Canadian city budgets are inaccurate and confusing, study finds

Southern Ontario cities and municipalities are among the least fiscally accountable governments in Canada, according to a new study that suggest cities tend to use antiquated accounting systems that result in large discrepancies at the end of the year and bewilder councillors over the state of city finances.

In short: Municipal governments release unnecessarily confusing financial documents that leave the average reader struggling to understand their meaning. And they often result is surprise surpluses at the end of the year.

"Just about anyone who follows them finds the annual debates over municipal budgets in Canada mystifying,” the C.D. Howe Institute study states. “In city after city, councillors and staff struggle to vote a balanced budget, warning ratepayers of tax increases and lobbying federal and provincial governments for more funds."

The C.D. Howe Institute studied a decade of municipal budgets and financial reports to find the difference between what cities planned on spending in a year and what they ended up spending. The details were released this week in its study, "Baffling Budgets: Canada's Cities Need Better Financial Reporting."

[ Related: Supreme Court agrees to hear appeal in B.C. right-to-die case ]

In the worst cases, the disparity was as much as 20 per cent. The study found that this often meant cities ended the year with massive surpluses that were "radically different from what anyone following the budget discussions would expect."

Even in Toronto, found to have the most accurate budget reports, annual debates break out about the success or failure of the government based on the surprise surplus reported at the end of the fiscal year.

The report finds that the Halton Region in southern Ontario has the worst budget accuracy of 24 Canadian municipalities, with a 22.2 per cent discrepancy between its budget and its year-end financial statements between 2003 and 2012. Halton was followed closely by Vaughan, Ont., at 19.9 per cent, and Brampton, Ont., at 18.7 per cent.

The Region of Peel (13.7 per cent) and Markham, Ont., (12.7 per cent) rounded out the list of the lowest five ranked municipalities.

Notably, all of these cities are located in the Greater Toronto Area. Toronto, however, was found to have the best accuracy rate in the country, with a discrepancy of only 3.7 per cent between its yearly budget and end-of-year financial report.

The Waterloo Region, with a 4.7 discrepancy, ranked second in the country. Niagara Region (5.3 per cent), Halifax (5.5 per cent) and Winnipeg (5.6 per cent) rounded out the top five.

[ More Brew: Saskatoon movie house first in province to offer booze ]

The problems stem from the type of accounting practices that are used in each level of government. While the provinces and the federal government use "accrual" accounting – which spreads the cost of assets over the span of their lives – municipal governments tend to budget for major purchases in the year they were made.

For example, a province might consider the cost of a bridge construction to be a moderate expense over a 10-year period, while a city might consider it a massive expense one year and then gone the next.

The C.D. Howe Institute ultimately suggests that inconsistent budgeting could leave councillors with a bias against making long-term investments. Would a city avoid approving a budget that predicts a massive spending increase because of the way it appears on the bottom line?

"That actual reported spending changes by Canada’s major cities routinely differ by large amounts from what they vote at budget time suggests that councillors have a less reliable grasp on municipal fiscal policy than Canadians might wish," the report suggests.

"In particular, it might impede their ability to manage the inevitable tension between the current desires and interests of taxpayers and users of municipal services, and those of taxpayers and service users in the future – notably in the construction and financing of long-lived assets."

Ultimately, the C.D. Howe Institute suggests much of the confusion could be remedied if cities adopted the same accrual accounting system for their budgets as provinces and the federal government currently use. The change would also bring city budget documents in line with their year-end financial statements, making it easier to compare what a city planned to spend, and what it actually spent.

The result would be less complicated accounting practices at city hall, easier monitoring of a government’s ability to stick to its budget and, just maybe, more willingness to invest in big-idea projects. Where do we sign up?

Want to know what news is brewing in Canada?
Follow @MRCoutts on Twitter.