Committee on Canadian Issues (CCI)
Atlanta, Georgia | June 5, 2010
Co-chairs Eric Sawyer and John Martin welcomed the committee to Atlanta for the twenty-fourth meeting since the committee’s inception in San Francisco in 1998.
GFOA President Len Brittain visited with the committee to provide an update on the GFOA Executive Board and other important items for the committee members. Len Brittain informed the committee that his focus as GFOA President will be long-term financial planning and that the GFOA annual conference in 2016 will be hosted in Toronto.
Standards Task Force
Diana Lokken and Kerry Tarasoff, the co-chairs of the Standards Task Force, circulated a six-month work plan to the committee. The task force continued its review of GFOA’s best practices for their applicability in Canada. The best practices approved by the committee can be accessed in the Canadian section of GFOA’s website. The Standards Task Force also is focusing on identifying best practices that are unique in Canada. Potential Canadian-specific best practices that are under initial consideration include a best practice on Tax Increment Financing in Canada and a Canadian-specific version of a best practice on the Appropriate Level of Unrestricted Fund Balance.
Professional Development Task Force
Ron Kaufman and Richard Sun, the co-chairs of the Professional Development Task Force, provided an update on the task force’s work plan. A major focus of the task force is to coordinate the Canadian-specific session and the Canadian discussion group at the GFOA annual conference. The Canadian-specific session at the GFOA annual conference in Atlanta, “Performance Measurement: Making it Work for you”, focused on the Ontario Municipal Benchmarking Initiative (OMBI). The committee suggested potential topics for the Canadian specific session for the next GFOA annual conference in San Antonio, which will be discussed further at the committee’s winter meeting in Vancouver. Committee members Eric Sawyer, John Martin and Ron Kaufman were the discussion leaders for the Canadian Discussion Group, which immediately followed the Canadian-specific session. The Canadian Discussion Group will be moved to Monday morning at the GFOA annual conference in San Antonio, from the traditional Tuesday afternoon scheduling.
The CCI approved the updated Canadian Award for Financial Reporting (CAnFR) Reviewer’s Checklist which reflects the new significant PSAB standards along with additional suggestions by the committee members.
Advocacy & Communications Task Force
Lori Craig and Ed Hankins, the co-chairs of the Advocacy & Communications Task Force, circulated the task force’s status update to the CCI. A significant focus of the task force is the production and distribution of the GFOA's Canadian newsletter, Canadian Finance Matters. Esther Lee, the committee coordinator for Canadian Finance Matters, provided an update on the changes incorporated in the formatting of the newsletter. The task force is examining a greater coordination among the major provincial associations in e-mailing the newsletter to its members. The winter 2010/2011 edition of the newsletter will reprint the Government Finance Review’s article on Developing a Municipal Price Index by Patrick Walters and John Dunfield of the City of Calgary, and will highlight one of the significant best practices adopted by the committee.
The task force continues to focus on improving the working relationships with other prominent associations within Canada.
The co-chairs of the CCI, on behalf of the committee, presented Paul Macklem, the GFOA’s Past President, a letter of gratitude for his outstanding service, including his participation at the GFOA BC Conference and the MFOA Conference.
The committee members also further defined each of the items on the list of the top ten significant issues facing municipal officers, based on their own professional observations.
The committee will continue its effort to recruit additional committee members from Alberta, Manitoba, Ontario, Quebec and Saskatchewan.
There being no further business before the committee, the meeting was adjourned. The next CCI meeting is scheduled to take place on Friday, February 4, and Saturday, February 5, 2011, in Vancouver.
Mid-Term Perspective from the GFOA President
Len Brittain, Director of Corporate Finance, City of Toronto; email@example.com
At the mid-point in my GFOA Presidency, I have had the privilege of meeting a large number of government finance officers across Canada and the United States, and overseas. I received the warmth of western hospitality during my visit to the Western Canada GFOA meeting in Winnipeg and had the opportunity of presenting at the Ontario MFOA conference in Markham. Both were great conferences with a good deal of progressive discussions. I also appeared at state association conferences in Florida, Ohio, New Jersey, and Texas, and at conferences in Sweden and South Africa.
One of the things that I have heard on my visits is that the recession fallout continues to batter the finances of many provincial, state and local governments. Despite having our own fiscal challenges, however, Canadian local governments have fared somewhat better than other parts of the continent since the economy has rebounded more quickly and revenue sources are less tied to the economy.
Many local governments in other parts of the world receive a share of income and/or sales taxes. While this can mean strong revenue growth during a growing economy, it can also mean that revenues drop quickly during economic slowdowns. Property tax revenues can be further affected by the economy in many jurisdictions, since they fluctuate with property values. However, this impact is often delayed by a year or so pending the update of property tax assessments which can extend the impact of the recession well past the point where it has officially ended. Many senior governments also place caps on property tax rates which constrains local discretion and adds to the challenges faced by government finance officers. The impact of property values on municipal revenues in Canada is different in that assessment value updates do not usually, on their own, affect the overall level of property taxes raised since municipalities are required to adjust tax/mill rates to eliminate the effects of value updates. As well, there is less of a tendency for senior governments to set overall caps on municipal property tax increases.
The governments that have best been able to absorb unexpected financial shocks from the economy or natural disasters are those that have taken a long term view in managing revenue sources, expenditures and balance sheets. One of my primary messages as President has been the importance of long term financial planning and I have had positive feedback on this initiative wherever I have gone. It also happens to be the number one item on the GFOA Committee on Canadian Issues' (CCI's) top ten list of issues of interest to government finance officers in Canada. Despite the fact that a fairly low percentage of finance officers indicate to me that their organizations have prepared comprehensive plans, the consensus seems to be that they are worthwhile and will help define the emerging role of the government finance officer. There are a number of resources that GFOA has available to support long term financial planning, including a blog where new information is posted regularly.
GFOA has embarked on a number of other exciting new initiatives that are certain to be of benefit to its members including:
- a new online resource for recovering from financial distress;
- a product to be released soon in the way of a financial management self-assessment system which will allow finance officers to examine in detail the entire financial management framework throughout their organizations to look for weak spots and opportunities for improvement;
- new and updated best practices, which are being further developed by each of the GFOA standing committees at their upcoming winter meetings as part of strategic plans for the Executive Board. To support those meetings, Past President Paul Macklem will make the trip across British Columbia to attend the winter meeting of the CCI. I will attend the winter meetings of the other six standing committees in Washington D.C.
Keep an eye on the web site at www.gfoa.org for information on the above activities.
It has been a very busy and rewarding first half of my Presidency which will conclude at the annual conference in San Antonio, Texas, in May 2011. I hope to see you there!
Highlighted Best Practice
A section of the GFOA website is dedicated to GFOA’s best practices that are applicable in Canada. One of the best practices that the Committee on Canadian Issues would like to highlight is the Tax Compliance best practice, the first best practice adopted by GFOA’s Executive Board that is specific to Canada. This best practice recommends that Canadian local and provincial government authorities comply with tax laws and establish procedures, controls and policies to ensure tax compliance within their organization.
Developing a Municipal Price Index
Patrick Walters, City Economist, City of Calgary; firstname.lastname@example.org
John Dunfield, Senior Corporate Planner, Corporate Financial Planning Budgeting and Reporting Office, City of Calgary; email@example.com
Governments are under considerable pressure to relate their spending and taxation levels to cost inflation, yet each local government’s experience with inflation can differ greatly from a national average. The City of Calgary, Alberta, has responded by developing a municipal price index (MPI) to improve the accuracy by which its local government costs can be projected. Calgary’s work has emphasized the need for governments to revisit their selected inflation measures for accuracy and to communicate broadly about how inflation measures correspond to local government needs.
The most widely applied measure of inflation is the Consumer Price Index (CPI). Given its pervasive use in setting cost-of-living adjustments, it can be the appropriate metric when calculating the rate of consumer inflation at the national level. Major components within the CPI include housing, food, and transportation. It is often used in inflation calculations such as Social Security payments, labor agreements, service contracts, and retirement benefits. The CPI is a useful proxy for cost inflation in general because it is well-known statistic, it is produced monthly by an independent source, and it is available free of charge.
Extending the use of the CPI into discussions about the appropriate level of tax and fee rate increases becomes problematic, however, because a government’s actual experience with inflation can differ greatly from the CPI. This is because the largest expenditures for governments are typically labor, materials, and contractual services—different factors than those found in the CPI.
Local governments would benefit from having a well-constructed index reflecting the changing costs of providing municipal services, but few cities have attempted to build and effectively use such a measure. The City of Calgary is now doing so. This article reviews some of the options available for constructing indexes of municipal costs, and then focuses on the Calgary experience, with some practical tips for creating an MPI and for dealing with some of the criticisms inherent in developing a cost index from scratch.
MEASURES OF COST INFLATION
Governments budget for expenditures on a variety of goods and services, and as the average price of that basket of purchases changes, so too does the purchasing power of local governments. Price indexes are the most commonly used tool for measuring changes in price levels, and thus purchasing power. A price index measures the change in the costs of purchasing a fixed basket of goods and services in the current period, compared to a base period, typically month-over-month or year-over-year.
The key issue in calculating price changes has always been defining the contents of the basket of purchases. The nature of the price index is determined by the composition of the specific basket—how spending is distributed among the components of the basket. Some of the more common price indexes are:
- The Consumer Price Index (CPI), which measures the price changes for common household purchases. It focuses on expenditures for food, shelter, clothing and footwear, household operations, and furnishings.
- The Producer’s Price Index (PPI), which measures the price changes of commodities at different stages of processing.
- The Gross Domestic Product (GDP) deflator, mostly used in national accounts. It is designed to reflect current expenditure patterns in an economy and therefore focuses on new domestically produced final goods and services.
Other price indexes measure changes in specific sectors of the economy. The Construction Price Index, used by the U.S. Department of Commerce, reflects the changes in the cost of construction materials and skilled and unskilled labor. It is a composite derived from separate indexes for construction of commercial facilities, residential housing, utilities, highways and general construction, as well as other construction contract indexes. Statistics Canada, a federal government agency, compiles the Canada CPI and has developed a similar index for non-residential building construction. Statistics Canada has also developed the Education Price Index (EPI) for elementary and secondary school spending. It compares current salary grids for teachers with a base year and uses selected sub-indexes from the CPI and the Industry Product Price Index as proxies for price increases for non-salary items purchased by school boards.
MEASURING MUNICIPAL GOVERNMENT COST INFLATION
Similar to education institutions, municipal governments have their own spending patterns that are different than those of other economic sectors. A price index that does not reflect the municipal purchasing structure does not truly reflect changes in the cost experience, and thus the purchasing power, of local governments. For instance, the CPI reflects household spending patterns that focus on shelter (27.7 percent of the Statistics Canada CPI basket), transportation (19.5 percent), food (15.5 percent), and recreation (12.9 percent) — none of which registers as leading purchase categories for local governments.
Since 1978, American City and County has been publishing a Municipal Cost Index (MCI) that estimates the rate of inflation for purchases by American municipalities. (The MCI archive is available at http://americancityandcounty.com/mciarchive.) The MCI is a composite index,a weighted average of more detailed price indexes measuring consumer price cost fluctuations (using the CPI), industrial commodity wholesale prices (using the PPI), and construction contract costs (using the Construction Price Index). The weighting factors used reflect the composition of local government purchases in the base year of 1967,and the MCI shows price changes over specific periods of time at the national level. Municipalities in Canada, including Calgary, have begun building on the concept of the MCI, with indexes reflecting the changes in specific costs within a local area.
DEVELOPING CALGARY’S INDEX
Work on Calgary’s MPI began in 2003 as part of a new direction that included considering the longer-term impacts of current financial decisions. The impetus to create an index for the costs of the goods and services Calgary’s municipal government purchases came not only from the recognition that the CPI did not fairly represent the municipal purchasing experience,but also from the need for a tool that would project cost scenarios into the future, rather than reflecting past experience (which is the focus of the CPI).
There are two main parts to the MPI calculation: the weightings of the expenditure categories (showing the relative importance of items in the index), and the inflation factor used for each component. The weightings are based on the approved City of Calgary operating budget, using tax-supported operations only (thereby excluding the utility operations that are funded purely from utility rates).
Exhibit 1 shows the expenditure account categories and their relative weightings.
The inflation factors for expected price changes are based on economic data from two main sources, the Conference Board of Canada (CBOC) and Statistics Canada. The key issue is to match an appropriate inflator from these external sources to the types of expenditures in each budget category. In some cases, there is a very good match: for instance, the Conference Board of Canada issues quarterly projections for natural gas prices, and “Natural Gas/Propane” is one of the city’s expenditure categories. For other accounts, a proxy is needed because there is no direct match between an indicator and an expenditure category. For instance, in the category of “Contractual and General Services,” since most white-collar consulting services are labor-intensive, the Conference Board forecast for wage rates within the province of Alberta is used. However, for contractual services within the Transportation Department, for functions such as street sweeping and snow clearing, projections based on the nonresidential building construction price time series from Statistics Canada (which includes both wage rates and materials costs) was judged to provide a better fit for the expenditures involved.
The largest expenditure category involves employee salaries, wages and benefits, which consume nearly 56 percent of Calgary’s tax-supported operating budget. To make sure Calgary’s MPI will reflect local costs, the city uses internal information for the inflation forecasts, based on a combination of actual labor settlements that extend into the future and a forecast provided by city labor relations staff for projected results of collective bargaining. The latter is confidential and therefore cannot be disclosed. Some of the other specific issues regarding expenditure types, and how Calgary has calculated inflation projections, are employee benefits, utility costs, interest expense, and gross debt charges.
Employee Benefits. This forecast comes from city staff specializing in benefit costs. These inflation figures will also include the salary increases. For example,a 3 percent increase in salaries and a further 2 percent increase in benefits would result in a total increase in benefits expenditures of 5 percent.
Utility Costs. Since the City of Calgary has long-term (20-year) contracts for electricity supply, the price increases are known for years in advance. Where Calgary pays market rates for other utility commodities, such as natural gas, the Conference Board of Canada provides a three-year projection.
Interest Expense. A calculation is done to generate the average interest rate for future years, based on a blend of all borrowing agreements currently in place and a forecast of future borrowings and future interest rates. The yearly change in this interest calculation represents the inflation for interest expense.
Gross Debt Charges. Gross debt charges, which represents the repayment of debt principal, has no inflationary dimension, so that factor is always 0 percent.
The MPI calculation is the average of the expected price changes for all components, weighted by the portion of the city tax-supported operating budget spent on each factor. With the Conference Board projections for some of the components being published quarterly, the Calgary MPI is updated each quarter. Exhibit 2 provides a mock-up of the City of Calgary MPI calculation based on information available up to the end of 2009. Note that the figures for 2008 and 2009 show the historical rates of cost change,while the 2010 and 2011 figures are projected rates of change using the information sources identified. The inflation factors shown for salaries and wages are only illustrative and do not represent the actual labor settlement projections being used in the Calgary MPI calculation, so the total index figure shown is not the actual MPI calculation for Calgary.
The work to date on Calgary’s MPI has shown that it is possible to construct a price index for local government purchases. Further, the results show a different pattern of cost changes for municipal purchases than the CPI shows for household expenditures. Exhibit 3 shows the differences in inflation estimates for the Calgary CPI versus the Calgary MPI over a six-year period.
ISSUES REGARDING THE MPI
As Calgary’s process for developing the MPI has become more refined, and its use as a tool in the budget process has become more widespread, its critics have become more vocal. Some of the major points raised in opposition to the MPI focus on whether the city should base tax increases on its own index, whether the basis of the MPI is sound, and the potential problem of ignoring the substitution effect, whereby buyers will substitute cheaper alternatives when prices get too high (and therefore price indexes will overstate real inflation).
Critics think that calculating an MPI to justify tax increases is self-serving, and that the product would be more credible if it were calculated by an independent body that has experience in creating cost indexes. As a result of this concern, Calgary is working through the Federation of Canadian Municipalities to encourage Statistics Canada to develop a set of regional municipal price indexes.
Another criticism is that with labor being the major cost component, the MPI calculation is somewhat circular. The local council (which oversees the day-to-day operation of the municipality) approves collective bargaining settlements, which strongly influence overall costs, and those figures are then used to rationalize budget requests. However, this process also reinforces the need for the council to be cognizant of the budgetary effect of approved labor settlements.
Finally, price indexes ignore the substitution effect. Any index that uses a fixed basket of goods for its calculations—as most do, in the name of consistency—faces this problem. For municipal governments, the substitution effect is minimized because the largest cost category, labor, has no ready and available substitute in the short term (contracting service provision out is a longer-term option). However, the benefit of having the MPI calculation is that it might prompt further investigation into less expensive substitutes for city inputs.
TIPS FOR USING THE MPI
Understanding the need for an index of costs associated with providing municipal services is building in Calgary. The city has found several ways to increase the credibility and therefore the uses of the MPI.
Continue to Refine the Calculation. Calgary found the most credible sources for inflation projections. Then, it revisited the areas where proxies are needed to estimate inflation for city-purchased goods and services that have no direct link to an economic factor where inflation is projected.
Educate Council Members. The city informed council members about the value of an index that measures the costs of purchases made by the local government, as opposed to the CPI, which measures the inflation on household purchases and therefore does not correspond closely to what cities actually buy. Briefing sessions with the council in advance of any budget discussions typically include a section on the MPI: how it is calculated, and how it differs from the CPI.
Publish the MPI Figures Regularly. The City of Calgary includes the MPI figure in every published quarterly economic update provided to the council and the public.
Keep a Longer-Term View of City Finances. Calgary develops three-year operating and capital budgets, along with a five-year capital plan, and it regularly publishes a long-range financial plan that provides a 10-year projection of where current trends are leading. Discussion about the MPI and how it is used in these longer-term calculations is included in each document.
One of the attractive features of the CPI as a measure of inflation is that the index is created and maintained by an experienced and credible supplier of economic data. Statistics Canada already produces a separate index for costs associated with public school boards and would thus would be one logical candidate to produce an index for municipal government costs. The Conference Board of Canada, an independent, not-for-profit applied research organization, is another potential source. In March 2009, the Federation of Canadian Municipalities (FCM) adopted a resolution sponsored by the City of Calgary that “encourage Statistics Canada to produce a monthly data series of national and regional price indices, which would measure the inflation of a fixed basket of goods and services purchased by Canadian municipal governments.”
This idea is being jointly explored by the FCM, Statistics Canada, and the Canadian Council on Social Development. At the same time, the Government Finance Officers Association is developing a best practice related to price indexes, in order to encourage the development of a municipal indicator that depicts the inflation rates for products and services purchased by local governments.
The development of municipal price indexes is important in creating an understanding that the patterns of local government spending are quite different than those of the average household. The usefulness of the MPI as a tool for decision-making will improve once council members and citizens accept that budget requirements should relate to the costs of purchasing goods and services used to serve local needs.
This article originally appeared in the April 2010 edition of the GFOA's Government Finance Review.
The Challenges of Public Sector Fiscal Sustainability
Jim Alexander, Associate Partner, Advisory Services, KPMG Canada; firstname.lastname@example.org
The last three years have been a remarkable time for public sector organizations. The global economic collapse of 2008 hit financial institutions and cascaded throughout the private sector, impacting companies large and small. The impact on public sector organizations was profound and immediate.
Levels of government that could run deficits went from declaring it will never happen here, to instead promoting deficits as a necessary stimulus. And many of these same jurisdictions are now facing the need to withdraw the stimulus funding and to examine the very nature of public services as they cope with wide-spread structural deficits. The challenge for organizations (like municipalities) that could not run deficits was even more profound.
Many municipalities have faced the reduction or collapse of significant portions of their tax base as particular industries left the area or struggled to cope with the economic downturn. Throughout the period, operating costs, wage bills and demand for public services continued to rise. These pressures lead to profound concerns around the sustainability of the public services offered by the various levels of government. The implicit questions are “Can we afford the services citizens seem to be expecting?” and ”What should the real footprint of government look like in the years to come?”
In a series of international thought leadership publications, KPMG tracked how public sector organizations across Canada and around the world have responded to these pressures over the past two to three years and compared this response to how such issues were tackled in other periods of economic challenge. Some of the key conclusions are:
- Examination of historical episodes in deficit recovery confirms that large adjustments can be made
- Governments often face a dual challenge of cutting expenses and raising revenues in the near-term while tackling long term pressures
- Most successful turnarounds have focused on spending rather than revenue
- Conventional tax and spending measures may not be enough to ensure fiscal sustainability
The recently released report “Shifting Gears—Paths to Fiscal Sustainability in Canada” outlines the three broad approaches governments have been using to tackle the challenges of fiscal sustainability. (The report was produced by the School of Public Policy and Governance and the Mowat Centre at the University of Toronto and supported by KPMG. It is available at www.mowatcentre.ca.)
First, governments can increase revenue through higher taxation or user fees. Second, governments can cut program spending, either through targeted initiatives or across the board restraint.
The third approach, and the one necessary to really achieve the sustainability of public services, is to adopt transformative approaches that profoundly re-shape the nature of public sector service delivery. The report outlines some of these transformative approaches with examples drawn from across Canada and internationally.
As municipalities face the budget challenges, all three approaches need to be examined. Raising taxes is always unpopular, but reviewing the nature of the revenue stream is essential. Beyond the tax rates themselves, other sources of revenue, such as user fees, need to be explored. This also includes examining the level of subsidization of the services.
In tackling the other two broad options of cutting program spending and transformative approaches, a key foundation is developing real clarity on the actual program and services being delivered and the associated service levels and the costs. It is remarkable how frequently organizations struggle without having this perspective—how crippling it is when this foundation is missing.
The good news is that there are now standard ways of describing the service levels governments deliver, so municipalities and the other levels of government can rapidly develop the service and program view of the expenditures in their jurisdiction.
Cutting program spending has often been tackled through Program Reviews, across the board cuts, addressing wages and benefits across the public sector or focusing on particular high spending departments. In municipalities, there have been excellent results achieved through Service Reviews. Built on the foundation of real transparency on the actual services, the service levels and the costs, significant shifts in sustainability can be achieved.
However, some of the most promising approaches build on the concepts of these service reviews and introduce global leading practices to explore new public service delivery models. Examples include:
- Examining the roles of various levels of government and teaming up with neighboring jurisdictions to eliminate duplications of services (e.g. sharing back office services with a neighboring municipality)
- Aggressively adopting open data policies and leveraging the capabilities and interests of the not-for-profit and the private sectors (e.g. the development of value-adding software applications, possibly reducing the requirements to fund out of the tax base)
- Devolution and the co-creation of public goods by groups of citizens (e.g. UK experience in involving local community groups with police in developing and promoting crime reduction strategies)
Tackling the challenges of public sector sustainability may seem daunting to municipalities and other levels of government. It is a large and complex problem. But organizations are tackling this successfully. There is a lot of experience to build on—one does not need to start with a blank sheet of paper.
In our experience, the key ingredients of success are:
- developing that foundation of knowledge of your services and their costs;
- examining the transformative levers that line up best with your current political leadership; and
- creating a program of change built on some quick wins and strong leadership.
The economic crisis of the past years is the once-in-a-generation opportunity to profoundly re-think and re-shape public services. We will be on this journey together as we re-shape the nature of public services and ensure their sustainability.
A Great Place to Live, Work and Play: A case for Service Level Budgeting
Victor Mema, Manager, Financial Planning, Regional Municipality of Wood Buffalo; email@example.com
Each municipality goes through a process of allocating financial resources from time to time. Many budgets are balanced mathematically. The question is, for each budget passed, are services balanced to the community’s expectations and priorities?
Service level budgeting goes by another name, budgeting for outcomes. This is a process of linking strategic planning, long term financial planning, performance measures and budgeting based on community goals. Normally, this involves a five-step deliberate process.
1. Set community goals: The first part of this overview title, ‘A great place to live, work and play’, is a common vision for many a community. Such a goal statement is broad enough to capture the basic characteristic of each community.
2. Set the price for total services: Residents set the price of total services, where total service is the total cost that residents are willing to pay for services and infrastructure. This is the total revenue available to fund community goals. Over time, baseline total revenue is set with acceptable levels for increases from each budget year.
3. Translate community goals into desired outcomes (service levels/performance measures): For each goal, develop specific objectives for which acceptable performance measurement can be done. For example, under the goal ‘A great place to live’, a specific service under roads/transportation would be, ‘All residential roads are cleared within 24 hours of a snow storm greater than 5 cm.’
4. Prioritize service clusters: For each goal, prioritize service requirements based on community input. This will establish the order of importance that residents place on each service and also guide decisions on what gets dropped if no funding is available.
5. Allocate funding based on priority scores: Once the priorities are ranked, funding is then allocated to each service cluster. This in effect allocates funding to services that are important to the community based on the price that the community is willing to pay.
This is a major shift from the traditional menu of budgeting approach and yields very tangible benefits to both residents, councillors and administrators; it places residents and their priorities in first place, focuses on measurable results, emphasizes accountability and transparency and above all links spending to results and priorities.
Service level budgeting is scalable, meaning it can be implemented regardless of municipality size. It also requires upfront education of residents, councillors and administrators.
The challenge is to have access to a flexible reporting system that can be set to produce reports by service level or by function and object to meet both internal and external reporting.
Asset Management and the Role of the CFO
Andy Wardell, CGA, MA, GFOA BC Association Representative and Vice Chair, AMBC; firstname.lastname@example.org
When you think about it, asset management is an organization-wide behaviour and when viewed from a system’s perspective, it can be approached holistically, opening the door for powerful multi-disciplinary dialogue that can transcend departments, divisions and organizations. One of the biggest challenges we all face is finding common ground and an ability to communicate across the professional disciplines.
Helping each other understand stewardship responsibilities for the asset base builds organizational capacity and knowledge and breaks down the silos that exist in many organizations.
So what does this means for Chief Financial Officers? CFOs are typically the leaders and champions for change and business process improvement. CFOs are also seen as the “trusted advisors” of Councils and City Managers. The demands CFOs know too well are much more than balanced budgets within an environment of fiscal restraint and a clean audit opinion. The mandate of stewardship over financial resources requires unique leadership abilities and being able to communicate the consequences of misalignment between levels of services, asset service risk and financial risk with a focus on building financial resilience into organizations.
How do you effectively plan long term financial resilience without a robust understanding of the asset base? Where in the asset life cycle are you? What does your annual report or financial plan communicate to the public on the state of asset base stewardship and what you are doing regarding asset risk, physical condition, functionality or demand? What do you communicate on the financial consequences of deferred maintenance or replacement?
Linkages between the long term financial plan and the strategic plan are well understood, but what about the long term asset management plan? Does your organization have one? CFOs are in a unique position to not only set the expectation but to champion the organizational need for a regularly updated long term asset management plan as an essential core piece of a well built long term financial plan.
In the broad sense of its mandate, we might say that PSAB went beyond financial reporting requirements with its “Statement of Recommended Practice: Assessment of Tangible Capital Assets”; it shone a light on an asset management issue that needs multi-disciplinary attention. Organizations need asset management champions and CFOs are uniquely positioned to make profound organizational improvements both in asset management and financial planning.
New to the landscape supporting British Columbia’s municipalities is Asset Management B.C. (AMBC). AMBC is part of the solution. Established in 2009, AMBC helps local governments address the challenge of aging infrastructure. Asset Management B.C.’s mission is “to provide leadership and support for the management of community infrastructure assets”. Comprised of professional associations and communities of varying sizes, ultimately AMBC is a community of practice that through education and tools helps municipalities strive toward asset management best practices.
In support of BC municipalities, there are many projects underway. Released in November 2010 was the “State of Asset Management in BC Report”. This report is just that… about the state of asset management in BC, not the state of assets. Key representatives from 39 local governments were interviewed, between September and November of 2009, in an effort to determine the state of asset management in the province. The report can be easily found on the AMBC website, http://www.assetmanagementbc.ca, in the “Just Released” section.
Other initiatives we have underway or recently concluded are:
- Development of a Model Local Government Asset Management Policy*
- Develop/Pilot of an Asset Management Self-Assessment Tool*
- Development of a Asset Management Roadmap (Beyond PSAB 3150)*
- Development of Case Studies and Pilot Projects
- Development of strategic partnerships (National and International)
- Delivery of 4 Regional Workshops, 1 International Seminar
- 2010 Presentations at various conferences including:
- British Columbia Water and Waste Association
- Local Government Managers Association
- Union of British Columbia Municipalities
- Public Works Association of British Columbia
- Government Finance Officers Association of British Columbia
- Canadian Network for Asset Managers
*As these initiatives progress please look for them on the AMBC website as we release beta versions for feedback and comment.
The work being done at AMBC is a systems based approach to asset management best practices in that it supports the integration of political, administrative, technical, operational, financial and planning aspects of asset management. The potential upside benefits are powerful, and our work is now being modelled in other provinces and starting to receive international attention.
Canadian Municipal Market Update—January 12, 2011
Paul Belanger, Director, Debt Capital Markets, Government Finance, RBC Capital Markets; email@example.com
2010 in Review
Last year, we predicted that 2010 would be another “interesting” year. And it was. Sovereign debt concerns in Europe moved to the fore, keeping the market on its toes and adding bouts of volatility from time to time. That being said, the Canadian debt markets enjoyed positive market tone, continued to have low underlying government bond yields, as well as continued spread contraction and pent-up investor demand, all of which was supportive of new issues. From a term perspective, issuers also had more access to longer dated investor demand at 10 and 30 years than in 2009.
Overall issuance in the Canadian debt market amounted to C$177 billion (up from C$157 billion in 2009). Many corporate issuers took advantage of the favourable environment to prefund maturities and refinance existing debt at record low coupon levels. At the lower end of the credit rating spectrum, improved risk appetite from investors contributed to the growth of the high yield market in Canada. Corporate issuance represented C$80 billion (up from C$56 billion the year before). Public sector borrowings remained near all time highs at C$97 billion, as the provinces were able to fund the majority of their historically large borrowing programs in the Canadian domestic market. Municipal issuance in 2010 was C$3.1 billion versus C$3.5 billion in 2009. Municipal issuance in 2009 was higher than normal as many issuers pushed funding into 2009 as the fall of 2008 was a very difficult new issue environment due to the U.S. credit meltdown. Municipal issuance in 2010 accounted for roughly 3.1% of government issuance and 1.8% of total debt issuance in Canada.
After the sharp recovery in credit spreads from the highs in early 2009, provincial and municipal spreads suffered a setback in the spring of 2010 as the European sovereign debt crisis erupted, invoking another flight to quality (and liquidity) by investors. Since that time, spreads have drifted lower throughout 2010, subject to the occasional episode of volatility when the headlines out of Europe flared up. Going forward, we expect spreads to be range bound and perhaps trend tighter for most of the year, but remain vulnerable to ongoing volatility as headline risk from Europe and the U.S. remains.
The rally in underlying bond yields in 2010 on the back of flight to quality flows and tepid economic recovery in the U.S. and other developed countries came as a surprise to many market participants. In the latter part of 2010 we saw government bond yields begin to move off the lows as signs of economic recovery begin to take hold. This increase in rates has offset recent spread tightening, increasing the cost of borrowing for provincial and municipal issuers. Although the cost of funds has risen from the lows, all-in rates remain attractive on a historical basis. Our current forecast is for rates to continue to rise next year in Canada, with the Bank of Canada beginning to raise rates at a modest pace in the second quarter.
Investors continue to exhibit a preference for liquidity. Those issuers who can provide regular issuance and larger benchmark maturities (i.e., at 5, 10 and 30 years) will be rewarded with a broader investor following and ultimately tighter spreads and better access to the market. Serial debentures remain a useful tool for smaller issuers whose borrowing requirements do not allow for C$100 million and larger issues. In 2010, municipalities were able to achieve larger serial debentures with several issues in the C$50 million to C$80 million range. Of the C$3.1 billion of municipal issuance in 2010, C$2.5 billion was in bullet form and C$600 million in serial debentures (versus C$2.7 billion and C$530 million respectively in 2009).
The longer end of the municipal market continues to develop as insurance and pension investors’ requirement for longer duration assets continue to support 30-year issuance by municipalities who have a need for longer term debt. A number of municipalities in Canada issued 30 year debt in 2010 (including Toronto, Peel, Winnipeg and Niagara) and we expect further issuance in this term going forward.
Although Canadian economic growth rates are expected to maintain the momentum of 2010 and come in just over 3% in 2011 and 2012, inflation expectations continue to remain in a comfortable range around 2.0%. RBC’s official forecast is for the Bank of Canada to begin increasing rates in the second quarter of 2011, increasing the overnight rate by 100 basis points to 2% by the end of 2011. 10 year Canada yields are forecast to end 2011 around 3.80%, about 50 basis points higher than current levels. However, even at those levels, 10 year Canada yields would still only be at the upper end of the range of the past couple of years.
We expect government borrowing to moderate slightly in 2011 as stimulus funding by the provinces runs off and fiscal situations improve across the country. Municipal issuance should continue to keep pace with 2010 levels as capital spending continues to work its way through.
While credit spreads for provinces and municipalities should remain steady or even contract modestly given the supply picture, the expected increase in underlying Canada yields could raise borrowing costs modestly for municipalities in 2011.
Winnipeg Western Canadian GFOA Conference—A Success
Sam Weller, Executive Director of GFOA BC; firstname.lastname@example.org
Betty Holsten Boyer, Manager of Financial Planning and Review, City of Winnipeg; email@example.com
The people of Manitoba were wonderful hosts for our 2010 Annual Conference in Winnipeg, September 15th to 17th. Friendly people, great weather and multicultural history combined to provide a great backdrop for a very successful conference.
Two hundred people gathered in the elegant Provencher room in the historic Fort Garry Hotel. The group was welcomed by Conference Chair, Mike Ruta, Chief Financial Officer/Deputy Chief Administrative Officer of the City of Winnipeg. Len Brittain, President, GFOA of the U.S. and Canada, brought greetings on behalf of the international organization. The Honourable Reg Alcock gave the keynote address. He stimulated and challenged us with his talk on the new realities of public sector finance, relevant to all levels of government.
Delegates attended technical sessions over the next two and a half days on varied topics. One session reflected on the challenges of an organization-wide Asset Management approach profiled by CH2M Hill Consulting. Both Calgary and Winnipeg presented their own progress along the asset management continuum. No government financial conference is complete without a Public Sector Accounting Board (PSAB) update, and Winnipeg did not disappoint. Also of note, was a plenary session for Managing and Reporting Public Sector Performance. The Canadian Comprehensive Audit Foundation and Christina Altmayer, staff to the National Performance Management Advisory Commission in collaboration with GFOA, shared their respective “Hot Off the Press” recommendations. Further session highlights included green procurement, service collaboration to enhance service to taxpayers, Public Private Partnerships with PPP Canada funding, and an economic/fiscal update outlining how national and international trends significantly impact our public sector. The final morning saw Alan Salmon, President of K2 Enterprises Canada, dazzle the crowd with his tips and tricks on a range of technology applications and gadgets that make the life of any finance officer easier.
There were lots of opportunity to network with finance officers from other provinces, exhibitors and sponsors at meal times, nutrition breaks and the evening social events. The local committee hosted a great reception at the Manitoba Museum on Wednesday night, dressed appropriately for the occasion. On Thursday night, a Multicultural Banquet was served followed by fantastic ethnic entertainment. The evening included performances by Japanese drummers, Sri Lanka dancers, a First Nations hoop dancer, with the final act showcasing the world renowned Rusalka Ukrainian dancers.
Work is well underway for the next western Canadian conference, to be held in Banff, Alberta, from September 14th to 16th, 2011. We hope to see you there!
Join GFOA today
GFOA’s current President, Len Brittain, Director of Corporate Finance for the City of Toronto, Ontario, and immediate Past President, Paul Macklem, General Manager, Corporate Sustainability, City of Kelowna, British Columbia, are among more than 300 public-sector Canadian finance professionals who rely on GFOA to stay current with the latest developments in public finance, to sharpen their technical skills, and to network with colleagues from across North America.
Our nearly 17,400 members take advantage of discounts on valuable training opportunities, save on timely publications, and obtain guidance from GFOA’s popular Best Practices and Advisories, including best practices for Canadian governments.
Additionally, a special standing committee exists exclusively to serve the special needs of Canadian finance officers. For more information on the committee, go to www.gfoa.org and click on the Canadian flag.
Save on GFOA’s annual conference when you register by January 31
If you’re not yet signed up to attend GFOA’s 105th Annual Conference, May 22-25, 2011, at the Henry B. Gonzalez Convention Center in San Antonio, Texas, register by January 31, 2011, to take advantage of an early registration fee. Check out this year’s concurrent sessions on GFOA’s Annual Conference page.
Please note that the Canadian Discussion Group, which meets on Monday, May 23, will provide delegates the opportunity to share information and concerns with members of GFOA's Standing Committee on Canadian Issues. Also, a Canadian-specific session will be held on Tuesday, May 24, and will focus on one of the key topics currently impacting Canadian government finance officers.
Earn additional CPE credits by signing up for GFOA’s preconference seminars on Friday and Saturday before this year’s conference at the Henry B. Gonzalez Convention Center.
Visit www.gfoa.org to register today! Questions? E-mail firstname.lastname@example.org.
Prepare high quality financial reports with GFOA’s Canadian Award for Financial Reporting Awards Program
GFOA’s Canadian Award for Excellence in Financial Reporting Program (CAnFR Program) encourages and assists Canadian local governments to go beyond the minimum requirements of generally accepted accounting principles, as set by the Public Sector Accounting Board of the Canadian Institute of Chartered Accountants, to prepare comprehensive annual financial reports that evidence the spirit of transparency and full disclosure. The program then recognizes individual governments that succeed in achieving that goal.
The GFOA currently offers three scholarships annually to students enrolled in full-time courses of study preparing for careers in state and local government, and one scholarship annually to an employee of a state or local government enrolled in part-time graduate study preparing for a career in state and local government finance. For more information about these scholarships, please visit GFOA's Scholarship Page. Please note, applications must be postmarked by February 18, 2011, to be considered, and recipients of the scholarships will be announced on April 22.
Dalhousie University’s School of Public Administration faculty are undertaking preliminary research on how frequently Canadian local governments use mechanisms besides the traditional ‘provided in house through a municipal department’ model. We're particularly interested in the mechanism used (e.g., local government enterprise, contract out, inter-municipal body, PPP, etc.) and the services involved. Those interested in contributing to the research are requested to respond by email to email@example.com.