Budgets, budgetary control and budget reporting

In business, a budget is an internal management tool. In government it is a legal instrument: council's approval of the budget authorizes the administration to raise and spend money, and the property tax rate is set to balance it. Saskatchewan's municipal legislation, like that of other provinces, requires councils to adopt an annual operating and capital budget and, in general, prohibits budgeting for an operating deficit. Because the budget is the foundation of public accountability, PSAS require the original budget to be presented in the financial statements. This lesson explains how municipal budgets are prepared, why they usually differ in basis from PSAS statements, how to convert one to the other, and how to analyse variances.

How municipal budgets are built

A typical Canadian municipality prepares an operating budget and a capital budget, often with a multi-year capital plan. The operating budget is prepared on a funding basis that resembles modified cash: it includes revenues and the expenditures needed to run services, plus debt principal repayments and transfers to reserves, and excludes amortization. It must balance, meaning planned revenues equal planned expenditures, transfers and debt payments. The capital budget lists projects and how each will be funded: capital transfers, development levies, reserves and borrowing. The property tax levy is the balancing figure: council sets the mill rate needed to raise the revenue the operating budget requires after other sources.

This funding basis differs from PSAS in four main ways. Amortization is an expense under PSAS but is not budgeted. Capital spending is budgeted as an expenditure but is not a PSAS expense. Debt principal repayments and transfers to and from reserves are budgeted, but they are not revenues or expenses. And capital transfers and levies are budgeted in the capital budget but are revenue under PSAS. As a result, a municipality that adopts a balanced funding budget usually shows a budgeted surplus in its PSAS statements, because capital revenue appears but capital spending does not.

Presenting the budget under PSAS

PS 1201 required, and PS 1202 continues to require, the original budget for the year to be presented on the statement of operations, prepared on a basis consistent with the actual results, with the same scope and classifications. Many municipalities therefore convert their funding budget to the PSAS basis for the statements, adding amortization, removing capital spending, debt principal and reserve transfers, and adding capital revenue. PS 1202 adds new budget requirements: entities must disclose when a budget was not prepared or approved, and amended budgets may be used in place of the original only in limited circumstances, such as a change in governance. Users then compare the annual surplus with the budgeted surplus and each revenue and expense line with its budget.

# From a funding-basis budget to a PSAS budget, and variances, for the invented
# City of Aspen Ridge, Saskatchewan, 2027 (thousands of dollars).
operating = {"revenue": 45_100, "expenditure (no amortization)": 42_500,
             "debt principal": 1_600, "transfers to reserves": 1_000}
capital = {"spending": 15_000, "capital transfers": 6_500, "development levies": 1_200,
           "from reserves": 4_300, "new borrowing": 3_000}
amortization = 7_700

assert operating["revenue"] == (operating["expenditure (no amortization)"]
                                + operating["debt principal"] + operating["transfers to reserves"])
assert capital["spending"] == sum(v for k, v in capital.items() if k != "spending")
psas_revenue = operating["revenue"] + capital["capital transfers"] + capital["development levies"]
psas_expense = operating["expenditure (no amortization)"] + amortization
print(f"Budgeted PSAS revenue  {psas_revenue:,}")
print(f"Budgeted PSAS expenses {psas_expense:,}")
print(f"Budgeted annual surplus {psas_revenue - psas_expense:,}  (the funding budget was 'balanced')")
print()
budget = {"Property taxes": 31_000, "User fees": 9_500, "Operating transfers": 4_000,
          "Capital transfers": 6_500, "Development levies": 1_200, "Investment income": 600, "Other": 0}
actual = {"Property taxes": 31_200, "User fees": 9_600, "Operating transfers": 4_100,
          "Capital transfers": 6_000, "Development levies": 1_200, "Investment income": 900, "Other": 1_000}
print(f"{'Revenue':22}{'Budget':>8}{'Actual':>8}{'Variance':>10}")
for k in budget:
    print(f"{k:22}{budget[k]:>8,}{actual[k]:>8,}{actual[k] - budget[k]:>+10,}")
print(f"{'Total':22}{sum(budget.values()):>8,}{sum(actual.values()):>8,}{sum(actual.values()) - sum(budget.values()):>+10,}")

Budgeted PSAS revenue  52,800
Budgeted PSAS expenses 50,200
Budgeted annual surplus 2,600  (the funding budget was 'balanced')

Revenue                 Budget  Actual  Variance
Property taxes          31,000  31,200      +200
User fees                9,500   9,600      +100
Operating transfers      4,000   4,100      +100
Capital transfers        6,500   6,000      -500
Development levies       1,200   1,200        +0
Investment income          600     900      +300
Other                        0   1,000    +1,000
Total                   52,800  54,000    +1,200

The first part of the program converts Aspen Ridge's 2027 funding budget. The balanced operating budget has revenue of $45.1 million, covering operating expenditure of $42.5 million, debt principal of $1.6 million and transfers to reserves of $1.0 million. The capital budget has $15.0 million of projects, funded by $6.5 million of capital transfers, $1.2 million of development levies, $4.3 million from reserves and $3.0 million of new borrowing. On the PSAS basis, budgeted revenue is $52.8 million and budgeted expenses, including $7.7 million of budgeted amortization, are $50.2 million, a budgeted surplus of $2.6 million. The second part compares actual revenue with that budget.

Explaining variances

Variances need explanation, not just calculation. Aspen Ridge's revenue exceeded budget by $1.2 million. Most of the difference comes from $1.0 million of other revenue that was not budgeted: an insurance recovery on a flood-damaged lift station. Investment income was $300,000 above budget because interest rates stayed higher than assumed. Capital transfers were $500,000 below budget, but that is a timing difference: projects were delayed, so less spending met transfer stipulations, and the unspent amount remains deferred. On the expense side, the city spent $1.3 million less than budgeted, mainly in transportation, where a mild winter cut snow-removal costs by $700,000. A good analysis separates permanent variances, which affect future budgets, from timing variances, which reverse.

Budget comparisons also inform the next budget. Council will ask whether the $1.0 million of unbudgeted revenue is likely to recur (it is not) and whether the snow-removal savings justify a lower budget (probably not, since winters vary). Rating agencies look at the history of budget variances as a measure of budgetary discipline. And the public uses the comparison to hold council to account for the tax rate it set. Under PS 1202, the budget must be comparable with the actual figures, so a municipality cannot simply present its funding budget beside PSAS results; it must convert it as the program does, or adopt its budget on the PSAS basis directly, as some larger cities now do.

Budgets in not-for-profit organizations

ASNPO do not require a budget comparison, and few charities present one in their statements, though boards and funders rely heavily on budgets. Riverbend Community Pantry's board approves an annual budget, and its provincial school breakfast grant requires a program budget and a final report comparing spending with it. Many funders also require that grant revenue be spent within the grant period, which links budgeting with the deferral of restricted contributions discussed in lesson 9.

Budget processes and participation

The budget process in a Canadian city usually runs from late summer to the following spring. Administration prepares service-level options and a draft operating budget in the fall, presenting the tax rate needed to fund them; council reviews departmental budgets in public sessions, often with public consultation or surveys; and council adopts the operating and capital budgets, usually before year-end or early in the new year, followed by the property tax bylaw setting mill rates once assessment rolls are final. Many cities now adopt multi-year operating budgets, approving rates for two to four years with annual adjustments, which improves planning but requires care when presenting the original budget under PSAS: the budget presented must be the one approved for the year, and PS 1202's limits on amended budgets apply to mid-cycle changes.

Public participation has become more common. Some cities use participatory budgeting for part of the capital budget, letting residents propose and vote on projects; others publish budget simulators that let residents see the tax effect of service choices. These practices do not change the accounting, but they increase the importance of clear budget documents and of financial statements that relate clearly to the budget. Rating agencies and the Government Finance Officers Association's budget award program in both Canada and the United States encourage budgets that explain policies, operations and financial plans in plain language.

Performance budgeting and service costs

Budgets increasingly link money to results. A performance-based budget sets targets for each service, such as kilometres of road resurfaced, fire response times or recreation visits, and reports actual performance alongside spending. Activity-based costing, introduced in management accounting courses, helps a city find the full cost of a service, including overhead and amortization, so that user fees can be set rationally and council can compare the cost of delivering a service in-house with contracting it out. Aspen Ridge's 2027 budget documents report the cost per lane-kilometre of snow clearing and the recovery ratio of recreation fees, which the variance analysis uses to explain the snow-removal saving.

Cost recovery is a policy choice. Water and wastewater rates in most Canadian provinces are expected to recover full costs; recreation fees typically recover a third to a half of costs, with taxes paying the rest because recreation has broad community benefits; and planning fees may be set to recover the cost of processing applications. When a city sets fees, it should know both the cash cost and the full accrual cost of the service, including amortization of facilities. The budget comparison then shows whether fees and costs behaved as planned, and the segment disclosure in lesson 7 shows the results by service.

Finally, budgets connect to long-term financial planning. Many cities now prepare ten-year financial plans that project operating costs, capital needs, reserves and debt, and test the tax rate increases required under different scenarios. The annual budget is then one year of the plan, and the financial statements show how the year turned out. For Aspen Ridge, the long-term plan shows that sustaining the asset base requires increasing capital reserve contributions by about $500,000 a year for the next decade, a message the 2027 budget variance analysis and the statements reinforce.

Budgets also matter for accountability within the administration. Department heads are responsible for staying within their budgets, and monthly or quarterly variance reports to council allow early action when costs or revenues depart from plan. The year-end comparison in the statements is the final step in a cycle that runs throughout the year, and its explanations should be consistent with what council heard during the year.

When results depart sharply from the budget, councils may need to act during the year. A provincial government or municipal regulator may require a municipality that incurs an unplanned deficit to recover it in the next budget, and lenders watch for repeated shortfalls. The statements report what happened; the budget process decides how to respond.