What You See is Not What You Get: Budgets versus Results in Canada’s Major Cities, 2019

Canada’s municipalities deliver services that are critical to quality of life, and require major commitments of resources in taxes, fees and intergovernmental transfers. But their budgeting practices, and people’s ability to measure their municipality’s performance against its budget commitments, are nowhere near the level appropriate to this importance. This report looks at the annual projections for spending and the bottom line (revenues minus expenses) in the budgets of 31 of Canada’s largest municipalities over the period from 2010 to 2018, and the results reported in those municipalities’ year-end financial statements. It asks what a councillor, or taxpayer, or citizen – a person who is motivated and numerate, but non-expert – would infer from each budget, and would conclude when comparing the budget to the results. In most of the municipalities we look at, simply finding informative numbers about spending plans in budgets is a challenge: less than one-third of their budget documents contain numbers using the same public sector accounting standards (PSAS) used in the year-end financial statements. Users who do put the time and effort into finding numbers describing their municipality’s operating and capital spending plans, and compare them to the expenses reported after year end, would typically conclude that the municipality did a terrible job of hitting its budget projections. Comparing plans in cities’ budget documents to results in cities’ financial statements, users would find that the difference between spending growth as projected in budgets and expenses growth published after year-end averaged 8 percent annually. A key contributor to these discrepancies is the fact that cities typically budget using different accounting practices than the PSAS-consistent rules they follow in publishing their results. Critically, municipal budgets show investments in capital assets like buildings, sewers and transit on a cash, upfront basis while the financial statements amortize the cost over years. Comparing budgets on a PSAS basis to results yields an average annual gap between plans and outcomes of 4 percent, and suggests that cities have a tendency to undershoot their budgeted spending. As for the bottom line, the budget debate in most municipalities, and the assumptions of most councillors, citizens and journalists, emphasize the need to “balance the operating budget,” and downplays the separate capital budget. PSAS do not separate “operating” and “capital” – accrual accounting writes capital down as it delivers its services (amortization), and produces a single statement of revenue and expense with a bottom line that represents a change in a government’s net worth and capacity to deliver services. A city’s “operating budget” balance is nevertheless typically the subject of serious anxiety, culminating in council voting a budget with a bottom line very close to zero. In these municipalities, the revelation of substantial surpluses in the year-end financial statements is completely at variance with peoples’ understanding, and the anxiety of the budget debate. Most Canadians would be amazed to learn that Canada’s cities routinely record large surpluses, and – in contrast to many senior governments – have positive net worth. The 31 municipalities we look at ran aggregate budget surpluses of $11 billion in 2018, $8 billion over budget expectations. Improving this situation is partly a matter of presenting budgets using the same PSAS-consistent revenue, expense, and bottom-line numbers that municipalities already use in their financial statements. Ideally, provinces that mandate municipal budgets prepared in other ways – splitting operating and capital budgets, with the latter prepared on an antiquated cash basis – would stop doing so. Councillors, ratepayers, and voters should insist on better numbers from their municipalities, and on the improved fiscal accountability the better numbers will make possible.