Public Accounts Committee on Nov. 3rd, 2016

[The Chair, Conservative, Kevin Sorenson]

I call the meeting to order.

Good afternoon, everyone. This is meeting no. 31 of the Standing Committee on Public Accounts, on Thursday, November 3, 2016.

I remind everyone today that we are televised. Not only for the committee but also for those who are in attendance in the audience, we would please ask you to turn your cell phones to mute or vibrate or to shut them off. That will lessen the number of disruptions.

Today we are reviewing the Public Accounts of Canada 2016. Our clerk has received a communiqué from Mr. Matthews, the Comptroller General of Canada. In 2009, this committee recommended in its 10th report, and the government agreed, that the Comptroller General inform the House of Commons Standing Committee on Public Accounts, by way of email to the clerk of the committee, of any known errors in the published version of the Public Accounts of Canada prior to the commencement of the committee meeting. The Comptroller General has advised our committee that as of today, there are no known errors in the Public Accounts of Canada 2016.

Because many of us are new to the committee, should errors be discovered, corrections will be made and updated versions of the documents will be posted on the Receiver General website. For ease of reference, the original versions published in the Public Accounts of Canada 2016 and the revised versions with shaded changes are posted on the Receiver General website under “errata”.

As your chair, I am pleased to report that this arrangement is in place and functioning as this committee wanted and requested some time ago, and that has been dealt with.

Returning to our meeting today, as witnesses we have before us, from the Office of the Auditor General of Canada, Mr. Michael Ferguson, the Auditor General of Canada, and Karen Hogan, principal. From Treasury Board Secretariat we have Mr. Bill Matthews, Comptroller General of Canada, and Ms. Diane Peressini, executive director, government accounting policy and reporting. From the Department of Finance we have Mr. Paul Rochon, deputy minister, and Mr. Nicholas Leswick, assistant deputy minister, economic and fiscal policy branch.

We welcome you all here today. We thank you for being in attendance and we will now turn to you and to our Auditor General for his opening statements. Welcome.

[Michael Ferguson, Auditor General of Canada, Office of the Auditor General of Canada]

Thank you.

Mr. Chair, thank you for the opportunity to discuss our audit of the consolidated financial statements of the Government of Canada for the 2015-16 fiscal year. I am accompanied today by Karen Hogan, the principal responsible for the audit of the Government of Canada's consolidated financial statements.

The consolidated financial statements are a key government accountability document. They provide a great deal of information that can help parliamentarians understand the results of the government's financial transactions for the past year. Specifically, they report the financial position, results of operations, and changes in financial position of the government for the year ended March 31, 2016. We audit these financial statements and provide an opinion on them.

The comptroller general will answer questions about the preparation of the consolidated financial statements and the Public Accounts of Canada. We will focus our comments on our audit opinion and our observations.

Our independent auditor's report is on page 2.4 in volume 1 of the public accounts. Once again, we have given an unmodified audit opinion on the consolidated financial statements, something we have done for the last 18 years. We assessed the consolidated financial statements against generally accepted accounting principles. We found that the statements conform in all material respects, which means that you can rely on the information they contain.

I would also like to draw your attention to our observations, which can be found after the consolidated financial statements, in section 2 of volume 1 of the public accounts. Volume 1 also contains other audited financial statements, such as those of the employment insurance operating account in section 4 and of the Canada pension plan in section 6.

In our observations, we provided information about four matters that warrant further attention: the government's transformation of pay administration, discount rates used in estimating the value of long-term liabilities, National Defence's inventory management, and liabilities for contaminated sites. I will now briefly address each of these matters.

First, I will address the transformation of the government's pay administration.

Note 4(e) to the consolidated financial statements indicates that the government spent approximately $50 billion on personnel costs during the year. Each year, we devote many staff hours to auditing these costs. This year, we found a higher rate of error involving overpayments and underpayments to employees in the last month of the fiscal year, when employee pay was processed under the new pay system.

Because the new system was only in place for one month, these errors were, taken together, not material to the consolidated financial statements. As a result, we were able to provide an unmodified opinion. However, we consider the nature and extent of these errors to be significant, given the direct impact on government employees. We have started the planning phase of a performance audit on the transformation of pay administration initiative.

In our observations we noted that some discount rates that the government uses to estimate the value of long-term liabilities are at the high end of the acceptable range. Higher discount rates result in lower estimated values for those liabilities, which is an example of measurement uncertainty referred to in note 1 to the consolidated financial statements of the Government of Canada.

The government has started a project to update its approach to selecting discount rates, and we agree that this is important.

We recommended that the government consider industry practices, emerging changes in accounting standards, and trends in the Canadian financial market as part of this project.

We once again noted National Defence's challenges in properly recording and valuing its more than $6-billion inventory. We have brought this to the attention of Parliament in each of the past 13 years.

The department has made progress with its inventory management; however, it continues to have errors in the areas of inventory pricing, the identification of obsolete inventory, the misclassification of items, and some quantity errors.

Last year we had an observation about improvements that the government needed to make in its approach to estimating the value of remediating its contaminated sites.

This year we were satisfied that the government has made the necessary adjustments to its model and has achieved a better approach to estimating these liabilities.

Our annual audit of the Government of Canada's consolidated financial statements takes about 50,000 hours of our staff's time, which is more than it takes to complete six performance audits. We have to work with several government departments, agencies, and crown corporations to complete this work. We add value through our financial audit, which helps to support parliamentary oversight of the government and promotes transparency.

I would like to thank the comptroller general, his staff, and the staff of the departments, agencies, and crown corporations who were involved in preparing the government's consolidated financial statements. We appreciate the effort, co-operation, and help of all involved.

Mr. Chair, I would like to conclude by saying that I am pleased that the public accounts committee is holding this hearing so soon after the release of the government's consolidated financial statements, because there is more value in examining financial information when it is current.

This concludes my opening remarks. We would be pleased to answer the committee's questions.

Thank you.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Ferguson.

We'll now turn to Mr. Matthews.

For our committee's benefit, there is also a PowerPoint presentation that he has provided us. It will be appearing on the television as well.

Again, welcome here, Mr. Matthews.

[Bill Matthews, Comptroller General of Canada, Treasury Board Secretariat]

Thank you, Mr. Chair.

Thank you for the opportunity to discuss the Public Accounts of Canada for 2015-16.

The Public Accounts include the audited consolidated financial statements for the 2015-16 fiscal year, which ended on March 31, 2016, in addition to other unaudited financial information. They are part of a series of reports to Parliament and Canadians on the state of the government's finances.

I'm pleased to note that for the 18th consecutive year the Auditor General has issued an unmodified or clean audit opinion of these financial statements. This demonstrates once again the high quality and accuracy of Canada's financial reporting.

A great deal of work goes into these financial statements, which are prepared under the joint direction of the Minister of Finance, the President of the Treasury Board, and the Receiver General for Canada. I would like to recognize the excellent work of the financial community across the Government of Canada. Its members are responsible for maintaining detailed records of the transactions in their departmental accounts and strong internal controls. They, therefore, deserve much of the credit for the fact that the government's consolidated financial statements are consistently presented fairly every year.

I would also like to thank the Office of the Auditor General for their continued co-operation and assistance.

I would now like to spend a few minutes walking the committee through a short deck that provides an overview of the Public Accounts. If you prefer, we can simply table the deck for your consideration and go straight to questions, but I think you previously said I could take a few minutes to make this presentation.

For the Public Accounts of Canada 2016, you have paper copies and there are also copies on the screen. For those of you looking at the screen, you may notice that the word “protected” shows up in the top corner. That's because that information was protected until the public accounts became public. It is no longer protected, so those of you with security minds can put your minds at ease on that front. We're all good there.

We are going to go through the slide deck, but it's not my intent to spend time on every page. I will hit the highlights and really pay attention to some of the changes in the results of the financial statements versus the budgets, and also those of the previous year.

Public Accounts of Canada has three volumes. Volume I is the audited financial statements, which the Auditor General has already mentioned, supplemented by some unaudited information. In volume II, we get into the details of each department and each ministry's revenue and expenses, their use of authorities, and what they spent and lapsed, if you're interested in that. Volume III contains information that is either required by the Financial Administration Act or just because of past practice has become normal for us to make public. I will mention that volume III is bigger than what any province would produce on its own financial statements.

The key thing about the financial statements or the Public Accounts of Canada is that they look backward. We are dealing here with the year April 1, 2015, up until March 31, 2016. The Auditor General has already mentioned the importance of studying the public accounts while they're still current, but let's keep in mind that this information is already over six months old, so it is a backward-looking document.

One of the things that I suggest you look at when you study the Public Accounts of Canada is the results of the actual year against the budget, and also against the previous fiscal year. It's a good way to find out what's changed. I'll just highlight a few things for you.

If you look at the total revenues, the budget for 2015—and we do publish the original budget here—had revenues of $290 billion. Actual revenues came in above that. If you looked at the actual for the previous year, they were at $282 billion. If you're interested in knowing why that is, I and my colleagues from the Department of Finance would be happy to talk about that.

Some other things to highlight for you include program expenses. The budget was $263 billion, but they came in at $270 billion. There are a few reasons for that, and again we'd be happy to get into those details but they relate to employment insurance, some fiscal transfers to Alberta and to Newfoundland, as well as some of the changes or impacts on our longer-term liabilities and related expenses having to do with pensions. The Auditor General has already mentioned some work we plan to undertake on discount rates.

[The Chair, Conservative, Kevin Sorenson]

Yes, go ahead, Mr. Christopherson, on a point of order.

[David Christopherson, NDP, Hamilton Centre, ON]

Thank you, Chair. I apologize for interrupting.

I'd like to know what people are seeing at home right now. Is that screen on their screen, or is it this with that in the background?

[The Chair, Conservative, Kevin Sorenson]

My understanding is that the cameras will be on the witness who is giving the presentation. They may go to the screen at one point or another, but typically the camera stays on the one speaking.

[David Christopherson, NDP, Hamilton Centre, ON]

I don't know how much latitude there is. I know the rules are very precise, but if we can make sure that screen is coming up so that the people at home have a context for what's being said, I would think they would benefit.

[The Chair, Conservative, Kevin Sorenson]

It did come up. It was initially on for a certain period of time, but as Mr. Matthews is speaking, it goes to him.

[David Christopherson, NDP, Hamilton Centre, ON]

Very good. Thanks, Chair.

[The Chair, Conservative, Kevin Sorenson]

Thank you for that point of order.

We'll go back to Mr. Matthews.

[Bill Matthews]

Thank you.

The final thing I will highlight on slide seven for you is something called other comprehensive loss. That is a bit of an accounting anomaly that you will see, and it relates to how we account for our crown corporations that follow private sector accounting standards. I will not go into detail about that number here, but if you are interested in knowing what that is, I would be happy to. It is a bit of a weird number and weird terminology for non-accountants.

On slide eight, it's the same thing, but on the balance sheet side, or the statement of financial position side, there is the accumulated deficit. You will notice here there are no budget numbers, so it just shows the numbers for 2015-16 versus 2014-15. From a budgeting perspective, we do budgets only for revenues and expense items, not for assets and liabilities, so the only comparator here is with the previous year. If you're interested in knowing what's changed, the one I will flag for you is pension and other future benefits, and again, that relates to the point I just made on the previous slide, related to our benefits expense. There's a link there to our discount rates.

The other thing I should note for you on the slide is that you will hear a lot of talk about debt-to-GDP ratios. It's the accumulated deficit number on the slide that actually drives the debt-to-GDP ratios. That's one half of the equation. If you're curious about that, debt-to-GDP was 31.1% at this time versus 31% in the previous year, so there has not been much of a change there. There was an economic and fiscal update earlier this week for which you may want to ask about debt-to-GDP ratios.

In slide nine, the Auditor General has already mentioned that there are four observations in this year's public accounts. They are his observations, so I'm not going to go into detail as to what they are, but the list is here for you. Two of them are new: the transformation for pay administration and the discount rate item. The other two are updates on previous items. We would be happy to answer any questions about what the government intends to do or should be doing to respond to those observations. Before I leave this slide, I should also mention that these observations are a unique feature you will see in public sector reporting. If you were in the private sector, you would not see observations and a lot of opinion, so it is a bit of a unique feature that you will see in the public sector.

Slide 10 is an interesting one. It looks at total voted appropriations. I'll just quickly remind members here that departments spend funds in two ways. They can have either what is called “statutory authority” or “voted authority”.

Statutory authority means the department has the legislated authority to spend whatever it needs to spend. A good example of statutory authority is employment insurance benefits. If you qualify for the benefit, you get the benefit. We don't actually check to see if there's enough money in the vote.

Voted authority means that the department cannot exceed what has been voted by Parliament. We have for you here the breakdown of the voted authorities that were used during the current year, by department. I will just remind you that about 35% of total government spending is voted. The other 65% is statutory. Things like old age security, EI, and GIS are all statutory spending, so you're not seeing them on the slide here.

I thought it would be interesting for members to see this slide for two reasons. One is that it might be worthwhile to have the Auditor General comment on which departments they audit, and this would give you a good clue as to where they spend their time. The other thing that will jump out at you here is that ESDC, Employment and Social Development Canada, is not on this list. That's because the bulk of its funding is statutory. This breaks down the big departments by voted, but there's an obvious omission there in terms of the whole-of-government picture, and that's ESDC.

The other reason I want to highlight this information is for the next slide, which is slide 11, because there's been a fair amount of media attention in the last few days on lapsed funding. Lapsed funding is voted funding that does not get spent. Here we have the big six departments from a lapsed perspective. Treasury Board is a bit of an anomaly because most of its votes are for contingency purposes, so it's money that is voted only in case it's actually needed for some contingency. The other five here are line departments that deliver programs, so if the members are interested in learning about why money was lapsed, we will do the best we can to answer those questions here today.

You will see one note here. Below each item you will see something called frozen allotments. That is something we have added from a disclosure perspective this year. Late in the fiscal year, we now publish when a department has a frozen allotment. I will explain what that means, because it is a bit of a technical term. You can see in public what a department actually has frozen, which is an indicator as to what it's not going to spend. We have the frozen allotment because Parliament votes departments up to amounts, such as up to, say, $100 million for project X, Y, or Z.

They don't vote reductions partway through the year. If a department has $100 million in authorized spending and they say they can't spend it all, we don't go to Parliament and ask to please reduce their votes, because it's an up-to amount. As long as they're not going to go over, Parliament has done its thing.

Inside the government, though, if we know that National Defence, for instance, isn't going to spend all its money and has asked us if they can spend that money in future years, we need to put a control in place so they don't spend it in both years. That's what's called a frozen allotment. Partway through the fiscal year, we now make public frozen allotments of departments so it's almost like a planned lapse; it's not an unplanned event. This arose throughout the year. The department has said they're not going to spend it, and we make that information public throughout the year. I thought I would highlight that for you.

I would like to mention three more points just before concluding.

First, there is a relatively new tool called InfoBase.

InfoBase is an online tool that members of Parliament can use to look at government spending and other data such as HR data. The reason I'm highlighting it for you today is that public accounts can be rather intimidating documents. InfoBase takes voted authorities, public accounts information, HR information by department, and it's online, and it's searchable. It's great if you're not comfortable thumbing through all this paper. If you have a quick question, InfoBase is a really interesting source. The public accounts data for the current year has recently been added to InfoBase, which is why I'm mentioning it today. As well, supplementary estimates (B) for the current year were tabled earlier today, I believe. That information is now in InfoBase as well.

It's a great tool for parliamentarians to go online and do searches if you're not a fan of the archaic way of doing things. I would encourage you to make use of it either as a committee or as individuals. I thought I should mention that.

As we do have questions, if you are referring to a specific page in the public accounts, I would ask that you give us the page number. We will do our best to find the page number in the other language because they are in different orders. We'll take a moment so members can find the information in the language of their choice.

Finally, I have my usual plea. There is a lot of information here. If during your studies there are pieces of information that you do not find useful, please let us know. It does take a huge effort to produce these things, and we would love to drop that. Even when you look online at the InfoBase tool and you see something there and you ask why we need it in both places, we would love to hear back from you on that front.

Mr. Chair, I will be pleased to answer questions on what I have just said or on what I spoke about earlier in my presentation.

Thank you.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much, Mr. Matthews.

We'll now move into our first round of questioning, which is a seven-minute round. We'll go to Mr. Lefebvre.

[Paul Lefebvre, Liberal, Sudbury, ON]

Thank you, Mr. Chair.

Thank you once again for coming to discuss the Public Accounts with us, Mr. Matthews. As a number of us are new to this committee, we have several questions we would like to ask so we can understand how these figures are calculated.

I will speak in English and French, but I have before me the English document, which is entitled Public Accounts of Canada 2016.

I am on page 1.19 of volume 1 of the English version, and I would like to understand how you have come up with the net debt figure and what the asset base consists of.

The chart on this page shows how Canada's debt-to-GDP ratio compares with those of the other G7 countries. Do all these countries, including Canada, use the same accounting rules to calculate their debt-to-GDP ratios? Canada, Germany, the United States, the United Kingdom, and all the other G7 countries are compared in this document.

Here is an excerpt from that page in English:

Canada’s total government net debt-to-GDP ratio...stood at 26.7 per cent in 2015. This is the lowest level among Group of Seven (G7) countries, which the IMF expects will record an average net debt of 83.0 per cent of GDP for the same year.

When you compare Canada with the other countries, it seems to be in excellent financial shape. However, does everyone use the same rules to calculate debt-to-GDP ratios?

[Bill Matthews]

I will begin answering the question, and then Mr. Rochon may want to add something.

Thank you for that question, which concerns accounting standards. Nearly every country has its own public sector standards in this area.

That being said, they're not that different.

All these countries are using accrual accounting. I'll come back to one exception in a second.

The United States has its own set of rules. Canada has its own set of rules.

Some of these countries have gone to international accounting standards for the public sector, which is a relatively young set of standards. If you were to compare it to the private sector, the private sector moved to an international set of accounting standards in 2011. The public sector is behind. The international standards are not as mature as the private sector.

[Paul Lefebvre, Liberal, Sudbury, ON]

The reason I am asking, Mr. Matthews—I'm sorry, I have little time here—is that we don't include in our assets the non-financial assets category when we make that calculation. Do the other countries include those?

[Bill Matthews]

The basic rules are the same. The other thing I should add, though, is that Europe runs more on a statistical model, but the basic rules are pretty close to the same. You'll see some differences.

Paul, do you want to add anything?

[The Chair, Conservative, Kevin Sorenson]

Would you like to add anything, Mr. Rochon?

[Paul Rochon, Deputy Minister, Department of Finance]

Sure, I can add a little to that.

When you're looking at international comparisons of net debt positions, clearly for Canada there are two main factors for which we have to make adjustment. The first is the federal nature of Canada and the second is the fact that we, unlike many other countries, have a large contributory public pension plan, the CPP and the QPP, so the number that you have here for Canada in the total government net debt comparator is the sum of the debts of the federal government and the provincial governments, less the assets in those two pension plans.

[Paul Lefebvre, Liberal, Sudbury, ON]

That's in those two pension plans.

[Paul Rochon]

Correct.

[Paul Lefebvre, Liberal, Sudbury, ON]

Okay, thank you.

On that point, if I look at page 1.17, I'm just trying to determine what is included in these financial assets. I'm trying to determine how we get to that number. I see taxes receivable at 28.9%, and that is described at page 7.3 in volume 1.

Can you explain to me what we mean when we talk about taxes receivable? In taxes, we have RRSPs, which are basically a deferred tax. Basically, the tax will be payable down the road. Also, when somebody does a freeze of their shares within their holding corporations, they freeze taxes. Those taxes will be remitted to the government later on.

There is also an estate freeze. When a corporation pays a dividend, there is the refundable dividend tax on hand, the RDTOH.

That's the RDTOH, the refundable dividend tax on hand. Are amounts like RRSPs assets of the government now or not?

[Bill Matthews]

Thank you for your question.

The figures on this come from the Canada Revenue Agency.

They are based on income tax returns already filed, so if you're thinking about future-type events, they wouldn't actually meet the qualification of an asset, so—

[Paul Lefebvre, Liberal, Sudbury, ON]

When we look at the overall debt, we're looking at RRSPs, which are money we put aside on which we'll be paying taxes later. We know we have to pay taxes on it. When you have a holding company and you've frozen shares, there are taxes that will be paid when you sell your shares, or if you die, those taxes will become payable, and that's also a government asset. When you look at it as well on a simple corporate level, you pay taxes. The corporation pays the tax, and after that there's the mechanism of making sure that the system is balanced. If there's an increase in taxes, when you pay out a dividend, there's a refundable tax that comes into play. Those measures are not in there.

[Bill Matthews]

No, the measures here are based on accounting standards, and you don't recognize something as a receivable or an asset until the event has taken place that gives you the right to that asset.

I can't speak to how you do future revenue planning based on those analyses. That might be a different question.