Monday, 4 May 2020

Mayors claiming poverty without trying to innovate

Much of the expected revival of the economy has been squashed by Covid-19, a collapse of oil prices due to the Russia/ Saudi Arabia skirmish , and our own federal government’s environmental agenda. These combined cataclysms have forced governments to shift much of their ballyhooed conservative fiscal agenda to the left. We now predict large deficits and massive debts to be the norm for some time to come. Much of the decisions cannot just be blamed on the governments as they had to adjust to counteract the effects of these increasing losses in revenue and increases in costs.

Unfortunately lower levels of government have had to face the same problems; however municipalities have not dealt with the loss in property tax revenues very well. Calgary, for example has continued to raise taxes, and has been reluctant to cut spending. There are some fundamental issues to be considered; in Calgary the collapse of the oil industry has already affected the real estate industry and the property tax base. For years the Institute for Public Sector Accountability (IPSA) has proposed that the Market Value Assessment system be abolished for a more equitable system. One based on actual sale/purchase price of properties inflated annually by the CPI, however this will require the Province to make the change, and so far there seems to be no movement towards even reviewing the current system.
Municipalities are claiming to have millions of dollars in lost revenues and require at least $10B from higher levels of government.  IPSA, and other organizations have argued and proved that municipalities do not have a revenue problem but rather a substantial spending problem. The issue is twofold:
  • One most citizens do not understand the difference between a Budget and an Annual Report. A budget is a projection and wish list for future expenditure, which is then used to determine the rate of taxation to raise revenues. An annual report is the financial result which uses the Public Sector Accounting Standards (PSAS).
  • Two the problem is that municipal budgets display their investments in capital projects (sewers, buildings, etc, ) on  a cash basis, while annual reports amortize the costs of capital project over years.
So any comparison of budgets on PSAS basis will show that cities undershoot their budgeted spending and hence have enormous surpluses. In fact a 2019 C.D. Howe Institute analysis of 31 municipalities, including show that these municipalities had a total budget surplus of $18B in 2018.
The following are some of the accumulated surpluses of Toronto $1.4B (2018), Edmonton $1,0B (2018), Calgary $1.3B (2019) and Vancouver $3.0B (2019).
So while politicians claim poverty, it is citizens that should demand clarity, and accountability. In effect instead of the Municipal Minister of Alberta, and British Columbia allowing for the budgeting of deficits, they should be mandating a new approach to budgeting, including Zero Base Budgets and the use of PSAS for both budgets and annual financial statements
As for our Councillors they must recognize that using budget deficits and hiding behind a budget vote to cover their inability to cuts costs will not prevent taxes to go up. It is their vote to increase taxes that causes the problem.
It is said that necessity is the mother of invention. Every industry is innovating to deliver services during this crisis, but governments have continued in their merry way of spending rather than cutting costs and innovate. Covid-19 may have provided the opportunity to review how Municipalities budget and account for their finances, we just need political will and courage to make the change

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