way;
    •   All disclosure requirements, including:
            o Provincial and Federal;
            o Municipal Government Act (MGA);
            o Public Sector Accounting Board (PSAB); and
            o Council mandates
    •   Roles and responsibilities of all the key staff involved with reserves:
            o Financial Reporting Officers
            o Business Unit Directors
            o Finance Managers


Report Date: 29 October 2009                                                     Page 54 of 56
Financial Reserves Compliance Audit
Report: AR09-02

            o Finance Leads; and
            o Operations Leads.
    •   Processing of reserve transactions, including:
            o timeliness of recording transactions;
            o accuracy;
            o completeness;
            o consistency;
            o transaction approvals;
            o periodic reconciliations and verifications;
            o year-end reconciliations and verifications;
            o monitoring of transactions; and
            o any other activities as required.
    •   The triennial review process for all reserves, including the establishment of an
        administrative review committee, and the criteria to be used in the three-year
        cycle review. The review criteria are expected to include an examination of
            o the purpose;
            o funding sources;
            o funding levels, current and future;
            o appropriate maximum funding approval;
            o conditions;
            o restrictions;
            o relevance; and
            o activity levels by dollar value and volume.

The policy is expected to identify threshold values where the ALT and Council need to
be made aware of exceptional circumstances and where a BU Director can make
decisions in exceptional circumstances.

Annual Report on Reserves and Long Term Liabilities

The review process over sufficiency and accuracy of information disclosed will be
strengthened by the establishment and communication of clear guidance on the roles
and responsibilities for reserve transactions (as per recommendation 4), and an increase
in the amount of information, support and analysis done for the year-end review
(including an enhanced information template and mandatory completion of all sections),
as well as additional resources provided to review reserves and investigate any issues
noted.

Process

This enhanced process will increase the oversight by Finance including reporting detail
to Council and include additional organizational training and support, detailed disclosure
and attestation.

        •   Each Finance Lead and Operations Lead will continue to be required to sign
            an attestation document stating that, to the best of their knowledge, the
            information provided is complete, accurate and compliant with Council
            policies, the reserve's mandate and any other conditions or restrictions of the
            reserve.



Report Date: 29 October 2009                                                    Page 55 of 56
Financial Reserves Compliance Audit
Report: AR09-02

       •    An increase in the role of the Financial Reporting Officer year-end review to
            that required by this recommendation will increase the amount of time
            necessary for the year-end reserve report, as well, by virtue of more
            information being provided as well as an increase in the role to be more of a
            “watchdog”.

Annual Report Template

In addition, the Reserve Template (the template) is expected to be revised to include
additional fields to be completed and mandatory completion of all sections.

The revised template is expected to identify and disclose:

       •    the creation date;
       •    all authorizing documents*;
       •    the approved purpose*;
       •    the next review date;
       •    all conditions*;
       •    all restrictions, both internal and external;
       •    related budget programs*;
       •    all funding sources*;
       •    whether principal is available for use;
       •    investment income eligibility*;
       •    current activity schedule*; and
       •    budget activity schedule.

* Information which is currently disclosed

Any non-compliance with the established criteria will require clear disclosure as to why it
occurred and how it will be remedied.

The revision will require some reserves to use two pages or more of the Report on
Reserves Report.

Conclusion

Administration is confident that these changes and enhancements will improve effective
Reserves stewardship and ensure Reserves are managed on a consistent basis.




Report Date: 29 October 2009                                                   Page 56 of 56

				
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