Municipal Reserves & Surpluses (What I’ve learned) Part 1

Steve LeBlanc · March 22, 2026

What are they? What do they do? How do they impact your tax dollars?
This is Part 1 - what I’ve learned as a resident.

Reserves:

Arcadia maintains three (3) reserves:

  1. Operating Reserves: For ongoing expenses (salaries, utilities).
  2. Capital Reserves: For large, long-term assets (new buildings, major infrastructure)
  3. Sewer Capital Reserve

Operational Reserves

Municipal operating reserves are financial safety nets, often capped by provincial law (like NB’s 5% rule), designed to cover unexpected shortfalls or urgent operating expenses, ensuring service continuity, funded by budget surpluses, acting like an emergency fund for day-to-day costs like salaries or utilities, and distinct from capital reserves.

Purpose of Operational Reserves

  • Financial Stability: Provides a cushion for unexpected events, economic downturns, or unforeseen operating costs.
  • Service Continuity: Prevents disruption of essential services (like police, fire, water) during funding gaps.
  • Cash Flow Management: Smooths out uneven revenue streams throughout the year.
  • Unforeseen Opportunities: Allows municipalities to act quickly on opportunities, such as urgent equipment purchases.

Key Characteristics

  • Funding Source: Built up over time from annual budget surpluses or specific transfers.
  • Usage: Restricted to general operating expenses, not long-term capital projects.
  • Legal Limits (New Brunswick Example): The Local Governance Act allows a General Operating Reserve Fund (GOF) with a balance not exceeding 5% of the previous year’s budgeted operating expenditures.

Examples of Use

  • Covering unexpected increases in fuel, salary, or utility costs.
  • Addressing temporary revenue shortfalls from grants or taxes.

Capital Reserves

Capital reserves for municipalities are funds set aside by council for future large, one-time capital expenses (like major infrastructure repairs or asset replacement, including buildings) or to manage financial stability, preventing sudden tax hikes and smoothing out budget fluctuations, funded by sources like development charges, asset sale proceeds, or operating surpluses, and managed under specific policies. They serve as a long-term financing tool, ensuring funds are available for tangible assets with benefits exceeding one year.

Purpose of Capital Reserves:

  • Asset Replacement & Acquisition: Funding for replacing aging infrastructure (roads, sewers, water systems) or buying new equipment.
  • Tax Stability: Smoothing out large capital costs to avoid sudden, significant tax increases for residents.
  • Intergenerational Equity: Saving now for future costs incurred by current development, ensuring future taxpayers don’t bear the full burden.
  • Self-Borrowing: Acting as an internal financing mechanism for projects, reducing reliance on external debt and interest rate risks.
  • Managing Growth: Financing growth-related infrastructure through Development Charges (DCCs).

Funding Sources

  • Annual operating budget surpluses.
  • Development Charges (DCCs).
  • Proceeds from selling real property or assets.
  • Specific grants or transfers.

Transferring municipal reserve funds is a process strictly governed by provincial legislation, municipal bylaws, and accounting standards. The ability to transfer funds between different types of reserves (e.g., capital to operating) often depends on the specific rules of the municipality’s governing province and its own internal policies.

Key Concepts

  • Council Resolution/Bylaw: All transfers to and from reserves and reserve funds generally require approval by a council resolution or bylaw. This ensures transparency and proper governance.
  • CFO Recommendation: The Treasurer or Chief Financial Officer typically reviews the financial situation and recommends the necessary transfers to Council, often as part of the annual budget process or year-end review.
  • Council Approval: A formal council resolution or a bylaw amendment is passed to authorize the transfer.
  • Accounting Entry: The transfer is processed by debiting the contributing account and crediting the receiving reserve account.
  • Reporting: The transfer activity is included in the year-end financial statements and annual reports.

A municipality can generally transfer funds between reserves, but it requires specific council approval through a bylaw or resolution, often as part of the annual budget, and must comply with provincial legislation and the specific purpose for which each reserve was created, with some designated funds (like federal program reserves) having strict restrictions against transfers. Transfers usually need to be for legitimate municipal purposes, follow proper accounting, and sometimes involve internal loans with interest, all detailed in the municipality’s reserve policy.

More can be found under: NEW BRUNSWICK REGULATION 97-145, under the
Municipalities Act (O.C. 97-1036) Filed December 19, 1997

Surpluses

Municipal surpluses are funds remaining when a local government’s actual revenue exceeds its expenses and budgeted expenditures at the end of a fiscal year. These extra funds, often resulting from efficient spending or unexpected revenue, are used to pay down debt, build reserves for future projects, or fund one-time infrastructure improvements.

Definition & Composition:
A surplus is not just cash; it includes the accumulated total of unused funds, which can be held in reserves (restricted or unrestricted) or invested in tangible capital assets.

Purpose:
They act as a, financial management tool, allowing municipalities to manage risk, ensure stable tax rates, and fund future projects.

Usage:
Instead of automatically lowering taxes, councils often direct these funds toward “rainy day” funds, infrastructure improvements (e.g., road repairs, park upgrades), or debt reduction.

Types:

  • Accumulated Surplus: Total net assets, including infrastructure and cash.

  • Unappropriated Surplus: Funds not yet designated for specific uses.

  • Restricted Surplus: Funds designated for specific, approved projects or reserves.

Municipalities must generally include planned budgetary surpluses in their financial planning to avoid deficits.