When a Canadian city’s surplus is a bad thing

Globe and Mail
January 16, 2014
By David Parkinson

In its continuing quest to shame various levels of Canadian government into better fiscal practices, Toronto-based economic think tank C.D. Howe Institute has put Canada’s cities under its microscope. It discovered a river of surpluses at the municipal level – and an accounting hodgepodge that blurs and distorts those numbers, leaving them near-impenetrable to anyone but the most expert analyst.

A new study released by C.D. Howe on Wednesday concluded that Toronto has the best budget record of any Canadian city over the past decade, in terms of actual spending changes aligning with budgeted spending changes. (Perhaps a source of comfort to voters watching the extraordinary circus in recent months in and around the city’s council chamber.) The most inaccurate budgeting, on the other hand, came from many of the municipalities immediately surrounding Toronto: Halton, Vaughan, Brampton, Peel, Markham and York occupy the bottom six positions.

But the report’s authors, C.D. Howe senior policy analyst Benjamin Dachis and CEO William Robson, said comparing the financial results, not only among cities but even to each city’s own budgets, is a frustrating apples-to-oranges exercise. Canadian cities, unlike the majority of the country’s higher-level governments, don’t share common accounting methods. What’s worse, many individual cities use different accounting practices in their budgets than they use in their year-end financial statements.

This is most glaring in the accounting for long-life capital projects (buildings and infrastructure). In the year-end financial statements, cities are required to, appropriately, accrue the cost of these projects over the life of the resulting assets. But at budget time, most cities routinely budget for actual cash outlays - which exaggerates the up-front expenses of these projects while understating the long-term costs.

This has contributed to a generally poor record among Canada’s cities on actually hitting their budget targets, but not in the way we’re used to seeing with government. Collectively, Canadian municipalities have run up $29-billion in surpluses over the past five years. Calgary had $4.3-billion in cumulative surpluses in the past five years; in 2012 alone, Markham ran a surplus equivalent to 38.5 per cent of revenues.

As the report notes, these are mystifying results for anyone witness to the heated debates and public hand-wringing when city council is grappling with balancing the budget at the start of each year. But beware: These surpluses are, at least in part, an accounting mirage.

While most of us wouldn’t consider chronic surpluses to be as big a problem as, say, chronic deficits, they nevertheless display inaccurate budgeting that needlessly starves taxpayers of money. What’s more, the poor and inconsistent financial reporting practices are “potentially distorting investment decisions and obscuring the extent to which cities are fiscally sustainable,” wrote the authors. “More generally, inconsistent presentations hamper the scrutiny by legislators, ratepayers, and voters that Canadians need to hold their municipal governments to account.”

The authors say cities need to adopt the same budget practices as most governments at the federal and provincial level already have. Most importantly, that means adopting accrual accounting of capital projects in both budgets and financial statements. They also recommend that cities prominently show and explain in their year-end results any discrepancies from their original budget plans.

These moves are just common sense. Taxpayers shouldn’t be squeezed at budget time only to see unexplained surpluses magically surface at the end of the year. They should know that their tax bills are being properly and accurately aligned with the long-term services for which they are paying. And they shouldn’t need an abacus and a Magic 8-Ball to assess their city council’s budget.