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Baffling Budgets: The Sorry State of Municipal Fiscal Accountability in Canada

Benjamin Dachis () and William Robson ()

C.D. Howe Institute Commentary, 2014, issue 397

Abstract: In nearly all Canada’s major municipalities, what should be a simple exercise – comparing the spending city council votes in its annual budget with the actual spending reported at year-end – will baffle any but the most expert reader. While most of Canada’s federal and provincial governments now use the same accounting methods in preparing their budgets and their financial reports, municipalities typically do not. As a result, the headline totals for revenue and spending in budgets and financial reports are usually not comparable, and judging whether a city over- or under-shot its budget targets, and by how much –which should be a simple matter of comparing headline numbers – is not possible for a typical councillor, taxpayer or citizen. The exact discrepancies between budget presentations and financial reports vary from city to city, but a critical common element is that most cities use antiquated budgeting for capital projects. Most of Canada’s senior governments use modern “accrual” accounting that matches the costs of long-lived assets such as buildings and infrastructure to the period they deliver their services. Municipal budgets, by contrast, show cash outlays on capital, exaggerating the up-front cost of major projects, and understating their later expenses. This study shows how a reasonably intelligent but time-constrained non-expert user – a councillor or taxpayer – might attempt to reconcile budgeted spending with actual results. We look at the last 10 years of municipal budgets and financial reports for cities from coast to coast and calculate standard statistical measures (root mean square errors) of the gaps between the planned spending changes and what cities presented at the end of the year. Among Canada’s largest cities, Toronto and Waterloo Region come off best, with gaps of less than 5 percent, but the worst – Brampton, Halton Region, and Vaughan – have gaps of around 20 percent, and cities generally are far worse at hitting their targets than Canada’s federal and provincial governments. Canada’s senior governments have tended to over-shoot their budgeted spending over the past decade. Among municipalities, the inappropriate budgetary treatment of capital assets and poor record of hitting budget targets seems to have a different real-world consequence. The financial statements of Canada’s major cities show a cumulative surplus over the past five years of $29 billion – Calgary, Saskatoon, Halton Region, Vaughan and Markham have run the largest surpluses compared to their revenues – and the cities with the biggest gaps between budget targets and end-of-year spending have tended to have larger surpluses. This record suggests that cities have tended to over-charge up-front for capital projects, and thus not matched the costs of these projects to taxpayers with the delivery of their benefits over time as well as they could have. Changes in provincial legislation could foster better municipal financial reporting, but cities also have the capacity to present more meaningful numbers on their own. Both provinces and municipalities should take steps to improve the fiscal accountability of municipalities and the stewardship of municipal funds.

Keywords: Fiscal; Policy; and; Tax; Competitiveness (search for similar items in EconPapers)
JEL-codes: H72 H83 (search for similar items in EconPapers)
Date: 2014
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