A growing number of First Nations are establishing reserve funds through their property tax revenue to address short and long terms needs in their communities.
Over the past several years, FNTC has been responsive to this trend by developing policy on how reserve funds should be established and rules regarding their use. Typically First Nations use reserve funds as a means to help respond to significant capital requirements related to the building, replacing or repairing of community infrastructure in support of local services delivery.
This practice of planning and saving for capital improvements has meant a real reduction in alternative financing costs. Increasingly, however, First Nations are also turning to reserve funds to help finance non-capital projects.
Some examples of these non-capital reserve funds include reserve funds for the following:
- An expected increase in the cost of local services (e.g., police or fire protection);
- An expected decline in revenues because of a planned redevelopment or the closing of a business; and,
- Future costs associated with a land designation, zoning, or the future costs associated with developing detailed land use plans.
Whether established for capital purposes or not, each reserve fund has to be supported by a plan of how the reserve fund will be used.
This approach reflects best practices for financial management followed by local governments and is a requirement when setting up a fund.
For example, a capital reserve fund requires a capital plan, a clear statement of the capital project and how the reserve fund will be used to finance the project.
Non-capital reserves can be supported by a contingent liability plan or an economic plan, depending on the nature of the reserve fund.
In addition to plans, the expenditure standards require annual reporting of the reserve fund balance as part of the First Nation’s Annual Expenditure Law.
The reserve fund report also shows projected transfers in and out of the reserve fund, supporting audit requirements.
Another example of a non-capital reserve fund is the “contingency reserve fund” which is used by some local governments for the purposes of funding unforeseen operating expenditures and stabilizing the temporary impacts of cyclical local revenue decreases.
Over the last several months the FNTC has been examining best practices in the use of contingency reserves and how First Nations and their taxpayers can utilize these reserves to achieve community objectives and will be developing standards in this area.
This research has canvassed how and when local governments use the funds and the type of requirements local governments must meet to ensure transparency and accountability to their taxpayers.
Clearly, the use of reserve funds is a necessary component of sound fiscal management. They can be excellent financial tools as long as they are supported by a plan, strategically balanced, and transparent to the public.
A recent study of local governments by a leading economist revealed that reserve funds finance about 25% of most local government infrastructure.
By using all their FSMA local revenue raising powers, First Nations could achieve a similar ratio and be able to finance more infrastructure to support local services, attract investment and grow their revenues.