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Sep 2017 | Tax & Spend


Continuous policy development is integral for a governance structure that can adapt to changing political and regulatory environments. While it may not be entirely misconceived that too many rules and regulations weigh governments down, governments of all sizes must still critically reflect upon their own existing policies and their shortcomings. In a policy climate where municipal governments face high retirement rates and succession challenges, greater demand for transparency and accountability, as well as significant funding challenges, the implementation of comprehensive financial policies is critical. Evaluating its own financial policies – recognizing policies that were needed and those that needed to be re-crafted – the Town of Parry Sound improved its budget process to be more sustainable, consistent and efficient.

(For a complete audiobook version of this article, please visit our Digest Audiobook page)


I. Why We Need Policies


Having existing policies in place is critical to ensuring transfer of knowledge from one generation to the next. With a significant number of municipal staff retiring in the next five years, it is important for municipalities to start documenting policies so that they can continue operations with minimal impact and loss of knowledge, ensuring uniformity between generations. Usually there is not a long overlap between the retiring staff and the replacement staff, if there is any overlap at all. This issue is heightened in smaller municipalities where one person may equate to 25 percent or more of a government department. Larger cities, on the other hand, often have some redundancies where a single person leaving does not take all of the knowledge of the operations of the department.

Similarly, policies provide for consistency in how the municipality operates and handles situations. This ensures that all ratepayers and stakeholders are treated equally and provides staff with support to use in situations when customers have discrepancies. Not only does this ensure consistency from customer to customer, but also for the same customer from time to time. For example, if a policy dictates that interest is charged monthly, then a customer knows to expect that interest is charged each month and that it is not charged periodically or on a different schedule from one year to the next. In smaller municipalities where everybody knows everybody, treating customers inequitably or inconsistently becomes instantly and widely known throughout the municipality.

In the present environment, residents demand that their local governments are transparent and open and the development and publication of municipal financial policies provides a level of transparency. By documenting and sharing your policies you provide to your ratepayers, there is increased accountability to use taxpayer funds responsibly. Knowing how their tax dollars are being used provides a level of comfort to residents. For this reason, the Town of Parry Sound has a separate webpage to publicly provide all of its financial policies.

Finally, policies provide for long-term decision making. Policies that are designed with sustainability in mind improve financial decision making. Policies also mitigate the chance that short term “wins” that are not beneficial in the longer term (for example zero percent tax increases) occur. In smaller municipalities, where $20,000 to $100,000 is a 1 percent tax hike, every dollar counts and the importance of sound financial management is even more important (arguably) than in larger municipalities where $20,000 is not noticed.


II. Key Policies to Have


One of the first policies that we adopted in Parry Sound when I started was an Operating Surplus and Deficit Policy.  This policy outlined how year-end surpluses (or deficits) would be allocated to reserves at the end of the year. Prior to this, the surplus was used to offset the next year’s budget. The downside with this approach is that it delays the development of the budget as you are waiting for the audit to be completed.  By allocating surpluses, (our policy puts 30 percent to each of a rate stabilization reserve and a capital replacement reserve fund as well as 10 percent to a capital contingency reserve and 30 percent is discretionary) there are built in contributions to capital reserves for future years.  This also makes the following year’s budget easier as we budget based on known reserve balances rather than waiting to see how the surplus works out.


“… policies provide for consistency in how the municipality operates and handles situations. This ensures that all ratepayers and stakeholders are treated equally and provides staff with support to use in situations when customers have discrepancies. Not only does this ensure consistency from customer to customer, but also for the same customer from time to time.”


Another key policy that has improved our budget process is the development of a Budget and Financial Controls Policy.  A key area of this policy is the establishment of the target tax levy increase. The range tries to tie an inflationary index (we use CPI, however other indices may be used) as well as our known wage increases to the annual levy increase. This ensures that the levy (our first version used “tax rate” however with the varying impacts of assessments shifts this proved to be unsustainable) increases with the cost of providing services to residents. Since the adoption of this policy we have been able to reduce the budget process to one overview meeting and two deliberation meetings. We have also gone to Council both years with a proposed budget within the target range which improves efficiency during the deliberation process.  The policy also outlines a rating system that is used to prioritize capital and operating requests, improving consistency as well as allowing the most important projects to be included in the budget. Since 2014, the Town has reduced the budget process from April to the first week in February, in part due to the policy as well as improvements to the budget document.

Policies tend to be interrelated and require periodic review to ensure there is a consistent message.  The Town’s Reserve and Reserve Fund Policy sets target ranges for balances of the Town’s reserves and reserve funds. These targets periodically need to be reviewed in order to meet the strategic plan requirements, but also operational changes as well.  The Town’s reserve and reserve fund policy came out of a review of our reserves which had almost 100 different active reserves. These have been significantly reduced. The policy outlines requirements for how and when reserves and reserve funds are established, as well as requiring that each reserve has a stated purpose.

Other policies that we have created since 2014 include: Debt Management and Capital Financing, Donation Revenue, Tax Collections, Accounts Receivable Collections and Asset Management.  The Town also reviewed and modernized its Investment and Procurement policies.


III. Don’t Recreate the Wheel


For small municipalities, the idea of having multiple policies may seem daunting given the resources that are in place to create them. However, often you don’t have to “recreate the wheel” when it comes to financial policies. An internet search, phone call, or email is often sufficient to get a copy of another municipality’s policies. Many policies have core components that will be the same for every town or city, however each policy should be tailored to the individual needs of the municipality. Drafting a new policy can be daunting, but using examples helps with the majority of the policies and allows those who don’t have policy departments to focus on the local tailoring.

As mentioned earlier, a policy cannot be something that sits on the shelf. In a world of ongoing changes and increased focus on asset management, policies affect one another and need to be adjusted in order to all be focused on the same goals. If your capital financing plan requires that certain assets must be funded through Pay-As-You-Go, it would make sense that your reserves policy has target levels which ensure that there will be sufficient funding available (e.g. don’t have a target level for fleet replacement reserves of one-year replacement if you are trying to save for a ladder truck over 20 years).

At the same time, a sustainable plan should not be something that is constantly changing. Changes should be strategic and make sense for the municipality’s long term financial planning goals and philosophies.


IV. Conclusion


Financial policies are important to municipalities of all sizes because they provide for consistent dealing of stakeholders and situations, providing for transparent and predictable decision making. Documented policies also ensure a transfer of knowledge when staff change.

Finally, financial policies don’t have to be thought up from scratch; there are many available resources that can assist in the foundation of a policy for your municipality. Between the internet, municipal associations, research groups and personal contacts, a good policy is not hard to find and adapt to your municipality.


TREVOR PINN is a Chartered Professional Accountant (CPA, CA) and Director of Finance and POA Court Services for the Town of Parry Sound, ON.  Trevor has been with the Town of Parry Sound since February 2014, prior to that he spent 5 years in public practice where he has a background in business valuation and municipal auditing.  Trevor has presented to the Federation of Northern Ontario Municipalities and the Municipal Finance Officers’ Association on improving municipal budget processes.