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? Lets discuss this a bit

Lets go around the room to see what you expect to get out of the course One or two areas of concern or objectives only Well 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

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

Policy, Direction: The Public Good to be Achieved: the Policy Process

Accounting, Evaluating and Reporting

Its about the money..

Resourcing the Policy Objectives: the Budget Process

Delivery the Public Good: Operations, Management and Control

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

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

$4.4
$5.5 $10.7

What is a capital expenditure?

All Levels

$19.3

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 Contracts over $25,000 Number for all departments Dollar Value Total For All Contracts Number for all departments Dollar Value 9,093,124,000 1,449,332

22,369 7,699,610

1,471,701

Total Professional Services

6,644,789,504

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

Acquisition of Lands and Buildings Land purchases Engineering works Buildings 25,653,944 151,218,112 602,586,581

Total Land and Buildings

Acquisition of Machinery and Equipment Computer Equipment

779,458,637

1,011,777,101

Specialized and industrial equipment

Furniture Total Acquisition of Machinery and Equipment Total Purchases of Services, Property and Equipment

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 2.40 grantees 4.65 state and local 16.95 Total

4.65 5.65 1.90 1.50 .85

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-forprofit 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 Socits dconomie Mixte in Qubec 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

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

Standards and Principles: Accrual, GAAP

Financial Accounting and Reports

Framework
Budgets: Process Dynamics Budgets: Form and Function

Understanding the Canadian Public Sector

Capital Planning and Budgeting

Management Control

Managing the Budget: Cash Forecasting

Reporting and Accountability

Positioning Financial Management

Improving Value for Money Control, Probity, Accountability

Measuring and Rewarding Performance

Financial Management

Supporting Good DecisionMaking

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

Accounting for Financial Purposes

Financial accounting Generates retrospective Information of financial Position and performance.

Managerial Accounting Generates financial Information for decision Making, accountability And planning

Accounting for Management

Planning

Optimal Management of Allocated Resources Cash Management

Present

Performance Reporting

Future

Past

Accounting for Financial Purposes

Internal Reporting

External Reporting

Audit

Source of Funds

Program Financing

Allocation of Funds Generation of Revenue

Planning Management Accounting

Financial Management

Cash Management
Performance Reporting Internal Reporting

Financial Accounting Financial Accounting

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

Governments 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 debtcapacity 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 Generally Accepted Accounting Principles more later that are adapted to their conditions: there is no one GAAP 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 quasicommercial 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
Consumption Taxes Income Taxes Personal Income Taxes federal and provincial General Sales Tax GST,PST,HST Alcohol beverages and tobacco taxes Amusement taxes Corporation Income Taxes Gasoline taxes Custom duties Liquor profits Mining and logging taxes Remitted gaming profits Capital taxes

Property Taxes

Other Taxes

General Property Taxes

Payroll taxes

Motor vehicle licenses

Other consumption taxes

Taxes on payments to non-residents

Other property taxes

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

Contributio ns to social security plans

Sales of goods and services by public entities

User Fees and Service Charges

Investment Income

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