Budgets Basic Municipal Finance/Accounting - AMCTOamcto.com/imis15/Documents/Education and Professional Development...Budgets & Basic Municipal Finance/Accounting Rob Ford, CPA, CMA,

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Budgets & Basic MunicipalFinance/Accounting

Rob Ford, CPA, CMA, AMCT

Chief Administrative Officer

Municipal Clerk’s Institute

Basics of Municipal Accounting

Definition of Accounting:The systematic recording, reporting and analysis of the financial transactions of a business.

Accounting:• Is not an exact science• Is not precise or 100% accurate• Does not provide the “right” answer• Is flexible• Requires judgement and assumptions

Canadian Generally Accepted Accounting Principles (CGAAP)• Applies to the private sector as well as the municipal sector• E.g. accruals, matching principle, revenue/expense recognition

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Public Sector Accounting Board (PSAB)

• Independent body who sets standards for the public sector

• In early 2000’s introduced minor changes including:

Elimination of prepaid expenses and certain inventories

Revised format of financial statements, e.g. segment reporting

• 2009 saw the biggest change in municipal accounting in years,with the introduction of Tangible Capital Assets (TCA’s)• Value of a municipality's capital assets are recorded on the Balance Sheet, with depreciation recorded on the Operating Statement

• Previously, municipalities expensed the total capital cost in one year

• Also, brought back prepaid expenses and inventories


Chart of Accounts

• Required to record, track and report on all transactions

• “Accounting Type”

o Assets – what a municipality ownso Liabilities – what a municipality oweso Surplus – net difference between Assets & Liabilities

• Operationalo Used to record expenditures and revenues; both operating and capitalo Generally divided into two segments:

Activity, Department, Business Unit, etc. e.g. By‐Law, Road Resurfacing, etc. Object Code; type of expenditure; e.g. wages, contracted services, supplies

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Basics of Municipal Accounting ‐ Terminology

Capital Budget• Completed annually, includes one time expenditures for major projects (often

referred to as infrastructure) such a roads, vehicles/equipment, parks, sidewalks, trails, streetlights, playgrounds and buildings.

Debenture Debt• A type of long term loan used as partial financing for major capital projects.

The debt, including interest, is repayable over time with terms ranging from 5 to 40 years. Debenture debt spreads the project cost and related tax increase over a number of years and ensures that future taxpayers pay their fair share of capital projects being completed today.

Development Charges (DC’s)• A charge paid by developers to partially pay for the cost of new capital projects

required as a result of growth (e.g. new roads, trails, community centres, fire stations, etc.). DC’s do not cover the entire cost, as legislation requires municipalities to fund a portion of most projects. In addition, certain expenditures and ineligible and must be paid for entirely by the municipality.


Federal Gas Tax (FGT)• Permanent, stable funding from the Government of Canada that municipalities

can use on a wide range of capital infrastructure.

General Levy• Often referred the Tax Levy, it is the total amount that must be funded by

property taxes.

Long Range Capital Forecast (LRCF)• Same type of expenditures as the Capital Budget, with the only difference

being that a forecast covers a number of years in the future.

Operating Budget• The expenditures (e.g. wages/benefits, supplies, contracted services, utilities,

etc.) required to deliver day to day municipal services. It also includes revenues that municipalities receive (e.g. user fees, interest income, permit fees, etc.).

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Operating Budget Forecast• A multi year, high level estimate of the future expenditures, staffing and

revenues required to maintain service levels, maintain existing infrastructure and manage the impacts of growth.

Operating Surplus/Deficit Forecast• Calculates the estimated operating surplus or deficit (difference between

budget and actuals) for the current budget year.

Payments in Lieu of Taxation (PIL’s)• Payments by Municipal, Provincial and Federal who are exempt from taxation.

Generally calculated on the same basis, but are exceptions for certain institutions (e.g. Hospitals based on bed capacity)

Reserves & Reserve Funds

Categorized as Statutory/Obligatory and Discretionary

Statutory/Obligatory Reserve Funds:• Must be established to comply with legislation or regulation• Assets and liabilities must be segregated; e.g. separate bank account• Can only be used for the mandated purpose• Parkland Reserve Fund (Planning Act) and Development Charges (Development Charges Act & Regulations)

Discretionary Reserves & Reserve Funds:• Set up by Council for specific purposes• Generally categorized into Capital or Stability/Financial Management• Remain part of the General Fund• Can be established by Council resolution or By‐law• Unfortunately, allocations to these are easy targets at budget time

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Fund Accounting – a distinguishing feature of municipalities

PropertyTaxes/PIL’s

User Fees

GeneralLevy

OperatingBudget

Major Non‐Tax Revenues

Reserves & Reserve Funds

Budget Allocations

Capital Budget

Procurement (a.k.a. Purchasing)

• As public sector bodies, municipalities are obligated to undertake open and transparent competitive bidding processes

• Wide variety of methods used to solicit bids:

EOI – Expression of Interest RFI – Request for Information RPQ – Request for Pre‐Qualification RFQ – Request for Quotation RFT – Request for Tender RFP – Request for Proposal

• Non competitive bids may be acquired in limited circumstances

Sole Source – only one supplier can provide the good or service Single Source – preference to use a specific vendor

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Procurement (a.k.a. Purchasing)

• In a competitive bidding environment, award is based on the type of bid issueda) RFQ/RFT – to the lowest bidder meeting specificationsb) RFP – to the highest scoring proponent

• Court decisions have and continue to shape municipal procurementa) Bid Shopping”

• No intent to ever award a contract• Municipality just trying to get a cost estimate

b) Lowest or any Bid not Necessarily Accepted• For years, used as a wide ranging “out” clause• Case law has basically invalidated its use

Revenue – Property Taxes

55%29%

16%

Region ‐ 55%

Municipality ‐ 29%

Education ‐ 16%

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Tax Rates & Assessment

Tax Rates: • Tax rate increase is not the same as the budget or levy increase

• Tax rates are affected by many non budget factors such as: Tax Ratios; all property classes have a ratio relative to Residential of 1 Other Revenues; e.g. Payments in Lieu of Taxes Assessment shifts between property classes Reassessment which happens every four years

Assessment:• Additional tax revenue from assessment growth (new homes and business) is critical revenue at budget time

• Reassessment is revenue neutral for the municipality, but not for individual homeowners

Budgets

Textbook Definitions:1) An estimation of the revenue and expenses required over a specified future

period of time.

2) A detailed quantitative plan for acquiring and using financial and other resources over a specified forthcoming time period.

Simple Definition:Department work plan converted into dollars.

Who’s Involved in the Budget?

• Everyone in the organization, regardless of level and responsibility• Budget is more than just preparing, managing and monitoring• If you spend money, you’re part of the budget process• If you get a paycheque, you’re part of the process

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Budget MethodologiesDecision Package

Who created them?Software vendors, Accountants, Consultants?

Are they really any different?

What Really Matters:•Strategic Approach•Budget “Mindset”

Traditional

Activity Based

Incremental

Zero Based (ZBB)

Priority Based

Funding Envelope

Program Based

Budget Strategies/Philosophies

Conflicting Demands & Objectives:Departments, Council, Finance, Public, Developers

Who is Responsible For The Money?Generally not Finance

Level Playing Field for all Departments:No one should be advantaged or disadvantaged due to size, revenue generation capacity, legislative requirements, etc.

Corporate vs. Departmental Targets:Are they the same or different?

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Budget Strategies/Philosophies

Prioritizing Budget Requests:• Whose priorities take precedent?

Does the “To Do” method work?• Have To, Need To, Should Do, Want To, Like To

Do formal ranking systems work?• Yes, if the methodology is Objective, not Subjective

What NOT to do at Budget Time:• Introduce new user fees or drastically increase existing fees• Significantly reduce existing service levels• Drastically alter service delivery method, even if budget neutral• Recommend new policies, financial or otherwise

Master Plan, Studies & Strategies

Help or Hindrance?

Help:• Sets strategic direction for municipality and departments• Objective, often completed externally• Prioritizes competing demands

Hindrance:• Costly to complete and require frequent updating• Creates unrealistic expectations• Widens existing funding gap

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Council and Budget Approach

Multi Year

Forecast

Council Sets

Increase

Staff Submit Budget

Council Debates

Budget Approved

Staff Submit Budget

Council Debates

Council Debates

Budget Finally

Approved

Council Debates

“Target” Approach

“Free for All” or “Kitchen Sink” Approach

General (Tax) Levy Budget –Revenue Sources

65.1%15.2%

9.5%

3.7%3.4%

1.6%

1.5%

Property Taxes

User Fees, Fines, etc.

Slots

Veridian (LDC)

Development Revenues

Discretionary Reserves

Interest & Other Income

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Operating Budget Considerations

Multi‐Year Operating Budget vs. Multi Year Operating Forecast

• Few municipalities adopt multi‐year budgets

• Many utilize higher level forecasting as part of long range planning

Controllable vs. Non‐Controllable Expenses

• In practice, distinction is very hard to make

• Usually in the eye of the beholder

• Often used to “sell” a budget that has a higher than normal increase

Operating Budget Considerations

Inflation – CPI vs. Municipal: • Council and Public always use CPI to measure tax rate increase• CPI shopping basket of goods is not representative of municipal costs

Budgeting For Revenues:• Generally much more challenging than budgeting expenditures• Most are tied to external factors beyond our direct control•Aggressively Conservative vs. Conservative vs. Conservatively Aggressive• Can’t afford to rely on revenues to balance the budget

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Operating Budget Management Policies

Objectives:

1) Keep overall expenditures within the approved budget

2) Manage post budget events and changed circumstances

3) Maintain integrity of financial system and reporting

4) Accountability and responsibility clearly defined

5) Early identification of surpluses and deficits

Operating Budget Management Policies

Characteristics of a Good Policy:

• CAO, not Council approved

• Flexibility for departments to reallocate budget within their area

• Process to cover over budgets that cannot be managed by department

• Regular review of budget to actuals by staff managing the budget

• Goes beyond just reading a printed report; drill down into the details

• Focuses on expenditures, but revenues still considered

• Regular forecasting, with explanations of significant variances

• Forecast reporting to Council at a high level

• Cannot use under budget amounts to make unbudgeted purchases

• Additional or unbudgeted revenues cannot be spent unless directly tied to service delivery

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Capital Budget – Revenue Sources

47%

42%

10%

1%

Development Charges

Discretionary Reserves

Federal Gas Tax

Other

Capital Budget/Forecast Considerations

Time Horizon:

• Budget is considered the 1st year only

• Forecast is all the subsequent years

• What’s the “right” forecast period?; 5, 10, 15, 20, 25 years?

• Must be a fully funded forecast, not a wish list

• Difficult to significantly defer or reduce scope once project identified

Operating Budget Impacts:

• Can be significant and will last the life of the asset

• Must be a consideration when the capital project is considered

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Capital Budget/Forecast Considerations

Lifecycle Maintenance/Rehabilitation Costs:• Similar concerns as Operating Budget, but these costs much higher

• Be wary of “over buying” at the front end; leads to higher costs here

• Conversely, additional money spent now can reduce costs over time

Capacity To Manage:• Even if the funds are there, is there enough qualified staff to manage?

• Staff availability and other work plan demands must be a consideration

Capital Budget Management Policies

Objectives:

1) Financing Over Budget and Unbudgeted projects

2) Open and transparent reporting to Council and Public

3) Accountability and responsibility clearly defined

Characteristics of a Good Policy:

• Council approved

• Process to offset over budget costs and unbudgeted projects

• Clear process for managing/approving change orders

• Timely reporting where major over budgets are anticipated

• Defined rules for the allowable amount and use of contingency

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Internal Control

Definition:A process effected by an entity’s Board of Directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories:

• Strategic – what the entity wants to be, their mission, etc.• Effectiveness and efficiency of operations• Reliability of financial reporting• Compliance with applicable laws and regulations

1) Control Environment:Setting the proper “tone at the top” through: Management philosophy and operating style Organizational structure How authority and responsibility are assigned Staff Competence; hiring, training and promoting Taking Action – responding to weaknesses, including actual, suspected

or alleged fraud

Internal Control

2) Risk Assessment Process: What can go wrong? Assess the significance and likelihood

3) Information Systems/Business Processes/Communications: The “information” system; hardware, software, procedures, people Procedures and records to initiate, record, process and report

transactions and prepare financial and performance reports Understand individual roles and responsibilities, policy manuals

4) Control Activities: Approvals, authorizations, verifications Segregation of duties

5) Monitoring: Ongoing assessment of design, performance, operation of controls Deficiencies communicated and addressed on a timely basis

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Internal Audits

Financial/Compliance:

• Compliance to approved internal procedures, policies• Focus on high risk areas; e.g. cash handling, asset safeguarding• Can be scheduled, “surprise” or ad‐hoc triggered by an issue• Fraud/theft can be uncovered through this type of audit

Value For Money:• Unique to government and the not‐for profit sector• A systematic review to ensure that resources are managed with due regard to:

Economy – careful use of resources to save expense, time & effort

Efficiency – delivering the same level of service for less cost, time, effort

Effectiveness – delivering a better service or getting a better return for the same amount of expense, time or effort

External Audit

• Under the Municipal Act 2001, municipalities must appoint an external auditor, for a period not to exceed five years

• Objective is for the auditor to state that in their opinion, the financial statements present fairly the financial position and operations of the municipality

• Fraud/theft rarely uncovered through the external audit

• All departments are audited, not just Finance

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Fraud/Theft

• Is a fact of life in all businesses; municipalities are no exception

• Often go unreported due to negative bad press

• Can take all shapes and forms, including:

Theft of assets; computer hardware, inventory

Theft of cash

Fraudulent expense claims; e.g. mileage

Medical, dental, vision benefits

Fraudulent payments to third parties

Theft of time

Fraud/Theft

What are some of the triggers/causes?

• It’s easy ‐ lack of policies, internal controls, oversight, etc.

• Lack of accountability and consequences

• Lax attitudes at manager/supervisor level

• Corporate culture of, or personal sense of entitlement

• Cash, Cash, Cash, Cash, Cash, Cash, Cash

• Purchasing Cards, Purchasing Cards, Purchasing Cards

• Changes in an employee’s personal circumstances

• Limited or weak segregation of duties

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Working With Finance

Finance’s Dual Roles

• Finance has two, very often, conflicting roles1) Support, Assistance and Advice2) Policing and Safeguarding

• Preferred role is 1), but reality is 2), is a fact of life• Key for everyone is accepting, understanding, respecting

and separating the roles

• Support, Assistance and Advice Support department’s initiatives, budget requests, etc. Assist with budget preparation, monitoring and analysis Find innovative solutions Eliminate roadblocks Help navigate the procedural mine field

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Policing & Safeguarding

Treasurer’s Municipal Act 2001, obligation: “Statutory responsibility for handling all of the financial affairs of

the municipality”

Includes a wide range of responsibilities:

• Development and maintenance of corporate financial policies, procedures and strategies

• Development, implementation and monitoring of internal control systems and processes

• Safeguarding of municipal assets

• Ensure financial activities and reporting comply with legislative requirements

Strategic Financial Planning

What do the plans consist of ?

• Often a combination of Formal (e.g. policies, by‐law, resolutions) and Informal (e.g. well established practices)

What are the characteristics of a sound strategic financial plan?

• Operating surplus allocated to reserves

• Multi‐year forecasting for both operating and capital

• Major non‐tax revenues allocated to reserves

• Debt only issued for major asset construction/purchase

• Defined target balances for key reserves/reserve funds

• Provides for long term financial strength, stability, sustainability

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Internal Financial Reporting

• Reports are fairly standard; include account number/name, current month and year to date actuals, variance from budget in both $ and %

• Staff responsible for managing the budget must have direct accessto the financial system

• Includes the ability to produce their own financial reports and to drill down into the transaction level of detail within the financial system

• Forecast amounts should be added later in the year

• Level of detail (a.k.a. data roll‐ups) should be used to focus review

• If “Encumbrance/Committed” accounting used, must be included

• Capital reports may be customized for Project Manager needs and will include multiple years

Financial Information Return (FIR)

• Tool used by the Ministry of Municipal Affairs to collect financial and statistical information from all 444 municipalities

• Consists of 24 schedules for financial/statistical data plus 6 MPMP schedules

• Number of actual schedules requiring completion will vary by: type of municipality; i.e. lower tier, upper tier, single tier services provided other entities within the municipality

• Generally not published, distributed or posted on a municipality’s website

• Ministry maintains a website where FIR’s for all municipalities are available in Excel or PDF format

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Financial Statements

• Considered the “official” statements of the municipality

• Usually presented to Council and posted on the Municipality’s website

• Consists of: Consolidated Statement of Financial Position (Balance Sheet) Consolidated Statement of Operations (Profit & Loss) Consolidated Statement of Change in Net Financial Assets Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements

Who Uses Them?Financial Institutions, Bond Rating Agencies, Municipal Treasurers

Who Doesn’t Use Them?Council, Public, Media, Other Municipal Staff

Resources

Reading/Websites:• The Law of Municipal Finance ISBN 0‐433‐44266‐2• BMA Municipal Study• Is You City Healthy? Measuring Urban Fiscal Health ISBN 978‐0‐7727‐0940‐0• Property Taxation in Ontario – A Guide for Municipalities (MFOA)• FIR's http://oraweb.mah.gov.on.ca/fir/welcome.htm• Ontario Municipal Knowledge Network www.omkn.ca

Courses:• Municipal Accounting and Finance Program (AMCTO)• Municipal Finance 101 (MFOA)• Municipal Tax Administration Program (OMTRA)• Municipal Administration Program (AMCTO)