Government Operations Committee on May 10th, 2016

[Michael Ferguson]

Certainly that would be preferable.

When I think about all the issues you are struggling with.... I go back to my history. I was the comptroller in the Province of New Brunswick for five years. I was deputy minister of finance and secretary to the board of management for one year. I've had to live through all these issues about preparing budgets, preparing estimates, and preparing financial statements.

Certainly the practice in New Brunswick with preparing the budget was that both the budget and the main estimates were prepared at the same time. If you looked at the expenses in the budget, you could then go to the main estimates book and see the same number for expenses in the main estimates book. You could add up all the departments and you could see how that number was arrived at. Everything was agreed to at the same time.

Of course, then it takes some time for the estimates to get through all the estimates process and get voted in the legislature. The Financial Administration Act in New Brunswick provides authority for the comptroller to continue paying expenses for any program that existed before the start of the fiscal year. They can continue making those payments for the first three months of the fiscal year, so it allows the business of government to continue.

[Steven Blaney, Conservative, Bellechasse—Les Etchemins—Lévis, QC]

Mr. Ferguson, you explained that the departments have to change their accounting methods. If the three methods were standardized, would that not be a way of simplifying the process? Could something be presented on that subject? We have some concerns. We were told just now that the transition could be lengthy, costly, tedious and complex. We were told that Ontario changed its three methods and it took nine years.

In light of your information, would standardizing the accounting approach definitely lighten employees' workload?

[Michael Ferguson]

If I were starting from a clean piece of paper, I would certainly say prepare the budget on an accrual basis; prepare the estimates at the same time on an accrual basis, and of course the financial statements will be prepared on an accrual basis. I think that is a much simpler approach. It means not having to keep track of both the accounting expenses and the expenditures against the main estimates. I think that is fundamentally the simpler process.

I have sympathy for the fact that.... Departments right now have one approach. They have all of these different methods in place that they're used to using, so there would be a certain period of transition for departments to go through, which would.... Whenever you're changing something, even if it's not the best way of doing it and you're changing it to something else, there is always a transition period to make that change. That creates a little hesitation on the part of some people, perhaps.

In the end, if the transfer was made to an approach that was fully an accrual basis for the budget and the estimates, and of course the financial statements, it would be a simpler system.

[Steven Blaney, Conservative, Bellechasse—Les Etchemins—Lévis, QC]

I wanted to say this in the next round of questions, but I will mention it now.

I am very happy to see you today, Mr. Ferguson. As a minister, I had an opportunity to meet with you several times over the four years I was a minister. It seemed that every time, there was a chapter dealing with the departments for which I was responsible. Today, now that I am in opposition, I am even happier to see you. I urge you to continue the excellent work you do and the rigorous way you do it. You contribute...

[Kelly McCauley, Conservative, Edmonton West, AB]

He has almost a smile.

[Steven Blaney, Conservative, Bellechasse—Les Etchemins—Lévis, QC]

I just want to say that you do play an important role, of maintaining public confidence in government. That is important for our democracy.

[The Chair, Conservative, Tom Lukiwski]

Thank you very much.

I'm not sure whether you want to respond, Mr. Ferguson.

[Michael Ferguson]

I appreciate very much the comments.

I thank the member for his comments.

[The Chair, Conservative, Tom Lukiwski]

Mr. Weir, for seven minutes, please.

[Erin Weir, NDP, Regina—Lewvan, SK]

As my colleague Mr. Blaney said, the Auditor General tends to be very popular on the opposition side of the table. But I should also note that at this end of the opposition table, we really believe in a strong role for government and the value of public programs, and it seems to me there's a fundamental difference between auditing in the public sector and auditing in the private sector. In the public sector, your role is really to unearth all the problems and shine a light on them, whereas in the private sector an accountant might be paid by the company that they're auditing. There's a bit of a different incentive, and they might go a bit easier.

I wonder whether you think there's any risk, with that difference, of creating the impression that things are a lot worse in the public sector, when in fact they're just subject to tougher scrutiny.

[Michael Ferguson]

I think, Mr. Chair, there's perhaps a more fundamental difference. It's something that people aren't always particularly aware of in our office.

We tend to be known for the performance audits that we issue. Those are the audits that get the most attention and scrutiny, and those are audits that look at how government departments are operating certain programs.

Private sector audits tend to be similar to our financial statement audits. For the most part, you go in and look at a set of financial statements, look at all of the underlying information, and express an opinion on the fairness of that set of financial statements. In fact, our process for doing financial statement audits is essentially exactly the same as what a private sector firm would do. For the most part we are issuing clean audit opinions, audit opinions which say that the financial statements are presented fairly. Whenever we are presenting something that says something is presented fairly, people don't tend to have as much interest in it as when we are presenting something that says there are problems that need to be fixed.

Half of our business is doing financial statement audits. Our role would be very similar to the role of a private sector auditor and our relationship with our clients would be very similar to their relationship. But people tend to focus on our performance audit work, and that's why people see us perhaps as an organization that brings forward issues and see that particular difference between us and private sector auditors.

[Erin Weir, NDP, Regina—Lewvan, SK]

One point you made in your remarks was that tax expenditures, or I suppose any tax changes, aren't really covered in the estimates or in any of the regime of scrutiny that's established in the parliamentary system. I wonder whether you could elaborate on that and maybe make some recommendations and tell us how you think there could be a better evaluation of tax expenditures and perhaps of other tax changes.

[Michael Ferguson]

I will start and then I'll ask Monsieur Domingue to add to it.

We did a performance audit on tax expenditures recently. We have a report out on it. Fundamentally we were concerned that there are some types of tax measures that, while they are appropriately accounted for as reductions of tax revenue, have the characteristics of programs that could have been issued as a grant program, for example. We felt that parliamentarians should be aware of those types of programs.

I'll ask Monsieur Domingue if he has something else to add.

[Richard Domingue, Principal, Office of the Auditor General of Canada]

Those tax-based expenditures can account for tens of billions of dollars. What we noted in the report, and the government made some improvements to the reporting of those tax expenditures, is that even though they are not reported in the estimates, there is a tax expenditure report published every year. There is, then, some sort of reporting back and transparency with regard to the tax expenditures, but they are not included as statutory spending in the main estimates.

[Erin Weir, NDP, Regina—Lewvan, SK]

Did you think they should be?

[Michael Ferguson]

Fundamentally they are statutory, because they are legislative items. I think it doesn't necessarily matter whether they are included as statutory items in the way that you see them, but I think it needs to be very clear to parliamentarians how much the tax expenditures are and how much they are reducing the revenue base.

Again, there would be a line. Some of these things are integral to the tax system, and you would just say, well, that's part of the normal tax system. Others of them seem to be programs that could have been constructed as a grant program to pay a grant out to somebody. I think it's fundamentally those ones that we feel parliamentarians should be better aware of.

I don't think it matters much to us whether in the estimates they're described as statutory or non-statutory; they obviously get their authority through statute. I think fundamentally there needs to be a way that parliamentarians are aware of exactly what those types of tax expenditures are.

[Erin Weir, NDP, Regina—Lewvan, SK]

Another point you made in your remarks was about unfunded liabilities in public sector pensions. I'd ask you to elaborate a bit on that, particularly with reference to the fact that the Government of Canada is never going to go out of business. It's never going to have to wind up a pension plan and pay out all the benefits all at once, so is solvency valuation really a relevant metric in the federal public sector?

[Michael Ferguson]

A solvency valuation is one way that actuaries look at pension plans. It provides pension plan managers with a way of assessing the overall pension plan. I think, though, that understanding the pension liability and the growth in the pension liability and in the pension benefits is something that is particularly important.

Certainly the federal government has much more means to withstand the impacts of some of its different types of expenditures. I know that in New Brunswick, again going back to the small type of jurisdiction, the pension expense got to the point that a number of the pension plans had to be restructured into shared risk pension plans to make sure that everybody understood how much risk the employer was taking and how much risk the employees were taking. That was very much driven by the fact that the pension expense was starting to get so large as a percentage of expenditures that it had to be dealt with.

Again, the federal government has much more ability to manage this, but I think it's something that needs attention to be paid to it. There's an issue of intergenerational equity in it as well. In funding pension plans, part of what's happening is that the employees today and the government today—the employer today—are making sure they put enough money aside, within actuarial assumptions, to deal with it. If that doesn't happen and that liability just sits there, it could then be passed on to future generations to perhaps have to fund their own pension plan but also go back to fund the pensions of retirees, if the plan hadn't been fully funded.

It's not so much a question of solvency or other valuations. It is, though, very much a question of good, sound pension plan management to make sure that the plans are going to be able to live up to the promises that have been made.

[The Chair, Conservative, Tom Lukiwski]

Thank you, Mr. Ferguson.

Mr. Whalen, for seven minutes please.

[Nick Whalen, Liberal, St. John's East, NL]

Thank you, Mr. Chair, and thank you guys so much for being here today. It's great to get this in-depth look. Many of us on this side are excited about the prospect of trying to improve government oversight by aligning the estimates and the budget process, if that seems to be helpful, and also perhaps moving to a cash or accrual system on the estimates process.

It raises a number of questions, however. I'm not sure that pensions would necessarily be the best example, because pensions are going to be statutory. They won't come before us necessarily in the estimates.

How are other types of unfunded liabilities that might get to us currently accounted for in the estimates process? Maybe more important, what additional authority would our committee need to have to provide proper oversight to either approve or provide our support for non-cash appropriations or to deny or reduce authority for non-cash appropriations?

[Michael Ferguson]

In terms of unfunded liabilities, I guess the term “funded” really means that an appropriate level of assets have been set aside to pay for a particular liability, particularly in the pension plan. You figure out the value of all the promises owed, and then how much has been set aside in the pension plan assets to deal with that.

In terms of other liabilities, you could argue that probably all of them are unfunded because, by definition, they haven't been paid and they're going to have to be paid out of the cash, and there's been no specific funding set aside to pay for them. There may be some other exceptions to that. Fundamentally, they are going to be paid in the future. Unfunded liabilities are simply just the result of accrual accounting. You record the things that you haven't yet paid for or you haven't yet received because the underlying transactions have already happened.

In terms of the authority question, if I understand it appropriately, that maybe goes back to my example of something like the amortization, where there would need to be.... When the estimates are put together.... Again, the way we handled this in New Brunswick was amortization was in a separate vote all on its own. The individual departments were listed by how much amortization we thought was going to be recorded in the individual departments. Amortization was voted for the government as a whole as one vote. The reason for that was it meant that if the department underspent their amortization, if an asset wasn't built so the amortization wasn't as high as they originally expected it to be, they couldn't then transfer that money to something else and spend it on grants or contracts to somebody, or something like that. If they wanted to do that outside of the vote that they got for ordinary funding, they would have to go and get a supplementary appropriation.

In terms of how the committee deals with those types of things, just making sure there's the appropriate controls through the voting mechanism on the different accrual aspects of it would be what you'd need to do.

[Nick Whalen, Liberal, St. John's East, NL]

Along those same lines, would there have been in New Brunswick some type of a process for deferred long-term asset maintenance? How would those types of capital expenditures on asset maintenance figure into the process?

[Michael Ferguson]

No, that type of thing is more part of the decision of acquiring the asset in the first instance. When there is an asset, the asset is acquired; it's set up on the balance sheet, and amortization is recorded every year in the income statement. There may be some other expenses recorded around maybe retirement of the asset depending on the type of asset—contaminated site liability, some of those types of things. There would be nothing recorded for just the regular operation and the life-cycle cost of that asset when it was originally set up. That would be part of the original decision when saying, can we can afford this, because it is going to have an impact on our budget going forward. It's not something that would be voted because it is going to be future costs that would be accounted for in the future, but it's part of the original decision.

[Nick Whalen, Liberal, St. John's East, NL]

I have this idea now that we might need some extra votes if we move to an accrual accounting method in order to make sure that we're siloing off some types of spending. Are there other types of potential games departments might be able play if we move to an accrual system? It sounds like if they had to do extra work to provide us with the information on the cash accrual basis, then maybe that provides parliamentarians with information of those consolidated numbers that we might need to make a good decision on cash management.

Will we still have that information to make those good decisions if we switch, or will departments, through their own internal processes, manage things in a way that won't allow us to help?

[Michael Ferguson]

There will always be what are called the non-budgetary transactions, which are essentially the cash types of transactions, so again, the acquisition of a capital asset, the capital budget. The acquisition of a capital asset is not an expense when it's purchased, but it is an expenditure incurred to build something or acquire something. It's important that those votes for capital continue to exist even though they're not going to be part of the expenses of the government.

Similarly, significant investments...the $400 million in the venture capital action plan that I mentioned in my opening statement was an investment, not an expense that is carried on the government's balance sheet that will have to be assessed every year to determine whether it still has its value. I think it's also important that the committee have those types of things, loans and advances. All of those types of cash transactions still need to be accounted for, and in the estimates.

What doesn't really need to be in the estimates are all of the regular trade accounts payable and receivable at the end of the year. That would be set up on an accrual basis, and trying to deal with those types of things.

The committee would have to determine whether there are any of those types of cash things that they would want to know at the same time as also voting the expense authority on an accrual basis.