1994 ANNUAL REPORT, PROVINCIAL AUDITOR MINISTRY OF FINANCE
CONTENTS
Thursday 24 November 1994
Vision and hearing tests
Court system
1994 annual report, Provincial Auditor
Ministry of Finance
Jay Kaufman, deputy minister and secretary, treasury board
Bob Christie, associate secretary, treasury board and provincial controller
STANDING COMMITTEE ON PUBLIC ACCOUNTS
*Chair / Président: Cordiano, Joseph (Lawrence L)
*Vice-Chair / Vice-Présidente: Poole, Dianne (Eglinton L)
Bisson, Gilles (Cochrane South/-Sud ND)
*Callahan, Robert V. (Brampton South/-Sud L)
Crozier, Bruce (Essex South)
*Frankford, Robert (Scarborough East/-Est ND)
*Marchese, Rosario (Fort York ND)
*Marland, Margaret (Mississauga South/-Sud PC)
*Martel, Shelley, (Sudbury East/-Est ND)
*O'Connor, Larry (Durham-York ND)
Perruzza, Anthony (Downsview ND)
Tilson, David (Dufferin-Peel PC)
*In attendance / présents
Substitutions present / Membres remplaçants présents:
Fletcher, Derek (Guelph ND) for Mr Marchese
Kwinter, Monte (Wilson Heights L) for Mr Crozier
Lessard, Wayne (Windsor-Walkerville ND) for Mr Perruzza
Sutherland, Kimble (Oxford ND) for Mr Bisson
Also taking part / Autres participants et participantes:
Peters, Erik, Provincial Auditor
Clerk / Greffier: Decker, Todd
Staff / Personnel: Anderson, Anne, research officer, Legislative Research Service
The committee met at 1012 in committee room 1.
The Chair (Mr Joseph Cordiano): Good morning, members of the standing committee on public accounts. On our agenda today we have the Ministry of Finance before us.
Before we move on to the agenda item, we have two notices of motion from Mr Callahan. Mr Callahan would like to put these notices of motion on the record. If you would like to read these into the record, we can proceed with the remainder of the agenda for this morning.
VISION AND HEARING TESTS
Mr Robert V. Callahan (Brampton South): Thank you very much, Mr Chair. You each have a copy of the two notices of motion before you, which will assist you in reading along with me.
The first notice of motion is moved by myself.
"Whereas Ministry of Health funding -- through public health departments -- for hearing and vision `problem' screening in schools, day care centres and clinics will be rescinded effective January 1, 1995;
"And whereas a recent submission by Dr W.A. Hurst to the public accounts committee has shown that certain visual impairments are often exhibited in those who are learning-disabled;
"And whereas learning disabilities contribute significantly to delinquency as it has been shown that 80% of young offenders are learning-disabled;
"And whereas the test required to identify the visual condition that is often associated with learning disability can be conducted simply and inexpensively;
"Be it therefore resolved that the public accounts committee of the Ontario Legislature recommend to the Ministry of Health that public health departments be encouraged to reinstate the vision and hearing tests referred to above."
COURT SYSTEM
Mr Callahan: The second notice of motion is again moved by myself.
"Whereas some 50,000 cases, after the Askov decision, had to be stayed or withdrawn due to the delay in the Ontario court system;
"And whereas it appears that this situation may arise once again;
"Therefore be it resolved that the auditor be directed under section 17 of the Audit Act to conduct an investigation as to the current status of cases before the Provincial, Family and General Division courts of Ontario both criminal and civil having due regard for the following:
"(1) Initial date proceedings commenced;
"(2) Number of adjournments;
"(3) Number of pretrial motions;
"(4) Date trial is to be held;
"(5) Number of criminal cases that have or will reach their second-year anniversary before being heard;
"(6) Such further and other information as may affect the expeditious use of judicial resources."
Very quickly, if I could, just one comment on that second motion. We've heard questions in the House, we've heard responses from the Attorney General and I have some very severe concerns with the responses the Attorney General is giving. I'm not suggesting for one minute that she's not being candid, but I think she's not got the right facts. I've been in touch with --
The Chair: Mr Callahan, thank you very much. We can debate these motions next week.
1994 ANNUAL REPORT, PROVINCIAL AUDITOR MINISTRY OF FINANCE
The Chair: We will now move on to the agenda item. We have officials from the Ministry of Finance. Mr Robert Siddall, I believe, is here. Would you identify the other persons who are with you and we can proceed.
Mr Jay Kaufman: Perhaps I could introduce myself and the individuals who are with me. I'm Jay Kaufman, the Deputy Minister of Finance and secretary of treasury board. With me are Bob Christie, who is the associate secretary of treasury board and the provincial controller, and has had a great deal to do with the public accounts and working through the new public accounts system; Rob Siddall, who is the director of the financial information branch in the controller's office; and Barbara Stewart from treasury board, who is the director of the capital and crown corporations branch chair.
If I might, what I would like to do is say a few things by way of introduction. Essentially, we're available to committee members for questions. At the outset, I want to thank you for the invitation to come before the committee and speak on the issue of a new public accounts system that we have put in place in conjunction with the Provincial Auditor. We discussed this issue last year, and I want to begin by referring to the starting point for this exercise, but also indicate an appreciation to the committee for signalling to us some of the issues you did want to touch on in the auditor's report.
Last October, in response to the Provincial Auditor's recommendations, the Minister of Finance made a commitment to move towards the adoption of the Public Sector Accounting and Auditing Board recommendations in the public accounts for the year ending March 31, 1994.
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What we indicated to you at that time last year was that the way in which this could be accomplished was by taking a snapshot, at the end of March 31, 1994, of the accrual and consolidation position of the province at that point in time, that we would be reporting information at this one point in time, and a complete shift to a new system for the in-year reporting information, the second-quarter finances type of thing that you're very used to seeing. The adoption of this accounting methodology with respect to the budget and estimates would be very difficult for us, not the least because it would require an entire new system of financial management which had very substantial costs and clearly had substantial time frames associated with it. So we were trying to be very clear about what we thought we could accomplish for this year.
Secondly, I think we were also clear that there were a number of very difficult issues that we thought would arise in the shift to the PSAAB accrual and consolidation methodology, in particular highlighting the problem of capital. As we'll get into in more depth, this continues to be obviously an issue with respect to both the current way we're dealing with capital as well as under the new accrual and consolidation methodology.
The results of the efforts of this past year obviously are satisfying. Clearly, from our point of view, we're pleased to have received from the Provincial Auditor a clean opinion, and satisfying from another respect in that this undertaking -- and Erik in his report has really emphasized this point as well -- was a very, very substantial effort on behalf of the Ministry of Finance and the Provincial Auditor and the Provincial Auditor's staff. I really do want to stress to the committee the enormity of the undertaking and what staff from both the ministry and the Provincial Auditor have accomplished in order to in fact deliver on the public accounts on this due basis in October. Then everyone, in particular Erik and Bob Christie, who've led this exercise, are to be strongly commended. It's a difficult task, an enormous task and it involved working through some very, very difficult issues in order to produce the results.
In the financial report that we issued and also acknowledged by the Provincial Auditor, as I said, there remain, particularly in the area of capital, issues to be addressed. We have tried to signal that last year, and the whole problem of how physical assets, capital assets, infrastructure and investing in infrastructure are to be treated remains a difficult and outstanding issue, I think, for all parties.
In 1990, the government laid out a new direction with respect to capital investments, I think it's fair to say, that new policy derive from a concern on the part of the government to maintain investments in infrastructure throughout the recession despite difficult financial circumstances and a frustration both with the way in which capital was being dealt with as a one-time write-off, as a capital expense in the year it was being spent, and how that was reflected in a current account fashion in the accounts.
In that policy, the government clearly signalled the desire to separate the capital spending and the way in which capital spending is treated from the operating account, clearly attempting to indicate that debt associated with current account deficits is qualitatively different from investments and debt associated with investments in physical infrastructure.
As a result of that, there was, as you well know, the creation of a set of crown corporations referred to as capital corporations -- the Ontario Clean Water Agency, the Ontario Transportation Capital Corp, the Ontario Realty Corp -- all intended to approach capital in a different way and to utilize opportunities through the creation of crown corporations for alternative financing mechanisms in order to access financing more effectively and in a more diversified way than was currently the practice, and as well, to try and make the capital budgeting process far more strategic.
In terms of the accounting issues around this question of capital and infrastructure, an attempt to shift from, as I say, this one-time expending of capital to a recognition that capital has a life to it -- it provides benefits to people over a period of time -- and to attempt to account for that capital on a current account basis through capitalization, amortization of capital costs and reflecting that in the operating side through the principal and interest repayment, that clearly has been the framework and the policy objectives which have guided the way in which we have dealt with these issues.
It's quite fair to say that both in respect to the way in which we're treating capital, through the modified cash accounting methodology as well as in the new PSAAB formulation, generally speaking we, and I would suggest many others, are not satisfied that we have got this issue properly resolved.
Certainly other provinces, the federal government, the accounting and auditing profession itself are grappling with this. Just to make a point, provinces across the country have been shifting gradually to the PSAAB form and are experiencing many of the same difficulties that we are in terms of dealing with capital, the creation of new agencies and the relationship and the financial transactions between those agencies. PSAAB itself has put in place a task force to try and work through some of these questions in a way which hopefully will be satisfactory, and we in our report, and again acknowledged I think by Erik in his, have a continuing job to do here between the ministry and the Provincial Auditor and continue to discuss it, trying to resolve issues around the question of capital and the related issue of agencies and the consolidation and the transactions that exist between those agencies.
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In the report itself, there were three particular transactions that were flagged as of concern that people wanted to talk about: the GO Transit refinancing, the sale of properties to the Ontario Realty Corp and loan-based financing to the universities, schools and hospitals sector, USH.
At the outset, these issues deal with the questions I've been flagging which are continuing issues, but I want to emphasize with respect to each initiative that they flow pretty directly from the policy objectives the government has set, and each in its own way I think is a sound initiative.
If we look at the GO Transit refinancing question, that particular initiative was an opportunity to find alternative and cheaper ways of financing assets. It was our first attempt at this kind of approach. It opened up access to new sources of financing which we were not able to secure before. Through a dividend transaction between GO and the consolidated revenue fund, we were able to receive, as a result of that, over $400 million in revenues in the year. In terms of an approach and a result, it clearly had benefits for the province's finances, and also in terms of accessing new sources of capital.
With respect to the realty corporation, you've heard a lot about the realty corporation from others. In the last year, I went about trying to emphasize the importance of the realty corporation as a new approach to effectively managing government realty assets. It's noteworthy, for example, that the federal auditor has raised concerns at the federal level about the efficient management of realty assets. This is an area where we felt that in terms of approaches to capital but also in terms of our existing assets they both could be managed more effectively, on a more businesslike basis and in terms of optimizing their value.
One of the areas of concern, something that bedevilled us, is the whole question that in the public accounts these assets in fact have no recognized value. So, in terms of the types of transactions that we've attempted to execute, we are recognizing the market value of these land and realty assets and putting in, in terms of a new charge system, an incentive methodology to try and produce savings, economize on space and manage the disposition of those assets in an effective way once they become surplus.
With respect to the USH sector loans -- that is, loans for hospitals, schools and universities -- this goes to the essence of the issue of trying to recognize capital in a different fashion and using loans-based financing as a way of accounting for the life of these assets and, on a current account basis, through the operating account, and through principal and interest payment, recognizing what the current account costs of those are in order that the public and you are able to more directly appreciate what the current implications of those are and how those really relate to the question of the deficit. I would emphasize that in doing this transaction it was very important for us and the sectors involved to agree that there should be no incremental costs as a result of this restructuring of the way in which we want to do capital with respect to the USH sector. Those are three transactions that have been raised.
The other issue has to do with the question of the budget presentation. I should say that with respect to this year there are, as you know, similar transactions that were announced in the Finance minister's budget plan. We clearly will continue to execute those commitments and report those in relation to the budget as planned, so that you and the Legislature and the public can clearly see what the government has committed itself to in its budget and how it has performed in relation to those commitments. We will be, as I say, completing those initiatives that were announced previously.
The question that's been raised has to do with the desire to see the budget presentation in a fashion which resembles the methodology of accrual and consolidation. It's important to emphasize that the budget for the province represents the government's policy and financial plans and really speaks directly to the question of the consolidated revenue fund, and that the public accounts clearly, through the process of consolidation, speak to a wider array of budgetary financial issues.
The question, as I've said, around which there is a difference relates to the types of transactions around capital and their relationship to agencies. It's the intention, as the Minister of Finance has indicated, to continue with the current practice of reporting the budget based on the modified cash basis of accounting. He has also recognized that we are in a transition situation and that we need to work and continue to work in a way which begins to try and bring these two systems together.
But in order to do that, we've got to find solutions to these issues we've raised. We've committed, as I said at the outset, to work with the Provincial Auditor on a continuing basis to try and bridge those issues. All of these transactions have been, from day one, fully revealed in the budget, and these types of transactions will continue to be fully disclosed in the budget.
It's also important to indicate that in response to the Provincial Auditor's concerns the minister has also indicated to the Provincial Auditor that we will provide a comparison, as best we can, with the budget on the accrual and consolidation methodology. We will, while continuing with our current practice, also provide, as I say, a comparison with last year. We will attempt to do that both for our financial experience in 1994-95 as well as looking forward into the next year. There are people here who are better able to explain the intricacies of this than I am.
That will represent some continuing challenges to try and produce those comparisons because, as I said earlier, the way in which we're able to get this information necessary for the financial statements on this new methodology is through a snapshot method, and so there's some difficulty in getting a firm understanding as to exactly what the estimates are likely to be on a variety of the items that would go into that kind of comparison. It's not a simple and straightforward task, but certainly, with the two systems in place we do need to provide a bridge. As the Minister of Finance has indicated to the Provincial Auditor, we will be doing that.
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That really represents my opening comments. As I said, I've tried to be clear, starting with last year, on what I thought we could accomplish, what the outstanding issues were likely to be. We've tried to work through it and I think we've made progress on those issues over the year. The remaining issues relate principally to capital and the way in which the transactions related to crown corporations are, through the process of consolidation, being dealt with. As a ministry, we're committed to working actively with the Provincial Auditor and his staff to try to address and resolve many of these outstanding issues.
I will simply indicate, in conclusion, that the budget, as the Minister of Finance has indicated, will be presented in a way consistent with the practice of this year and last year and that there will be in the budget documents a comparison using the PSAAB accrual and consolidation formulation.
The Chair: Thank you very much. Mr Peters would like to make a comment, an opening statement, and then we'll move on to questions by members.
Mr Erik Peters: Thank you, Mr Chairman. I won't be long.
The motion passed by the committee last week requested that "the Ministry of Finance be called to address the Provincial Auditor's report as it concerns the government accounting methods." Therefore, I thought it might be helpful if I made a brief statement to review with the committee what these concerns are and, equally importantly, what they're not.
These concerns are about financial reality and not about differences in accounting rules. As urged by me last year, the province's financial statements for the year ended March 31, 1994, have been prepared in accordance with standards for good practice in accounting and financial reporting by governments in Canada. My audit opinion on these statements is clear of qualifications or reservations.
My urging to adopt the new accounting rules was not based on a whim or on my personal preference as Provincial Auditor. I urged the adoption of the new, more prescriptive accounting rules for the following reasons:
These rules were now available and were being used by financial analysts, rating agencies and investors in Ontario securities.
These rules were used by the other Canadian governments to a far greater extent, or had been, than they were used in Ontario.
Ontario was considered to have fallen behind the other Canadian governments in meeting these accounting and financial standards.
Legislators and taxpayers in Ontario were receiving significantly different financial information from that used by financial analysts, rating agencies and investors.
Ontario needed to better compete for investors' funds.
The adoption of the accounting recommendations of the Public Sector Accounting and Auditing Board, PSAAB, of the Canadian Institute of Chartered Accountants by the Ministry of Finance was a significant and very positive step and has resulted in improved financial reporting in the public accounts of the province of Ontario.
I'd like to take this opportunity, now that we have the Ministry of Finance officials with us today, to reiterate the comments I made last week concerning the tremendous effort made by the Ministry of Finance -- and by my own staff, for that matter -- to implement such massive change. As the Minister of Finance noted in a recent letter to me, "It was an accomplishment of which we can all be proud." I certainly echo his thoughts and would like to take this opportunity to express my appreciation to the ministry officials here with us today and to all of those who worked in the trenches for their hard work and the cooperation provided to my office during this massive undertaking.
However, while the audited financial statements of the province now provide more realistic financial information to decision-makers, as I indicated in my annual report, I'm concerned with the way certain transactions totalling $1.6 billion were presented in the actual unaudited deficit as reported in the budget and in the Ministry of Finance's Ontario Finances publication.
Quite frankly, the financial statements of the province show a more financially realistic deficit than the one presented to the Legislature in the budget. At a time when tough decisions have to be made by the Legislature, its members and therefore the taxpayers, it is imperative that we all have a clearer picture on where the province has been financially and where it is going. There, certainly, I should add that the Minister of Finance has stated in the House that the reconciliation -- the deputy minister has just reiterated that commitment. That is a tremendous step in the right direction, so we appreciate that.
In my annual report, and in a handout which I will give you in a minute, I outline three types of transactions, totalling about $1.6 billion, which were not included in the 1993-94 CRF unaudited deficit reported with the budget to the Legislature in May 1994. Reporting the financial reality of these transactions did not depend on the application of any accounting rules; it depended on reporting these transactions in their financial reality rather than in their budgeted form.
In my report, I also noted that according to the 1994 budget, similar transactions exceeding $2 billion are planned for the 1994-95 fiscal year. I urge the government to prepare a reconciliation of the CRF unaudited interim actual results reported in the budget with the results as they would be reported in their financial reality. As we just heard, there is a commitment to do so, but I will talk about that in detail in a moment.
Commencing with the 1995-96 fiscal year, I also strongly advocated that the government adopt the same accounting policies for the budget as I use in reporting the actual results in the province's financial statements.
With this and the previous discussion of this committee in mind, I've prepared a one-page handout detailing the $1.6 billion and the $2 billion which I will distribute. If the committee wishes, I'll take a few minutes to walk you through this.
The Chair: Does everyone have a copy?
Mr Peters: I think everybody has a copy of this at the moment.
Maybe by way of a brief preface on comments that the Deputy Minister of Finance has just made, in the area of capital there are essentially three issues that have to be addressed.
Firstly, there is direct capital; that is, infrastructure -- buildings or anything in brick and mortar with a future value -- that is constructed or built or acquired directly by the province. On that, I fully agree with the deputy minister that the rules are out. All governments are grappling with this issue at the moment as to how to deal with this particular issue.
However, on the two other capital areas mentioned, the rules are very clear. As far as capital grants are concerned, PSAAB has ruled, and the profession has accepted, that capital grants are grants, are grants, are grants. They are expenditures of the government when they are made.
In order to get out of this, we are recommending -- and we will certainly cooperate as best we can; we're happy to do that, Jay -- that appropriate, auditable business practices, systems and procedures be established to properly manage such things as existence, ownership, valuation, amortization rates and similar matters. We are happy to cooperate on this. But the current rule is that if it is a capital grant, it is an expenditure. Those are rules that have come out quite some time ago actually, a few years ago.
The other aspect on capital is structuring capital expenditures through loans, and that is the first item you find on the handout. Again, the Canadian Institute of Chartered Accountants has not only ruled generically, it has ruled specifically, that the loan-based financing given to these organizations through the capital investment corporations established under Bill 17 by the province of Ontario are grants to those recipients, and we see no reason why they should not be accounted for as grants by the government when it gives them.
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The financial reality of the situation, and this is why I talk about financial reality, is that none of these organizations has the financial wherewithal to repay these loans. It is a burden on the future parliaments when they vote the budget to give these organizations the money so they can repay the loans. That is the fundamental issue. The fundamental issue is not whether we account for them as capital or not as capital in these organizations, the fundamental issue is how they are being funded. When they are being made under the current rule of a grant is a grant is a grant, it is an expenditure of the government of the day that decides to give that money to the organization, because the only way they can ever pay it back is by Parliament getting together again and giving these organizations money to pay it back.
That is the first item, the $932 million, and in the budget, as best we can put it together from pages 104 and 115 of the 1994 budget, that amounts to almost $2 billion.
The second one, and I'm very grateful to you that in your comments you deal with the -- sorry, I'm talking about the third item. The first is the sale and repurchase. I have told this committee that this is an innovative and imaginative way of borrowing, but it is borrowing; it is not revenue. It is not revenue to the government. It is an imaginative, good way of incurring new debt, but it was accounted for in the original way as revenue.
There were agreements. They are already in the public accounts according to the public accounts, the accounts of GO Transit. There was a memorandum signed in December 1993 already in which the government had committed itself to repay this amount. Therefore, if you repay amounts, it's really not revenue. That was the third item.
The middle item, the transfer of government land and buildings, is essentially just that. It is a transfer of assets to another organization. I fully agree with the policy behind it, which is to better manage these assets, but the ultimate benefit to the government is strictly from the better management of these assets. That particular transfer did not result in one dollar of revenue being added to the coffers. In fact, the opposite took place.
A very deliberate decision was made, very clearly, to transfer what we call beneficial ownership, because if we had actually transferred real ownership and title had passed, there would be some very happy and very wealthy lawyers running around, because I think the estimates of the legal fees of those transactions were somewhat astounding. I think they exceeded somewhere around $20 million. In fact, the government very wisely -- the officials should be congratulated on their decision to go with the second alternative the lawyers provided, which was to do a transfer of beneficial ownership so that the management benefits could be realized. But for the accounts as a whole, for the public accounts, there was no revenue generated. They are future benefits.
These are essentially my comments. Thank you, Mr Chair.
The Chair: We will now proceed in rotation. I think it would be fair to split this up in 15-minute intervals and then see where we are at that point.
Mr Monte Kwinter (Wilson Heights): I'd like to just follow up on what the auditor had to say and ask the Deputy Minister of Finance some questions dealing with financial reality, and I want to concentrate on 1994-95.
In the report of the auditor, on page 2, he says, "Now that the preparation and presentation of the financial statements of the province for the year ended March 31, 1994, are on a more appropriate accounting basis, a clearer picture of the actual deficit for the year then ended and of the actual accumulated deficit and the public debt as of that date has emerged."
And the key point that he makes is:
"However, most of the key financial decisions by the legislators are based on the financial information presented in the budget which traditionally is presented for the upcoming year in the spring. While we do not and should not audit the budget, we believe significant improvements are required in presenting the actual interim unaudited results."
Mr Deputy, the concern I have is that I think the budget is not a document that is separate from what happens at public accounts. It's all part and parcel of informing the public, informing legislators of what is the financial reality, the state of the economics of the province.
I'd like to refer to page 1 of the statement that the auditor made when he released his report: he said "At the time when decisions have to be made by the Legislature, its members and therefore the taxpayers must have a clear picture of where the province has been financially and where it is at." The other thing I thought was quite significant is that when he talked again in his statement preceding the presentation, he said that the deficit for March 31, 1994, reported in May 1994 with the budget, and in August 1994 in the quarterly Ontario Finances publication, differed significantly from their financial reality under any accounting rules.
I heard your statement saying, "Well, you know, in public accounts we have one type of accounting rule and then we have a separate set when we deal with the budget." He is saying we're not really talking about how you present it, we're saying it doesn't matter what rules you use; there is a significant difference in the financial reality of the situation as we find it. Maybe you could comment on that and then I would like to proceed a little further.
Mr Kaufman: Well, let me try and deal with it. The fiscal reality, to the extent that the kinds of transactions the Provincial Auditor has identified represent difficulties with the Provincial Auditor -- those issues have been clearly presented in the budget, they were in the budget plan, they're fully disclosed and the rationale for why they have been structured in the way they've been structured is also presented.
In terms of those fiscal realities, I keep wanting to come back to the capital issue. The problem that we have identified for some considerable time and continue to identify as a continuing problem is the issue primarily of treatment of capital, trying to get a better distinction between what is a current account picture and what is a long-term picture with respect to the debt position of the province.
I suppose I take issue with the question of are we, through the budget, presenting fiscal reality. I think we are presenting fiscal reality through the budget, and all of the information that allows this piece of paper to be presented derives from the budget.
I think there is an honest set of issues that surround this whole question of capital. It may be the perception that a grant is a grant is a grant -- it's also that a brick in a hospital and a brick in a water sewer plant do not have a discernable difference either and that we, as a province, are substantial financiers of that investment. The question of how we recognize that investment and how it's reflected in terms of what is the current account impact of that is clearly something which the government has signalled, and I think many people have signalled for a variety of reasons, that they are not satisfied with those kinds of results. In his comments Erik has flagged a variety of issues around ownership, around benefit, which I think are a source of need for ongoing discussion among us. It may be that it's possible to get some reconciliation on some of those issues. But I suppose I do take issue with the statement that the budget doesn't reflect fiscal reality. The fact is that all of the information is fully disclosed in that context and the budget attempts to provide a context and a policy rationale around the way in which parts of it are being dealt with.
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If you take something like the GO deal -- I'm not going to get into an accounting squabble because I'm not an accountant, but in terms of the way in which that was treated, in the absence of consolidation, that essentially was a dividend payment from a crown corporation to the CRF and it got recognized as revenue in a way consistent with the way in which dividend payments from other agencies of government had traditionally been recognized. There's no question as well that we also created through GO Transit a debt obligation which in fact we are standing behind and, on a current account basis, we are committed to pay the principal and interest repayments and those are reflected in the budget as an operating cost.
Quite frankly, in terms of the objectives that the government is trying to achieve in terms of dealing with capital, the GO Transit deal in fact accomplishes those in a fairly precise way. I think it does represent a statement of reality. No one is hiding the fact that GO now has debt obligations associated with that transaction. It surely does have debt obligations associated with that transaction.
Those are some comments. The key point I want to emphasize is that through a comparison in the budget with the PSAAB system, and I just put cautions on that, it's not going to be as easy as it sounds. There will be an opportunity to look at that fiscal reality or financial reality in the budget that's coming up, both in relation to what has transpired this year and into the future, so I think people can judge for themselves -- it's a fairly fulsome set of numbers -- what the fiscal reality of the province really is.
The Vice-Chair (Ms Dianne Poole): Mr Kwinter, before you continue, the auditor would like to make a comment.
Mr Peters: If I may, just on the GO Transit, I agree with you. What you have brought up is a very important other issue, and that is that the budget itself -- you used the word "fiscal" and I think very advisedly. But the budget at the moment is a budgetary document that deals with the consolidated revenue fund alone. It does not deal with these outside organizations such as GO Transit or the capital investment corporation. This is one of the other issues that we are bringing in where we're advocating that these be brought into the budget, and I think the comment we have right now is it's not being done.
Having said that, though, I do have to raise with you the question of financial reality versus fiscal reality, and that is that indeed the consolidated revenue fund had made an agreement with GO Transit to pay back the debt. There is a memorandum of agreement that was signed by the Minister of Finance. There is no such transaction, for example, for the dividends that were received from the Ontario Lottery Corp or from the liquor control board. If I may explain that to you, and I see from the nodding that you may agree with me, the financial reality was that even for the consolidated revenue fund, that particular transaction was a debt and not revenue, based on the agreement signed before the year-end by the Minister of Finance. I just want to put this on the record.
Mr Kwinter: I think there's a fundamental problem in that I have always felt that the budget was a political document and the public finances and the reporting of the fiscal position of the government is an accounting document.
My concern is that we have a situation where the auditor today in his handout has introduced material that says that, in his opinion, there's $2.3 billion worth of expenditures that have been incurred by the government that have to be attributed as debt, as opposed to loans or as opposed to off-book transactions. Somewhere along the line, as you have done in the 1993-94 budget adjustment, that is going to be acknowledged and. sometime way after the budget has been presented, there will be an admission by the Finance officials that, "Yes, we understated the financial situation of the province and we are going to adjust the current year's deficit by the $1.8 billion, $1.9 billion or $2 billion," whatever the amount is, and that acknowledgement is made after the fact.
My concern is now that the auditor has pointed that out and it has been acknowledged by Finance officials that, "Yes, we accept the auditor's position and we are going to modify our reporting to do that, but we're not going to do it next year and we'll sort of wait until after we get over the political hurdle of the budget and then whenever we have to, when we get to the crunch, we will make that adjustment at that time."
That is the concern I have, and I don't want to in any way put words into the auditor's mouth, but I think that's what we're talking about when we talk about financial reality. If that is the situation, why not report it at the time you present the budget? The budget is a critical document, not in a financial sense in that it isn't the final accounting, but certainly the rating agencies, the investors, the people who look at this document -- and they know the game, and they immediately discount the figures that are given out because they know what is happening.
Why shouldn't the taxpayer know and why shouldn't the people know that this in fact is the fiscal situation as contemplated? We understand that it's a roadmap, it's a prediction of what could happen in the next fiscal period, but there are certainly certain basic facts that the auditor has stated in his remarks today have been absolutely agreed to by the financial community and the accounting community, that a grant is a grant is a grant. There's no way you can doctor it to say that it isn't, so why not acknowledge it and report it that way?
Mr Kaufman: I think I've tried to answer the general point, and with respect to the question of the $1.9 billion here, it's a combination of loans -- Erik's calling them grants, we're calling them loans. The reason we're structuring them as loans -- I'll try to explain precisely what the reality is that is fully disclosed in the budget. There's nothing being hidden. All the capital expenditures are laid out in detail. The number he's got here, for example, includes $300 million for the 407. The 407 happens to be a project, an investment, which will be financed ultimately through tolls.
Not that we don't want to report the spending on the 407, but the treatment of this as debt is something we simply at this juncture would never agree with. We really have to go through some of these issues. You have a capital project which is fully financed through toll revenues, and our assessment is that when we work through the rating agencies, this will be recognized as a non-recourse debt. The point I'm making here is that around this question of capital, the treatment of capital and how you're financing it, we've got to work through some of those issues, and getting an adequate resolution of what's a current account picture and what is a long-term debt-picture of the province been the objective.
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I'm not suggesting that what we're doing now is entirely satisfactory, but what we are trying to ensure, through the budget, is full disclosure and representation of all the transactions in the province. We have gone through various budgets to add more and more information in that regard so that you as legislators and the public are fully aware of all the transactions, and reasons for those, that are in the budget plan.
So, as I say, we have to work through some of these issues. It may be that we can in fact get to adequate resolutions on many of them, but at this juncture they're not resolved.
Dr Bob Christie: I think the other point, Mr Kwinter, that you mentioned had to do with the timing of the disclosure of some of the information that Mr Kaufman has spoken to. For purposes of clarity, when we mention that we have undertaken in the budget next year to provide a comparison of the budget basis to the modified accrual and consolidation basis, that will be provided both for the 1994 and 1995 results, the interim actual results for this year that the auditor has referred to in the first chapter of his report. The comparison will also be provided for the 1995-96 budget plan. So the budget documents will contain not only the disclosure that Jay has referred to on all of the individual transactions, but we will also assemble that into a comparison of the two bases of presenting the numbers, so there will be complete information disclosure and on both bases.
I think the timing difference that you're reflecting is a function of the fact that this year the conversion between the systems was made at public accounts time, which was largely a function of the amount of time it required to pull together some of these numbers. So we had a budget prepared on a particular basis and then a set of public accounts that came out six months later at the time of conversion. As we get into a full, complete cycle beginning next spring, we will be able to present that comparison on the two bases, and that is what has been indicated would be done.
The Vice-Chair: Mr Kwinter, I'm sorry, the time's expired, so we'll move on to the Conservative caucus and Mrs Marland.
Mrs Margaret Marland (Mississauga South): You know, I'm very concerned about what I'm hearing. Obviously, all of us sitting around this table as committee members are not necessarily financial whizzes -- I certainly never pretend to be something that I'm not -- but I'm here representing the ordinary person on the street. The ordinary person on the street in Ontario is entitled to know how much governments spend, where they spend their money and account for it.
The worst thing that can happen to any government is a confirmation that in fact governments do play a shell game with the taxpayers' money. If we want to be in a position where that is avoided, then we can't have this kind of gobbledegook that's going on. Frankly, when I hear the auditor talking about the necessity to have the new accounting rules apply to everything in terms of giving the financial reality, we can't have the auditor stating those concerns and have you, in my opinion, continue to defend what it is you're doing.
Frankly, Mr Kaufman, you said a few moments ago, "I'm not saying that what we're doing now is entirely satisfactory." Well, I'm sorry, what you do should be entirely satisfactory, and it should come from a background of you accepting advice from the Provincial Auditor if it's not generated within your own ministry.
GO Transit is probably one of the easiest things for somebody with my background to understand, and I think it's fair enough to say that of the 130 members in our Legislature most of them do not have strong financial or accounting backgrounds. I don't apologize, by the way, for not being an expert, because I don't think that members have to be experts, because we count on the experts that are in the employment of government. We have an expert in the auditor, and we have an expert in you as the deputy in Finance.
If the auditor is saying that a capital grant is a burden on future parliaments, then we have to have a way of reporting that as a liability in the budget. You said also this morning that GO Transit now has debt obligations. Well, of course they do. So you have to ask the question, why would, in the short term, the decision be made, in the example of GO Transit, to sell the rolling stock? Sure, I think you said $400 million in revenue from that sale, but now what you've done is put the future generations on the hook to repay, in fact, not only repay: Just in the pure operating expense of having to now lease this equipment, you've put that on the charge cards of my grandchildren, and I don't think that's the way to do business.
It's very funny that all three provincial governments -- so this isn't a partisan comment -- think it's very interesting that the city of Mississauga has $350 million in its reserve fund, and this is a city now of around half a million people. The way that has happened in the city of Mississauga is because they haven't played with the taxpayers' money and they have never bought anything that they couldn't pay for at the time. So there is no debt in the city of Mississauga.
I realize that is unique; it's actually unique in North America. Not only is there no debt in that city, but they haven't increased the taxes in the last three years. I think if a person like Mayor McCallion and her team of councils over the last 15 years that she's been mayor have been able to achieve that, you have to look at the province and wonder why it is that we're playing this game of putting -- we know why the crown corporations were organized: because it took that debt outside the consolidated revenue fund. But it doesn't make it right.
What I'm concerned about is, if we have the Provincial Auditor saying that capital grants are expenses of the current government, just as an example, how can you defend what it is you're doing? If you tell me that you were told to do it by the Treasurer, then that lets you off the hook, but if you -- and I guess I'm looking at you, Mr Kaufman, directly, as the deputy -- are the person who came up with this ingenious formula for getting major debt out of the budget process, I have to ask you why.
Mr Kaufman: Well, let me try and deal with a number of the points you've raised. First of all, the question of not being satisfied: I don't want that taken out of context. My reference was with respect to the issue of the treatment of capital. This is an area, both with respect to the PSAAB treatment as well as our own, that we need to work through, and hopefully we can get to an appropriate resolution.
I've spoken at length today about the issue of capital. In terms of GO Transit or a hospital or whatever the case, the point that's being made in terms of the treatment of capital is a recognition that capital in fact provides a stream of benefits over a long period of time and that, in terms of the costs of that capital, in current terms, on an annual basis, that be reflected in a more appropriate way. That's basically been the thrust of government policy on these issues.
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It's not a question of hiding the fact; I think it's reported in terms of the budget, in terms of financing requirements. All of this capital is reflected in the province's financing requirements and reflected as an item of debt. The decision to invest in new capital is clearly a decision of the government and ultimately of the Legislature in terms of its appropriation.
The reasons for the crowns? Government clearly indicated the rationale when it brought in the bill, what it was attempting to achieve through the crowns.
Mrs Marland: So it was a government decision, not a staff decision.
Mr Kaufman: Of course it was a government decision. They received advice from officials on these various initiatives.
Mrs Marland: Did you support that decision?
Mr Kaufman: My advice to the Minister of Finance is something I give to the Minister of Finance, and I've said here and I've said elsewhere that I believe the move to use crown corporations as a vehicle for the purpose which they were intended is a sound policy initiative. So obviously it's one which I think has considerable merit.
Mrs Marland: Even if their debt isn't reported?
Mr Kaufman: Well, their debt is. This goes to the issue that Mr Peters has raised around the question of consolidation and the way in which the budget is currently structured around reporting around the CRF. What the auditor is asking the province to do is in fact to go to a consolidated approach for the budget. That has certain consequences. It would change the nature of the relationship to previous budgets, and in terms of what people understand --
Mrs Marland: What would be bad about that? I mean, what would be bad about having the financial reality in public?
Mr Kaufman: I've been over this ground in terms of the fact that the budget does reflect financial reality. It reflects it with disclosure of information. It reflects it in a particular way.
I think what we've tried to do in order to bridge this problem, and I think it does that, as Mr Christie has indicated, is in fact to respond to the auditor's request through a comparison, so that in fact we have, in the budget, information structured precisely in the way that the auditor would like us to move.
Mrs Marland: Excuse me. Can I just ask Mr Peters a question, then, because if I'm not hearing this correctly, I'd like to know. Are you agreeing with what Mr Kaufman is saying, Mr Peters, or are you still concerned?
Mr Peters: I've heard good news this morning. This is a point that had not been on the table. I think when Mr Christie responded he said that in the future on the budget it would not just be a reconciliation to that reality for the current year, for the interim actual unaudited, but that would be carried through into the budget itself, and that may go a long way towards resolving these issues. I think that was a very good news item indeed.
Mrs Marland: Mr Kaufman, the average person on the street, when they get their mortgage paid off, they're absolutely relieved because they now own that investment of their home. They don't go out and take on another mortgage in order to have another long-term debt.
Mr Kaufman: Some of us have, I'm afraid.
Mr Larry O'Connor (Durham-York): Maybe when we get a few years older. I'm waiting for that day. I'm much younger than you, Margaret. Sorry.
Mrs Marland: The point is that a lot of people want to get into that position. So I would like to know, since you are the adviser, I presume, to the government in your position as deputy, do you support what GO Transit did? I'm using that only as an example. Do you support selling something that you own and then having the wonderful windfall that year from the revenue of the sale and yet incurring a debt for generations to come?
Mr Kaufman: I think that you can take the GO Transit issue out of context. The context is dealing with the financial realities of the province of Ontario in terms of, over the last number of years, a very difficult financial set of situations and choices between taxes, between expenditure cuts and between new ways in which we can raise money. That's the context in which we were dealing with and have been dealing with these kinds of issues.
Mrs Marland: So do you think putting the province into long-term debt to carry the cost of now paying for the GO Transit equipment is a good decision?
Mr Kaufman: What I've said is that I think the GO Transit deal was a sound deal. The issue of investment in capital is one on which the government feels very strongly committed. It has made that clear in terms of its budget policy. That's the direction the government has decided to go. They've offered their reasons for that. When one invests in infrastructure, it incurs long-term costs; it also yields long-term benefits. One can turn it around and say, "Why should current generations be fully financing today something which provides benefits to people over a long period of time?" That's the nature of capital investments.
So in terms of trying to get a better understanding of the difference between operating and capital and what that means, clearly the government has signalled that, and I think there is an important public policy debate that has gone on for a long period of time around these questions.
What I would make of the mortgage and the repaying issue is that the way in which we have now structured this in terms of the budgetary plan in fact is to include in the operating expenses of the government principal and interest repayment against those investments, so that in terms of decision-making, public policy decision-makers, the government and the Legislature, are now, in terms of the current decision around --
Mrs Marland: The interest will be in the operating budgets of the crown corporations, not in the government.
Mr Kaufman: No, the interest to repayment is in the operating accounts of the government.
Mrs Marland: For the crown corporations?
Mr Kaufman: For the crown corporations, precisely because we thought that it was important to get that part of the decision-making, which quite frankly was never there before. To the extent that we're incurring debt with respect to capital, it was off in some huge number called "public debtors" that no one could ever figure out.
What we've now done is clearly establish a very direct relationship between capital investment and the costs of that capital in the operating accounts. People are then forced to make choices as to what extent they're prepared to invest in more debt -- it really goes to the heart of your point -- invest in more capital which has long-term debt, and the consequences of that in terms of the operating deficit. So it in fact has presented policymakers with a much more realistic set of decisions, because they now are able to establish some direct relationship between the capital investment and the cost of that in the year in which it's being made.
So that was, again, the policy intent of government. As I say, there's a long history of debating these points in public finance literature. It does go some distance in, first of all, much more fulsome disclosure around capital investments and the cost of those, and it does change the nature of decision-making with respect to that. In that respect, I think we have moved the yardsticks.
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In terms of the accounting treatment issues, I think this is a very good -- and I'm not an accountant either. I don't pretend to understand all the intricacies of this, but I think there are needs to work through some of the accounting issues in order to get them more in line with what is a growing consensus around how capital ought to be treated in public finance. This is going to take some time to work out and I think it's incumbent upon us to respond, as we have last year and this year, to the Provincial Auditor and to be sure that whatever we're doing, it is fully in the public domain and that we are presenting information in the clearest way possible for people to make decisions, wherever they're sitting, whether it's in government or in the Legislature or outside the Legislature.
Mr Kimble Sutherland (Oxford): I was wondering if we could just elaborate a little bit on managing the government assets. Only being here since 1990, I haven't got all the history, but my sense is that in many respects, the government being a large property holder, landlord of all kinds of properties, in many effects the government just hung on to them until they actually got officially declared surplus and then decided, well, just put them out into the marketplace. Obviously, there was some consideration of not trying to flood a marketplace by putting too much on at a time, but how were we really managing those assets? Were we making the most effective use of them? How does that compare to what we're trying to accomplish now?
Mr Kaufman: I have two general points to make on that. The first is that by creating a corporation and putting a board in place and bringing in outside business expertise on that board, people really understand the business of realty management. And bringing a different kind of bottom-line discipline -- it's amazing how when you create a corporation, the bottom line becomes really far more important. That overall direct focus of a board with real expertise on the management of assets certainly has already shown real value added.
The second and, long-term, more fundamental point is that we plan to introduce a pricing system into the management of government realty, and that pricing system is directly related to the market valuation of assets. Ministries are now going to be faced with a specific price for the use of their space. That will produce a far more serious evaluation, in my view, of the choices that people are facing with respect to the use of physical space. I think it's clear already and it will be far clearer over time that there will be a consolidation of space in order to save money now that people know the price of spaces. In association with that -- as we start to see consolidation we start to see savings -- we're going to see the realty corporation looking at the best use of surplus facilities, whether that's developing them for sale, which currently has not been a real focus, or is using them for alternative purposes for government. I think there are clear benefits from both of those major changes in the way we're doing business.
The other thing to say is that this discipline in terms of the realty corporation has resulted already in a much leaner organization. I don't know the numbers offhand, but since moving to a corporation structure it's been possible to really rationalize the organization more effectively and there are substantial savings as a result of that. So I think there are some very solid benefits from the move.
Mr Sutherland: The other question is regarding this issue of the benefit of capital expenditures. Different governments have chosen through various means to try and ensure that our system of public services is delivered in an effective way. In many cases, in terms of achieving that goal, we try to go to community-based agencies, whether that be a hospital, whether that's through the system of school boards or many of our transfer payment agencies, and through the operating funds we flow, we allow them to provide those services and we believe that's a benefit to society as a whole.
In many cases, it would seem to me the capital expenditure is there hopefully to help either, in some cases, expand their service because of the demands on it or, in other cases, provide a more efficient operating structure for them to do that. It seems to me we are getting benefit out of that expenditure to those transfer payment agencies if it's increasing their operational ability.
Mr Kaufman: No doubt, and I think if you look at a variety of ministry strategic capital policy directions, more recent I would say, you will find that has become a paramount issue for ministries and the decision-making around capital investment.
A couple of good examples of that are in health care. The shift from an inpatient focus to an outpatient, day surgery focus, which has tremendous efficiencies associated with it, cannot be done without significant capital investment. Not only does that allow for an existing health care dollar to go much further; it also provides a level and type of service which is more effective and convenient for people utilizing those services.
Another example is multi-use facilities. It's clearly possible to begin to, rather than have different agencies have their own facility and all the administrative costs that go with that, consolidate into one facility and share a whole variety of services. In the Ministry of Education, along with Culture, Tourism and so on, we have in fact got a policy now of investing in multi-use facilities as a priority.
I would agree with you that capital is not simply a vehicle for responding to new demands. It's an investment tool for getting greater, and in some cases substantially greater, benefit, efficiency, out of the system.
Mr Sutherland: I guess that raises the issue -- and I'm not an accountant either to understand all the intricacies of it -- of how the benefit of that is measured. In some way, reporting that in an accounting framework seems like a big question as to whether all the current frameworks allow that to occur. Somehow, it would seem there needs to be some way of accounting for that as a benefit, whether to us as the direct capital or through some of the benefits provided to the transfer agencies, who in effect are carrying out programs on the government's behalf and on the taxpayers' behalf.
Mr Kaufman: I think I've emphasized again that this whole area is one which needs, and I think there's general agreement, continuing work to try and resolve how we get the best method of accounting for these.
Also, I take the auditor's point seriously on the point of accountability. In terms of these investments, they are investments, as I said before, largely financed by the province, and they are the result of provincial policy direction, so there is a need to be sure that we have effective accountability mechanisms associated with those investments. But the treatment of capital is something which a lot of people are looking at, including the audit community that has a task force, so my hope is that we will get something which comes out of the wash, both in terms of the audit community as well as the government community, that works for everybody. It would be very nice, quite frankly, to not have a situation where we have such substantial differences in comparison between the way various provinces treat different things. It would be nice to have some common, agreed-upon basis so that we were able to get a clearer view of things across the piece for comparative purposes and for decision-making purposes than we currently have.
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Erik's absolutely right: It is a bit of a dog's breakfast. It has always been thus, and I think everyone is strongly interested. I know my deputy finance colleagues and ministers of Finance have had ongoing concerns about these issues, and it won't surprise me that before very long this becomes a real focus in that forum as well, trying to resolve it and create some basis of agreement with the audit community.
The Chair: Mr Peters has a brief comment.
Mr Peters: Just a very brief one. This is a very valuable discussion, because what it really starts to focus on is getting away a little bit from the accounting rules but getting more into the economic substance of the transaction.
The real question on capital is really, is there a future benefit? The two schools of thought on it are, yes, there is a future benefit if, for example, a hospital can provide service in the future. At the same time, the traditional view to date by most of the governments has been that actually the hospital itself is a funding requirement in the future, because the government is on the hook in the future to fund the maintenance and operation of the hospital, it is on the hook to finance the debt that is incurred.
Currently all governments are in the position that they have to borrow in order to finance activities, so it is a matter of trade-off. The real crux of the matter rests really in two issues: Is there a true economic long-term benefit to the government from that particular capital investment, and, the second one, when should that benefit be recognized? Should it be recognized at the time you make the investment, or is it to be recognized over time? Those are the fundamental issues we're wrestling with, and I'm glad you've held them out.
Ms Dianne Poole (Eglinton): Mr Chair, I'd like to move a motion, and I think the clerk has copies which he's now distributing for the members' perusal.
I move that the Ministry of Finance implement financial business practices, procedures and systems acceptable to the Provincial Auditor to ensure that the Legislative Assembly receives, on a timely basis, financial information which reflects as closely as possible the financial reality of transactions completed or planned.
Mr Sutherland: I'd like some clarification on what this resolution really means. What are we defining as "on a timely basis"? I mean, we have a procedure that many of these things are presented in the public accounts at the end of the process. Are you saying that on a quarterly basis there should be something presented to say where things are going, of that nature? If you could clarify what you mean by this resolution, that would be helpful.
Ms Poole: This refers to the budgetary process. As we've heard from the Ministry of Finance today, there has been considerable effort put into ensuring that the public accounts are done in accordance with the accounting principles recommended by the auditor. Unfortunately, the way the budget is prepared does not reflect the financial reality. We could have a long debate over financial reality versus fiscal reality, but the fact is that the people of the province have a right to look at the government's budget and expect that it reflects financial reality as well as fiscal reality.
Mr Sutherland: I would just make a comment back, from the statements we've heard this morning both from the deputy minister and Mr Christie in terms of what's being presented, that this comparison is going to be presented in the budgets coming up, and a commitment has been made that way. I'm not sure whether the minister has made that commitment or not publicly or whatever, but the ministry certainly has, so I assume that is the case, that that is going to occur, in essence, what is here. So I'm not sure whether there is a need for this resolution at this time.
Ms Poole: I just think it's important the public accounts committee makes it very clear that this is a priority not only of the auditor but of the public accounts committee, and the ministry has obviously shown within the last year that they are willing to cooperate and bring the public accounts into line with the accounting principles. We would just like to ensure that in fact this happens with the budgetary process.
The Chair: Any further debate, discussion? If not, shall the motion, as put forward, carry? All those in favour? All those opposed? So the motion shall not carry. It is defeated.
I believe that brings this morning's agenda to a conclusion. I would like to thank the deputy minister and his staff for appearing before us this morning. I think this matter is probably something that will continue to be of a concern to the committee as we proceed into the future, so you'll probably be hearing from us some time in the new year. Thank you again for appearing before us.
Mr Kaufman: Thank you. We've enjoyed the discussion.
The Chair: If there are no further matters to be dealt with by the committee members this morning, we are adjourned.
The committee adjourned at 1149.