Published in the Globe and Mail on December 2nd, 2014
By: William Robson
William B.P. Robson is president and CEO of the C.D. Howe Institute. He is co-author of ‘Baffling Budgets: Canada’s Cities Need Better Financial Reporting’.
A common complaint during Toronto’s municipal election campaign was that nobody could make sense of the numbers. In fact, this is not a new problem: municipal budgets are mystifying. Incoming mayor John Tory and the freshly elected council can help that situation by presenting a budget that, unlike the current presentations, would let people straightforwardly measure intentions against results. If they did, future financial debates would make more sense – and Toronto would tax and spend smarter to boot.
City budgets are weirdly confusing. A person needs no special training in accounting and financial analysis to look at the federal government’s documents to see how much Ottawa plans to tax and spend this year compared to last year. Or to compare the feds’ audited results to budget after year-end. It’s laid out in simple tables: budget numbers right beside results.
Likewise in Ontario. The provincial budget shows intentions against the prior year. And the end-of-year report shows results against the budget. Clearly laid out so legislators and citizens can quickly get the big picture.
At the municipal level, though – you’d better have special training, or better yet, an audit team. Nowhere in Toronto’s beginning-of-year budgets can a councillor, taxpayer or citizen find even something as simple as total forecast revenue or spending compared to the previous year’s results. And the table in Toronto’s year-end reports that purports to show how they compare to that year’s budget don’t contain a single number that appeared in the budget itself!
Seeing how the city’s tax and spending plans compare to the previous year, or how the results compare to the plans, ought to be simple. But it is practically impossible.
Budgeting on a different basis than reporting results doesn’t just hamper intelligent debate. It matters on the ground – and under it.
The most critical inconsistency between Toronto’s budgets and its financial reports is the way they treat capital, particularly infrastructure: long-lived assets such as sewers, roads and subways. Like the federal and provincial governments, and like businesses, Toronto’s financial reports distinguish the water pipe expected to last for 50 years from the litre of fuel a city vehicle will burn in a day. Sensible financial reporting shows the pipe, like all capital investments, as an asset. And sensible reporting writes the pipe off over the 50 years it is expected to last. The annual write-downs of sewers, roads and subways are what show in annual spending.
But city budgets do not treat capital that way. Alongside its operating budget – the document that reports the fuel the city expects its vehicles to burn, along with wages, rent, insurance and other expected annual expenses – Toronto votes a separate capital budget that shows everything, no matter how long it will last, as an immediate cash outlay.
Two separate budgets, with two different accounting systems, naturally leads to confusion. You can’t add the totals up, so councillors debating Toronto’s 2015 budgets won’t be able to compare what they will vote to the results of the previous year. And councillors who wonder at the end of the year why the city hit or missed its budget targets will get the conversation-stopping answer that the accounting is different.
The confusion doesn’t just undermine accountability: it affects results – notably the infrastructure that is so important, and is often so frustrating, to Toronto’s households and businesses. Budget for a 50-year-pipe into a budget as though it were a litre of fuel, and it looks wildly expensive up front. That discourages investments in long-lived assets. When they do happen, moreover, it encourages front-loading their cost, with taxes, development charges and other levies that make today’s residents pay more than the benefits they will enjoy. And inadequate provision for future maintenance and replacement as infrastructure wears out.
Ask why cities don’t prepare consolidated budgets that match their financial reports, and the typical response is, well, it’s just not done that way. That same vacuous rejoinder was typical in Ottawa and Queen’s Park not long ago. But sense prevailed. Now Canadians and Ontarians looking at federal and provincial finances can easily compare plans to results, and results to plans. Torontonians should be able to do the same.
The new mayor and council can move Toronto ahead with a simple reform: get city staff to present a budget on the same basis as the financial reports. If they do, the fiscal debate in the next municipal election will be more enlightened. And meanwhile, Toronto will be better managed.
