Public Accounts Committee on March 3rd, 2009

[The Chair, Liberal, Shawn Murphy]

I call the meeting to order.

I want to welcome everyone here and apologize to all the witnesses and the other members of the public who are at the meeting. Unfortunately the House got tied up with quite a number of votes and it took quite a bit longer than some of us intended. But I guess that's the way Parliament and democracy work.

This hearing is pursuant to chapter 1, “A Study of Federal Transfers to Provinces and Territories”, of the December 2008 Report of the Auditor General of Canada. We have an inordinately large number of witnesses, and again I want to welcome each and every one of you.

We have, of course, from the Office of the Auditor General, the Auditor General, Sheila Fraser. She's accompanied by Neil Maxwell, assistant auditor general. We also have the deputy minister and accounting officer from the Department of Finance, Rob Wright. He's accompanied by Barbara Anderson, assistant deputy minister. From the Treasury Board Secretariat we have the Comptroller General, Mr. Rod Monette. He's accompanied by John Morgan, the assistant comptroller general. From the Privy Council we have Mr. Alfred MacLeod, assistant deputy minister; and Krista Campbell, acting director general. From the Public Sector Accounting Board we have Ms. Nola Buhr, chair; and Tim Beauchamp, director.

We have a pretty high-profile group of individuals with us, so again welcome to each and every one of you.

We're obviously not going to take the whole two hours, but we may be able to go beyond 5:30 a little. I would ask the witnesses who have circulated reports to perhaps highlight them and be as brief as possible.

I'm going to start with you, Ms. Fraser.

[Sheila Fraser, Auditor General of Canada, Office of the Auditor General of Canada]

Thank you, Mr. Chair.

I would ask that my full statement be put into the record, but I will just go through and shorten some of it.

We would like to thank you for this opportunity to present the results of our study of federal transfers to the provinces and territories that was published in our December 2008 report. As you mentioned, I am accompanied today by Neil Maxwell, assistant auditor general, who is responsible for this chapter.

Federal transfers to the provinces and territories make up a significant portion of the federal government's annual spending, and they are a major source of funds for services provided to Canadians. In the 2006-07 fiscal year, the most recent year for which complete information was available to us during the examination, these transfers amounted to about $50 billion, or just under 23% of federal spending. We carried out this study to answer questions that parliamentarians have raised about federal transfers. Because this is a study and not an audit, it is descriptive and does not include recommendations.

In this work, we examined the three main mechanisms the federal government uses to transfer funds to the provinces and territories. In our statement you will find further details on each of these transfers.

We found that the nature and extent of conditions attached to federal transfers to the provinces and territories vary significantly. While some transfers have specific conditions that recipients must meet, often including reporting to the federal government on the use of the transferred funds, others are unconditional.

As auditors, we recognize that decisions on whether, and to what extent, conditions are attached to transfers are policy decisions, often involving sensitive federal, provincial and territorial negotiations. We do not question policy decisions in our work.

According to the federal government, the level of federal accountability for how the provinces and territories spend transferred funds depends on the nature and extent of conditions attached to the transfers. In all cases, the federal government is accountable for its decision to use transfers with or without conditions as the best policy choice available in the circumstances.

The government's introduction of trusts in 1999 was a significant change in its use of transfer mechanisms. Since then, 23 trusts have been established to transfer about $27 billion to the provinces and territories. Transfers of this type are earmarked in public announcements by the federal government for specific purposes--for example, police officer recruitment or affordable housing--but there are no conditions that legally obligate provinces and territories to spend the funds for the announced purposes, or to report subsequently on that spending to the federal government.

As an alternative, federal officials told us that the government has opted in recent trusts to require provinces and territories to publicly announce how they intend to use the funds, on the assumption that their legislative assemblies and citizens will hold them to account for these commitments.

Mr. Chair, that's a very brief summary of my opening statement. We will be pleased to answer any questions committee members have.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Fraser.

We'll now go to Mr. Rob Wright, the Deputy Minister of Finance.

[Rob Wright, Deputy Minister, Department of Finance]

Thank you very much.

I would like my statement to be worked into the official record as well, Mr. Chair.

We're very pleased to be here. I'd like to thank the Auditor General for her report. It's a very thorough review of federal transfers to provincial governments, which are extremely important, particularly in challenging economic times such as now.

Overall transfers are about $60 billion this year. Over 20% of the federal government's budget is related to transfers. The four major transfers include the Canada health transfer and the Canada social transfer, which are conditional transfers to provincial governments, and the equalization program and territorial formula financing program, which are non-conditional. They simply transfer funds for the needs of provinces. Those four major transfers account for about $50 billion of our total transfer to provinces.

There are also important program transfers related to infrastructure, skills training, and housing, as the Auditor General just mentioned.

Finally, in recent years there have been a number of trusts established to deal with urgent recent priorities.

The objective of trust funds is very clear. They are transparent financial vehicles that the Government of Canada uses to transfer targeted funds to provinces and territories for short-term, urgent pressures in areas of shared national priority.

As well, trust funds offer flexibility to provinces and territories to either draw down funds immediately or over a specified longer period of time according to their respective needs.

I would emphasize that trust funds are very similar to the major transfer programs. Regardless of whether federal funding flows through the major transfers or trust funds, provinces and territories are accountable to their residents, legislatures, and auditors general on how they spend these funds. I think it's noted in the report that in recent years the government has sought and required public statements of accountability and intent, for which provincial governments are held to account.

That's all I would say in an abbreviated version, Mr. Chairman. It's a pleasure to be here.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Wright.

We'll now hear from the Comptroller General of Canada, Rod Monette.

[Rod Monette, Comptroller General of Canada, Treasury Board Secretariat]

Thank you very much, Mr. Chairman.

As well, I would ask that my statement be shown as read into the record.

As you mentioned, Mr. Chairman, I do have with me today Mr. John Morgan, the assistant comptroller general, financial management and analysis.

The Treasury Board approved a new transfer payment policy and related directive recently which took effect on October 1, 2008. With this directive we have specifically addressed transfers to other orders of government.

Mr. Chairman, we've also worked closely with the Department of Finance and other government departments to review the accounting of major transfer payments to ensure we have properly followed appropriate accounting policies.

Thank you, Mr. Chairman. I look forward to your questions.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Mr. Monette.

Finally, we'll hear from the chair of the Public Sector Accounting Board, Dr. Nola Buhr.

[Nola Buhr, Chair, Public Sector Accounting Board]

Thank you.

I'm sorry, but I do not speak French.

Therefore, all my remarks will be in English.

Thank you for the invitation to appear before the Standing Committee on Public Accounts. This is a first for the Public Sector Accounting Board, so I beg the committee's indulgence. We did not have a formal set of notes for submission, so I would like to take about four minutes now to outline a little what the Public Sector Accounting Board is and what the accounting issues are in relation to transfers.

The Public Sector Accounting Board, or PSAB, as we refer to it, thrives and exists only because we share views with and listen to our stakeholders. PSAB sets the accounting standards for all levels of government in Canada, and it does so as an independent standards-setter operating in the public interest. We are independent from preparers, auditors, and other stakeholders. This is important to ensure that no one stakeholder group influences or biases the standards. Sometimes it is difficult to find a solution that is acceptable to all and sometimes we are taken to task; nevertheless, that is our goal.

The board is comprised of members from all across Canada. We have representation from all levels of government. There are preparers and auditors. We have representation from ministers of finance. Indeed, we at one point had a former Minister of Finance on the board. There are representatives from academe as well as accounting practitioners and users of government financial statements. There are 12 members on the board, including volunteers.

The board follows an extensive due process, which includes publishing for public comment our proposed principles and guidance in order to seek views. We go through a public document release at least twice with each standard to ensure we've heard all the views and have heard from all of our stakeholders. It usually takes us about 18 to 24 months to complete a standard.

One thing the board strives for is comparability. Here I'm speaking about comparability with accounting. Comparability enables users to identify similarities and differences. The same set of facts should result in the same accounting, while different facts should result in different accounting.

You may take a capital asset like a truck and think that a truck is a truck, but a truck driven around Ottawa may have a different accounting compared to a truck driven over the tundra or a logging road. This is true for contractual arrangements as well. The terms and conditions set out in a contract can play an important role in determining how that contract is accounted for. For example, we have operating leases versus capital leases.

Our goal as standards-setters is to ensure that when a government has an asset, it's reported as an asset. Likewise, when the government has a liability, it gets reported as a liability, and so on. We have very stringent definitions as to what assets and liabilities are.

Accounting for government transfers is one of the most controversial issues the Public Sector Accounting Board has dealt with. We have been working for at least five years now in seeking views and opinions and trying to reach consensus on the issue.

The consensus revolves around these questions. Is there an asset from the provider's point of view? Are the transfers liabilities or are they revenue from the recipient's point of view? In order to make a decision there, it's necessary to analyze the terms and conditions of a transfer agreement. The question is this: when does a term or condition result in a liability and when does it not?

Let me give you an example. A general stipulation that requires funds to be spent on health care is non-specific. Funds could be used for salaries, equipment, and so on, and still meet the stipulation. It's very difficult to determine if the recipient has complied with the original intention. On the other hand, if the agreement specifically calls for the acquisition of a new MRI unit, that's more specific, and the recipient will have a clear liability until the MRI is acquired. It's easy to determine whether or not the MRI unit has been purchased.

What I'm trying to demonstrate is that the terms and stipulations contained in the individual transfer agreements can ultimately decide how to assess the intent of the provider, in this case the federal government, and what accounting is required. Clearly, a transfer without stipulations is revenue, and the recipient can do with it whatever they like. However, if the stipulations are specific, the recipient may have a liability until they fulfill those stipulations.

This is not an easy issue to grapple with. If it were, we would have had a standard in place earlier than now.

On a final point, though, I'd like to emphasize that accounting is focused on measuring financial position and annual results. While financial statements can demonstrate accountability in a number of ways, they cannot demonstrate whether there was value for money received, whether the recipient used the resources effectively and efficiently, or whether the recipient complied with specific contractual agreements. These are issues that are better addressed through other reports and other mechanisms.

That concludes my opening remarks. Both Tim Beauchamp and I are happy to take any questions you may have.

[The Chair, Liberal, Shawn Murphy]

Thank you very much. We appreciate that.

We're going to go to the first round of six minutes, starting with Ms. Ratansi.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

Thank you, Mr. Chair, and thank you all for being here.

I'll keep my questions brief. I have a question for the Auditor General. I look at all the mechanisms for transfer payments, and I look at the Canada health transfer, which has conditions, and the Canada social transfer, which has some conditions. I'm a little concerned when the health transfer has conditions, but there have been instances of the provinces, for example, using these payments not for health purposes but to buy lawnmowers. In terms of the Canada social transfer, a province used it to give a tax break of $300.

You make a statement here that more recent large transfers reflect a shift away from government-to-government reporting and towards government-to-citizen reporting. As a member of the public accounts committee, I am wondering what concern we should collectively have about the accountability of this money and whether it is really being used for the benefit of citizens.

I will park my question with you, and I'd like to ask Mr. Wright another question regarding the trusts.

There is an operating principle. The transfers appear to be announced, but nobody knows what the mechanism to capture that trust is. So could you give me some comfort as to why this is an operating principle that is not legally binding because it's not part of a trust agreement? The Eco-Fund comes to my mind, the $5 billion that nobody knows for sure has been drawn down or not. I will leave those two questions because six minutes is a short time.

[Sheila Fraser]

Thank you, Chair. Perhaps I could start.

On the question of accountability of the funds, there is accountability, obviously, in the provinces and territories, because they all produce financial statements that are audited by their legislative auditors. The issue, I think, goes back to Parliament and what accountability the Parliament of Canada wants to have over the use of those funds.

As you mentioned, with many of these transfers there is no reporting back to the federal government, and that is a policy decision. The decision has been made that the accountability to the citizens of that province or territory is sufficient. We don't comment on that decision. Perhaps the deputy minister has comments to make, but that is really a policy choice that's made.

[Rob Wright]

Thank you.

Maybe I'll just pick up from that, Sheila, if that's all right, because indeed if you look at the major transfer that you referred to, the social transfer, what we look at when we're managing transfers is that obviously it's a shared priority area. We know provinces are spending enormous amounts on health care and on certain elements of post-secondary education and social transfers, so we know we are only providing a portion of what they spend on it. There is no question, provincial governments are spending the equivalent of multiples of the money we transfer to them on the social side. That's why it comes back to the central point, which is that these are common priorities but the provincial governments are accountable to their electorates for proper spending. All the accountability functions of that process work.

Clearly, when we look at...how often do we renew these programs? Every five years we take stock of the overall effectiveness. Can we be more efficient in the transfers? Do we have the right outcomes there? There is a good discussion of accountability mechanisms at that time, but the core message there is that we provide substantial amounts of funds for common priorities, the provinces use it, and they are accountable for the overall spending. They don't segment and track the portion from the federal government for that purpose. I think that has worked well in Canada.

On the trust fund, the ecoTrust or the other trusts that have been put in place, a more recent trust, as I mentioned.... It's an area that comes into effect if there is an unanticipated surplus or some flexibility at the end of a fiscal year that we didn't anticipate. It's always a choice of whether to apply that to some debt reduction or to alternative approaches to spending. If you have some assurance over the long term, you can provide some long-term program spending. But in the recent past, since 1999, as the Auditor General mentioned, there have been a number of occasions when the government said, “This is an important, immediate priority for the federal government that is shared with the provincial government; we will come to an understanding of what we're trying to achieve collectively; the province will commit to doing something in that trust agreement and say so publicly before the end of that fiscal year, in which case we will transfer the funding for them for that common purpose.” A similar accountability would be expected as to the transfer you just referred to, on the social transfer, for example.

[The Chair, Liberal, Shawn Murphy]

You have 30 seconds.

[Yasmin Ratansi, Liberal, Don Valley East, ON]

I just have a comment then. As the Parliament of Canada, as the government that is sending down the money, especially the $5 billion.... When we asked the minister, he had no idea whether the money was drawn down or not. How does a citizen know? The citizen is not well informed. Yes, there are audited statements, but no citizen looks at the audited statement. We need to be careful that we do have checks and balances in place, and especially in the trust area.

I was wondering if the officials of the Public Sector Accounting Board have any concerns regarding these operating principles, which are not binding and therefore nobody knows what's going on.

[The Chair, Liberal, Shawn Murphy]

Ms. Buhr.

[Nola Buhr]

We would take the same approach as the Auditor General. If it is the government's policy to have terms and conditions or not have terms and conditions, it is not our role to act or not act on that. Our role is to account for what has transpired. So that is really outside our purview.

[The Chair, Liberal, Shawn Murphy]

Madame Faille, for six minutes.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Thank you, Mr. Chairman.

I would like to thank you for your presentations.

While some transfers are unconditional, the provinces must report on progress or on the way in which the money has been spent.

However, innovation is one aspect which seems to stand out in the Quebec model. As an example, we have social programs like $7-a-day day care now. In the examples I have before me, there are measures implemented by the Government of Quebec to help people on social assistance access the labour market.

Above and beyond the transfers, establishing common objectives rather than cash inflow conditions allows for innovation in social programs.

Is that one of the advantages of some of these funds?

[Sheila Fraser]

Is the question for me?

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

To whomever wishes to answer. Perhaps you, yes.

[Sheila Fraser]

I can simply state that federal government officials indicated to us that one of the reasons for having unconditional transfers is that the provinces and territories have a better understanding of their needs and can better attribute funds based on these.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

There are four types of transfers: the Canada Health Transfer, the Canada Social Transfer, the Equalization Program Transfer and the Territorial Formula Financing Transfer.

The transfer of funding to the provinces can be the subject of various reports. A number of national organizations complain about the fact that reports are irregular, incomplete and difficult to understand. With respect to the Canada Health Transfer, under the act there is a requirement to reach specific goals for care and special programs. The provinces have to be accountable. However, some provinces do not provide in-depth detail on what they do with the money.

We have been told that the territorial formula financing is the subject of some discussion. Yet, based on the reports they make to Parliament, it is rather invisible, despite the significant amounts that are transferred.

The Canada Social Transfer is the subject of very few public discussions. However, we know that there are significant and numerous inequalities between the rich and the poor.

Overall, is the federal government adequately accounting for what falls under its jurisdiction? Let us not forget that the federal government is responsible for services to aboriginal people, the Canadian Forces, the RCMP, veterans and inmates in penitentiaries. The federal government transfers funds into these programs, but it should also be held to account. In short, public reports need to be produced and harmonized to account for funding which is transferred between the various levels of government.

[Sheila Fraser]

Mr. Chairman, we have not examined this matter in the course of our audit. We looked at the nature of transfers and whether there were conditions attached, but we did not examine the reports resulting from these transfers.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

All right. Thank you.

[The Chair, Liberal, Shawn Murphy]

Thank you very much, Ms. Faille.

Mr. Christopherson, you have six minutes.