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Money, Taxes and Municipal Performance

Chapter 7The City's Financial Standard

3,492 words · Mike Seiler · Owen Sound, Ontario

In this chapter

• 7.1 Every Dollar Has an Owner
• 7.2 Complete Cost Accounting
• 7.3 Lifecycle Costing
• 7.4 Operating Costs
• 7.5 Capital Costs
• 7.6 Debt
• 7.7 Reserves
• 7.8 Grants
• 7.9 User Fees
• 7.10 Sponsorships
• 7.11 Partnerships
• 7.12 Volunteer Contributions
• 7.13 Unfunded Mandates
• 7.14 The No Hidden Liability Rule
• 7.15 The New Spending Gate
• 7.16 The Cost of Doing Nothing
• 7.17 Financial Assumptions Must Be Visible
• 7.18 Contingencies
• 7.19 Change Orders
• 7.20 Financial Transparency for Pilot Projects
• 7.21 Public Value
• 7.22 The Financial Dashboard

Every public dollar has an owner.

It belongs to the people who earned it before government collected it.

That should shape the way municipal money is discussed.

Taxes are necessary to operate a city. Roads, water systems, fire protection, parks, public buildings, transit, recreation and other municipal services do not maintain themselves.

The question is not whether government should spend money.

The question is whether government can show that the money was required, used carefully and connected to a result residents can understand.

This plan will treat municipal finances according to one central principle:

The City should never spend a dollar simply because the dollar is available.

Every expenditure should have:

• a public purpose;
• lawful authority;
• an identified funding source;
• a responsible department;
• a complete cost;
• an expected result;
• a method of measurement;
• an identified long-term obligation.

A good financial plan must look beyond the next budget.

A program that appears inexpensive today may create a large operating cost tomorrow.

A grant may pay for construction but not maintenance.

A donated asset may still require staff, insurance, electricity, storage and replacement.

A new building may be celebrated when it opens and become a financial burden twenty years later if nobody planned for its renewal.

Financial stewardship therefore requires more than balancing one annual budget.

It requires understanding what today's decisions mean tomorrow.

7.1Every Dollar Has an Owner

Municipal revenue comes from many places.

It may arrive through:

• property taxes;
• user fees;
• licences and permits;
• investment income;
• fines;
• development-related revenues;
• transfers from Grey County;
• provincial grants;
• federal grants;
• borrowing;
• reserves;
• sponsorship;
• partnerships.

But changing the source does not make the money free.

A provincial grant comes from taxpayers.

A federal grant comes from taxpayers.

Municipal borrowing must eventually be repaid.

Money from a reserve was collected or accumulated earlier.

A user fee is paid by a resident, visitor or business.

There is no category called free government money.

The Public Money Principle

Whenever a new expenditure is proposed, we should identify:

Who ultimately pays?

When do they pay?

Is the payment recurring?

What obligation remains after the original funding disappears?

This matters particularly when another level of government offers funding.

A grant can make an excellent project possible.

It can also tempt a municipality into building something it would never have chosen to maintain with its own money.

The funding source should never replace the question:

Is this still a good project?

7.2Complete Cost Accounting

The most misleading number in government can be an incomplete one.

A project may be described as costing $100,000 when that figure includes only the equipment.

The actual cost may also include:

• staff time;
• benefits;
• design;
• engineering;
• legal work;
• procurement;
• insurance;
• permits;
• training;
• communications;
• software;
• storage;
• utilities;
• maintenance;
• security;
• administration;
• replacement.

The City should adopt a Complete Cost Rule.

For major initiatives, cost estimates should identify all reasonably foreseeable municipal costs.

Capital Cost

What does it cost to acquire or construct?

Implementation Cost

What does it cost to put into operation?

Annual Operating Cost

What will it cost each year after launch?

Maintenance Cost

What must be spent to keep it operating safely?

Replacement Cost

When will the asset need to be renewed or replaced?

Administrative Cost

How much staff time is required?

Financing Cost

If money is borrowed, what will financing add to the total?

Closure Cost

If the initiative ends, is there a cost to terminate contracts, remove equipment, restore property or migrate information?

Opportunity Cost

What else are we choosing not to fund because this initiative receives the money?

Not every proposal will require a complicated financial model.

A small community event is different from a bridge.

The principle remains the same.

Show the whole cost appropriate to the size and risk of the decision.

7.3Lifecycle Costing

Municipal assets frequently last longer than the Council that approves them.

That means the real financial question is not:

Can we afford to buy it?

It is:

Can Owen Sound afford to own it?

Lifecycle costing should be required for major capital investments.

The Lifecycle Should Include

1. planning;
2. acquisition;
3. construction or installation;
4. operation;
5. routine maintenance;
6. major rehabilitation;
7. financing;
8. eventual replacement;
9. decommissioning where applicable.

Consider a simple example.

A public facility may receive outside funding for most of its construction.

That sounds attractive.

But if the building then requires:

• heating;
• electricity;
• insurance;
• cleaning;
• staffing;
• roof replacement;
• mechanical systems;
• accessibility upgrades;
• security;
• ongoing repairs;

the true financial commitment may be many times the original municipal contribution.

This does not mean we should avoid building things.

It means we should know what we are agreeing to.

The Twenty-Five-Year Question

For major infrastructure and facilities, Council should see a reasonable long-term estimate showing what the asset is expected to cost over its useful life.

The estimate will not be perfect.

It will still be more honest than pretending future costs do not exist because they occur after the current term of Council.

7.4Operating Costs

The operating budget pays for the day-to-day functioning of the City.

That includes areas such as:

• wages and benefits;
• utilities;
• fuel;
• maintenance;
• contracted services;
• insurance;
• supplies;
• programming;
• administration;
• technology;
• debt servicing;
• recurring services.

Operating costs deserve particular attention because they repeat.

A one-time $200,000 investment can be easier to absorb than a new $100,000 annual obligation that continues indefinitely.

Recurring Cost Rule

Every proposal creating a recurring municipal expense should identify:

• first-year cost;
• normal annual cost;
• expected inflation or escalation;
• funding source;
• whether the revenue source is permanent;
• whether new staff are required;
• what happens if the funding source disappears.

If a three-year grant creates a permanent position, Council should know who funds Year Four before approving Year One.

7.5Capital Costs

Capital spending creates or renews long-term assets.

This may include:

• roads;
• bridges;
• buildings;
• water systems;
• sewer systems;
• parks;
• vehicles;
• major equipment;
• technology infrastructure.

Capital investment is essential.

A City that refuses to invest will eventually pay more through failure.

The objective should therefore not be the smallest possible capital budget.

It should be the right capital investment at the right time.

Capital Priorities

Projects should be ranked using understandable criteria such as:

1. immediate health or safety;
2. legal or regulatory requirement;
3. risk of asset failure;
4. protection of essential services;
5. cost of delaying the project;
6. service improvement;
7. accessibility;
8. economic benefit;
9. environmental benefit;
10. community value.

Politics should not move a low-priority project ahead of an urgent infrastructure need merely because the lower-priority project is more visible.

7.6Debt

Debt is neither automatically good nor automatically bad.

Used responsibly, borrowing can allow residents who benefit from a long-lived asset to share its cost over time.

Used poorly, debt allows one Council to enjoy the political benefit of spending while leaving another generation with the payment.

Responsible Debt

Borrowing may be reasonable when:

• the asset has a long useful life;
• the public benefit extends over many years;
• the City can service the debt without weakening essential services;
• the borrowing cost is understood;
• the repayment term is appropriate to the asset;
• a credible maintenance and replacement plan exists.

Poor Debt

Borrowing should be approached very cautiously when used to:

• cover routine operating deficits;
• delay difficult budget decisions;
• fund short-lived benefits over a long repayment period;
• build assets the City cannot afford to maintain;
• finance projects without a clear public purpose.

The Debt Test

Before significant new borrowing, publish:

• amount borrowed;
• interest assumptions;
• repayment period;
• estimated total financing cost;
• annual debt payment;
• source of repayment;
• effect on municipal debt capacity;
• asset life;
• alternatives considered.

Residents should be able to see both the project and the bill.

7.7Reserves

A well-run municipality needs reserves.

They provide financial resilience when:

• equipment fails;
• infrastructure requires major renewal;
• emergencies occur;
• revenues decline unexpectedly;
• large predictable costs arrive.

A reserve is not unused money waiting for an attractive project.

It usually exists because somebody planned ahead.

Every Major Reserve Should Have

• a defined purpose;
• a target or funding rationale;
• transparent contributions;
• transparent withdrawals;
• long-term projections.

Reserve Raids

Using reserves can be entirely appropriate.

Using reserves to make an annual operating budget appear artificially affordable is different.

Where reserves are used to support ongoing operating costs, Council should clearly show:

• why;
• how long the approach can continue;
• what replaces the reserve funding;
• what future purpose may be weakened as a result.

We should not balance today's budget by quietly emptying tomorrow's repair account.

7.8Grants

Owen Sound should aggressively pursue outside funding where it advances a project the City should reasonably undertake.

We should also remain disciplined enough to refuse money when accepting it creates a poor long-term obligation.

The Grant Test

Before accepting significant grant funding, identify:

What does the grant pay for?

What does it not pay for?

Does the City need to match the funding?

What ongoing operating cost remains?

How long does the grant last?

What reporting obligations follow?

Are there restrictions on future municipal decisions?

Who owns the resulting asset?

Who maintains it?

What happens when funding ends?

Grants Are Opportunities, Not Strategy

A city's priorities should not change every time another government announces a new program.

The proper sequence is:

1. identify Owen Sound's priorities;
2. identify projects required to deliver those priorities;
3. seek grants that help deliver those projects.

Not:

1. find a grant;
2. invent a project;
3. commit the City to maintaining it forever.

7.9User Fees

Some municipal services are paid partly or entirely through user fees.

That can be appropriate where a particular individual or organization receives a specific service beyond the general benefit funded through taxation.

Examples may include:

• building permits;
• facility rentals;
• certain recreation programs;
• licences;
• specialized applications;
• equipment rentals.

User Fee Principles

Fees should be:

• connected to a legitimate municipal service;
• understandable;
• publicly listed;
• reviewed regularly;
• reasonably connected to cost and policy objectives;
• administered consistently.

Accessibility and Public Benefit

Full cost recovery will not always be the right policy.

A recreation program may create broader public benefits through:

• health;
• youth engagement;
• social connection;
• community safety;
• accessibility.

In such cases, partial public subsidy may be reasonable.

The subsidy should simply be visible.

Instead of pretending a service is free, say:

Cost per participant: $40
User fee: $10
Public contribution: $30

That allows an informed discussion about value.

7.10Sponsorships

Private and community sponsorship can help support:

• events;
• recreation;
• public amenities;
• youth programs;
• community equipment;
• cultural programs.

Sponsorship should supplement public resources without purchasing public influence.

Sponsorship Should Never Purchase

• preferential regulatory treatment;
• confidential resident data;
• procurement advantage;
• favourable planning decisions;
• political endorsement;
• exclusive influence over municipal policy.

Sponsorship Agreements Should Identify

• sponsor;
• contribution;
• term;
• recognition provided;
• any exclusivity;
• public obligations;
• termination provisions.

Naming rights and major sponsorships should be considered carefully because public assets can carry community and historical meaning beyond their commercial value.

7.11Partnerships

This plan relies heavily on partnership.

The City does not need to own every program.

Potential partners include:

• Grey County;
• Ontario;
• Canada;
• Saugeen Ojibway Nation;
• schools;
• Georgian College;
• the YMCA;
• service clubs;
• churches and faith communities;
• charities;
• businesses;
• unions;
• sports organizations;
• cultural organizations;
• neighbourhood groups.

Partnership can make public money go further.

It can also create unclear responsibility if poorly structured.

Every Significant Partnership Should Answer

• What is the shared objective?
• Who is responsible for what?
• Who pays?
• Who owns the equipment?
• Who owns the information?
• Who carries insurance?
• Who supervises staff or volunteers?
• What performance standard applies?
• What happens if one partner leaves?
• How is the agreement ended?

A handshake can begin a relationship.

It should not be the complete operating structure for a major public service.

7.12Volunteer Contributions

Volunteerism is one of the great assets of a community.

People coach sports.

Run events.

Serve on boards.

Maintain neighbourhood spaces.

Support seniors.

Organize fundraisers.

Help during emergencies.

Contribute expertise.

This plan intends to create more opportunities for residents and students to contribute to Owen Sound.

That contribution should be respected enough to measure honestly.

Volunteer Time Is Not Free

A volunteer may not receive a wage, but the program still has costs.

Those may include:

• supervision;
• equipment;
• insurance;
• training;
• protective gear;
• transportation;
• administration;
• background screening where appropriate;
• facilities.

The City should report volunteer contribution separately from municipal financial savings.

Where appropriate, volunteer hours may also be reported using a clearly identified reference value to demonstrate the scale of community contribution.

That does not mean the City pretends it paid money that it did not pay.

It means community effort is visible.

Volunteers Do Not Replace Employees

This principle remains firm.

Volunteer work should be:

• genuinely voluntary;
• appropriate for the task;
• safely supervised;
• additive to municipal capacity.

It should not be used to remove a paid municipal position or avoid appropriately compensating skilled, recurring or hazardous work.

Our existing initiatives propose civic work days involving City crews, residents and local businesses working together, with costs and savings published.

That model works only if the contribution of each group is reported honestly.

7.13Unfunded Mandates

Another government can create a municipal cost without sending a municipal invoice.

New regulations, reporting requirements, service expectations or legislative changes can require municipalities to:

• hire staff;
• purchase equipment;
• change infrastructure;
• undertake studies;
• modify procedures;
• provide new services.

Some of these requirements are necessary and appropriate.

The financial impact should still be visible.

Owen Sound Unfunded Mandate Ledger

Create a public ledger identifying significant new outside-government requirements.

For each item show:

• government responsible;
• requirement;
• effective date;
• estimated one-time City cost;
• estimated annual City cost;
• outside funding provided;
• net municipal cost;
• service or tax impact.

This accomplishes two things.

First, residents can understand what is driving the municipal budget.

Second, Owen Sound can advocate for reform using evidence instead of simply saying that another government costs us money.

No Blame Accounting

The ledger should not become a political complaint sheet.

If Ontario introduces a requirement that costs Owen Sound money but clearly improves safety, state both facts.

Cost: published.

Benefit: published.

Good government can disagree with another government without distorting the reason for the decision.

7.14The No Hidden Liability Rule

Every new municipal initiative creates some form of responsibility.

Before Council approves a significant new program or asset, somebody should be able to answer:

Who looks after this five years from now?

If nobody knows, the proposal is not ready.

Every Initiative Must Identify

Owner

Which department or organization is ultimately responsible?

Operator

Who performs the work?

Maintenance

Who maintains the asset or program?

Funding

What recurring source pays for it?

Insurance

Who carries the risk?

Information

Who owns and protects associated data?

Replacement

How is eventual replacement financed?

Exit

What happens if the initiative ends?

The Grant Has Ended Test

Imagine the external funding disappeared tomorrow.

What happens?

If the answer is:

"Property taxes automatically take over."

that should have been disclosed when the project was approved.

The Founder Has Left Test

For community partnerships and technology projects, ask:

What happens if the person who created this is no longer involved?

A public system should not depend permanently on one personality.

The Vendor Has Failed Test

For essential technology:

Can the City recover its information and continue operating if the vendor disappears?

The Building Is Thirty Years Old Test

For capital infrastructure:

Have we provided any way for a future Council to repair or replace it?

These questions turn sustainability into part of the decision rather than an unpleasant discovery years later.

7.15The New Spending Gate

Before a significant new expenditure enters the budget, it should pass a standard public test.

1. Purpose

What problem does this solve?

2. Authority

Is it a municipal responsibility?

3. Existing Service

Are we already paying someone to do this?

4. Alternative

Could the same result be achieved differently?

5. Complete Cost

What is the full cost?

6. Funding

Who pays?

7. Recurring Obligation

What will it cost next year?

8. Asset Impact

Does it create maintenance or replacement obligations?

9. Staffing

Does it require permanent employees?

10. Partnership

Could another organization help deliver it?

11. Measurement

How will we know it worked?

12. Exit

How do we stop if it does not work?

A proposal that cannot answer these questions should return for more work before approval.

7.16The Cost of Doing Nothing

Financial discipline does not always mean saying no.

Sometimes not spending money is the expensive choice.

A road allowed to deteriorate may require complete reconstruction.

A leaking roof ignored for several years may damage the structure beneath it.

A poorly maintained water system may fail.

An unresolved workplace problem may create overtime, absence and turnover.

A dangerous intersection may continue producing collisions.

A slow permit process may discourage investment.

Financial analysis should therefore include the cost of doing nothing.

For major proposals, compare:

Act Now

What does intervention cost?

Delay

What does postponement reasonably cost?

Do Nothing

What risk and future expense remain?

A responsible government does not minimize spending.

It minimizes waste and maximizes long-term public value.

7.17Financial Assumptions Must Be Visible

Budgets depend upon assumptions.

Examples include:

• inflation;
• interest rates;
• fuel costs;
• construction prices;
• wage agreements;
• assessment growth;
• grant funding;
• participation;
• revenue;
• project timelines.

The more sensitive a project is to an assumption, the more important it is to show that assumption.

Scenario Planning

For major projects, present reasonable scenarios.

Lower-Cost Case

What happens if favourable assumptions occur?

Expected Case

What is the best reasonable estimate?

Higher-Cost Case

What happens if costs or timelines move against us?

This reduces the temptation to choose the most attractive number simply because it helps get the project approved.

7.18Contingencies

Projects contain uncertainty.

A contingency is not automatically waste.

It is a financial acknowledgement that some conditions cannot be known perfectly before work begins.

Contingencies should be:

• appropriate to the project;
• clearly identified;
• controlled;
• reported when used.

Unused contingency should remain unused.

It should not become an invitation to expand the project simply because money remains available.

7.19Change Orders

Large projects can become significantly more expensive through accumulated changes.

A change may be justified.

The public should still see it.

Significant change orders should identify:

• original contract value;
• change amount;
• reason;
• revised project cost;
• approving authority;
• effect on schedule.

Where repeated changes reveal a planning failure, the City should say so and learn from it.

7.20Financial Transparency for Pilot Projects

Pilot projects will be used frequently in this plan.

A pilot must still have financial discipline.

Before launch, publish:

• maximum authorized cost;
• duration;
• staffing;
• equipment;
• partner contribution;
• expected participation;
• measures of success.

At completion, publish:

• actual cost;
• participation;
• cost per participant where relevant;
• benefits;
• problems;
• recommendation.

A successful pilot may become permanent.

An unsuccessful pilot should end.

A pilot should never become permanent simply because nobody formally stopped it.

7.21Public Value

Not everything valuable can be expressed in dollars.

A public park does not need to generate profit.

A fire department is not unsuccessful because it costs money.

An accessible sidewalk may create benefits that do not appear as City revenue.

A youth program may produce long-term social value.

A library, trail or recreation program may improve the community without producing a financial return.

Financial discipline therefore should not be confused with requiring every service to make money.

The question is:

What public value are we purchasing, and is the cost reasonable for the result?

Public value may include:

• safety;
• health;
• mobility;
• accessibility;
• economic activity;
• social connection;
• environmental protection;
• recreation;
• resilience;
• dignity;
• community identity.

The value should be identified before the spending is approved.

7.22The Financial Dashboard

The principles in this section should eventually appear in one understandable public financial dashboard.

Residents should be able to see:

Current Year

• budget;
• actual spending;
• actual revenue;
• forecast year-end position.

Debt

• current debt;
• annual debt servicing;
• planned new borrowing.

Reserves

• balances;
• intended uses;
• major withdrawals.

Capital

• approved projects;
• current cost;
• original estimate;
• status.

Grants

• grant received;
• City contribution;
• ongoing obligation.

Major Programs

• approved annual cost;
• actual cost;
• result.

Efficiencies

• gross saving;
• implementation cost;
• verified net saving.

Unfunded Mandates

• outside requirement;
• outside funding;
• municipal cost.

Numbers without context can mislead.

The dashboard should therefore allow residents to move from the number to the explanation.

The Financial Commitment

This business plan will not promise the lowest possible tax bill regardless of consequences.

A municipality that allows roads, pipes and buildings to fail in order to advertise low taxes is not financially disciplined.

It is borrowing invisibly from the future.

Nor will this plan treat every request for new spending as progress.

A new program is not successful because it was announced.

A grant is not a victory if the City cannot afford what follows.

A partnership is not efficient if responsibility is unclear.

A saving is not real if it is created by postponing necessary maintenance.

The financial standard is therefore:

Spend when there is a clear public purpose.

Know the complete cost.

Identify who pays.

Maintain what we already own.

Borrow carefully.

Protect reserves.

Use grants without becoming dependent upon them.

Measure public value.

Publish overruns and savings alike.

Never send a hidden bill to the next generation.

The people of Owen Sound should be able to see not only what their City costs, but what those dollars accomplish.

That is the beginning of financial trust.