Ontario’s cities skip proper accounting standards on capital asset values

Of all the fields of government, local government is perhaps the least sexy. “Anarchist” youth will riot wherever international leaders meet each other and provincial governments might prompt the odd protest but municipal activities seldom make front page headlines.

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That's all the more unfortunate considering the how much municipal government is responsible for and the level of variation in their performances across Canada. In 2008 the average Canadian municipality took in $4,971 of revenue per household. It also managed $18,228 worth of capital assets (mainly infrastructure like roads and sewers), backed by $1,963 dollars of long-term debt for each of those households, which each paid $102 each in interest charges. When put beside household balance sheets, these figures start to bring the economic significance of local government into perspective.

No recorded assets

Not counting the activities of second tier local government in Ontario, the comparative figures for the average municipality in the province are $4,884 of revenue, no recorded capital assets (more about that later), and $1,139 of long-term debt serviced at an interest cost of $67 per household. Of all the regions, Ontario municipalities make the smallest portion of their revenue from user charges. Their average of 20 per cent of revenue compares to a nationwide average of 23 per cent. They spend more of their money on salaries and benefits than the average Canadian municipality (54 per cent to 51 per cent), and less on contracted services (13 percent to 16 percent). Perhaps the most striking distinction in municipal performance in Ontario, though, is the total lack of capital asset reporting in Ontario municipalities' 2008 financial statements. As the city of Toronto states: “Tangible capital assets are significant economic resources managed by local government and a key component of cost in the delivery of many local government programs and services.” Evidence from every other province except Saskatchewan suggests the value of capital assets managed by the average Canadian municipality is approximately $19,000 per household, yet no Ontario municipality in my study of Canada's 88 largest municipalities gave a value for its assets in its 2008 financial statements. It is difficult to plan infrastructure maintenance and replacement, let-alone complain about an “infrastructure deficit” without knowing the value of the infrastructure that might need to be replaced. The Public Sector Accounting Board, responsible for setting municipal accounting guidelines, has mandated capital asset reporting for the 2009 financial year. Most Canadian municipalities reported capital asset values last financial year but Ontario's appear to be lagging. As with most governments, municipalities are a natural monopoly; a single provider is generally the most efficient market structure. The implication for the people who pay taxes and user fees and use roads, garbage collection, and recreational services is that they don't have the same level of choice in who provides these essential services as they would in a competitive market. In the absence of real competitive pressure, it is important that municipalities help residents understand what services are being provided and at what cost. The lack of capital asset reporting is an example of incomplete disclosure that makes it difficult for residents to judge whether their municipality is performing well compared to itself in previous years and other municipalities at any time. In turn this lack of comparison impedes residents who may wish to make realistic and enforceable demands for municipal performance. In competitive industries, competition forces all producers to reach a standard in order to remain viable. Alas, there is little competition in the municipal sector. The vast range of difference in performance and even the way that performance is reported on suggest that the natural monopoly status of municipalities has left considerable efficiency gains on the table.

$65 billion a year industry

Taken together, Canada's municipalities represent a roughly $65 billion per year industry, or about one dollar in twenty of GDP. At five per cent of GDP, a 20 per cent increase in the productivity of municipal government would add a full percentage point to the national wealth. With these figures in mind, it might be time for some rioters to focus their attention closer to home on City Hall, and ask their municipality to catch up with the rest of Canada in terms of municipal asset reporting. David Seymour is a Senior Policy Analyst at the Frontier Centre for Public Policy fcpp.org and author of the 2009 Local Government Performance Index.

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