C.D. Howe report slams city accounting
Report on city spending outlines inconsistent fiscal accounting practices and inaccurate spending projections across the GTA and Canada
Toronto Star
January 15, 2014
By Alex Ballingall
Go ahead, try this out: check the budget your city council approved in 2012, and see how it compares with spending reported at the end of the year.
Chances are, you’ll find such a simple democratic task “impossible,” concludes a damning C.D. Howe Institute report, published Wednesday, on fiscal accountability at the city level.
Titled “Baffling Budgets: Canada’s Cities Need Better Financial Reporting,” the paper argues that different accounting methods used for budgets and year-end fiscal reports mean efforts to compare the two would “baffle any but the most expert reader.”
The way they are typically presented is simply too confusing for most citizens, and might even serve as a barrier to approving big spending projects, contend the report authors Benjamin Dachis and Bill Robson.
On top of that, once the numbers are crunched, their report reveals big differences between budgeted and actual spending, with some GTA municipalities proving to be the most inaccurate budgeters of Canada’s 24 biggest cities.
“The budget process is almost meaningless because, when we see the (year-end) numbers, they could be out by this crazy variance,” said Robson, C.D. Howe president, speaking to the Star’s editorial board Tuesday.
Coming in dead last for budgeting accuracy from 2003 to 2012 was Halton Region, which missed spending projections by an average of 22 per cent, according to the report. Vaughan and Brampton were second and third last respectively, missing spending targets by 19.9 and 18.7 per cent.
Others fared better, including Durham Region, Mississauga and Hamilton, all of which posted less than 10 per cent spending inaccuracy. The City of Toronto ranked most accurate in the report, with projections missing their mark by an average 3.7 per cent.
But even so, Toronto’s results would rank eighth if the report included Ottawa and the provinces and territories, the authors state. “It’s nothing to brag about,” said Dachis, a C.D. Howe senior policy analyst.
In light of these discrepancies, Dachis and Robson argue Canada’s cities should put together their budget projections using the same “accrual accounting” method as they do for year-end fiscal statements.
The provinces and federal government already do so, but most cities currently use “cash budgeting” when they map out their spending. This method displays big items like infrastructure projects with large upfront costs, instead of breaking them down in annual chunks over the years it takes to pay for them.
Dachis and Robson argue that part of the reason these different accounting methods are problematic is because they contribute to the reported surpluses at the end of the year. The “cash” method exaggerates costs up front, while, in year-end reports, those costs are measured over several years, meaning big items will appear less expensive at year’s end.
This means cities might be collecting more revenue — through measures like property taxes and user fees — than the value of their services, the report states.
Another consequence of inconsistent accounting is on infrastructure spending. Dachis and Robson argue it’s likely the “cash” accounting method’s high upfront costs for big spending items — like new streetcars and subway tracks or a sewage system upgrade — encourages cities to raise revenues up front to finance such projects. This puts a disproportionate burden on the present-day tax base that could deter governments from signing off on large-scale — but potentially necessary — infrastructure developments, they contend.
“We do think it’s discouraging capital investment,” Dachis said.
“It’s treating a 50-year infrastructure project the same as you would a cup of coffee,” Robson added.
“No sensible organization does that.”
GTHA cities budget accuracy between 2003 and 2012
(Percentages represent the average yearly difference between the city budgets and the money actually spent over the 10-year time frame)
Toronto: 3.7 per cent
Durham Region: 5.9 per cent
Hamilton: 7 per cent
Mississauga: 9.5 per cent
York Region: 12.6 per cent
Markham: 12.7 per cent
Peel Region: 13.7 per cent
Brampton: 18.7 per cent
Vaughan: 19.9 per cent
Halton Region: 22.4 per cent
