Fix City Finances 2: Three Reasons Why Transparency Is In the Best Interests of Cities

or, How to get more money from higher levels of government

This is the second of six common sense solutions for fixing municipal finances.

How Money Gets Spent

Cities, like so many other levels of government, and indeed organizations big and small, often do their best to make their budgets and financial information as DIFFICULT to understand as possible.

That’s probably human nature. Being transparent allows people to point out your shortcomings and ask tougher questions. No one likes that.

But there are 3 reasons why cities, in Canada and elsewhere, should be crystal clear about what’s really going on with their finances.

1. Higher Levels of Governments Will Believe You

Cities rely on higher levels of government – provincial/territorial or federal – for both regular and ad hoc funding. Without a clear picture of city finances, other governments default to assuming there is lots of money squirreled away in “Reserves”, and will turn a deaf ear to calls for more funding. 

Reserves are the black hole of municipal finance. 

Cities hold reserves – essentially cash in the bank – to protect against a rainy day. In Canada and certain other jurisdictions, cities are not legally allowed to run a deficit. Reserves are the cushion for keeping the city in fiscal balance.

Best practice is to hold reserves equal to about 9% of annual expenditures. Reserve management can, and should, be as simple as that.

But cities are overly technocratic and secretive when it comes to reserves. Complex formulae ensure that no outsider can decipher how a city is performing against its benchmarks.

Part of the issue is that during the pandemic, municipal reserve balances increased significantly in many cities. Emergency funds flowed in. Some expenditures dropped. As a result, many reserve funds ballooned. 

Ever since, provincial and federal governments have resisted providing new ad hoc funding to cities in response to new challenges (e.g., homeless encampments, disaster relief, transit operating deficits, refugee support … the list goes on) because they suspect cities have plenty of spare funds sitting in reserves. Since city finances are not transparent, the only option for higher levels of government is to squeeze reserves to the breaking point.

Cities would be a lot smarter to come clean on reserves. Define what is a reasonable level, and how this compares to current levels. And demonstrate what strategies they will use to ensure the best use of reserves. Otherwise, others will arbitrarily do it for them.

2. You Can Have an Adult Discussion About Trade-Offs

There will never be enough public money to fund all the demands for public services. But there is rarely a discussion of trade offs. Are there some public services worth increasing taxes for? 

It’s hard to agree to increase your taxes without knowing what current tax dollars are doing. If the city budget doesn’t present a clear and detailed picture of how tax dollars and any tax increases are being spent, people will assume some resources are being wasted and which could be reallocated. 

We can’t have adult discussions about what sort of city we want to build and how we are going to pay for it, without a clear picture of how the city is currently spending our tax money. 

3. You’ll Rebuild Trust in Public Institutions

Trust in government, including city hall, has been on a long downward slide. But it’s hard to trust a government if we don’t have confidence in how they spend our money. 

Financial transparency is the best – perhaps only – way to build that confidence. For those municipal leaders who are serious about rebuilding trust in city hall, start by opening the books, answering the public’s questions around spending, and presenting budgets in a manner that everyone can understand. Other approaches to rebuilding trust are fairly meaningless without telling people how you are spending their money.

Transparency Can Be Your Friend

For public servants, both political and bureaucratic, there might be a lot of reasons not to promote financial transparency.

But if you want more federal and provincial funding, a grown-up discussion on how we might fund new priorities, and engaged citizens that trust city hall, then we suggest you start by presenting budgets in a way that everyone can easily understand and engage with.