Two sets of books, too much confusion

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This article was published 21/02/2020 (2085 days ago), so information in it may no longer be current.

It’s one of the most frustrating aspects of municipal finances: the confusing mess created when cities maintain two sets of books.

The C.D. Howe Institute released a study this week showing most Canadian cities use different accounting standards for their annual budgets than they do for their year-end, audited financial statements.

Winnipeg is one of those cities.

It’s a huge problem. Not only is it confusing when trying to compare the results of budgets with year-end results, it distorts the true picture of the finances.

In its report, “What You See is Not What You Get: Budgets versus Results in Canada’s Major Cities,” C.D. Howe, a Toronto-based non-profit policy research organization, reports the 31 municipalities it reviewed posted an aggregate surplus of $11 billion in 2018.

That was $8-billion higher than what those municipalities budgeted for. It’s not just because they were off in their projections, it’s mostly because they use different accounting standards for budgets and year-end financial statements.

“In these municipalities, the revelation of substantial surpluses in the year-end financial statements is completely at variance with peoples’ understanding, and the anxiety of the budget debate,” the report says. “Most Canadians would be amazed to learn that Canada’s cities routinely record large surpluses, and — in contrast to many senior governments — have positive net worth.”

Every year, the City of Winnipeg presents an operating and a capital budget that must be approved by council; however, its budget is not prepared in accordance with public sector accounting standards (PSAS).

By contrast, the year-end financial statements — the official, audited “books” — are in compliance. The consolidated financial statements include all resources and operations controlled by the City of Winnipeg, including utilities. They also follow PSAS rules on accrual accounting and the amortization of capital.

City budgets do not. They focus mostly on the general revenue fund (also called the tax-supported budget), which includes services such as fire, police, snow-clearing and libraries. It doesn’t include utilities (water and waste, Winnipeg Transit, etc.), special operating agencies, and other operations controlled by the city.

Moreover, the accounting methods used to present it do not comply with PSAS, including transfers from funds and the treatment of capital spending.

The city is required under provincial legislation to balance the general revenue fund. However, because the accounting methods used do not comply with PSAS (and because it doesn’t include all aspects of city operations) it’s vastly different than the audited financial statements presented at the end of the year.

It’s a hot mess, and unnecessarily confusing for the public.

While Winnipeg has been reporting small surpluses and deficits in its general revenue fund in recent years, its real bottom line in year-end audited financial statements is much different.

The city posted a $295-million surplus in 2018, according to its consolidated financial statements.

The C.D. Howe report found only about one-third of cities presented PSAS-compliant information in their budgets.

“All municipalities should present their budgets in a manner that is consistent with the way they present their financial results,” the report said. “At the very least, budgets should contain clearly identifiable PSAS consistent information on revenues, expenses, and the bottom line.”

It appears the Manitoba government may be considering some changes in this area. Under Bill 18, introduced in December, cabinet would have the ability to impose new financial reporting requirements on the city for its annual budgets.

The Tory government hasn’t said what it intends to do with that, but when it gives itself authority to make new regulations, there’s usually a reason.

Hopefully, it results in more open and transparent city budgets. Taxpayers have a right to clear information about how their governments are spending their money.

tom.brodbeck@freepress.mb.ca