Tuesday, 26 May 2020

Municipal Finances are not what they seem to be

Ever since my interview with Danielle Smith on April 28th, I have received a number of kudos and requests to elaborate on the City of Calgary Finances. Many listeners have asked me to explain the differences between a Budget and the Annual report.  While I am going to use the City of Calgary as an example, the comments can be applied to any municipality in Canada, since they use the same methodology and accounting standards to report their finances.
         The budget is a mere wish list, it is a plan, expressed in quantitative, usually monetary terms, using a modified cash basis, and covers a specified period of time usually a year. The City of Calgary does a 4 year budget. Each program’s objectives are translated into terms that correspond to the spheres of responsibility of the managers charged with implementing them. It is a list of proposed expenditures and is the basis for raising revenues to cover the costs and establish the taxation rate for the period. The budget is not independently audited.
          The Annual report, on the other hand, is a picture of the financial position of the City at a specific point in time usually December 31st.  It is the net worth statement of the organization and all items shown are recorded at their historic cost. The report is prepared using accrual accounting  as prescribed under Public Sector Accounting Standards  which recognizes economic events and  more accurately reflects economic reality. The final report is audited by an Independent Auditor
The differences in methodology and accounting standards, not only cause confusion for the ordinary citizen, but also enable politicians to obfuscate the real financial status of an organization.  These days every municipality is claiming poverty and either are demanding more funding from other levels of government or are busily seeking to expand their tax base, and increasing taxes to cover their large expenditures. A study by the C.D. Howe Institute in 2019 showed that 31 municipalities in Canada had accumulated surpluses of $11 billion.
Let us focus on Calgary 2019 Annual Report. When the results are republished in the newspapers, the details that I am going to use are never showed, and these are the figures that citizens should really care about.
         Accumulated Surplus $21,025B (2019), $19, 695B (2018) an increase of $1,330 B
         The Accumulated surplus of $21,025 B is made up of the following:
         Equity in Non-Financial Assets including Enmax and other Capital Funds $18,532B
         Reserves of $2,494B, including $426m in the Fiscal Satiability(Rainy Day) Fund
         Expenses $3,914B of which $1,980B were salaries and benefits
         Long-Term Debt $2,889B
The problems and confusion exist for several reasons, one that the budget and annual reports are produced under different sets of accounting standards. Then the reporting of annual results is published in a manner as to portray a rosy picture instead of details that will show the true and transparent picture of the financial state of the organization. So much so that after the interview, I received a stern comment from Councillor Davison’s Special Project Contractor, who was paid $18,000 in 2018, which proves how confused things are at City Hall, he wrote: “All of which has nothing to do with the 2019 annual report or the accumulated surplus which is mostly capital works. The city owns $87.4 billion in assets. Some are bound to increase in value… if you want to file a complaint with the ethics commissioner against city council members go for it”.
I don’t know if it is only the contractor who is confused or is it that Councillors are too, because these are the facts, the City does not own $87.4B in assets, Tangible Capital assets as at December 31st 2019 were $18,48B. The bigger issue is that acquiring capital assets requires funds that are borrowed or received from other levels of government. Maintenance of these assets requires operating costs. Since a municipality does not really produce any product the funds must come from taxes, and there is only one taxpayer even if the money comes from higher levels of government. As for the increasing value of City Assets; has anybody seen the City sell an asset at a profit and return that money to the taxpayer? May be once but not on a regular basis. There is the recent proof; ‘the bill to tear down the Saddledome will mostly fall to the city at an estimated cost of $12.4 million (the Flames’ contribution to the demolition will not exceed $1.5 million).
I have covered and wrote about Calgary’s City finances for over 20 years and have taught Public Sector Finance, now with The Institute for Public Sector Accounting, I contribute to the Daniele Smith show on QR770, and other media to hold Council accountable for their actions. I am concerned Calgarians do not get the full story and that perhaps even Councillors do not understand the ramifications of their decisions on budgets and financial matters. Voting against a budget does not mean anything if you vote for a tax increase resulting from the budget.
 In conclusion I would ask Calgarians and for that matter citizens of other municipalities to demand more transparency and accountability from their elected officials. What they tell you may not be what is real.

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