The Unexamined Beast of Local Government

Commentary, David Seymour, Local Government, Role of Government, Taxation, Uncategorized

Financial statements are the lifeblood of good governance. Unfortunately, poor financial reporting is the norm for Canadian municipalities, made worse by the fact that there is no consistent standard for comparing one municipality to the next.

It is easy to assess the performance of the federal and provincial governments: unfortunately our municipalities, the neglected cousin of the body politic, easily escape our attention and their impact on our daily lives.

However, by taking a nation-wide view of municipal performance by comparing financial statements, citizens can easily understand and appreciated how their municipality fares relative to others.

A look at the various statements prepared by our municipalities reveals there is almost no consistent standard of comparability from one municipality to the next. For example, some cities report capital and operating expenditure separately while others do not; some present illustrious reports with running commentaries on their activities, others present only photocopies of accounts with columns of numbers running at an angle to the rest of the page; some don’t even bother to put financial statements online.

In general, standards of disclosure are best in the West, worsening steadily as one moves to central Canada and points east, where caveats like “these statements are not prepared in accordance with Generally Accepted Accounting Practice” can be found. For anyone trying to understand how municipalities fare relative to each other, reading the various statements is like a pilot having to learn a whole new landing protocol at every airport.

It is just as important for municipalities’ financial statements to have a best-practice standard as for airports to have uniform procedures to ensure safety. Financial statements which conform to best-practice standards makes it easier for municipalities to both compare themselves to each other and to ensure that they can make the necessary improvements in how they collect and spend money. Unfortunately, our municipalities can’t seem to decide on what best practice to use.

This year’s LGPI looked at 79 of Canada’s most populous municipalities. The average ones manage something like $15,000 worth of capital assets for every household in their jurisdiction. We had to use the phrase “something like” because no Ontario municipality reported a figure for this value in 2007. Many municipalities across the country have balance sheets that neglect to completely report the cost of maintaining the infrastructure assets of their core businesses. It will only become mandatory next year for municipalities to report the value of capital assets; most countries comparable to Canada, not to mention the private sector, righted this defect decades ago.

The long-term asset position of cities aside, the average municipality taxes a total $1,937 for every household in its jurisdiction and spends $4,557 once user fees, grants from other governments, and investment incomes are accounted for. Not all of that comes from households directly; some is taxed away from businesses that those households frequent. To put the roughly $4,600 in perspective, the figure represents about one dollar in thirteen of the average household income. That should be a big deal, especially considering the lack of attention paid to accountability standards and municipal finances in general.

Only half of such spending is focused on what might be considered the core role of government. Municipalities on the Prairies and in Ontario generally spend more on transport, law enforcement, and environmental services than on recreations, administration, and social services. Municipalities in B.C. and in the Maritimes focus the majority of their expenditure on non-core roles of municipal government. While a municipality complains of funding pressures, it is incumbent for citizens to ask whether the spending is focused on activities that are essential roles of municipal government (like roads) or spending on activities with private sector substitutes (like entertainment) or indirect expenses (like administration).

Only when municipal reporting converges on a best practice similar to that seen in other similar countries will Canadians really understand how so much of their assets and incomes are used in the economy. For now, municipal governments under-report, and their finances are under-examined, when compared to federal and provincial counterparts.