Look For Staff Cuts At City Hall: BENN

There are lies, damned lies and accounting. An adaptation of an old adage.

As a CFO of publicly traded companies, I often had to struggle with how to present fairly the operating results and financial condition of the company. The auditors could hide behind the veil of ‘presents fairly in accordance with Generally Accepted Accounting Principles (GAAP)’. No such caveat was available to the CEO and CFO in its filings with the Securities Exchange Commission (SEC). We had to sign a statement at the end of our quarterly and annual reports that they presented fairly the operating results and financial condition of the company. No GAAP veil behind which to hide. And therein the problems lie. There are a number of academic generated accounting policies that do not always reflect fairly an organization’s financial performance. I got around the dilemma with sound advice from SEC legal and accounting specialists.

This is background for the challenges that staff, council and the public have in understanding the financial reports coming from city hall. I do not question whether these reports present fairly in accordance with GAAP. I do question whether they present fairly. The city is required to present its financial statements in accordance with GAAP. It is not permitted to present any other format … except if they actually wanted to.

Enter into the equation the art form of the financial analyst. The person who is trained to understand the subtleties of GAAP. What is an allocation that will be settled with cash, and what won’t? To adjust the GAAP compliant financial reports to more cash based financial results.

Balancing a budget using reserves is an illusion. Unless the bookkeeping entry involves adding cash to a restricted cash account, only to be used when drawing down on the reserves, then the reserves are but the accumulation of an innumerable collection of bookkeeping entries. Each of which is in accordance with GAAP.

Think, if you will, of setting up a college fund for your kids. Are you putting the cash aside in a separate account? Or, did you raid that reserve from time to time to pay for those all inclusive vacations in Mexico? Which scenario actually pays the tuition? Which one most closely resembles how the city has (mis)managed its reserves?

On to the practical end of things. Plan for the worst, hope for the best. Council should insist that staff provide them with a cash-based budget scenario. Start with the actual sources of cash. For the amounts that are less certain, such as payments in lieu of taxes, the information should be broken out by ‘realistic’ (i.e. what we got last year) and ‘optimistic’. Note that any transfers to and from non-cash backed operating reserves are not included. Nor are non-specific grants from some source that might or might not come to fruition.

Follow that with the actual uses of cash. Debt service, both scheduled principal and interest charges. Compensation and other operating expenses for core programs, as in must be done by the municipality. No bookkeeping entries involving transfers to the operating reserves unless they involve placing the cash in a restricted-use bank account. To be clear, this implies that not essential programs and related staffing levels are at risk. This requires staff to take a cold-hearted view of their roles. How essential are they?

If the sources of cash exceed the base level operating expenses, then non-essential, as in not strictly the responsibility of the municipality, can be added. If the sources of cash are less than the base-level operating expenses … tough decisions must follow. Not decisions on how to reduce expenditures. The initial requirement is that the operating costs are solely to cover the ‘must do’s’. There should not be any ‘but this is something that is important but not required’ programs in this base level analysis.

The tough decisions must focus on how to raise, with a high degree of certainty, more operating cash. Like higher increases to the property tax rates. ‘If only the province or federal governments would give us more’ is not part of this equation.

At issue is whether council has the courage to follow through on this. At issue is whether staff are capable of differentiating between ‘must do’ and ‘but we have always done this’. Because, to be absolutely clear, the result will likely include a significant reduction in staff levels. And it will be painful.

Ron Benn, a finance executive, has been a member of the Centrepointe Community Association for the better part of three decades.

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