IT’S ABOUT ACCOUNTABILITY

Interim and Annual Reporting

Budget Documents

Plamondon & Associates Inc.

IT’S ABOUT ACCOUNTABILITY

Interim and Annual Reporting

Budget Documents

September 27, 2004

Plamondon & Associates Inc.

About Plamondon & Associates Inc.

Plamondon & Associates Inc. is a leading Canadian public policy research and consulting firm specializing in the reporting and measurement of public finance, governance, and taxation,

Plamondon’s work has been internationally recognized in journals, conferences and public legislatures. Landmark studies has led Bob Plamondon FCA to make numerous appearances in the national media and before the House of Commons Standing Committee on Finance and Economic Affairs.

Of note, the Canadian Institute of Chartered Accountants selected Bob to be an Impact CA, the group that represents the profession to Canada’s decision-makers, and to serve as a judge for the Financial Post awards for the best annual reports in Canada. In 2003, Bob was awarded the designation of FCA by the Institute of Chartered Accountants in recognition of a distinguished career.

Recent projects of interest include:

Finance Canada Canadian Institute of Chartered Accountants Export Development Canada and Via Rail Canada Inc. Public Policy Forum Canadian Institutes of Health Research Canada Customs and Revenue Agency (Revenue Canada) Finance Canada

Evaluation of the governance of Canada’s system for “Debt and Reserves Management” Annual report, “Measuring Progress - The State of Federal Government Finances” and “ Do the Right Thing - A Study of a National sales Tax System” Review of Governance Practices, Policies and Effectiveness of the Board of Directors Author: Ten Steps to a Governance Checkup for Boards of Crown Corporations and Government Agencies Ten Steps Author: Transforming Health Research in Canada: The Making of the Canadian Institutes of Health Research Study and Reports: § The Environment for Tax Administration in Canada before CCRA § The Impact of the Implementation of the HST on Business Compliance Costs § Cutting the Costs of Tax Collection Down to Size: Estimating the Magnitude of Compliance and Administrative Costs of Canada’s Tax Systems § A Study of a National Sales Tax System Studies and Reports § Compliance Issues - Small Business and the Corporate Income Tax System (for the Technical Committee on Business Taxation) § A Study of Tax Compliance (the underground economy) § GST Compliance Costs for Small Business in Canada § Personal Income Tax Co-ordination – The Federal-Provincial Tax Collection Agreements

502 Mayfair Avenue

Ottawa On K1Y 0L3

(613) 724-4400

bob.plamondon@sympatico.ca

Table of contents

1.0 Introduction. 6

2.0 Fundamental Characteristics of Financial Information. 8

3.0 Recommendations – Budget Documents. 10

4.0 Recommendations - Interim Financial Reports. 30

5.0 Recommendations - Annual Report 37

6.0 Recommendations – Briefing and Orientation. 50

Ottawa’s commitment to accountability

Ottawa’s 20/20 vision

A Responsible and Responsive City

• Accountability - The City demonstrates leadership by following through and sticking to its decisions and by conducting on-going strategic monitoring and making appropriate adjustments.
• Fiscal Responsibility - The City does not spend more than it can afford. It looks for innovative ways to fund and deliver services and makes efficient use of its infrastructure and resources.
• Conduct an Open and Participatory Process - The City conducts business in a broad and open way that makes it easy for everyone to participate and collaborate.
• Partnerships - The City works with other levels of government, the private sector and community-based organizations to achieve objectives.
• Public Awareness - The City educates the public about important issues in order to raise awareness and understanding to enable the public to make knowledgeable choices.

Ottawa City Council

Motion extracts from 2004 on

Financial reporting and accountability

• …WHEREAS good decision-making depends on the presence of reliable and up to date information on which to base those decisions …
• … [The] 2004 City of Ottawa budget process has been hampered by the absence of full information on the state of the 2003 fiscal year …
• … the City Manager provide Council with the previous years up to date actuals prior to subsequent budget deliberations … on a quarterly basis …
• … the 2005 budget be presented in a manner that reflects best accounting practices, making the relationship between the operating and capital budgets clear, and include a five-year horizon and two-year history; that the budget be based on benchmarking, and tied into the principles of the official plan …

1.0 Introduction

Accountability is fundamental to good governance. It is about monitoring and reporting performance, and taking responsibility for the results achieved. When Council decides what results it wants to measure, the City reveals to staff and residents its expectations, priorities and vision.

The recommendations in this study will help Ottawa build on existing practices to become leaders in accountability by achieving excellence in financial reporting. This does not entail a significant investment of City resources as much of the information needed for accountability and decision-making already exists within the City’s systems. What is needed is a framework that delivers the most relevant and reliable information to Council at the right time and in the right form.

The specific areas of accountability covered by this report are the reporting of actual financial results and information provided by staff to support the budget process.[1]

The study is informed by:

q Interviews with City staff, Councillors (committee chairs), the Greater Ottawa Chamber of Commerce and the Canadian Federation of Independent Business;

q Survey of municipalities across Canada;

q Review of financial reports and budget documents for cities across Canada;

q Literature review and examination of relevant City documents; and,

q Guidelines prepared by the Public Sector Accounting Board and the Government Finance Officers Association

In many ways, this is a groundbreaking study. No other city in Canada has undertaken such a systematic study of financial reporting. It is also critical because the decisions that flow from this report are likely to lay the foundations for accountability for the decade that follows.

The recommendations contained in this report are segmented into four areas.

Section 3: Budget documents

Section 4: Interim financial reports

Section 5: Annual financial report

Section 6. Briefing and orientation

There are 36 recommendations in this report. Attached to most recommendations is a reference to an actual report from another city that illustrates a format that Ottawa could emulate. These reports were collected in the field work phase of this study and have been given to City staff as reference documents.

As a cautionary note, it will take time for City staff and Council to develop the skills required to make maximum use of a new reporting and control system. In particular, City staff will need time to select performance indicators, prepare seasonal budgets, develop forecasting skills, and design the format of reports.

2.0 Fundamental characteristics of financial information

To be useful, information must meet certain key tests of relevance and reliability.

Information only has value if it has the potential to impact on decision-making. Such decisions could include:

• allocation and use of financial resources;
• assessment of financial condition;
• performance measurement;
• comparison with plans;
• compliance with legislation;
• management of risks; and,
• management of assets.

To be relevant, information must be timely, clearly presented and readily understandable. Consistency is also fundamental to the relevance of data; both in the way that information is presented and by reporting the same information year over year.

To be reliable and credible, information must be free from bias. There must be a commitment to report data whether a result is favourable or not.

Comparators make information more useful. This could include comparisons with prior periods, similar organizations, benchmarks and performance indicators.

Benchmarks are particularly important in a not-for profit environment which, unlike the private sector, does not have market forces to provide near instant feedback on performance and responsiveness to need. Performance indicators are also an effective means of communicating expectations and priority to staff.

The budget is an essential planning and control document in municipal government. It also communicates the City’s priorities and expectations to staff and residents. Actual results should always be presented with its associated budget, and wherever possible using a format consistent with the budget.

Audited year-end financial statements do not include all data that Council needs to make decisions. In addition, the statements are not fully compatible with the format of the budget; the document with which Council is most familiar. As a consequence, special reports and schedules are required to provide Council with all relevant information.

The primary user for the City’s financial information is Council. While there are other users with specific needs, Council must be given priority in the design of the financial reporting system. Council can then determine if it wants to provide streamlined or tailored data to meet the needs of other users.

In designing a financial reporting package, it needs to be recognized that there is no single format that will work for all Councillors. Even individual Council members can gain insight by examining reports that cover the same area presented in a different way. For example, one report might show expenses by department while another report could show expenses by function. One report could segment revenues altogether, while another could net revenues against relevant costs. While there may be a consolidated report that shows all revenues and expenses, separate schedules are needed to provide relevant details. What is important is that Council gets the information needed to make decisions.

As much as consistency is valued, it is crucial that users be asked for feedback each year on the quality and usefulness of financial information so that improvement is a continuous process.

Finally, for the information to be useful, Council must be given every opportunity to learn how it can best be used. It is unrealistic to expect that all Councillors will have the financial skill and knowledge to interpret information without adequate briefing or training.

3.0 Recommendations – Budget documents

These recommendations are comprehensive and are designed to provide the City with an overall framework for financial reporting and its budget documentation.

The City may already follow some of these practices, in whole or in part. In most instances the recommendations will result in Council receiving more financial information, which will be specifically targeted to their needs. In other instances, the recommendations will mean that Council will receive less information that they do at present, particularly where this data is voluminous and not particularly relevant.

1 Provide context to the budget

Budget decisions are made within an economic and social environment that must be considered. This environment includes national, regional and local conditions for economic growth, inflation, population, housing, poverty and employment.

A budget is also based on assumptions, which should be made explicit to Council to ensure they understand the various risks. While many items in the budget are easy to forecast, and variances, if any, are unlikely to be material, other items are more difficult to forecast. This includes both revenue and expenses. Some risk relates to weather (e.g. costs of removing snow or heating and air conditioning). Interest rate fluctuations can influence both revenue and expense. Subsidies from other governments can be vulnerable to external influences. Managing risk encourages contingency planning. It will also influence the design of the reporting system that should keep track of budget variances over the course of the year.

Third, the City should provide an analysis of its own financial condition. This could include an examination of conditions and trends for the City’s debt rating; burden of debt and interest costs; and trends in level of expenditures and revenues.

Fourth, it would be useful to embed the key elements of the strategic plan at the front of the budget document. This would remind Council of the longer-term objectives they want to achieve. Where relevant, elements of the strategic plan should also be incorporated into specific line items of the budget.

Illustrations:

Calgary Section on socio-economic overview

Winnipeg Overview provides economic context

Toronto Strategic direction throughout budget; Assumptions (page 27)

2 Provide a high level summary section - including property tax impacts

Given the sheer quantity of information contained in the budget document, a well-crafted summary would help to ensure that Council readily sees the “big picture”. Such a summary would also be useful to residents that naturally have difficulty making effective use of a 500-page document.

The current four-page summary is too minimal. A more robust section would be in the order of 10-20 pages.

To enhance understanding and permit meaningful analysis, the summary should show revenues and expenses in a number of different ways. For example the current budget does not reveal that expenses by object (i.e. that 37% of all expenditures are for wages, 25% are materials good and utilities, 24% are for capital purchases etc.). It does not readily show how much the City collects in user fees or in grants from the provincial government. There is also no historical review to show how the numbers have been trending over the previous five years.

The summary should include the following elements:

· Revenue and expense totals

· Revenue and expense by Department, with separate line items for major categories (i.e. segment tax supported and rate supported, plus provide additional line disclosure for major departments and identifiable operations)

· Revenue and expenses by expenditure type (wages, purchased services etc.)

· Staffing levels

· Key reference points (prior year, current-year forecast etc.)

· Property tax impact

· Capital budget summary

· Five year summary of key numbers

· Medium and long-term implications

The most important performance indicators should also be included in the summary section (discussed later in this report). Consideration should also be given to translating the performance indicators into a scorecard format in which a grade or score is assigned by area and in the aggregate.[2]

Many governments help users understand the sensitivity of budget numbers by providing a “ready reckoner”, a tool that reveals the consequence of changes in tax rates. For example, what would be the impact on the budget from each 1% increase or decrease in property taxes, or in parking rates, or building permits etc. In regards to property taxes the distinction between tax rates and assessment should be made clear. In other words, the percentage change in taxes being collected from existing homeowners should be clearly disclosed.

It is critical that the summary provides a clear overview of the budget and highlights all key problem areas.

The summary should be made “user friendly” by incorporating graphs and charts wherever possible.

Illustrations:

Calgary Excellent summary (Pages 1-23) incl. property tax impact

Winnipeg Extensive summary in overview

Burlington Gross and net shown in overview

St. John’s Strong summary

Vancouver Excellent transition from highlights to details

3 Segregate budget between tax supported and rate supported

Council and taxpayers look differently at services that are fully paid for by user fees versus those that are funded by property taxes and other sources.

There are only a few areas where the City provides service where costs are fully recovered by users rather than from property taxes. In most cases where user fee are charged, only a portion of the cost of service is raised. For example, the 2004 operating budget for OC Transpo targets a cost recovery rate of 50.4%, meaning that this service is substantially supported through taxes.

Water and sewer are the only areas where rates are set, and accounts rendered, to fully recover the cost of service and consumption. Effectively, this means that changes in the cost of these services do not directly impact on the level of property tax.

An additional reason for segregating water and sewer revenue/expenditures is the magnitude. Ottawa’s 2004 budget projected revenues and expenditures for water and sewer to be $178.5 million, some 20% of the total property tax bill.

Illustrations:

Winnipeg Utilities in a separate section

4 Include relevant reference points wherever possible

Without relevant comparators, numbers in the budget can be almost meaningless. Currently Ottawa’s operating budget provides only the prior year budget and the dollar value change.

Reference to prior years to budget and actual amounts is essential to determining trends in the cost of service and in service level changes.

It would be useful to show both dollar and percent change from comparative figures.

Illustrations:

Saskatoon Shows two year actual and two years projected

Burlington Percentage changes for base budget and prior budget

Vancouver Shows two years of actual and budget # and % change

5 Establish a base budget and show service level changes

As much as organizations like to say they begin each budget deliberation with a clean slate, often called a Zero Based Budget (ZBB), the reality is that budget deliberations need a starting point, which is usually current operations. Even when a ZBB is embraced, decision makers still need to understand the current operations to determine the impact of their decisions.

Council and residents understand a base budget more in terms of services offered than dollars spent. That means that as prices for goods and services change, the amount of funding similarly needs to change simply to maintain current service levels. The price changes might be due to general conditions, such as inflation, or specific changes, such as fluctuations in market conditions such as has been seen recently in fuel and insurance. Changes in the regulatory environment, such as new safety regulations, can also have an impact on the cost to maintain base conditions.

Another issue that needs to be considered is “one-time” expenditures. To establish base conditions these items should be removed from a prior year budget.

Finally, the base budget should reflect any efficiency gains or losses that were realized in the year. These gains or losses result from a number of factors including technology and restructuring.

It is from a base budget that Council can contemplate service level enhancements or reductions. Without knowing the true base budget, Council might well be surprised to learn that even with an increase in funding a particular service might well end up being reduced.

Illustrations:

Hamilton Clear presentation of the base budget

Calgary Section on service delivery adjustments

Line item established base budget

Hamilton For enhancements and reductions

Thunder Bay Clear explanation of service enhancements & reductions

6 Give more prominence to revenue details

Council focuses much of its budget deliberations on expenditures; however, City revenues (not including property taxes) also warrant attention. Apart from property taxes, the City generates revenues and subsidies of over $1 billion each year.

Currently the budget allocates about one-half of its total revenues against each associated line item of cost. While it is useful to show receipts this way, particularly when neither a profit or full recovery of costs is expected, it is still important for Council to see the overall flow of funds that the City needs to manage. The City’s audited financial statement shows revenues in this way (i.e. revenues as distinct from expenses).

There is no need to choose one format over another. Whenever a single budget format does not meet user needs, alternative perspectives should be presented.

It is recommended that the budget include a section that provides details on the nature and extent of revenues.

Illustrations:

Saskatoon Revenues segmented and shown in related area

Vancouver Section on revenue details

7 Incorporate performance indicators and comparisons with other cities

Council needs performance measures to evaluate the efficiency, effectiveness and economy of City operations. These indicators should be incorporated into the budget, either as a separate section or, preferably, embedded in the document against related budget amounts.

High-level comparisons with other cities can also give context to budget amounts. While no two cities or sets of figures are truly comparable, at a high level they show a level of proportion and magnitude can be useful. Council should assume that these comparisons will be made by stakeholders if it helps them to advance a particular cause. Many cities include comparisons in their budget documents. Such analysis will help to answer questions about how well the City is performing and whether tax levels are at appropriate levels.

A selection of performance indicators used in financial reports by other cities and under Ontario’s Municipal Measurement Program is shown on the following pages. Recognizing the performance indicators are only one tool in evaluating performance, Council should reflect upon its strategic plan to determine which indicators should be used and given prominence.

Illustrations:

Toronto Performance indicators used extensively throughout budget document

Hamilton Summary section

Calgary Section on performance indicators

Calgary’s Performance Measures

Community Performance

1. Population growth

2. Quality of life (citizen survey)

3. Parks and recreation (citizen survey)

4. Density of new suburbs (statistic on housing units per acre in new communities)

5. Rush hour traffic (citizen survey)

6. Use of Transit -- Annual transit trips per capita

7. Air quality - % of time air quality index rated as good

8. Residential waste - tonnes per capita

9. Poverty – percentage of persons living in poverty - segmented by age

10. Homelessness – numbers – by age

11. Unemployment – by age

12. Reported crimes per capita – property and person

13. Personal and household victimization rates

14. Youth accused rate for criminal code charges

15. Traffic safety – collision rate per 100,000 population, segmented by fatal collisions, personas killed, persons injured, property damage collisions, total reportable collision rate

16. Emergency medical services response time – percent responding within 8 minutes – total call volume

17. Fire response time – percent response within 6 minutes and response times by community

Corporate Measures

18. Bond rating – short and long term

19. Expenditure per capita (operating) – inflation adjusted, excluding one-time contributions to reserves

20. Value for money of civic services (citizen survey)

Note: Performance measures are focused on outcomes and not process

Ontario Municipal Measurement Program

Local Government

1. Operating costs for general government as a percentage of total municipal operating costs.

Fire

2. Operating costs for fire services per $1,000 of assessment.

 Police

3. Operating costs for police services per household

4. Total crime rate as defined by Statistics Canada.

 Roads

5. Operating costs for paved (hard top) roads per lane kilometre.

6. Operating costs for unpaved (loose top) roads per lane kilometre.

7. Operating costs for winter control maintenance of roadways per lane kilometre.

8. Percentage of paved lane kilometres where conditions are rated as good to very good.

9. Percentage of winter event responses that met or exceeded municipal road maintenance standards.

 Transit

10. Operating costs for conventional transit per regular service passenger trip.

11. Number of conventional transit passenger trips per person in the service area in a year.

Wastewater (Sewage)

12. Operating costs for the collection of wastewater per kilometre of wastewater main.

13. Number of wastewater main backups per 100 kilometres of wastewater main in a year.

14. Percentage of wastewater estimated to have by-passed treatment.

Water

15. Operating costs for water treatment and distribution of water per megalitre treated. (Integrated System).

16. Numbers of breaks in water mains per 100 kilometres of water main pipe.

17. Weighted number of days when a boil advisory issued by the Medical Officer of Health, applicable to a municipal water supply, was in effect.

Solid Waste Management (Garbage)

18. Operating costs for solid waste collection per ton(ne) or per household.

19. Operating costs for solid waste diversion (recycling) per ton(ne) or per household.

20. Operating costs for solid waste management (all services including collection, disposal and diversion) diversion per ton(ne) or per household.

21. (a) Number of days per year when a Ministry of Environment compliance order for remediation concerning an air or groundwater standard was in effect for a solid waste management facility, by site.

(b) Total number of solid waste management sites owned by municipality.

22. Number of complaints received in a year concerning the collection of solid waste and recycling materials per 1,000 households.

22. Percentage of residential solid waste diverted.

Land Use Planning

23. Percentage of new development with final approval, which is located within settlement areas and the number of new lots, blocks and/or units.

24. Percentage of land designated for agricultural purposes, which were preserved, and number of hectares of land originally designated for agricultural purposes, which was designed for other uses.

8 Prepare a two-year forward-looking budget

While Council approves one budget at a time, the decisions taken each year inevitably impact future budgets.

There is also the possibility that staff can be aware of a problem area that does not affect the current budget, but will clearly impact on future budgets. An excellent example was the short term “holiday” in OMERS premiums that provided short-term benefits to financial relief to municipal governments.

Tax policy changes should also be taken into account when Council is informed about pending budget pressures. .

Calgary calls its forward-looking budget a “shadow budget”. By following a few key assumptions, the shadow budget projects what spending and taxation levels are likely to be in the years ahead. This not only assists with financial planning, but also gives Council greater insight on the implications of the decisions they make in a given year.

Illustrations:

Calgary Shadow budget in budget guidelines section

Winnipeg Provides current year estimate, budget year plus one

Burlington Assumptions disclosed in overview

Hamilton Provides ten years’ of projected budget pressures

9 Content that gives more prominence to key or large items

While it is useful to follow a consistent format in the budget document for all departments, it is disproportionate to give the same coverage to $200 million to transit spending as the $750,000 spent on the Committee of Adjustment.

One way to approach this issue would be to generally give less detail for all areas while providing more content to the areas that consume the most resources.

The minimal detail could include total program budget (with relevant comparators) and staffing level. The next level of detail would be to show expenditures by object (i.e. wages, supplies). Additional content for key areas could include information about the nature and scope of operations, performance indicators, comparisons with other jurisdictions, explanations of service level changes, operational highlights, etc.

Illustrations:

Winnipeg Section on utilities

Toronto: Program details vary throughout

Calgary Segmented by major area

10 Prominent section on user fees

The notes to the year-end financial statements indicate that Ottawa took in close to $500 million in user fees and charges in 2003. While Council ultimately approves these fees through the budget process, their presentation in the budget document is either nonexistent or lacking in transparency.

It is recommended that a section of the budget be devoted exclusively to user fees.

This information will make Council aware of the amount of taxpayer support for each item on which fees are assessed (for example, the cost versus the fee charged for ice time; recovery rates for OC Transpo etc.)

Illustrations:

Hamilton Full section on user fees

Calgary Highlights (page 5)

11 Make the budget document easier to navigate and use

Making the budget document “user friendly” is all about understanding the terminology and being able to find information quickly. That is why most municipalities make extensive use of tabs in the hard copies of their budget documents. Other “user friendly” budgets provide a substantive index and a glossary of terms. In some areas Council would benefit by having “helpful hints” provided about what a particular budget item includes.

Any terminology not used by Council should be removed from the budget. This includes all “motherhood statements“ and “process goals”, which Councillors indicated were not helpful.

The City should look carefully at the names it uses to describe city services. For example, the initiated may think “Roads” is a better description than “Surface Operations”.

Perhaps the best method of enhancing user friendliness would be to make the budget accessible electronically. This would allow the execution of simple search functions, possibly with a “drill down” feature that would systematically reveal more detail about a department’s spending. Many cities already provide a CD version of the budget, although, for the most part, these are simply PDF files of what is produced “hard copy”.

Finally, all budget documents must be clearly labeled listing date of preparation, status of Council review/approval, and some indication of when subsequent and final versions of the budget will be released. A schedule summarizing changes from previous versions of the budget would be helpful. Release of the final budget at the earliest possible date would enhance its usefulness.

Illustrations:

Hamilton Extensive use of tabs

Toronto Glossary of terms (pages 242-245)

Vancouver Provides summary of capital with operating budget

Saskatoon Includes a detailed index at the back of book

12 Effective distribution of budget document

Even if an elaborate and interactive version of the budget was available online or on a CD, Council still needs a hard copy version. These voluminous versions are costly to produce (more so than at present if tabs and others methods are used).

Given its cost and size there is no reason why hard copies of the budget document need to be made widely available. Beyond Council and senior management, additional copies could be made available for reference at City libraries and information centres. Of note, the City of Calgary charges $20.00 for copies of its budget documents.

Saving money and respecting the environment are good reasons to print as few copies of the budget as possible, but access remains an important issue. Most needs can be met by placing the full budget document on the City ’s Web site. In addition, a simple CD version could be made available to key stakeholders at minimal cost to the City.

The summary version of the budget should also be made available on line and distributed to all staff by internal methods. A decision to print and distribute the summary version could be made based on costs considerations and feedback from budget consultations.

At the end of each budget cycle Council should be surveyed to determine if improvements to the documents can be made.

Illustrations:

Mississauga CD available

Region of Peel CD available

Items Specific to the Capital Budget

13 Integrate Capital and Operating Budget

Most municipalities provide separate documents for their capital and operating budgets. This may be done for a number of reasons, including the desire to ensure that new infrastructure needs receive adequate attention. It may also be done because a single budget document would be too thick. The capital budget may also be shown separately because the concepts and financing are more difficult to understand

However, having two documents makes it less convenient and more difficult to analyze. Having two documents increases the risk that a disproportionate amount of time will be spent on one document, usually the operating budget, to the detriment of scrutiny on the capital budget.

At a minimum, a summary of the capital budget should be included at the front end of the operating budget.

Ideally, the capital and operating budget should be integrated by program area in a single comprehensive budget. Putting capital and operating budgets together by area will make it much easier for Council to assess alignment with the organization’s strategic objectives.

Toronto manages to accomplish this task in a document of only 250 pages (Ottawa Operating and Capital Budget are a combined 525 pages).

Illustrations:

Toronto Summary budget of 250 pages

Vancouver Includes capital budget summary with the operating budget

Thunder Bay Includes tax-supported capital and operating budgets in a single document

14 Explain flow of capital budget and reserve funds each year

Perhaps the least understood segments of any municipal budget are the operation of the capital budget, the issuance of debt and the flow of money through the reserve funds. It may well be that only a few people outside of finance professionals working in municipal government truly understand the concepts and flow of funds.

Because this area of municipal finance is so unique, a “primer” on its functioning should be included in each and every capital budget.

The identification of an expenditure as capital versus operating is also a significant issue. Since borrowings can only be secured for capital items (the City cannot budget for a deficit from operations) some worry that many cities misclassify certain expenditures to gain access to debt financing. To ensure the integrity of the capital account, the guidelines for inclusion in the capital fund should be made clear in the budget document.

An explanation should also be included about the significance and purpose of each reserve fund. This would include an assessment of the adequacy of each reserve fund and some discussion about desirable levels.

To enhance understanding the City should also look at simplifying the terminology and eliminating all unnecessary transactions between the capital budget and reserve funds.

Illustrations:

Toronto Explanation of terms and glossary (page 38, 242-246)

Winnipeg Summary section on capital budget

15 Provide a long-term capital budget and financing plan

There is a strong need and desire by Council to have a capital budget and financing plan that extends up to ten years.

Beyond knowing if the City ’s infrastructure program is sustainable, Council wants to know what major projects are planned and whether the City will have the financial capacity to execute the plan. This will include a careful review of current and projected debt loads.

Every city faces a rationing process for capital projects. There are always roads that need to be fixed and community centres refurbished. There is always a greater demand for sporting and cultural facilities than what exists at present. But how is the line drawn between those projects that get funded, those that get deferred and those that get rejected? The process currently used by Ottawa Council is less formal and transparent than many would like. What is sought is a listing of projects with a priority rating attached. The priority rating should be based on predetermined criteria and an objective process of evaluation.

The ability to evaluate a capital program, including whether adequate investments are being made in infrastructure, would benefit from a long-term view that goes backwards and forwards.

Illustrations:

Burlington Ten-year capital budget

Winnipeg Current year plus five

Calgary Five-year detailed budget

16 Highlight significant capital projects

There are 115 projects with $265 million in new capital authorities described in Ottawa’s 419-page capital budget. The same coverage is given to major road projects that cost $35 million as the $30,000 allocated to replace an air conditioner in a library. These small dollar routine items need less oversight than major capital works.

While there be a certain amount of “routine” capital spending that could be shown in overall funding “envelopes”, major capital projects, such as a new bridge, building or treatment plant will result in spikes in capital spending that need to be highlighted in the long-term capital plan.

Council needs more detail on these large-scale capital projects than on routine items.

Illustrations:

Toronto Categories (page 37)

Burlington Categories listed in overview

Calgary Shows type for each capital project

4.0 Recommendations - Interim financial reports

17 Issue quarterly financial report on operations within 45 days of period end – capital report on semi-annual basis

City Council resolutions make it clear that it wants to receive periodic financial reports. What needs to be determined are the “when”, “what”, and “how” the information should be reported.

The Government of Canada publicly issues a six-page monthly financial statement and report. Most cities also prepare periodic financial statements or updates to Council, although at varying intervals. Some cities only issue interim reports only to support budget deliberations.

Relative to monthly reports, quarterly reporting reduces cost while still covering a meaningful period of time.

Some suggest that the first quarter report is only marginally useful since cumulatively it only covers a short period. It has the other disadvantage of needing to be prepared at about the same time as staff is working on the previous year-end. While this is all true, there is also value in following a consistent reporting timeline. A glimpse at first quarter results helps to set the mood for council deliberations and provides another point of review and measure of accountability.

It is recommended that the City produce financial statements on a quarterly basis, issued not more than 45 days after the end of the period. This should provide an adequate period for the production and review of the statements, and for management to provide appropriate explanations and commentary. The report itself should have a modest production quality. Most other cities simply provide a photocopied document, prepared using word processing software.

Because the activity on capital projects varies widely throughout the year, a three-month accountability period may be too short to give meaningful progress reports. Consequently, a financial report on capital projects and reserve funds need only be prepared with the second quarter operating statement. However, City staff should bring any problem areas on capital projects to Council in any of the quarterly reports.

Illustrations:

St. John’s Report produced 3-4 weeks after period end

Halifax 1 month after period end

Calgary 6 weeks after period end

Burlington 6 weeks after period end

Region of Peel Remaining spending and reserve fund status

York Region Detailed update on spending and status

18 Post interim report on Web site as soon as it is available

Council has ultimate responsibility for the finances of the City. Some suggest that, as a result, periodic reports should first be presented to Council, or one of its committees, before being released to the public. However, following this process may cause a delay in the release of the information to the public of up to three weeks. We believe timeliness should take priority.

Once City staff has prepared, reviewed and analyzed the quarterly report, it should be sent to all Councillors via email. The report should be available to the public the following day on the City’s Web site. A press release could also be issued to draw attention to the report’s availability. All reports should be kept on the City ’s Web site and not be deleted.

Management should accept full responsibility for the preparation of the financial statements. The signatures of the City Manager should be affixed to the report.

Illustrations:

All cities surveyed made reports public and posted on their Web sites.

19 Provide content at a high level with adequate discussion and analysis

Interim reports do not need to be at the same level of detail as the annual report or budget documents. Nonetheless, the reports should follow the same general format and terminology as other reports.

Each report should begin with a brief analysis from management describing the highlights from the period.

Detailed comments should be given on performance issues and budget exceptions.

Comparisons should also be made with prior periods and with the budget.

Illustrations:

Calgary Excellent Executive Information

Hamilton Concise Executive Summary.

Burlington Comparisons with prior year

20 Disclose “seasonal budget” in interim reports

Council approves the annual budget without giving direction on when funds are to be spent during the year.

Most of the City’s labour budget is spread evenly over the year making it relatively straightforward to periodically determine if a program is within its budget.

Other items vary by season, such as winter maintenance, or may be discretionary as to timing.

It would be very helpful to the analysis that is prepared for quarterly reports for the budget to be seasonally adjusted. Beyond permitting the calculation of variances, it may also make City staff more mindful of where they stand relative to approved budgets. Prior year results are very informative in the preparation of a seasonal budget.

Illustrations:

Halifax Prepares a monthly budget

Sudbury Prepares quarterly budget

21 Provide forecast to year-end and compute variances

The periodic report should provide an accountability of staff performance and an indication if the year-end targets will be met. This means that there should be no surprises at year-end.

The seasonal budget, which is likely to have been prepared well before the beginning of the year, provides insufficient guidance on whether year-end targets will be met. The direct knowledge and insight of city managers offered during the course of the year is required to establish whether year-end targets are likely to be met.

The report must provide actual numbers along with a forecast of revenues and expenditures to the end of the year. Explanations should cover both favorable and unfavorable variances for both revenue and expenses. Whatever remedial measures are contemplated to address the variances should be disclosed.

It is unlikely that a forecast prepared after only three months of operations would be particularly accurate or instructive. A forecast prepared mid-way through the year would establish how well the year is proceeding, and the third quarter forecast would help inform budget deliberations.

Illustrations:

Hamilton Includes summary and analysis of variances

Saskatoon Details on projections and variances

22 City “enterprises” to prepare interim reports for Council

Council should also receive the most recent quarterly financial reports from City owned entities; namely, Ottawa Hydro and Ottawa Housing.

These reports would be furnished directly by each entity and should include a complete financial statement.

Illustrations:

Kitchener Water utility statements

5.0 Recommendations - Annual report

23 Produce a professional and complete annual report

Currently the City of Ottawa’s annual report consists of its year-end audited financial statements. While the audit is typically complete sometime in April, the financial statements are tabled with Council in June, at which point approval has been given on consent. This is far from a complete or timely reporting.

Most cities, including those much smaller than Ottawa, produce a robust, professional annual report that documents their city’s activity over the preceding year.

Whereas an interim report provides a brief snapshot of how the city is managing its budget throughout the year, the annual report provides an account of how well the city fared in meetings its objectives. It is also contributes to the historical record of the city.

It is recommended that the City of Ottawa produce a professional annual report to document financial and other results in a manner that renders accountability to Council and taxpayers.

It is vital that the report be an accountability document. It should be factual, unbiased and free from statements that seek to minimize problems or exaggerate accomplishments. It should not be designed to make Council or staff look good or bad; it should simply provide a faithful representation of what actually happened over the previous year.

Some cities use their annual report as a promotional document for the city. We disagree with this approach. Any document designed to make the city look favourable has a bias.

To be relevant and timely, the report should be released no later than April 30 of each year

The annual report would not be as detailed or voluminous as the budget document. It should include data that can be compared with relevant benchmarks. Special reports and schedules should be prepared in areas where detail is required.

For credibility and usefulness, it is critical that the same data and measures be used each year.

A good test of an annual report is meeting the guidelines for excellence established by the Government Finance Officers Association. This should be considered as the starting point to good financial reporting.

All cities of reasonable size in Canada produce an annual report, most of which are professionally printed in full colour and on reasonable stock. External production costs for various city reports were disclosed as follows:

Calgary $35,000 York region $25,000

Halifax $16,000 Region of Peel $14,300

Mississauga $11,000 Kitchener $ 8,000

Business groups offer no objection to an investment of funds in an initiative designed to educate Council and taxpayers about city finances. They believe there is a much higher cost to pay when inadequate or inaccessible information leads to poor decision-making.

Making maximum use of the online version of the report can minimize costs. Wherever possible, users should be encouraged to download and print the report from their own computers.

Quantities of the hard copy should be sufficient to provide distribution to the City’s key contact list, senior management, media outlets, libraries, and Council. Each Councillor should be given about 50 copies of the report for distribution to community leaders in their ward. Based on what other cities produce, Ottawa should print between 3,000 and 5.000 copies of the annual report. A CD version of the annual report should also be produced.

Illustrations:

Winnipeg: High gloss – very promotional

Calgary: Professional quality

Burlington: Lower quality of production but still professional

Saskatoon: GFAO award (Introduction)

24 Incorporate strategic plan and economic context

Stewardship and performance evaluation implies that financial and other results are evaluated against a plan.

The strategic plan sets out the vision for the city, elements of which should be included in the annual report. Where possible, actual results should be specifically related to the corresponding element in the strategic plan.

For reference purposes, much of the material about the economic health of the city included in the budget document should form part of the annual report.

Illustrations:

Burlington: Strategic plan (page 3)

Region of Peel: Business and labour review (pages 45-47)

25 Messages from Mayor and City Manager (Governance)

Every city that prepares an annual report includes a section where the Mayor and City Manager provide a brief letter or statement describing relevant highlights over the preceding year.

Such statements are useful reminders to residents of the roles that elected and non-elected officials occupy and of the importance that staff has in contributing to the city’s quality of life.

An annual report is a useful place to document how Council and staff is organized. A section on governance could list details about the various committees of Council and the City ’s administrative structure.

An element of good governance is the acceptance of responsibility for financial reports by senior leadership. The signatures of the Mayor, Audit Committee chair, City Manager and Treasurer should be affixed to the report accepting their responsibility for the completeness of the annual report.

Illustrations:

York Region Mayor and CAO (pages 6 & 7)

Winnipeg Responsibility (pages 30 & 32); Council and staff (page 55)

Saskatoon Council (page 1) and staff (page 2)

26 Provide audited financial statements and use separate schedules where required

The cornerstone of any annual report is the year-end audited financial statement. A key challenge is taking a statement designed to meet accounting rules set by the Public Sector Accounting Board and making it understandable and useful to Council. This can largely be accomplished by providing schedules of information.

In addition, explanations need to be provided about financial statement amounts that do not appear in the budget. Specifically this includes adjustments to non-cash amounts like accruals for employee benefits, landfill closure costs, and net long-term and capital leases.

While aggregated information is useful for evaluating the overall financial condition of the city, there are a number of relatively self-sustaining activities that operate as separate business units, with specific cost recovery targets, or operate with relatively greater independence than a city department. There are also units that are of such size or importance that their activities should be segregated and not shown only as part of a department or category. Separate schedules should be included in the annual report that disclose the financial results for these units and enterprises.

Illustrations:

Saskatoon: Audited statements with budget (page 21)

Saskatoon Extensive use of schedules (pages 35-65)

Calgary: Operating and capital expenditures by area (pages 36&37)

27 Include management’s discussion and analysis

The numbers by themselves do not adequately describe what transpired over the year. It would be unusual in the extreme if actual results corresponded exactly with the budget and if every expectation materialized.

This is why the City Manager or Treasurer should include a reasonably detailed “discussion and analysis” of actual results, including a summary of any changes in service levels over the preceding year.

This section should also include management’s assessment and opinion on the City’s financial condition, provide highlights of revenues and expenditures, offer explanations of key variances, indicate how the City is managing risk, and comment on the adequacy of reserves.

Illustrations:

Burlington: Treasurer’s Report (pages 10-19)

Calgary Chief Financial Officer (pages 29-34)

28 Show data by function and nature

To increase user understanding of the nature of City finances, expenditures should be shown by both function (i.e. department) and nature (i.e. wages, material, purchased services etc.)

Many municipalities disclose this information in a note to the financial statements, although a more prominent disclosure in a separate schedule would highlight this information more effectively.

To make the high level numbers more meaningful, they should also be shown on the basis of an average or median household. Disclosure on a per capita basis may also be helpful in making comparisons with other cities.

Illustrations:

Region of Peel: By object (page 41)

Saskatoon By object (page 60)

29 Report on major capital projects

In addition to showing revenue and expense for the capital fund by department, disclosure should be made of investments made in specific major capital projects over the course of the year.

It would also be helpful to identify major capital projects on which work has yet to commence.

Insight into the long-term capital plan would also be beneficial.

Illustrations:

York Region Page 29

30 Include section on performance

An annual assessment or report card is routine for employees. It should also be routine for the City.

Staff and Council should reflect on the City’s strategic plan and identify the measures that define success and the expectations that define excellence. These measures should be faithfully and consistently reported in the annual report.

Performance indicators that are translated into a scorecard are much easier for people to interpret. Technically, this would involve setting standards for poor and excellent performance with actual results revealing a score, say out of 10, that is high when excellence is achieved and low when results do not meet the minimum standard.

Illustrations:

Burlington Disclosure of provincial data (pages 101-104)

Hamilton Various indicators (page 23)

Calgary Various (pages 9-31)

31 Provide extensive five-year historical review

Most annual reports provide an assortment of statistics covering a five-year period. Typically the data includes financial, demographic and economic statistics.

The data reveal trends and informs debate. At a minimum it helps to ensure a common starting for those that want to cite past results. Examples include:

Illustrations:

York Pages 52-53, 56

Winnipeg Pages 50-53

Calgary Pages 74-75, 78-79

32 Reference to wages over $100,000

Most annual reports for Ontario cities include a section listing all staff with earnings in excess of $100,000.

If such a schedule is not provided in the annual report then reference should be made as to where the information can be readily accessed.

Illustrations:

Region of Peel Pages 39-40

York Region Pages 54-55

Hamilton Pages 31-32

33 Disclose major employers and/or taxpayers

As a way of reminding elected officials and residents of the importance that various organizations have on City finances and its economy, many cities disclose in their annual report a list of major taxpayers.

Either assessment or number of employees can determine the relative size of an organization.

Illustrations:

York Region Eleven disclosed (page 56)

Region of Peel Top thirty employers (page 46)

Saskatoon Twelve disclosed (page 66)

34 Provide city contact information and include comment card

Most annual reports include a section listing the various contact names and numbers that can be used for information or city services.

An annual report can always be made better, especially for those outside Council who are unfamiliar with City finances. It should be made easy for those who want to make suggestion by enclosing a detachable addressed “comment card”. An email address should also be provided for comments. The on-line version of the report should also provide a simple means of providing feedback.

Research should be conducted with each annual report to ensure that best practices are being met and that all practical improvements are implemented.

Illustrations:

Winnipeg Page 56

Region of Peel Page 50

Hamilton Page 27 of Community Report

6.0 Recommendations – Briefing and Orientation

35 Provide extensive orientation for new Councillors

The first few months in office for most Council members are overwhelming. It may take a year or more before new Councillors gain enough knowledge to meaningfully contribute to debates on City finances. To accelerate this learning process it is recommend that an extensive orientation session be developed. Returning Councillors may also partake in some or all of these sessions.

Of note, Councillors report receiving a more rigorous orientation in some of the former municipalities than is available today with the City of Ottawa. Some sessions were reported to last a full week, with new Councillors being exposed to all senior staff, each of whom gave a presentation and then responded to questions. Nowhere is this orientation more important than in the area of finance.

Illustrations:

Calgary Holds extensive briefing after every election.

York Region Holds briefings and workshops. Each Commissioner provides overview on their area, including key initiatives

36 Continuously brief Council on financial issues

Even the best financial information is useless if it is not understood by decision-makers. It is also unreasonable to expect Council to be financial experts on municipal finance without adequate orientation and briefing

City staff has generally taken a reactive stance in dealing with the needs of Council for information. For the most part, Councillors get information by asking questions of individual staff members. While Council appreciates this “one-on-one” access, this is not the most effective or economical learning environment.

It is recommended that City staff take a more pro-active and efficient approach to briefing Council.

Illustrations:

Calgary Holds annual sessions to brief media

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[1] Study objectives are listed in Volume II to this report. Also included in Volume II are a detailed methodology and the results from survey of municipal governments.

[2] The Canadian Institute of Chartered Accountants scorecard on the financial condition of the Government of Canada follows a format that the city might consider for the purpose.