This coming Tuesday the Corporate Services Committee will be reviewing about 20 pages of variance analysis that is to a major extent, quite useless. No wonder our Town Councilors tend to have that deer in the headlights look whenever finances are discussed and believe that a $4M deficit is not real. The problem with the variance analysis is that they continue to compare apples to oranges. They compare the actual amounts up to June 30 to the budget amounts...useless as this ignores seasonality and does nothing to compare June 30, 2012 to June 2011, 2011. There is a glimmer of useful information in that they have a ‘forecast’ for the year but once again they screw up the analysis by comparing the forecast to the June actuals.
Just to help effect positive change I would suggest the following. First I’ll pass on a trick we used at both Enbridge and TransCanada. Adopt a numbering system for the forecasts. If you do a forecast with 3 months actual results and 9 months of estimate you would refer to it as the (3+9) Forecast (i.e 3 months actual and 9 months of forecast). For the Town, this June forecast would be referred to as a (6+6) Forecast (6 months actual and 6 months of forecast) and when they update this analysis at the end of September it would be referred to as the (9+3) Forecast.
The second thing that I suggest is there needs to be a variance analysis of actual results to prior year actual results for the same time period. You need to be able to see if you are doing better than the prior year at the same point in time.
Forecasting is a great tool BUT you have to compare forecasts to the original budget. The budget never changes, the forecasts do. Comparing a (6+6) forecast to what is essentially a (6+0) number, as the Town staff has done, is completely useless.
I saved you the need to review the 20 pages of Death by Variance Analysis and will report the following key accomplishments and areas of concern.
The elimination of five staff "Budget/Actual includes transition cost related to pre-2012 reorganization" has cost $768, 610 up to the end of June and the year end forecast is $853,513 but don’t worry the money’s coming from our operating reserves ($678,489) to pay for the constructive dismissals. The estimated pay back will be two years. These items were not budgeted, but were voted on separately by Council after the budget. What do you think?
A break even budget was originally developed and the current forecast only shows us short about $350,000. That’s only 3% over. Give all the senior executive directors a bonus!
However, when I go back to Note 8 of the audited financial statements I get a different sense of the situation. You can’t mix operating and capital and you have to budget for asset amortization. Delivering on the current forecast will result in an operating deficit of just over $4,800,000. It’s funny how you can continue to tell Council your overspent by 3% when it is close to 14 times worse. Raising taxes by 1.5% per year will take us over 25 years to balance our budgets. I’ll be long gone from Town by then. The sooner the better for a few people too!
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