Canadian Public Sector Financial Management - Introduction Andrew Graham Queens University School of Policy Studies grahama

Canadian Public Sector Canadian Public Sector Financial Management Financial Management - Introduction - Introduction

Andrew GrahamAndrew Graham

Queens UniversityQueens University

School of Policy StudiesSchool of Policy Studies

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

Objectives of the CourseObjectives of the Course

You had a You had a choice: choice:

this this course orcourse or

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

• Let’s go around the room to Let’s go around the room to see what you expect to get see what you expect to get out of the courseout of the course

• One or two areas of concern One or two areas of concern or objectives onlyor objectives only

• We’ll then see if we can meet We’ll then see if we can meet your needsyour needs

Objectives of the Course – ‘As Objectives of the Course – ‘As Advertised’Advertised’

Focus on tools and Focus on tools and understanding in managing understanding in managing public finances in order to public finances in order to carry out good public policycarry out good public policy

Public sector financial Public sector financial management as a policy management as a policy issue itself: accountability, issue itself: accountability, due diligence, relationship to due diligence, relationship to taxation and debttaxation and debt


An understanding of, but not an An understanding of, but not an expertise in, the expertise in, the basic elementsbasic elements of financial managementof financial management

Over the course, we will move Over the course, we will move from a broad understanding of from a broad understanding of the macro elements towards the macro elements towards more more hands-on managementhands-on management of of financial responsibilities of financial responsibilities of any public managerany public manager


To help you be an To help you be an intelligent intelligent useruser of financial of financial information, take an information, take an informed approach to your informed approach to your role as a financial manager role as a financial manager and carry out your and carry out your responsibilities as a public responsibilities as a public sector financial managersector financial manager

What the course is not aboutWhat the course is not about

• Public finance – taxation Public finance – taxation policy, economic policypolicy, economic policy

• Getting you certified as a CA Getting you certified as a CA – we are doing a fly past not – we are doing a fly past not an accreditation processan accreditation process

• Seeing if you can do detailed Seeing if you can do detailed calculations or mathcalculations or math

Structure of the CourseStructure of the Course

Six areas of focus: Six areas of focus: • Public Sector Financial Management Public Sector Financial Management • Concepts of Accounting and Concepts of Accounting and

Financial StatementsFinancial Statements• Budgeting: Forms and ProcessBudgeting: Forms and Process• Managerial Control and Managerial Control and

Controllership Controllership • Expenditure and Cash ManagementExpenditure and Cash Management• Reporting and AccountabilityReporting and Accountability

Any Questions about the Any Questions about the course, structure, etc?course, structure, etc?

Remember, there is noRemember, there is nostupid question and make no stupid question and make no assumptions that you are not assumptions that you are not

comfortable with.comfortable with.

Where Financial Where Financial Management Fits into the Management Fits into the

Cycle of Public Sector Cycle of Public Sector ManagementManagement

Policy, Direction: The Public Good to

be Achieved: the Policy Process

Resourcing the Policy

Objectives: the Budget Process

Accounting, Evaluating and

Reporting

Delivery the Public Good: Operations, Management and

Control

It’s about

the money..

Public Sector – what is it?Public Sector – what is it?

• Public sector larger and more Public sector larger and more complex than government in complex than government in traditional sensetraditional sense

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

(to a limited extent), special entities(to a limited extent), special entities– Greater public sector entities: health Greater public sector entities: health

and educationand education– Not-for-profit: voluntary organizationsNot-for-profit: voluntary organizations

Public Sector – what is it?Public Sector – what is it?

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

sector basis of accounting or operate sector basis of accounting or operate on fully commercial basison fully commercial basis

– General adoption of general public General adoption of general public sector and voluntary sector GAAP and sector and voluntary sector GAAP and CICA Accounting Standards, but not CICA Accounting Standards, but not othersothers

– Time and scope cannot accommodate Time and scope cannot accommodate all variations, especially in areas such all variations, especially in areas such as funds management, fund raising, as funds management, fund raising, etc.etc.

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

What is a capital

expenditure?

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

Public sector capital expenditures by level of government, 2002 (billions of dollars):

Federal $4.4

Provincial $5.5

Municipal $10.7

All Levels $19.3

Excludes health authorities and educational authorities.

Government spends a lot of Government spends a lot of money – and it belongs to youmoney – 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 SurplusAn Era of Surplus

Public Finances are complex – Public Finances are complex – example: transfersexample: transfers

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

Federal Government Contracting Federal Government Contracting ActivityActivity

Contracts below $25,000 Number for all departments

1,449,332Dollar Value 1,393,514,000

Contracts over $25,000Number for all departments 22,369Dollar Value 7,699,610

Total For All ContractsNumber for all departments 1,471,701Dollar Value 9,093,124,000

Total Professional Services 6,644,789,504

Acquisition of Lands and Buildings

Land purchases 25,653,944

Engineering works 151,218,112

Buildings 602,586,581

Total Land and Buildings 779,458,637

Acquisition of Machinery and Equipment

Computer Equipment 1,011,777,101

Specialized and industrial equipment

576,809,857

Furniture 167,047,391

Total Acquisition of Machinery and Equipment

3,603,452,879

Total Purchases of Services, Property and Equipment

11,027,701,010

Federal Federal Government Government Purchases Purchases

of of Services, Services,

Lands Lands and and

Equipment Equipment for for

2004-20052004-2005

4.65

.85

5.65

2.40

1.501.90

The True Size of The True Size of GovernmentGovernment(in millions) – from an (in millions) – from an American PerspectiveAmerican Perspective

1.90 full-time-equivalent civil servants1.90 full-time-equivalent civil servants 1.50 uniformed military personnel1.50 uniformed military personnel .85 postal workers.85 postal workers 5.65 contractors5.65 contractors 2.40 grantees2.40 grantees 4.65 state and local4.65 state and local16.95 Total16.95 Total

From: “Just How Much Bigger is Government in Canada?”, F. Steven Ferris and L. Stanley Werner, Carleton University, October, 2006

The Not-for-Profit SectorThe Not-for-Profit Sector

• Taking health care entities into Taking health care entities into account, the revenue of the not-account, the revenue of the not-for-profit is $112 billionfor-profit is $112 billion

• Significant portion of that is from Significant portion of that is from other governments so funds are other governments so funds are transferredtransferred

• One good reason to account for One good reason to account for not-for-profit as part of the not-for-profit as part of the greater public sectorgreater public sector

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

And Government has And Government has agencies…agencies…

Why Financial Why Financial Management?Management?

• Governments could not Governments could not function without funds for function without funds for policy and programspolicy and programs

• Money is a scarce commodity Money is a scarce commodity and competition for it is and competition for it is fierce which makes its fierce which makes its effective management effective management criticalcritical

Why Financial Management?Why Financial Management?

• The money is public and The money is public and administered in a democracy administered in a democracy thereby creating a broad base of thereby creating a broad base of ownership and interest. Accounting ownership and interest. Accounting for those funds is a primordial value for those funds is a primordial value of democratic societyof democratic society

• Budgeting and financial Budgeting and financial management procedures are the management procedures are the accounting manifestation of public accounting manifestation of public policypolicy

What is Financial What is Financial Management?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?: What is Financial Management?: Issues and DiscussionIssues 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 twoFinancial management is a two way street: serving managers’ needs and serving the accounting needs of the public sector

What is Financial Management?: What is Financial Management?: Issues and DiscussionIssues and Discussion• Have to recognize that actual Have to recognize that actual

financial management practice also financial management practice also involves such elements as involves such elements as – allocating resources, allocating resources, – monitoring financial and program monitoring financial and program

performance, performance, – monitoring the use of funds within monitoring the use of funds within

assigned budgets assigned budgets – deciding on adjustments to deciding on adjustments to

spending or fees as a result of spending or fees as a result of financial information and financial information and

– accounting for all the aboveaccounting for all the above


• More than just receiving reports and More than just receiving reports and reacting to themreacting to them

• Financial management is involved in Financial management is involved in sound policy making right through to sound policy making right through to accounting for past performanceaccounting for past performance

• Especially crucial in program delivery Especially crucial in program delivery areas where resources are always scarce areas where resources are always scarce and demands high requiring the most and demands high requiring the most effective means to manage resources.effective means to manage resources.


• Financial resource management Financial resource management and accounting are a hugely and accounting are a hugely powerful metaphor for powerful metaphor for government performancegovernment performance

• Often financial information Often financial information serves as a surrogate for serves as a surrogate for performance informationperformance information

Budgets: Form and Function

Budgets: Process Dynamics

Capital Planning and Budgeting

Management Control

Managing the Budget: Cash Forecasting

Standards and Principles: Accrual, GAAP

Financial Accounting and Reports

Reporting and Accountability

Understanding the Canadian Public Sector

CourseCourse

FrameworkFramework

Positioning Financial ManagementPositioning Financial Management

Financial Financial ManagementManagement

ImprovingImprovingValue forValue for

MoneyMoney

MeasuringMeasuringandand

RewardingRewardingPerformancePerformance

EnablingEnablingChangeChange

ImprovingImprovingPerformancePerformance

ManagingManagingRiskRisk

SupportingSupportingGood Good

Decision-Decision-MakingMaking

Control, Probity,Accountability

What is Financial Management?What is Financial Management?

Alternative Definition that Alternative Definition that encompasses Finkler: encompasses Finkler:

Financial Management is that part Financial Management is that part of the management and policy of the management and policy

process that focuses on financial process that focuses on financial resources and information to resources and information to deliver services and support deliver services and support managerial decision making.managerial decision making.

The The Framework of Framework of

Financial Financial ManagementManagement

Financial Management

Financing of

Programs

Financial Accountin

g

Financing of

Programs

Source of Funding

Deployment and Allocation of Resources

Generation of

Revenue

Financial Accounting

Accounting for Management

Accounting for Financial Purposes

Managerial AccountingGenerates financial

Information for decisionMaking, accountability

And planning

Financial accountingGenerates retrospective Information of financial

Position and performance.

Accounting for Management

PlanningOptimal

Management of Allocated

Resources – Cash

Management

Performance Reporting

Future Present Past

Accounting for Financial Purposes

Internal Reporting

External Reporting

Audit

Financial Management

Program Financing


Source of Funds

Allocation of Funds

Generation of Revenue

Management Accounting


Planning

Cash ManagementPerformance ReportingInternal Reporting

External Reporting

Audit

What are the ‘basic elements of What are the ‘basic elements of public sector financial public sector financial management’?management’?• Budgets and fiscal policyBudgets and fiscal policy• Government as an economic Government as an economic

actoractor• Budgetary and planning Budgetary and planning

processes in governmentprocesses in government• Public sector accounting Public sector accounting

practice, standards and practice, standards and rulesrules

• Managing budgetsManaging budgets

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

statementsstatements• Cash management and cash Cash management and cash

forecastingforecasting• Accountability and reportingAccountability and reporting

What makes government What makes government financial management differentfinancial management different

• Government’s goal is to provide Government’s goal is to provide services, regulations or policies, services, regulations or policies, not make a profitnot make a profit– Implications: net cost of service Implications: net cost of service

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

– Inputs and process take on much Inputs and process take on much more meaning as equity and more meaning as equity and distributional measuresdistributional measures


• The principle source of The principle source of government revenue is taxationgovernment revenue is taxation– Implications: the captive nature of Implications: the captive nature of

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


• Governments operate, for the most Governments operate, for the most part, in a non-competitive environmentpart, in a non-competitive environment– Net cost of services and affordability Net cost of services and affordability

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

– Performance measurement is Performance measurement is needed but it is dangerous to take needed but it is dangerous to take one single measure as reflective of one single measure as reflective of the reality of government servicesthe reality of government services


• Government budgets portray Government budgets portray public policy, establish revenue public policy, establish revenue estimates, expenditure and estimates, expenditure and financing requirements, and financing requirements, and are important in the are important in the government accounting cyclegovernment accounting cycle– Actual-to-budget information Actual-to-budget information

becomes an important element of becomes an important element of financial reportingfinancial reporting


• Government redistribute wealthGovernment redistribute wealth– Financial and performance data Financial and performance data

must explain how and where must explain how and where

• Senior governments have debt-Senior governments have debt-capacity limits unparalleled by capacity limits unparalleled by any other organizationany other organization– Debt and net debt are crucial to Debt and net debt are crucial to

highlight in government financial highlight in government financial statementsstatements


• Government capital spending Government capital spending may not focus on maximizing may not focus on maximizing return because government return because government objectives are broaderobjectives are broader– Capital spending and its impact Capital spending and its impact

on debt is important to on debt is important to highlighthighlight


• Governments are held to a higher Governments are held to a higher standard of external accountability standard of external accountability and scrutiny than businesses and and scrutiny than businesses and not-for-profit organizationsnot-for-profit organizations– Leads to a conflicting need to provide Leads to a conflicting need to provide

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

– Greater emphasis on cash flows and Greater emphasis on cash flows and accountability to the relevant accountability to the relevant constituencyconstituency


• Notwithstanding all of the above, many Notwithstanding all of the above, many publicly owned entities are similar to publicly owned entities are similar to those that make profits, e.g. utilities, those that make profits, e.g. utilities, LCBO, Crowns: LCBO, Crowns:

• Often they receive more dispensation Often they receive more dispensation in terms of releasing information in terms of releasing information because of the commercial nature of because of the commercial nature of their objectives. their objectives.

• Similarly, their accounting practices Similarly, their accounting practices will more closely approximate the will more closely approximate the private sector.private sector.

How are Government and Private How are Government and Private Sector Financial Management the Sector Financial Management the Same?Same?

• Both use forms of Both use forms of GAAP – Generally GAAP – Generally Accepted Accounting PrinciplesAccepted Accounting Principles – more – more later – that are adapted to their later – that are adapted to their conditions: there is no one GAAPconditions: there is no one GAAP

• Both use various financial statements Both use various financial statements for information stakeholders (owners, for information stakeholders (owners, stock holders, voters) on financial stock holders, voters) on financial performanceperformance

• Both use financial management Both use financial management systems such as Oracle, SAP, etc to systems such as Oracle, SAP, etc to support their transactions and support their transactions and accounting needsaccounting needs

Governments source their funding Governments source their funding in many waysin many ways• Over 60, in fact, in Canada, not Over 60, in fact, in Canada, not

counting a multitude of quasi-counting a multitude of quasi-commercial feescommercial fees

• Total government revenue in Total government revenue in 2000 was over 40% of GDP while 2000 was over 40% of GDP while federal government revenue was federal government revenue was just below 20%just below 20%

• This course is not about tax This course is not about tax policy or fiscal policypolicy or fiscal policy

Complexity of the Revenue Landscape in Complexity of the Revenue Landscape in Government – TaxesGovernment – TaxesSource: Statistics Canada Classification GridSource: 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

Other income taxes

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

Other Taxes

Payroll taxes

Motor vehicle licenses

Natural resource taxes and licenses

Miscellaneous taxes

Property Taxes

General Property Taxes

Capital taxes

Other property taxes

Complexity of the Revenue Landscape in Complexity of the Revenue Landscape in Government – Fees and PremiumsGovernment – Fees and PremiumsSource: Statistics Canada Classification GridSource: Statistics Canada Classification Grid

Health and drug insurance premiums

Contributions 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 Complexity of How Public Sector Delivers its “Products”Delivers its “Products”

• Direct governmentDirect government• Social regulationSocial regulation• Economic regulationEconomic regulation• ContractingContracting• GrantGrant• Direct loanDirect loan• Loan guaranteeLoan guarantee• InsuranceInsurance• Tax expenditureTax expenditure• Fees, chargesFees, charges• Liability lawLiability law• Government Government

corporationscorporations• Vouchers Vouchers

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

The Public Sector Financial The Public Sector Financial LandscapeLandscape

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

Sector Organizations Sector Organizations • Generally Lower Rates of CompensationGenerally Lower Rates of Compensation

The Public Sector Financial The Public Sector Financial LandscapeLandscape

• 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

Documents

Canadian Public Sector Financial Management - Introduction Andrew Graham Queens University School of Policy Studies grahama