No one knows if Toronto hits its budget targets: Toronto Star Op-Ed

As councillors and the mayor trade barbs about whether Toronto taxes and spends too much or too little, it might seem natural to ask how this year’s proposed budget compares to last year’s results. Will we spend more or less? Or to ask how last year’s results compare to the budget council approved a year ago. Did the city hit its targets? Weirdly, however, those are questions almost no one can answer.

Lots of organizations — governments, businesses, not-for-profits — produce budgets at the beginning of a year. And after year-end, they produce financial reports. Comparing results to plans is crucial to seeing how things worked out, and figuring out how to do better next time.

But in Toronto, comparing results to plans is all but impossible. For one fundamental reason: the city does not calculate revenue and spending in its budgets the same way it does in its year-end reports.

In fact, like nearly all cities, Toronto doesn’t vote on just one budget. It votes on two: an operating budget and a capital budget. Both focus on cash outlays. On the operating side, this often makes sense: salaries get paid, coffee gets drunk. But on the capital side, it makes no sense: roads, sewers and subways don’t get used up in a year — they can last for decades.

The end-of-year reports deal with capital more sensibly. They treat long-lived assets the same way a business or non-profit would — record their cost over their expected lives.

So what should be a straightforward task — adding up a city’s budgets for operations and capital spending and comparing that total to results at year-end — will baffle the average Torontonian or city councillor.

In a recent C.D. Howe Institute study, we collected budgets and financial reports of all major Canadian cities for the past 10 years, and compared their budgeted spending changes with what they reported at year-end. No organization will hit its budget targets dead-on — surprises like floods and storms happen — but the typical gap between what councillors voted on and what their cities later reported is embarrassing.

Toronto’s gap over the decade was actually one of the smallest among Canada’s major cities. But while its four-percentage-point score looks small compared to other cities, it is nothing to brag about. Canada’s federal and provincial governments, which have also perpetrated some serious overruns over the past decade, hit their budget targets far better. Put Toronto in that field and it would have ranked not first, but eighth. The cities with the worst misses in our group, Toronto’s neighbours Vaughan, Brampton and Halton Region, had annual gaps around 20 percentage points, which is far worse than any senior government.

This record might tempt Torontonians to give up on budget debates altogether. But the confusing numbers are not just a concern for accountants. They can affect the choices councillors make, and those choices have real consequences.

Cash budgeting for capital projects — treating a 50-year infrastructure project like a cup of coffee — makes them look expensive up front, and understates their costs later. That can discourage infrastructure investments — leading to congested roads and leaky pipes. And when cities do invest in infrastructure, it can encourage them to front-load its costs of investments — taxes, development charges and other levies on today’s residents that are higher than the benefits they will enjoy — rather than spreading them fairly over time.

The federal government, Ontario and most provinces now produce budgets on the same basis as their financial reports, accounting properly for capital spending. Toronto should do the same.

The 2014 budget debate, in which the mayor and councillors argue about where they are going without real knowledge of where they are, should be the last of its kind.

Benjamin Dachis is a Senior Policy Analyst and William B.P. Robson is President and CEO of the C.D. Howe Institute. They are the authors of Baffling Budgets: Canada’s Cities Need Better Financial Reporting.