Municipal Accounting Standards Hamper Financial Comparisons

Commentary, Municipal Government, Frontier Centre

The Frontier Centre for Public Policy today released The 2007 Local Government Performance Index: A Financial Analysis of 30 Canadian Cities, a Canada wide financial comparison of the nation’s thirty most populous cities.

The index draws statistics from the financial statements of the municipalities and relevant data from Statistics Canada to make comparisons of the financial performance of the different cities, as defined by municipal jurisdictions. These statistics have also been corroborated by a survey forwarded to senior staff of most of the thirty councils.

Unfortunately, authors Larry Mitchell and David Seymour write, a severe constraint, but only one of many, to the Local Government Performance Index (LGPI) analysis lies in the Public Sector Accounting Board accounting standards, which permit the immediate write-off of all expenditures, including amounts spent upon capital asset creation.

A consequence of using cash-basis accounting is the omission of asset-related depreciation funding from expenditure totals.

This deficiency means that

• Current municipal expenditures will not be sufficient to maintain infrastructure in optimal condition, as no budget allowance is made to fund these amounts.

• No revenue is raised to cover these costs.

• No accounting for and reporting of the costs (the loss of asset economic service potential) of asset usage are made, and therefore cannot be factored into the charges made for services involving asset use.

This omission, the authors state, has far-reaching economic implications for the Canadian economy.

As well, the omission makes comparisons with other jurisdictions irrelevant, because depreciation allowances are included elsewhere as a standard good accounting (full accruals-based) practice.

Depreciation allowances in other jurisdictions invariably add over 20% per annum to municipal operating expenditures to meet asset-related loss of service potential provisions, the author’s found. The size of this omission and its impact on reported Canadian municipal infrastructure deficits (an estimated $60 billion and increasing at $2 billion per annum) should be obvious.