Claims that municipalities are impoverished and in need of increased revenues needs a closer look
Canadians always hear that their cities are strapped for cash. Yet a new report from the C.D. Howe Institute reveals that Canada’s biggest municipalities ran aggregate budget surpluses of $11 billion in 2018.
In “What You See is Not What You Get: Budgets versus Results in Canada’s Major Cities, 2019” authors Farah Omran and William B.P. Robson show how municipal budget debates mislead councillors, commentators and citizens about the state of city finances. They compare the budgets of Canada’s 31 most populous municipalities from 2010 to 2018 to the results reported in those municipalities’ year-end financial statements. When it comes to spending, the difference between what a reader of city budgets would have expected and what the financial statements showed averaged 8 percent over that period. And far from what the annual angst around balanced budgets would lead people to expect, these municipalities reported a staggering accumulated surpluses of $207 billion by the end of 2018.
A key reason for these gaps is that most cities use different accounting in their budgets than in their financial statements. Municipalities must follow Public Sector Accounting Standards (PSAS) when they publish their results. But less than one third of these 31 cities show PSAS-consistent figures in their budgets. Critically, municipal budgets show investments in buildings and infrastructure as cash outlays, while their financial statements, more reasonably, write capital assets off over their useful lives – typically many years. Comparing budgets on a PSAS basis to results yields an average annual gap between plans and outcomes of 4 percent, and suggests cities are budgeting for more expenses than they are spending, and therefore taking in more revenues than they need.
To address this, the authors recommend all municipalities present budget information in a manner that is consistent with the way they present their financial results. Only about one-third of the cities examined provide this information in their budgets documents themselves, and many do not make them easy to find. Ideally, all cities would publish the same PSAS-consistent information in their budgets that they provide in their financial statements, so that users would be able to see not how the figures compare.
Provinces bear some of the blame for the disconnect between city budgets and results. For instance, Alberta requires their municipalities to have cash-based capital budgets separate from their operating budgets, while Ontario requires their municipalities to balance their operating budgets and include transfers to and from reserves. British Columbia requires municipalities to include debt principal repayments in their spending. However, the authors point out, none of this prevents municipalities from presenting PSAS-consistent budget information as well.
“Canada’s cities are crying poor, yet record big surpluses and sit on piles of cash,” said Robson. “Councillors, ratepayers, and voters should demand budgets that help them anticipate what their cities will report at year-end. Consistent accounting is not too much to ask.”
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.