Canadian Public Sector Financial Management - Introduction

Andrew Graham Queens University School of Policy Studies

http://post.queensu.ca/~grahama/

Objectives of the Course

You had a choice: this course or

What is Wrong with You? Let’s discuss this a bit………

• Let’s go around the room to see

what you expect to get out of the course

• One or two areas of concern or

objectives only

• We’ll then see if we can meet your

needs

Objectives of the Course – ‘As Advertised’ Focus on tools and understanding in managing public finances in order to carry out good public policy Public sector financial management as a policy issue itself: accountability, due diligence, relationship to taxation and debt

Objectives of the Course – ‘As Advertised’ An understanding of, but not an

expertise in, the basic elements of

financial management Over the course, we will move from a broad understanding of the macro elements towards more

hands-on management of financial

responsibilities of any public manager

Objectives of the Course – ‘As Advertised’ To help you be an intelligent user of

financial information, take an informed approach to your role as a financial manager and carry out your responsibilities as a public sector financial manager

What the course is not about

• Public finance – taxation policy,

economic policy

• Getting you certified as a CA – we

are doing a fly past not an accreditation process

• Seeing if you can do detailed

calculations or math

Structure of the Course

Six areas of focus: • Public Sector Financial Management • Concepts of Accounting and Financial Statements • Budgeting: Forms and Process • Managerial Control and Controllership • Expenditure and Cash Management • Reporting and Accountability

Any Questions about the course, structure, etc?

Remember, there is no stupid question and make no assumptions that you are not comfortable with.

Where Financial Management Fits into the Cycle of Public Sector Management

Accounting, Evaluating and Reporting Policy, Direction: The Public Good to be Achieved: the Policy Process It’s about the money..

Delivery the Public Good: Operations, Management and Control Resourcing the Policy Objectives: the Budget Process

Public Sector – what is it?

• Public sector larger and more

complex than government in traditional sense

• Course adopts an inclusive focus: – Government, all levels – Near government: agencies, crowns (to

a limited extent), special entities

– Greater public sector entities: health

and education

– Not-for-profit: voluntary organizations

Public Sector – what is it?

• Limitations to such inclusion: – No public entities that use private

sector basis of accounting or operate on fully commercial basis

– General adoption of general public

sector and voluntary sector GAAP and CICA Accounting Standards, but not others

– Time and scope cannot accommodate

all variations, especially in areas such as funds management, fund raising, etc.

Government spends a lot of money – and it belongs to you

Consolidated federal, provincial, territorial and local government expenditures, 2001-2002 = $430,313,000,000 Consolidated federal, provincial, territorial and local government revenue, 2001-2002 = $432,912,000,000

Government spends a lot of money – and it belongs to you

Public sector capital expenditures by level of government, 2002 (billions of dollars): Federal Provincial Municipal All Levels $4.4

$5.5

$10.7

$19.3

What is a capital expenditure?

Excludes health authorities and educational authorities.

Government spends a lot of money – and it belongs to you

•In 2005-2006,

consolidated revenues of $572.9 billion and overall government spending of $546.9 billion.

•

Revenues from income taxes, which amounted to $224.2 billion, and consumption taxes, which reached $107.5 billion, together accounted for nearly three-fifths of consolidated revenues.

•

In terms of spending, about half the total increase in 2005/2006 came from two areas: social services, where spending hit $164.1 billion; and health, which reached $102.3 billion.

Source: The Daily. Stats Can, http://www.statcan.ca/Daily/English/060615/d060615a.htm

An Era of Surplus

Public Finances are complex – example: transfers

Source: PWGSC: http://www.tpsgc-pwgsc.gc.ca/acquisitions/text/ggwrp/docs/final_report-e.pdf

Federal Government Contracting Activity Contracts below $25,000 Number for all departments Dollar Value 1,393,514,000 1,449,332 Contracts over $25,000 Number for all departments Dollar Value Total For All Contracts Number for all departments Dollar Value 9,093,124,000 22,369 7,699,610 1,471,701

Federal Government Purchases of Services, Lands and Equipment for 2004-2005

Total Professional Services Acquisition of Lands and Buildings

Land purchases Engineering works Buildings

Total Land and Buildings Acquisition of Machinery and Equipment

Computer Equipment Specialized and industrial equipment Furniture

Total Acquisition of Machinery and Equipment Total Purchases of Services, Property and Equipment 6,644,789,504

25,653,944 151,218,112 602,586,581

779,458,637

1,011,777,101 576,809,857 167,047,391

3,603,452,879 11,027,701,010

The True Size of Government (in millions) – from an American Perspective 1.90 full-time-equivalent civil servants 1.50 uniformed military personnel .85 postal workers 5.65 contractors 2.40 grantees 4.65 state and local 16.95 Total 2.40

4.65

1.90

1.50

.85

5.65

From: “Just How Much Bigger is Government in Canada?”,

F. Steven Ferris and L. Stanley Werner, Carleton University, October, 2006

The Not-for-Profit Sector

• Taking health care entities into

account, the revenue of the not-for profit is $112 billion

• Significant portion of that is from

other governments so funds are transferred

• One good reason to account for

not-for-profit as part of the greater public sector

And Government has agencies…

Executive Agencies in the U.K. State Owned Enterprises in New Zealand Business Enterprises in Australia Special Operating Agencies in Canada's federal government, provinces, and cities Delegated Administrative Organizations in Alberta Sociétés d’Économie Mixte in Québec Service Agencies such as the Canada Food Inspection Agency, Canada Customs and Revenue Agency Enterprise Modeling in Edmonton Semi-autonomous commissions providing services to municipalities in New Brunswick

Why Financial Management?

• Governments could not function

without funds for policy and programs

• Money is a scarce commodity and

competition for it is fierce which makes its effective management critical

Why Financial Management?

• The money is public and administered in

a democracy thereby creating a broad base of ownership and interest. Accounting for those funds is a primordial value of democratic society

• Budgeting and financial management

procedures are the accounting manifestation of public policy

What is Financial Management?

Finkler: The subset of management that focuses on generating financial information that can be used to improve decision making.

Source: Financial Management for Public, Health and

Not-for-Profit Organization, Steven Finkler, Prentice Hall

What is Financial Management?: Issues and Discussion



Focus on information is narrow but good financial information is a key element



Focus on information tends to reflect the accounting perspective that serves decision makers – the focus of this course is on the decision maker as well as the interaction between the two



Financial management is a two way street: serving managers’ needs and serving the accounting needs of the public sector

What is Financial Management?: Issues and Discussion

• Have to recognize that actual financial

management practice also involves such elements as

– allocating resources, – monitoring financial and program

performance,

– monitoring the use of funds within

assigned budgets

– deciding on adjustments to spending

or fees as a result of financial information and

– accounting for all the above

What is Financial Management?: Issues and Discussion

• More than just receiving reports and reacting to them • Financial management is involved in sound policy making right through to accounting for past performance • Especially crucial in program delivery areas where resources are always scarce and demands high requiring the most effective means to manage resources.

What is Financial Management?: Issues and Discussion

• Financial resource management and accounting are a hugely powerful metaphor for government performance • Often financial information serves as a surrogate for performance information

Course Framework Understanding the Canadian Public Sector Standards and Principles: Accrual, GAAP Budgets: Form and Function Financial Accounting and Reports Budgets: Process Dynamics Capital Planning and Budgeting Management Control Reporting and Accountability Managing the Budget: Cash Forecasting

Positioning Financial Management

Improving Value for Money Measuring and Rewarding Performance Financial Management Control, Probity, Accountability Supporting Good Decision Making Enabling Change Improving Performance Managing Risk

What is Financial Management?

Alternative Definition that encompasses Finkler: Financial Management is that part of the management and policy process that focuses on financial resources and information to deliver services and support managerial decision making.

The Framework of Financial Management

Financial Management Financing of Programs Financial Accounting

Financing of Programs Source of Funding Deployment and Allocation of Resources Generation of Revenue

Financial Accounting Accounting for Management Managerial Accounting Generates financial Information for decision Making, accountability And planning Accounting for Financial Purposes Financial accounting Generates retrospective Information of financial Position and performance.

Accounting for Management Planning Future Optimal Management of Allocated Resources – Cash Management Present Performance Reporting Past

Internal Reporting Accounting for Financial Purposes External Reporting Audit

Financial Management Program Financing Source of Funds Allocation of Funds Generation of Revenue Management Accounting Financial Accounting Financial Accounting Planning Cash Management Performance Reporting Internal Reporting External Reporting Audit

What are the ‘basic elements of public sector financial management’?

• Budgets and fiscal policy • Government as an economic

actor

• Budgetary and planning

processes in government

• Public sector accounting

practice, standards and rules

• Managing budgets

What are the ‘basic elements of public sector financial management’?

• Control • Understanding financial statements • Cash management and cash

forecasting

• Accountability and reporting

What makes government financial management different

• Government’s goal is to provide

services, regulations or policies, not make a profit

– Implications: net cost of service and

affordability take on more importance than a bottom-line of financial performance

– Inputs and process take on much

more meaning as equity and distributional measures

What makes government financial management different

• The principle source of government

revenue is taxation

– Implications: the captive nature of

taxpayers as involuntary contributors means that they will want access to simple and understandable information about what has been done with their money

What makes government financial management different

• Governments operate, for the most part, in a

non-competitive environment

– Net cost of services and affordability are

therefore not enough to provide adequate measurement of efficiency and effectiveness outside the market model

– Performance measurement is needed but it

is dangerous to take one single measure as reflective of the reality of government services

What makes government financial management different

• Government budgets portray public

policy, establish revenue estimates, expenditure and financing requirements, and are important in the government accounting cycle

– Actual-to-budget information

becomes an important element of financial reporting

What makes government financial management different

• Government redistribute wealth – Financial and performance data must

explain how and where

• Senior governments have debt-

capacity limits unparalleled by any other organization

– Debt and net debt are crucial to

highlight in government financial statements

What makes government financial management different

• Government capital spending may

not focus on maximizing return because government objectives are broader

– Capital spending and its impact on

debt is important to highlight

What makes government financial management different

• Governments are held to a higher

standard of external accountability and scrutiny than businesses and not-for-profit organizations

– Leads to a conflicting need to provide

a great deal of detail, both financial and non-financial while keeping reporting simple and understandable

– Greater emphasis on cash flows and

accountability to the relevant constituency

What makes government financial management different

• Notwithstanding all of the above, many publicly

owned entities are similar to those that make profits, e.g. utilities, LCBO, Crowns:

• Often they receive more dispensation in terms

of releasing information because of the commercial nature of their objectives.

• Similarly, their accounting practices will more

closely approximate the private sector.

How are Government and Private Sector Financial Management the Same?

• Both use forms of

GAAP

GAAP – Generally Accepted Accounting Principles

– more later – that are adapted to their conditions: there is no one

• Both use various financial statements for

information stakeholders (owners, stock holders, voters) on financial performance

• Both use financial management systems such as

Oracle, SAP, etc to support their transactions and accounting needs

Governments source their funding in many ways

• Over 60, in fact, in Canada, not counting

a multitude of quasi-commercial fees

• Total government revenue in 2000 was

over 40% of GDP while federal government revenue was just below 20%

• This course is not about tax policy or

fiscal policy

Complexity of the Revenue Landscape in Government – Taxes Source: Statistics Canada Classification Grid Income Taxes Personal Income Taxes – federal and provincial Corporation Income Taxes Mining and logging taxes Taxes on payments to non-residents Consumption Taxes General Sales Tax – GST,PST,HST Alcohol beverages and tobacco taxes Amusement taxes Gasoline taxes Custom duties Liquor profits Remitted gaming profits Other consumption taxes Property Taxes General Property Taxes Capital taxes Other property taxes Other Taxes Payroll taxes Motor vehicle licenses Natural resource taxes and licenses Miscellaneous taxes Other income taxes

Complexity of the Revenue Landscape in Government – Fees and Premiums Source: Statistics Canada Classification Grid Health and drug insurance premiums User Fees and Service Charges Contributio ns to social security plans Investment Income Sales of goods and services by public entities Endowments and Contributions Partnership Income

Complexity of How Public Sector Delivers its “Products”

• Direct government • Social regulation • Economic regulation • Contracting • Grant • Direct loan • Loan guarantee • Insurance • Tax expenditure • Fees, charges • Liability law • Government

corporations

• Vouchers

All these “tools of government” involve some form of resource management implications. Consider how.

The Public Sector Financial Landscape

• A Mix of Criteria • Difficulty of Relating Costs and Benefits • Apples and Oranges • Performance Measurement is Elusive • Constraints on Goals and Objectives • Service Orientation of Many Public

Sector Organizations

• Generally Lower Rates of Compensation

The Public Sector Financial Landscape

• Varying Forms of Governance • Short-term orientation - one election to the

next Political Realities and Necessities

• Need for Visibility – show me the ribbon to cut • Multiple external pressures • In Your Fish Bowl accountability • Bureaucratic rules and regulations • Managerial Constraints • Management cultures • Legislative restrictions Legislative restrictions