6.0 Financial Management

This section provides an overview of the various types of funding, the sources of funding as well as the process involved in financial management.

In order to meet its responsibilities, a municipal government must know how much money it has to operate and how much it costs to provide programs and services.

Council and the LGA need to work together to manage money effectively. Setting clear and accurate budgets and following them is the most important step in this process. Other important activities include accurate book-keeping and record-keeping and completion of an annual audit.

The funding provided to most municipal governments from other levels of government can be divided into two types: operating and capital. It is very important that Councillors, the LGA and the staff know and respect the difference between each type.

Operating Funding – sometimes referred to as Operations and Maintenance money, this is provided to municipal governments to cover day-to-day operating expenses and the cost of delivering programs and services. Typical operating expenses include salaries, Council honorariums, utility costs, travel costs and the various costs incurred for programs and services such as recreation, cultural activities, water treatment and delivery, waste management and maintenance.

Capital Funding – is provided to help cover the cost of acquiring a physical asset that is used to provide a service or to do something. Capital assets typically last for long periods of time (more than one year) and are included as part of inventory. Common examples include buildings, facilities, utility systems and mobile equipment such as trucks, graders, loaders, etc. Expenditures that improve or extend the useful life of an existing asset are also considered capital expenditures. Certain major renovation/improvement projects on existing infrastructure may be classified as capital.

Following is an overview of the different sources of funding typically available to NWT municipalities:

Operations and Maintenance Funding – operational funding provided annually by MACA to support municipal governments in delivering programs and services. The amount of funding provided is determined by a formula that takes into account three factors – the community population, community infrastructure assessed value and a northern cost index.

There are two formulas in use. One is applicable to Designated Authorities. The other formula is applied to all other eligible municipal governments.

Community Public Infrastructure Funding – capital funding provided annually by MACA to support municipal governments with the provision of community public infrastructure required to deliver community programs and services. The amount of funding provided is calculated using a base-plus approach. Each municipal government receives two per cent of the total budget available plus an additional amount determined by a formula. The formula takes into account the current replacement value of a community’s public infrastructure relative to the community’s population size.

Gas Tax Funding – capital funding provided annually by the Government of Canada through an agreement with the GNWT. Municipalities share $15 million per year. The amount of funding provided to a community is calculated using a one per cent base plus an additional amount based on population. It is important that an LGA is aware of the types of projects and expenditures that are eligible under this program. Under the terms of the Gas Tax Agreement, municipal governments are required to maintain a separate bank account for these funds and must provide quarterly reports to MACA in order to continue receiving their gas tax funding.

Water and Sewer Services Funding – operational funding MACA may provide to an eligible municipal government to assist with the costs of providing water and sewer services. This funding does not include the capital costs associated with water and sewer treatment facilities. The amount of funding provided to a municipal government is determined by calculating the standard costs for the applicable type of water delivery system (piped, trucked or blended) and sewer treatment facility and comparing these costs to the potential revenues the municipal government could collect. The actual water/sewer rates charged in each community are set at the sole discretion of the municipal government.

Extraordinary Funding – MACA may, at its discretion, provide funding to municipal governments to assist with extraordinary funding requirements to deal with events that are beyond what a municipal government could reasonably and prudently plan for. This funding can only be accessed by providing MACA with a written application explaining the circumstances and amount of funding required.

Property Taxation – For municipal governments that have authority to tax real property such as cities, towns and villages, this revenue has an important role both in providing funding and in encouraging residents to become more interested in the setting of priorities and the development of budgets, plans, programs and services. Other municipalities have the option to charge and collect such taxes.

Most municipal governments obtain other revenues by undertaking contract services and other miscellaneous activities. Common examples of contract services include airport, road and facilities maintenance.

For the larger municipalities in the NWT, a significant portion of their annual revenues are derived from other sources such as taxation, user fees, private-public partnerships (P3s), debenture financing, contribution agreements and investments.

A community government’s annual budget (Jean Marie River Finance Policy) effectively contains several important types of information, including:

• the community’s overall goals and priorities,
• a financial plan that estimates the monies to be received and spent,
• an operational guide that describes activities, services and functions,
• a communications guide that highlights significant budget issues and trends and
• a planning guide that sets a framework for future financial activities.

In accordance with GNWT legislation, each municipal government must prepare and submit an annual budget to the Minister of MACA. It should be noted that the administration is not authorized to receive or spend any funds if Council does not have an approved budget.

The budget must show all monies to be received and spent and must be balanced – a municipal government cannot pass a deficit budget. If a deficit exists at the end of a fiscal year, the budget for the next fiscal year must show how the deficit will be eliminated.

A typical community government’s annual budget is organized as follows:

• A table, for each program area, showing all forecast revenues and expenditures.
• A table showing all forecast revenues and expenditures for the water/sewer program.
• A table showing all forecast capital funding and planned capital spending.
• A summary table showing the total forecast revenue / expense balance for the year.

Both the Council and the LGA play an important role in setting an annual budget. Councillors should focus on the “big picture”, rather than the details. The LGA and finance staff are responsible for providing the financial information that a Council needs to set priorities and make decisions. Council’s role in setting a budget is to:

• identify community priorities,
• set goals, objectives and standards for service delivery (e.g. water deliveries),
• make bylaws, resolutions or policies that set fees for services (user fees, garbage collection, water rates etc.) and
• adopt a budget that assigns financial resources to meet local needs and priorities.

The LGA’s role in supporting Council includes:

• providing information about the actual costs incurred to provide programs and services in the previous year,
• identifying areas where significant changes in revenues or expenses are expected compared to previous years (e.g. salary increases, new programs, new revenue sources ), and
• being aware of new potential sources of funding and the process to follow to access such funding.

Monitoring the state of a municipal government’s finances is a key part of the LGA’s job. Two basic steps are involved: book-keeping and variance reporting.

Book-keeping
Is the recording of the day-to-day financial transactions of an organization. Accurate book-keeping can provide a Council and LGA with up-to-date information on the general state of the municipal government’s finances and identify trends (e.g. revenue shortfalls, over-spending) that Council needs to address to keep the overall budget on track. Good book-keeping practices also make the audit process and preparation of financial statements much easier at year-end.

Once Council adopts a budget for a new year, it is important that the LGA, working with the finance staff and/or an accountant, reviews the chart of accounts to ensure it closely resembles the way in which the budget is organized. A chart of accounts is the system of accounts and sub-accounts used in accounting software to code revenue and expenditure transactions into organized categories. The way the transactions are recorded and organized in the accounting software should match the overall structure of the annual budget.

Normally, items such as salaries or utility bills don’t change much from year to year. New programs, capital projects and other one-time initiatives can lead to big budget changes. If the accounting books are not set up to reflect how money is coming into and flowing out of the municipal government, it becomes very difficult for the LGA and Council to track the state of the finances.

Variance Reporting
It is the LGA’s job to stay on top of the finances and provide updates to Council. Each month, the LGA should ensure that interim financial reports are produced and reviewed to compare year-to-date revenue and expenses balances against the budget. Such reports can be easily produced from the accounting software as long as the accounting books have been set up properly at the start of the year and staff is diligent in recording transactions properly

These interim reports, known as variance reports, show where a municipal government’s revenues and expenses to date are varying compared to what was forecast in the Council-approved budget.

Regular variance reporting and review can help a Council understand where financial problems may be developing and enable it to make decisions that will address the problems.

Community governments are required to provide audited financial statements to the Minister of MACA within 120 days of the end of the fiscal year.

An annual financial statement is a summary of the state of a municipal government’s finances for one year. It contains a Statement of Financial Operations that shows the total revenues, expenses and surplus or deficit for the year and a Statement of Financial Position that lists a municipal government’s current assets, liabilities and equity position. Other information usually shown in a financial statement includes reserve fund balances, a statement of cash flow and other detailed notes.

An audit is an independent evaluation of the validity and reliability of a community’s financial information. Council must appoint an auditor once a year to review the financial records and comment on management practices. The auditor must be appointed by Council and Council must advise the Minister of the name of the auditor within 30 days of being selected.

Funding from other levels of government always comes with the obligation to provide reports on how the money was spent. A failure to produce an audited financial statement on time can have serious consequences for a municipal government, including the possibility of having subsequent-year funding suspended.

As noted in section 4.3.1, a policy can delegate authority from Council to the LGA to take specific action in specific situations. Financial policies (or bylaws) (Jean Marie River First Nation Finance Policy) often cover a variety of topics including spending authority, signing authority, contract and procurement authorities, short-term investment and borrowing authorities, cash management and collections.