1997 ANNUAL REPORT, PROVINCIAL AUDITOR
CONTENTS
Thursday 4 June 1998
1997 Annual Report, Provincial Auditor: 1996-97 public accounts and reporting of contingency funds
Ministry of Finance
Mr Colin Andersen, assistant deputy minister, fiscal and financial policy division
Mr Robert Siddall, director, controllership branch
Ms Carol Layton, acting director, fiscal planning branch
STANDING COMMITTEE ON PUBLIC ACCOUNTS
Chair / Président
Mr Bernard Grandmaître (Ottawa East / -Est L)
Vice-Chair / Vice-Président
Mr Richard Patten (Ottawa Centre / -Centre L)
Mr Marcel Beaubien (Lambton PC)
Mr Bernard Grandmaître (Ottawa East / -Est L)
Mr Bill Grimmett (Muskoka-Georgian Bay /
Muskoka-Baie-Georgienne PC)
Mr Jean-Marc Lalonde (Prescott and Russell / Prescott et Russell L)
Ms Shelley Martel (Sudbury East / -Est ND)
Mr Richard Patten (Ottawa Centre / -Centre L)
Mr Peter L. Preston (Brant-Haldimand PC)
Mr Joseph N. Tascona (Simcoe Centre / -Centre PC)
Mr Terence H. Young (Halton Centre / -Centre PC)
Substitutions / Membres remplaçants
Mr John R. Baird (Nepean PC)
Mr Gary Fox (Prince Edward-Lennox-South Hastings /
Prince Edward-Lennox-Hastings-Sud PC)
Mr E.J. Douglas Rollins (Quinte PC)
Also taking part / Autres participants et participantes
Mr Erik Peters, Provincial Auditor
Mr Gerry Phillips (Scarborough-Agincourt L)
Clerk / Greffière
Ms Donna Bryce
Staff / Personnel
Ms Elaine Campbell, research officer, Legislative Research Service
1997 ANNUAL REPORT, PROVINCIAL AUDITOR
Consideration of 1996-97 public accounts and reporting of contingency funds.
The Vice-Chair (Mr Richard Patten): I'd like to call this meeting to order. Ben is in the House. He has to speak to a bill, but he should be here shortly.
The first item of business is the report of the subcommittee, which you have before you. I could read through it, if you like, or do you want to just peruse it? I'll give you a minute to read through it.
Are there any comments or questions related to the subcommittee report? No. Could I have a mover for it, please?
Mr Jean-Marc Lalonde (Prescott and Russell): I move it.
The Vice-Chair: All in favour? Good.
We can move to the second item.
Mr Erik Peters: Chair, may I just raise a question? It's a technical question regarding items 5 and 6 of the subcommittee report. I have no problem with adopting it, but is there a plan? Are these now adopted motions of the committee as a result of the committee or is there a separate motion required?
Clerk of the Committee (Ms Donna Bryce): This becomes a motion.
Mr Peters: It becomes a motion and therefore my office is instructed under items 5 and 6 to do special assignments under section 17 of the Audit Act.
Clerk of the Committee: Correct.
MINISTRY OF FINANCE
The Vice-Chair: I'll call forward the witnesses from the Ministry of Finance. Mr Colin Andersen -- by the way, on the agenda it says acting, but actually he's the assistant deputy minister now; congratulations -- Carol Layton, the acting director, fiscal planning branch; and Robert Siddall, the director, controllership branch. Welcome to the committee this morning. Do you have a presentation?
Mr Colin Andersen: Yes. Copies are just being circulated.
The Vice-Chair: Following which, of course, some of the members will probably have some questions for you. Please proceed.
Mr Andersen: First of all, I'd like to thank the committee for the invitation to be here today. I have with me Robert Siddall, the provincial controller, and Carol Layton, the director of the fiscal planning branch.
I'll refer you to the presentation that we've just handed out. It will essentially cover three areas: We'd like to take a brief run through some of the recommendations of the Ontario Financial Review Commission in the area of prudent fiscal planning; then we'd like to talk about how the province has adopted those recommendations in our annual planning and reporting; and finally, to show how some of those results have actually been communicated and reported in the annual public accounts.
If you flip to page 3, as you're probably aware, the government established the Ontario Financial Review Commission in 1995 to review the financial management practices of the government and make recommendations for improvement. Membership included prominent accountants and business men and women in Ontario and it was chaired by Bill Broadhurst of Price Waterhouse. Erik Peters acted as adviser to the commission and played a prominent role in the development of its recommendations. Those recommendations were provided in November 1995 in a report called Beyond the Numbers, which I'm sure many of you have seen, and I actually have a copy of it with me today.
The mandate of the commission is outlined on page 4, specifically the parts of the mandate that refer to what we've been asked to come and talk to you about today. What we've got here on slide 4 is actually an excerpt from the OIC that established the OFRC, and I'll just draw your attention to a couple of points.
The commission was mandated to examine the financial management and reporting of the government, including the timeliness and content of its reports. That included all of its reports: the estimates, the provincial budget, the quarterly finances, annual reports for the crown agencies and the public accounts.
It was also specifically asked to look at prudent planning and provide options, with a framework for a medium-term plan and a realistic budget framework for expenditure planning, specifically including the use of contingency provisions. We'll go into more details about the specific recommendations in the areas of economic assumptions, revenue variations and the like in subsequent slides.
On to page 5 now. The commission provided 55 recommendations in total. The government's progress towards implementing those recommendations was reported in the 1996 budget. There was a fairly lengthy appendix that outlined those. I'll draw your attention to some of the OFRC's overall recommendations, specifically those relating to planning.
The commission believed that its most important recommendations related to prudent planning, both with regard to measuring progress towards appropriate goals, but as well planning that makes allowances for unforeseen events that reduce the risk that the government will fail to meet its debt and deficit targets.
More specifically related to prudent planning, on page 6 you see recommendation 1.1 from the commission:
"That government adopt a prudent planning framework which encourages cautious forecasting and better expenditure planning; monitors results for the purposes of taking any corrective action that is needed; and includes provisions for unexpected changes in its economic outlook, in order to ensure that it meets or exceeds its deficit and debt reduction targets in the most effective and efficient way."
Recommendation 1.7, which is outlined on slide 7, went on to say, "That government's fiscal forecast be biased towards the cautious end of the range of forecasts that are consistent with its economic forecast."
On page 8, building on the overall recommendation that I already alluded to earlier about making allowances for unforeseen events, recommendation 1.8 of the OFRC states:
"That the budget set out a contingency fund exclusively to cushion fiscal targets against the impact of negative unforeseen economic changes." It also says, "Government should apply any part of the fund which has not been spent by year-end to reducing the deficit and debt."
Page 9 gives an excerpt from the 1995 federal budget. In developing its recommendations, the committee heard from the federal Ministry of Finance, and I would draw your attention to the bottom two paragraphs of that page, which outline the federal government's approach and use of a contingency reserve. It has included a reserve in the neighbourhood of $2.5 billion to $3 billion in its planning and, again, uses that reserve to cover risks arising from unavoidable inaccuracies in the models and unpredictable events.
The specific point to draw your attention to as well is the sentence there that is in bold: "The contingency reserve is not a source of funding for new policy initiatives."
On to the next page. I would now like to speak to how the recommendations have been implemented in the province's fiscal planning and reporting. In its discussions, the OFRC stressed that cautious forecasts cushion the impact of unexpected changes, helping to limit the risk of increased debt or of disruptive in-year cuts to planned spending.
The 1996 budget specifically contained a $650-million reserve as part of the caution built into the plan. This was specifically laid out in the budget and was said to "protect the budget plan against unforeseen risks such as unexpected and adverse changes in the economic outlook." The reserve was not used in that fiscal year and contributed directly to over-achievement of the 1996-97 deficit target.
A similar reserve of $650 million is included in the fiscal plan in every year, and it is important to emphasize that it is available only to protect the plan against unforeseen economic circumstances. If economic growth plays out as forecast, as the budget explicitly states, the reserve is applied to deficit reduction and not to any new spending.
On to page 11: In case you're wondering how the $650-million figure was determined, basically it accommodates a variance in our revenue forecast equal to the revenue yield from approximately 1.5 points of GDP growth. That's a fairly cautious margin of error, I guess you could say. It provides for a certain cushion.
Alternatively, you could look at that reserve as accommodating the equivalent of an unexpected drop at the time of about 7% of RST, or retail sales tax revenue, or 12% of corporation tax revenue. Obviously, all of those thing wouldn't happen simultaneously.
In addition to the $650-million reserve, the fiscal plan also incorporates regular use of prudent and cautious forecasts in a number of areas, in the revenue and public debt interest, or PDI specifically. Again, that's consistent with the OFRC recommendations.
For the 1996-97 budget, the economic growth projections used in the budget were deliberately set at more cautious than the consensus of the private sector forecasts. Similarly, both the short- and long-term interest rate assumptions used in the budget were more cautious than the average private sector forecast by approximately 100 or so basis points.
Each year this caution is fully disclosed in the budget in the detailed economic outlook paper which is included in the accompanying budget papers or the appendix to the budget. So every year you can look and see exactly how much caution and what that equates to in both percentage terms and dollar terms.
All of this contributed to helping overachieve the 1996 budget target of $8.2 billion. It was overachieved by about $1.3 million. So the caution that was in there and continuing good economic growth helped to contribute to that overachievement.
The OFRC also made specific recommendations with regard to the reporting of restructuring charges. I am on to page 13 right now, which outlines recommendation 2.13 of the OFRC. That recommendation states:
"When reporting the impact of restructuring that involves reducing staff, government follow the guidance of the Emerging Issues Committee of the Canadian Institute of Chartered Accountants. In general terms, this would mean accruing and expensing the cost at the time the restructuring decision is made."
In practical terms, this means that costs are to be reflected in the government's fiscal plan and deficit, sometimes before the actual cash payments for things like severance and the like are made.
Over to page 14. To this end the 1996 Ontario budget included a forecast for restructuring charges based on anticipated government restructuring decisions of about $900 million. This was a best estimate at the time, based on information that was available at that point of the fiscal year, knowing that significant restructuring was being initiated in both the health and the municipal sectors.
At this point, I'll turn it over to Mr Siddall to take you through the details of what was eventually recorded in the 1996-97 public accounts for some of the restructuring items.
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Mr Robert Siddall: Thank you, Colin. If you turn to page 15 of our presentation, when we actually came to the end of the year to book the decisions around restructuring, the public accounts for the year 1996-97 included a restructuring accrual of $2.4 billion.
On the page you will see that this accrual was made up of four major areas of restructuring: $970 million for hospital restructuring for the decisions that were made during the year related to the hospital restructuring; $772 million for government decisions involving the restructuring of the municipal sector; $438 million for employees' severance costs in the OPS related to the restructuring that the government had also made decisions on at that time; and also an accrual of $250 million for the province's share of the costs of the retirement incentive for teachers, which at that time the government had made a decision to proceed forward on, offering a retirement incentive for the teachers. In the budget this year, this particular item has been reclassified and included in the charge of the final agreement that has been signed with the teachers.
If you go to page 16, again some of how we go about coming up with these accruals, the accruals are determined as the year proceeds and as the government makes its decisions. The accruals represent the best estimate of the cost of these decisions at the time the decisions are made, and they're updated annually, based on the information that we received during the year. The accruals that we made two or three years ago have to be reviewed each year and updated each year, based on any new information we have during the year.
Included in that new information is the cost of the actual cash going out the door, paying off these accruals or these liabilities. In the case of restructuring accruals, the time period of when the cash will actually go out the door is not 30 days after the year-end, but anywhere from one to four years after the year that we set the accrual up.
We also thought today that we would go through and provide the committee members who might be new to the area some discussion about why we moved to PSAAB in the first place, and also we thought we'd go through, or at least present for your review, the 1996-97 public accounts financial statements and annual report. I believe it was two years ago that Erik Peters took the committee through the 1995-96 annual report, which was the first year we did an annual report, and had a discussion of that, but I don't believe the committee has formally been presented with the public accounts or had the opportunity to talk to the public accounts for 1996-97.
If I go to page 17, prior to 1993-94, the province was following a modified cash basis of accounting. The focus for the government was managing cash flows. There were concerns at that time, voiced by the Provincial Auditor, Erik Peters, about the fact that the cash books could be managed by managing your cash flows and that they didn't reflect the decisions of government.
Taking his concerns and the concerns of others into consideration, the province adopted the recommendations of the Public Sector Accounting and Auditing Board in its 1993-94 financial statements. In terms of what other provinces are doing, most provinces in Canada are now following the majority of the recommendations of the Public Sector Accounting and Auditing Board.
In 1995, the government, concerned with its financial management practices, set up a commission called the Ontario Financial Review Commission, which Colin referred to, and asked them not to look just at the planning aspects but also at the reporting aspects of our financial management practices in the province.
Their recommendations were that the PSAAB accounting basis be used consistently in the government's presentation of its financial information. That included in the budget estimates and Ontario Finances and in the public accounts.
The province is continuing to move towards the adoption of PSAAB. We now have adopted it in the budget and in Ontario Finances and in the public accounts. The estimates, as you know, are still on a modified cash basis, or the appropriation control is still on a modified cash basis of accounting. We continue to look at the issue of moving back to an accrual basis with the introduction of a new financial system for the province.
In terms of the OFRC recommendations on financial reporting on page 18, I referred to the first one. They also recommended that we produce an annual report that puts some narrative around the numbers. The financial statements, as you see, have a lot of discussion in the notes to the financial statements that are written, I would say, for financial analysts and knowledgeable users. The commission felt it was also useful to have a narrative similar to an annual report in the private sector that described the results of operations in the year in terms of description that people would be able to better understand.
They also requested that we move up the public accounts tabling so that it would be more timely to the members of the Legislature and to the public. We have been working towards moving up that deadline over the last couple of years.
In terms of our targets, page 19, this year our target is to have ready for tabling the public accounts by 150 days after the year-end of March 31. It is our intention to continue following the recommendations of the Public Sector Accounting and Auditing Board in the financial statements this year. The interim number in the Ontario budget for this year is $5.2 billion and we will continue to release an annual report with the public accounts this year.
In terms of the annual report that I presented to you, the recommendation of the OFRC is on page 20 and it provides a description of the key items that should be in the annual report. I draw your attention to both the annual report and the financial statements, to the fact that both reports include a statement by the Provincial Auditor stating that for the year ended 1996-97 the auditor provided an unqualified opinion on the accounts of the province.
If you look through the annual report, you'll also find, as described on page 21, that there is a section on economic and fiscal highlights, a section on revenues and expenses in the province, and a summary of in-year changes in revenues and expenses for the year under consideration. The OFRC also recommended that we put a budget comparison or a budget column in the financial statements so that users could clearly compare the government's plan against its actual expenditures and revenues.
There's also a section on financing and debt management, and a practice that is adopted in some jurisdictions of providing condensed information instead of the full set of financial statements, referring the user to the full set of financial statements if they would like to look at the detail in the notes, done between the annual report and the financial statements.
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The Vice-Chair: Thank you very much. I suggest a rotation of 10 minutes for each caucus.
Mr Gerry Phillips (Scarborough-Agincourt): It's an extremely important matter for Ontario. I compare this to the equivalent of a public company having to report its finances accurately or else it gets delisted. I've always felt that on the basis of the budget, at least in public accounts, people judge how well the province is doing financially. I've got some significant concerns on the way we're reporting things.
Let's start with the restructuring. You say the commission said that when reporting the impact of restructuring that involves reducing staff, the government follows guidance etc.
I see that in 1997-98 the restructuring charges were about $3.2 billion. Did all that restructuring involve the reduction of staff? Is that the basis on which you booked the restructuring charges?
Mr Andersen: Not necessarily. The recommendation of the commission was to go with the recommendations that were coming out of the Emerging Issues Committee. The one recommendation that was there specifically dealt with restructuring that involved reductions in the number of staff, but the recommendations with regard to reporting of restructuring charges actually go beyond that into the area of what is sometimes loosely referred to as exit costs. Those could include the costs associated with the government transferring responsibilities to another area. For example, in hospital restructuring, it might also include other costs such as getting out of leases or equipment changes or some minor renovations. It does not involve construction costs per se.
Mr Phillips: But I see you've booked $828 million for the TTC.
Mr Andersen: That one was specifically involved with the cancellation of an agreement associated with the transfer of responsibilities under local services realignment. It was essentially the province paying off its remaining obligations under that agreement.
You're getting into some of the 1997-98 restructuring charges. The presentation we have made was referring more to the 1996-97, which we were asked to come and talk about. We can certainly talk about some of those other areas as well, if you'd like, but the ones that you are referring to weren't included in the 1996-97 fiscal year.
Mr Phillips: I assume you're here to explain the basis on which you put these things together. This will be our one chance to talk to the financial officials before the Provincial Auditor has to pass opinion on the books.
I have the same question on the school board capital ventures, where you decided to write off $971 million against 1997-98. Was that part of the Ontario Financial Review Commission's recommendations?
Mr Andersen: They did not make specific recommendations with regard to that particular item, of course, because they were reporting in 1995. You're referring to circumstances that pertain to the 1997-98 fiscal year. We certainly feel that all of the bookings or the expensing that we're doing is quite consistent with the recommendations of PSAAB. The overall motivation around that is that decisions of the government should be booked at the time and fully reflected at the time the decision is made and is more accurately --
Mr Phillips: You can make a decision and then just play games with the books. You can say, "We made the decision, so we'll write the cost off." Doesn't that give you -- not you -- a government of the day almost an unfettered right to move the numbers around?
Mr Andersen: No, absolutely not. I think these recommendations mean that a government does have to accurately and fully disclose the full extent of decisions at the time it makes those decisions, whereas in the past a decision could be undertaken where some of the impact of that decision might be spread out over a number of years. Under these recommendations and through the use of PSAAB, I believe that the full extent and the full impact of those are more accurately reported to the public so that they can actually see the full nature of those decisions.
The most obvious example to use would be reporting on the full costing of any changes in pensions that are undertaken. Those are more accurately reflected in the year that changes to pension plans are made under PSAAB than they were before under the cash system of accounting, where the full liabilities or the amount of money that was being paid out under those plans might not be seen until 20 or 25 years later, when members of a plan actually were retiring and starting to receive their benefits.
Mr Phillips: That was my next question. I see the teacher pension number in 1997-98 is $971 million, and then the next year it's $62 million. I gather that the actual cash outlay is going to be $1.1 billion, that the taxpayers will actually lay out $1.1 billion, but we're going to record a $62-million expenditure on the books.
I have two questions. Does that help the public, when we show a $971-million expense going to $62 million, but the taxpayers are actually laying out $1.1 billion? Is that a more transparent explanation of the expenditures?
Mr Siddall: Neither Colin nor I are experts on the pension area, but in the sense of the accounting, the $971 million this year represents the agreement that was signed by the teachers and the province that has provided an enhanced pension plan to the teachers. Under public sector accounting, we have to book the cost of this to when a decision is made.
In following up what Colin said, the issue is, from a cash basis, in the old days you could make a decision and you wouldn't actually have to pay it out or reflect it in your books until maybe, in the pension area, five or 10 years later.
Mr Phillips: But am I not right on the numbers, that the province actually is paying over $1 billion in cash but recording $62 million on the books?
Mr Siddall: If the committee wants detail, I'd suggest we ask one of our pension people to come over.
Mr Phillips: That may be helpful.
Mr Siddall: The agreement that was signed with the teachers dealt with the fact, as you referred to, that the province continue to make special funding payments to the teachers' pension plan. That is set out in legislation. The agreement, over the next couple of years, has us, as you say, dropping out of that commitment and not making those cash payments of $1 billion a year; that's part of the agreement. The reason why the number drops down to $62 million is that, as you know, the pension plan has been very successful in its investments, and its investment activity has covered off its liabilities that have been there for a number of years, and to some extent covers off the liabilities it's creating currently.
Mr Phillips: I realize that. It says $62 million. When we asked the officials how much cash is actually being paid out by the taxpayers, they told us it's about $1.1 billion. That's how much cash the province has to put out. But you're recording $62 million. I'm just trying to get a feeling of, again representing the public, how accurate our finances are right now. Maybe it would be useful to have, if we need them, somebody.
The Vice-Chair: You have one minute, Mr Phillips.
Mr Phillips: Will it come around again?
The Vice-Chair: Yes, it will come around again. Sure.
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Mr Andersen: There are a number of items, with regard to the reporting you're talking about, with regard to those numbers. There were some provisions that were made in 1996-97 for part of the teachers' pension deal. There's $250 million for the early retirement incentive in there. In 1997-98 there are a number of offsetting changes as well. The plan had some fairly good investment performance, so you'd see that there was a reduction of about $500 million or so in the expense on that, offset by the $725-million provision for the enhancements as part of the early retirement incentive.
At the same time, the cash payment you're referring to, it was publicly reported a fair number of times that there's an ongoing cash payment of about $555 million that is going to end, and that amounted to about $33 billion over 31 years or so, something like that. That will be coming to an end as part of that plan as well. You'll see that reflected in the cash numbers in the years going forward.
Mr Phillips: But am I right on the $1 billion?
The Vice-Chair: Sorry, Mr Phillips, your time has passed.
Mr Andersen: For that particular year, but I think we should get some of the other folks over.
The Vice-Chair: Before we move to Ms Martel, you had made an offer. Were you asking for them to appear?
Mr Phillips: I would find that helpful, that we have someone who would give the committee an explanation of why we record $62 million and the taxpayers actually lay out $1.1 billion. If that's supposed to represent transparency, I'd just like to have a better explanation of it.
Mr Andersen: Okay. We'll see if someone is available to come over.
Ms Shelley Martel (Sudbury East): On page 14, you outline for the committee that the forecast for the restructuring cost is about $900 million, or $900 million for decisions made that involve restructuring costs. Then on page 15 you laid out for us what some of those items included.
So that I understand this more clearly, how much of the money actually ended up flowing, if any, in some cases? If I wanted to make a comparison between the decisions that were being made and the amount attached to that and then how much money flowed, where would I look for that? I'm assuming that would come the next fiscal year, but am I looking for that in the budget, in the fiscal plans, or would it be recorded in both places?
Mr Andersen: There are two areas. The budget, as Rob mentioned, is done on a PSAAB basis, or an accrual method of accounting. The province's printed estimates are done on a cash basis. You could see the PSAAB expenses that are reported each year in the budget. You would eventually see the cash showing up in the printed estimates each year.
We actually have a table we could hand out that shows, for the restructuring and other charges that have been taken to date, up to the 1998-99 fiscal year, essentially how much of the cash has flowed or is planned to flow by the end of this fiscal year. The table is just coming around now, so maybe I'll pause for a second until everybody has it in front of them, and then I'll walk you through the table.
I'll explain what this table does. Down the far left-hand side you'll see the items that over the past four fiscal years, and I'm including 1998-99 in that four, have been reported as restructuring and other charges in the budgets and the public accounts. They're largely in the areas of health, education and the municipalities.
You'll see that for the 1995-96 year, we reported restructuring charges of $854 million, largely in the OPS area for severance and the like. Then 1996-97 was the first year that the relatively significant health care restructuring investments started to be reported in the budget, and you'll see that there were reports in both the 1996-97 and 1997-98 years with regard to those. The total amount for the 1996-97 year was about $2.2 billion, and then in the 1997-98 year again we had some significant health care restructuring investments as well as some significant education restructuring.
If you add those all together, you get in the neighbourhood of $5 billion or $6 billion, I suppose. When you look over to the far right, to the two cash flow columns, you'll see that almost $4 billion of that will flow by the end of this year. So for almost two thirds of the restructuring charges, the cash will actually go out the door following the PSAAB expenses that have been made.
Ms Martel: That piece of paper is coming out of where, the budget?
Mr Andersen: No, it isn't actually printed in the budget. All of the PSAAB numbers are generally there. What we refer to as the B paper, or the fiscal outlook, always has a tabulation of the restructuring charges. This year the B paper, the Ontario fiscal plan, has about a three-page outline of the restructuring charges, and that's on page 27. Then I'll draw your attention to the public accounts documents, some of which you have right in front of you.
Page 12 of the financial statements page in the blue books that you have in front of you has a full page in the notes to the financial statements, and that specifically deals with all the restructuring charges and provides details on those. Similarly, the annual report, which you are also provided a copy of, has a section on restructuring and I would draw your attention to page 14 of that document. So on a PSAAB basis, all those restructuring charges are laid out in quite a bit of detail. Then the public accounts obviously have the audited amounts that end up at the end of the year, and the printed estimates each year also provide the details on those.
The other thing I would draw your attention to is that we also, in the B paper, specifically break out, under the operating expenses for each ministry, the restructuring charges that pertain to the individual ministries. That's a relatively recent innovation in the last year or two. I would draw your attention to table B4, which is on page 54 of the 1998 Ontario Budget, and you'll see that for each ministry broken out on a separate line we have the restructuring charges that pertain to that particular ministry.
We feel we lay out in quite a bit of detail those restructuring charges. You can see the underlying, ongoing budgets for the ministries, but as well you can see the restructuring charges, which are largely of a one-time nature. It seems to be fuller disclosure to break them out separately, rather than blend them into the individual ministry lines.
As well, the printed estimates themselves always have, for each ministry, a reconciliation table that reconciles the cash numbers, therefore the estimates, to the PSAAB or accrual numbers that are included in the budget. Quite often that table will explicitly include a reconciliation between the restructuring charges and the cash numbers. For example, in the 1998-99 estimates that were just released a little while ago, in volume 1 there are tables. For example, the Ministry of Health, health care restructuring costs show an explicit line reconciling the hospital costs for the 1998-99 year. That's on page xix. Right at the front of that document there's a whole series of those tables, so you can see them there as well.
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Mr Marcel Beaubien (Lambton): I'd like to stay on the restructuring charges. In your presentation this morning, on page 15 you mention about $250 million for the teachers' retirement incentive. However, in the budget papers, on page 35 it shows a teachers' pension plan expense of $226 million. Why is there a $24-million discrepancy?
Mr Andersen: That is the same issue that Mr Phillips was alluding to. We were going to be bringing some people over. However, I've been told that as it turns out, of the two people who are actually the experts on this, one of them is on vacation and the other one is ill and not in the office today. So I'm sorry; we'll have to undertake to get an answer to your question with regard to that specific item.
I know the $226 million that you refer to for 1997-98 reflects both a $499-million reduction in the regular pension expense, mainly due to good investment performance, and a $725-million provision for benefit enhancements. The $250 million that you're referring to was actually provided in the 1996-97 year, and that was a provision for an anticipated negotiation with the teachers on an early retirement incentive.
In regard to your specific question, you're actually talking about two different fiscal years and two different numbers.
Mr Beaubien: While we're on that subject, I might as well try to get an answer to this one. We had allocated $250 million in the previous budget. That money was not used in that fiscal year, correct?
Mr Andersen: On a PSAAB basis, the total cost of the negotiations or the deal that was reached with the teachers' plan was about $975 million, of which $250 million had already been expensed in 1996-97, and then the remaining $725 million was booked in 1997-98. So it's not quite accurate to say that it was not used. On a cash basis it hadn't been flowed, but the full cost of the enhancements under that arrangement have been booked or used; it just happens to be split over two years, 1996-97 and 1997-98.
Mr Beaubien: I won't pursue this one any further. I'll wait until we have further details on this.
If I go back to page 15 of your presentation, you mentioned an accrual of $430 million for employee severance costs, but then again if I refer you back to the budget papers, on page 35 for local services realignment it shows a figure of $498 million.
Mr Andersen: That was page 35?
Mr Beaubien: Yes, page 35 of the budget papers.
Mr Andersen: The number that you were just referencing was which one?
Mr Beaubien: You show $438 million in your presentation this morning, and in the papers it shows $498. The point I'm trying to make is that we have a $650-million reserve, and although I'm not an accountant, I guess you can make figures dance whenever you want to make them dance. My question for my own personal interest is, how much money have we got in reserves kicking around?
Mr Andersen: I'll just answer your first question, actually. The $438-million number that you were pointing to, if you actually look on the chart we just handed out, is a provision for Ontario public service employee severance. The other number that you were pointing to, the $498 million, is actually a number that was provided for local services realignment, which is the transfer of a number of programs between the province and the municipalities. So you're actually talking about two entirely different things and different years as well.
What was the second question again?
Mr Beaubien: My other question: for instance, if we look at health care restructuring, if I look at what I have in front of me on page 35 in the budget papers, anything related to health care totals $479 million, according to what I have in front of me. Yet you show in your presentation this morning $970 million for the government's approved plan to restructure and realign hospital services. How do I balance these two figures?
Mr Andersen: The table that you're looking at on page 35 tabulates in-year operating expense changes, so those are changes that are over and above what was originally reported at the start of the fiscal year in the 1997 budget. For some of the items that you're talking about, there were already provisions that had been included in the budget earlier in the year, and this just shows the top-up or incremental amount.
A better table to look at is actually the one on page 27 if you want to see the total restructuring charges that pertain to the health care area. You'll see that for hospitals or health care, specifically for 1997-98, there was a provision made of $880 million. For that item specifically, at the beginning of the year, in the 1997 budget, there was a $450-million provision made. During the year that number was increased by $430 million, to bring it to the $880-million number that you see there. Again, I would point you to page 27 to see the total amount as opposed to the incremental amount.
Mr Beaubien: That's the point I'm trying to make: How much money do we have kicking around in reserve? I used that figure specifically to try to demonstrate that point, instead of using page 27.
Mr Siddall: If I could respond to that question, I think there's confusion around the reserves that we include when we do a forecast and what we actually show when we come to do the public accounts as the actual expenditures. There are no reserves in the public accounts' actual expenditures at the end of the year; there are provincial liabilities that are to be paid out in the future.
If we take your example of the $438 million on page 13, that $438 million was based on the government's review of the business plans for each of the ministries during the year and determining or putting a value on the cost of making the decisions that were included in those business plans.
When we came to take a look at the interim numbers for 1997-98, we went back to those original plans. We looked at the cash that had been paid out during the year against those accruals and we adjusted our accrual for last year to reflect a number of things: that our plans had changed during the year; that some of the decisions we were making were either going to take longer to make or were not going to be made; and/or in some cases that certain costs were underestimated and the accrual had to be increased to reflect the proper costs that we've now experienced, or our best estimate of the costs based on the information we now have.
If you go to this year's budget, you will see that that original $438 million was adjusted by $200 million to reflect the changes that have occurred since those original decisions were made. Then, added to that are the additional decisions that we made in 1997-98 of $175 million. So the net impact on the fiscal year 1997-98 for the government restructuring in the OPS area is $25 million.
The reserves are something that we set up when we forecast and when we plan. Both the Provincial Auditor and ourselves, in terms of doing the public accounts, have to take out that caution and present to the public the actuals to our best judgement.
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Mr Phillips: My interpretation of Mr Beaubien's question, and frankly I don't think we got a very clear answer, is that the government has written off $6.3 billion. They've expensed $6.3 billion in "restructuring and other charges," and coming into this fiscal year they had actually laid out in cash $1.1 billion. So there's $5.2 billion sitting there, expensed, gone, but the expense has yet to be spent. If you're in government, it's kind of neat, because you've got $5 billion to play with that you've expensed. It's a great re-election fund, frankly, and I'm envious. So there's roughly $5 billion of just expensed but unspent money. I think the government plans to spend $2.7 billion of it this fiscal year, so there will still be $2.5 billion heading into the election to be spent. That's how I interpret this nifty little page.
My question is on some of these interim restructuring charges. The capital money for the Toronto Transit Commission of $828 million, I assume that's a capital expense, is it?
Mr Andersen: It's reported under our operating expense. It's a one-time payment to discharge the provincial responsibilities flowing from the cancellation or the end of the TTC five-year capital transfer in the Sheppard subway --
Mr Phillips: Isn't that a capital expense?
Mr Siddall: Again, in making that decision, we changed -- the original agreement was to provide capital to the TTC, but by making a decision to get out of that area and accruing a payment to represent our obligation under that contract, it became an operating expense in the sense that when that money goes out, there is no claim of the province as to how it can be used.
Mr Phillips: Really?
Mr Siddall: In terms of the normal prudence, but it doesn't have the claim that it could be used to create a specific asset.
Mr Phillips: Boy, oh, boy. What about the school construction, $971 million? Is that a capital expense?
Mr Andersen: The school one that you're referring to, you'll be well aware that there is a move to a new funding formula in the school system which involves a fairly significant amount of restructuring that's to be undertaken there.
Mr Phillips: This is to pay off schools that are constructed.
Mr Andersen: This is for schools that have been constructed and for which school boards have incurred debt already.
Mr Phillips: Will this be shown as a capital expense on our books?
Mr Andersen: Under the new funding formula that's being put in place, school boards will no longer be provided with capital grants to build schools and we won't be expensing new school construction in the year that the construction is started or undertaken. Rather, there will be a pupil accommodation grant provided in that funding formula and it will be up to schools to decide whether to undertake new construction or whatever.
Mr Phillips: I understand the future, but did you show this $971 million as capital or operating?
Mr Andersen: As part of the move towards that new funding formula, the government has provided a fairly significant amount of transition funding in recognition of the significant restructuring that's undertaken. It has also committed to school boards that it will undertake the obligation for the next three years to assume the principal and interest costs for that debt servicing. Again, this is part of helping to provide more stability to the system and to the school boards themselves during a transition period. This will help them to better access capital markets and provide them with stability, knowing that those payments for the next three years have been --
Mr Phillips: Can I interrupt for a second? These are schools that are already constructed. They're built.
Mr Andersen: These are ones that have already been constructed.
Mr Phillips: And you have shown this school construction cost as an operating expense by the province?
Mr Andersen: The construction was already undertaken by school boards, and through our accounting and paying for the debt servicing, we show that as a restructuring charge through the operating side of our budget.
Mr Phillips: In last year's budget?
Mr Andersen: In the 1998 budget. You see that reported here, but the actual amounts themselves are reported in the 1997-98 --
Mr Phillips: That's what I said: the 1997 budget.
Mr Andersen: Yes, the 1997-98 fiscal year.
Mr Phillips: Not the 1998 budget; the 1997 budget.
Ms Carol Layton: It's in the 1998 budget but it shows it for the 1997-98 fiscal year.
Mr Phillips: Yes, but you've expensed it in the 1997 budget as an operating expense.
Mr Andersen: That's correct.
Mr Phillips: But through the history of the province, the provincial government, when we are paying for capital expenses -- and these are schools that are constructed. Would we not normally show that as a capital expenditure?
Mr Andersen: As part of the change to the new funding formula, the new construction that's going to be undertaken will be flowed through the operating grant or the GLG or whatever you'd like to call it and there won't be capital grants to schools any more. You would see that if you were to look at the historical capital expense for the Ministry of Education. It is being reported through the operating side and will continue to be shown through the operating side as part of the new funding formula because it will be up to school boards themselves to decide whether they want to actually construct schools or lease or do all of the various options that they might want to do.
Mr Phillips: It's very odd. Maybe I could stick on that capital thing for just a moment. I hope it's appropriate to ask the question. Historically we spend about $400 million a year on new school construction. The province has cut that to about $90 million, switched it into operating, and said to schools that you now essentially will either be able to lease them or we'll pay the lease cost or we'll pay the annual principal and interest costs.
My question is this: The province predicts enrolment will grow by 25,000 students a year. It means that each year the new school construction should be around $400 million. In my opinion, what you've done is gotten us into a potential significant debt trap here, where we start to lease and we lease and we lease and we lease and then eventually the annual lease costs exceed what we were paying annually in capital costs. Have you done a 10-year projection on the difference between doing this on a capital basis and doing it on a lease basis and what amount of debt the taxpayers are going to be in on for these new school constructions? Have you done that kind of 10-year projection?
Mr Andersen: I think actually that would be a question that more appropriately would go to the Ministry of Education with regard to the details around the new funding formula and the implementation of that. It doesn't necessarily relate specifically to what we're talking about here, which is the public accounts. Your question refers, I think, more to a future fiscal year.
Mr Phillips: Actually, it's very germane to the Ministry of Finance because it is you that we count on to manage our finances. In my opinion, if you've agreed to this, we are agreeing to a potentially significant debt trap for the taxpayers. Has the Ministry of Finance agreed to this? Obviously you've agreed to the process, but have you done your own analysis to determine what kind of debt we're going to get into with this way of handling school construction?
Mr Andersen: There will be some discretion for school boards to determine and answer that question themselves. They have a number of options open to them, and incurring debt isn't the only one. I'm not sure exactly with regard to some of the numbers you've cited; I haven't heard those figures before.
As part of the introduction of the new funding formula, it certainly is felt that this is a better way and a more fair way for all school boards across the province of being provided with a fair funding basis both on the operating side and their ability to provide accommodation for their students.
Mr Phillips: I repeat: I think we are heading into a very dramatic debt trap on this one. Every year we spent $400 million because that's the enrolment growth. It's very easy for about three years to lease it; leasing is essentially just having someone else with the debt on their books but we with 100% of the obligation. I'm disappointed that the Ministry of Finance hasn't done that projection down the road. I'm not sure the Provincial Auditor can do it, but I would personally really appreciate if there is a way of getting a 10-year projection on the school capital debenture costs that we're going to incur.
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Another question: The province now has 100% responsibility for education. The province sets the educational mill rate for residential; the province sets the amount of money to be raised from commercial-industrial. Is it your plan that this revenue be now shown on the books of the province, the property tax revenue?
Mr Andersen: No, it's not. Those revenues are municipal revenues. I can maybe turn this over to Rob to provide a more detailed answer.
Mr Siddall: Our position -- and again, we've had some discussions with the Provincial Auditor -- is that these revenues are collected by the municipalities and passed directly on to the school boards.
Mr Phillips: But it's all set by you, by the province.
Mr Siddall: Yes, we're setting the rates, but who has access to the money are the school boards, not ourselves.
Mr Phillips: I'm not sure that's correct. The province says: "That's the mill rate. You raise it." Then it says to the school board: "You have that much money to spend. You will collect that much money from that municipality and we'll send you a grant for the rest." I don't think anybody has any discretion at all. No municipality has any discretion to vary that and no school board has any discretion to spend any more or less money -- or any more money than you say. Have you had an opinion on that?
Mr Siddall: We've asked for help from external audit, like, from a CA firm, on this issue and have an opinion on that, but we have not finished our discussions with the Provincial Auditor.
Mr Phillips: Could we have that opinion, then, Mr Chair, from the external auditor?
Mr Siddall: Well, not the external auditor -- the accounting firm.
Mr Phillips: The external accounting firm.
Mr Siddall: The external auditor is the Provincial Auditor.
The Chair (Mr Bernard Grandmaître): The external accounting firm, did you say?
Mr Phillips: I'd like to see the opinion that says that we don't have to record this as a provincial --
The Chair: Can the auditor clarify that?
Mr Peters: We'll certainly take that opinion into consideration in our work. As you know, this is currently under development and assessment by my office. It's up to the Ministry of Finance whether they wish to provide it.
Mr Phillips: That's who I was asking, actually.
Mr Peters: The last we have seen was that it was only in draft form. I don't think it had been finalized. Maybe there has been a final opinion by now.
Mr Siddall: In fairness, to be blunt, the only opinion that counts is the Provincial Auditor's opinion.
Mr Phillips: But you were saying that you went on the basis of an external accounting firm.
Mr Siddall: I'm saying as the preparer of the financial statements, based on our own expertise, and we asked and received support in coming up with that decision.
Back to Colin's comments about coming before the committee today, we are in the midst of having the 1997-98 public accounts audited by the Provincial Auditor, and that's just one of the decisions that both the auditor and ourselves, as preparers, have to come to an agreement on.
The Chair: Mr Phillips, one last question.
Mr Phillips: Quickly, on the public accounts, the debt issue for Ontario Hydro is of significant concern to all of us, because I think Hydro paid $200 million to us taxpayers to guarantee their debt. Have you had a chance to look at, because we're issuing debt for them, Hydro's financial statements? They've released their annual report and they've done some accounting here that says they didn't use generally accepted accounting principles. Has the ministry expressed any concern about that, seeing, as I say, that we're on the hook for them?
Mr Siddall: Again, as you're aware, there is a separate opinion provided by the firm of Ernst and Young on those financial statements. Ontario Hydro works with its external auditor the same way we work with Erik Peters in terms of coming up with an opinion on our financial statements. I believe if you turn to their opinion, they have given an unqualified opinion on this set of accounts.
Mr Phillips: So we don't care about it? I'm trying to get an idea of what attitude the ministry takes to this.
Mr Siddall: The ministry takes the attitude basically that they have a set of external auditors, that those auditors are well recognized in Ontario, in Canada and around the world, and that the decisions between the preparer and the auditor are their decisions.
The Chair: Thank you, Mr Phillips. Maybe the auditor can provide us with clarification on this last question and answer.
Mr Peters: A comment that I would like to add to this is that the Ernst and Young opinion of course is also based on this report the province has given. You will find reference in that report to the six-point plan developed by the government for the restructuring of Ontario Hydro. So while the auditor of Ontario Hydro may have been reasonably comfortable, and we know they have done additional work to give that opinion, we are embarked currently on work to assess what this financial report of Hydro actually means for the finances of the province, and we are working together with the Ministry of Finance to assess what has actually happened in Hydro and how this will be reflected in the public accounts for the year ended March 31, 1998.
So we are dealing with two separate issues, because, as we pointed out in last year's public accounts, we certainly consider that the risk of the province to have made good under the guarantee is significantly increased.
Ms Martel: I want to return to the table we have been working off around restructuring and other charges, particularly to the point Mr Phillips was raising around what some of us would think would be capital costs but which appear as operating costs.
I listened carefully to the Ministry of Finance position on this. I'd like to ask the auditor, though, with respect to both the $828 million that refers to the Sheppard subway and the $971 to capital debentures and how they appear as operating: Is that a normal way to show expenditures which some of us would otherwise believe to be capital, not operating, expenditures?
Mr Peters: In government accounting currently, all capital expenditures are expensed, charged against the deficit, in the year incurred. The current practice is that. So, yes, it would be an operating expenditure of the government although it is capital in nature; it would be disclosed as that, but it would be charged against the deficit, if you will, in the year incurred.
Ms Martel: It's not so much the year I'm worried about as how it's classified. My argument would be that money that was spent on schools already built long before there was any hint that we were having any funding formula and certainly long before the new funding formula finally appeared are really capital expenditures, not operating expenditures.
Mr Peters: I appreciate your point. I'm in the position that this item was included in the budget, which we don't audit. What we do audit are the public accounts of the province, and we are currently looking at the public accounts for the year ended March 31. We're in the process of auditing this, so I cannot comment on this right now. This is how the Ministry of Finance has decided to disclose it in the budget, but how it will manifest itself in the public accounts is currently under review by my office.
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Ms Martel: Do you have a follow-up on that?
Mr Phillips: I don't mean to take Ms Martel's time, but I go back to my opening comment, and that is that I view this like a public corporation, and people actually rely on the budget more than public accounts.
Firstly, I find it very curious that the subway capital is shown as an operating expense in the budget. I find it very curious that all these schools that have been constructed, which over the history of the province would have been shown as capital, are now in operating. I would find it even more curious if the public accounts show it as a capital cost when they show it in the budget as an operating cost. It's part of my concern that the books are now getting so confused that I'm not sure the public can rely on certainly the budget; hopefully they can rely on -- they can rely on -- your statement.
Mr Peters: Unless I qualify my opinion.
Mr Phillips: Whatever. I guess we're trapped here. You can't comment on what has been presented here because you say that's not in the public accounts. It really strikes me as odd that, in following the logic they presented, they could terminate any agreement they've got on anything; if they were just going to establish a new one, we'll pay it a different way and write if off. To me, it's totally clear-cut that that should have been shown as a capital expenditure. Where we go from here, I don't know.
Ms Martel: Can I return to the contingency fund so that I can understand this a little bit better? This is a follow-up from Mr Beaubien's question. I didn't clearly understand, and that's probably more my fault than anything else, the difference between what he called reserves and what I think you've defined as what is shown in the contingency fund. Could you just explain that.
Mr Andersen: Which number?
Ms Martel: He asked a question about how much money is in reserves. You provided an explanation which I didn't quite catch. That's my fault more than anything else.
Mr Andersen: It's really a terminology question here that we're dealing with. As Rob was mentioning, the term "reserves" is quite often used. We have the term "contingency fund." Both of those are planning tools that are used in the preparation of the province's budget and fiscal plan.
What Rob was mentioning was that by the time the public accounts come out, which report on the actual expenditures -- the public accounts report on past expenditures, essentially; the contingencies and the reserves are used to anticipate what may happen. By the time the public accounts roll around, you have the certainty of knowing the actual expenditures, so you don't need those contingencies or reserves any more.
I'm not sure if that answers your question. Rob, did you have anything to add?
Mr Siddall: If I could, I'd like to just go back to your previous question. If the committee members turn to pages 28 and 29 of the financial statements we provided to you, I think it responds to what Erik Peters said in terms of the fact that when we do the financial statements for the province, we don't make a distinction between operating and capital.
As you'll see on page 29, "Expense by Ministry," there is no distinction between operating and capital. If you turn to page 28, you'll see that what we're calling "operating transfer payments" and "capital transfer payments" are actually included together in one line. So the stuff you're talking about, when it comes to public accounts time, the only thing we really show as capital is under the line "Acquisition/Construction of Physical Assets." Those are the physical assets that are purchased by the government for its own use in its programs and are, as Erik Peters referred to, expensed under public sector accounting and auditing board recommendations.
Ms Martel: Let me ask a question, just so I understand clearly, about the contingency fund. You said the reserve of $650 million that was set aside in the 1996 budget was consistent with the recommendations that have been made and cannot be used for new initiatives.
I'm sorry that I don't know this. That would have been applied to the deficit then and appeared in 1997 as being applied towards the deficit, and then another $650 million set aside? Would you just add to it or are you actually applying it in the fiscal year that ends, applying whatever is left in that fund, directly back to the deficit?
Mr Andersen: At the beginning of each year in the budget plan you'll see in our standard fiscal tables that we have tables that outline revenue/expense and then at the bottom it shows the reserve, then it comes to the total that shows a deficit. So each year at the beginning of the year you would see a $650-million reserve that was included in the calculation of the size of the deficit for that year.
That has been included at the start of the year for 1996-97, 1997-98 and 1998-99. In both of the previous years, 1996-97 and 1997-98, those amounts were not needed and what you would see is that when the interim or final numbers are actually reported, those numbers, the $650 million, would be set to zero.
If you'll look at page 9 of the financial statements document that you have, I'll show you. The table that's there outlines the budget plan and then what actually came to pass for the 1997 year. So you'll see that the plan included -- in the far left-hand column, about three or four lines from the bottom, there is a line that says, "Reserve." That's under "Statement of Operations and Accumulated Deficit." So there are three columns at the right that say, "Budget 1997," "Actual 1997," and "Actual 1996." The "Budget 1997" column is the numbers as they were originally printed in the budget and that shows a $650-million reserve. For the year ending March 31, 1997, that reserve was not needed, so you'll see in the corresponding "Actual 1997" column that there is a zero there. If you look down you'll see that the deficit has also gone down.
It's very clearly laid out that the $650 million, if the economy plays out as forecast, can't be spent on new initiatives or anything like that. It actually has to go to reducing the deficit.
Mr John R. Baird (Nepean): I want to discuss with you the issue with respect to the new policy that's been taken regarding using the range of private sector economists' forecasts and being in the conservative end of that spectrum of opinion. That has been used for the last three years?
Mr Andersen: Since the recommendations of the OFRC came out, sure. So that would have been for the 1996-97, 1997-98, and again has been used in the 1998-99 budget.
Mr Baird: We heard from a number of presenters in the pre-budget consultations of the importance that the government's forecasts, particularly with respect to the deficit, are met not just in terms of the domestic confidence here in Ontario but for the bond markets and so forth. Particularly a number of economists mentioned that we had to set aggressive goals on deficit reduction, but that we had to as well set realistic revenue projections, because previous governments had been even upwards of $3 billion or $4 billion off.
What is the ministry's view with respect to that policy, and, as we approach a balanced budget, is there a view or belief that there's a measure there where at some point we are being too conservative, or is that conservative end of the spectrum the continued policy of the ministry?
Mr Andersen: Certainly it will be a continued policy of the ministry to continue to use prudent forecasts and cautious forecasts. The actual level of prudence, I think you could say, is a matter of debate. The way we have done it is, we have actually tied it roughly to about a point and a half of economic growth and we feel that's a fairly good measure, a good cushion, if you like.
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Some may argue that as we approach a balanced budget, perhaps the amount of caution that is built into there through the size of the $650-million reserve, for example, could be smaller. I believe that more appropriately it should be tied to the economy, and in boom times you might say that you may not have to have as large a reserve, but certainly in times of recession it makes a lot of sense to have a fair amount of caution built in there. Certainly the credit rating agencies and the bond markets look at how the government is doing towards meeting the objectives it has laid out in its plan. They certainly feel a lot better about governments that meet or overachieve their targets than ones that miss them.
From a planning perspective it can be very disruptive to ministries and to the clients the ministries serve if an in-year correction is needed because there hasn't been sufficient prudence or caution built into the plan. If things aren't playing out as people were expecting from an economic perspective and in-year expenditure reductions are needed to be found so that deficit targets can be made, it can be very difficult for ministries to actually do that. Particularly as you get further into the fiscal year and their plans are relatively set, it can be very difficult for them to make any kinds of changes. They have very little flexibility left.
It's certainly going to be consistent with the recommendations that we received. We feel it is very appropriate to stay at the low end or below the forecasts that are out there. Better to overachieve the deficit targets and not have to undertake some of those in-year corrections.
Mr Baird: I would just differentiate, in your comments, between reserves and contingencies associated with pressures for increased expenditures, and the revenue forecasts of economic growth and tax revenue because I think they're two different things.
Has the ministry done any examination in other provinces, in other jurisdictions, with respect to where Ontario would sit in terms of the growth forecasts? It makes, obviously, lesser forecasts because you want to be in the conservative end of the spectrum. So I guess they'd look at the best forecasts, look at the spectrum of private sector forecasts and then they're in the conservative end of it. Do we look at other jurisdictions and say where we end up in terms of meeting our targets versus other jurisdictions?
Mr Andersen: Yes. As part of the assessment of our own performance we would naturally be looking at other governments and seeing how they're doing. As part of the OFRC, they had delegations come in from other jurisdictions, the federal government, for example, to provide advice on the level of prudence and caution that could be built into budgets to help assist, from a planning perspective, with meeting targets and the like. We do that kind of thing. We keep an eye on what other provinces are doing in their budgets, as they release their budgets and report on how they're doing.
As we meet with investors and people who lend us money, naturally, particularly those who are out of the country or off the continent, they quite often have questions about how other jurisdictions or other provinces in Canada are doing because they don't necessarily view Ontario as just Ontario alone; they look at the other provinces, they look at the federal government. They've certainly been pleased to see that we are all basically going in the same direction in eliminating our deficit, so we have to be aware of what the other provinces are doing and how well they are doing in meeting their own targets.
Mr Baird: But in comparison with the federal Department of Finance's forecasts, for example, Ontario's prudence would not be an anomaly with other jurisdictions.
Mr Andersen: I don't think so. I showed you the excerpt from the federal budget that shows their reserve is about $2.5 billion or so. We feel that we've tied ours to the size of our economy, and that seems to be a fairly good measure. Others are building caution into their budgets on roughly the same kinds of lines.
Mr Baird: Getting back to contingency funds and reserve funds, they haven't been required in recent years, which is a good thing, obviously. In this year's budget papers there's a second reserve fund or contingency fund at Management Board.
Mr Andersen: There's a contingency fund every year for Management Board. You'll see that it has some traditional items that appear every year, but it's basically to cover commitments or projects where the precise costs are not specifically known yet because maybe the ministry involved is not at the stage yet where it has been able to provide the detailed analysis for it. Those are ones that we feel are pretty likely to happen; they just haven't been developed in sufficient detail to actually build them into a ministry's expenditure base.
Examples of ones that are in the Management Board contingency fund for the 1998-99 fiscal year: There's some money that has been put there for the year 2000 corporate project. It's being held in a contingency fund because we have not yet been able to allocate the expenditures or disburse them to the respective ministries. We know those expenditures are coming; we just haven't yet been able to assign them to individual ministries. They will be by the end of the year.
We're also undertaking a corporate financial information system, and likewise by the end of the year we'll have more details about that. Every year you would see that there's a provision for potential extra forest firefighting, for example. This summer, who knows? If this is a really dry summer we may need more money than has actually been provided in the ministry's budget for that particular item.
Mr Baird: A dry spring.
Mr Andersen: Right. However, we're holding it in Management Board for now, and if it's not needed, then it's not needed, and the ministry cannot reallocate that money, for example, to a different priority.
Ms Layton: Just to add one point to that, as the fiscal year progresses we produce quarterly Ontario finances. You'll start to see that that's where we show the actual assignment of the moneys that are sitting in the contingency fund right into the ministry's budget. Certainly as Colin says, by the end of the year it's gone because it has all been distributed.
Mr Andersen: I would just add one other point. There is another kind of contingency fund that you would see, and that is that every year we also build into our budget $200 million for anticipated year-end underspending, so it's almost a negative kind of contingency. We know, just based on the size of our budget, that by the time the year-end rolls around, inevitably there is underspending in every ministry. They don't come down right to their very last dime, so $200 million is included every year for that. Again, that is reduced to zero by the time the public accounts come out.
The Chair: Mr Andersen, Ms Layton and Mr Siddall, thank you for appearing before us this morning.
Now, members, we'll get on with item 3 on the agenda.
Mr Baird: My colleague the member for Halton Centre was particularly interested in that. I believe he was the member who put that on the agenda and had asked if there would be an opportunity to push that off to the next meeting of the committee.
The Chair: In fact, I was going to suggest that. I realize Mr Young was very interested in this item. Yes, I think the members --
Interjection.
The Chair: June 11 would be next Thursday.
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Mr Peters: If I may make a brief comment on that. When we discussed that item in subcommittee I mentioned to Mr Young that I would not be able to give a detailed briefing largely because we are currently conducting work in that area. What I would like to advise the committee of early is that after this meeting is concluded, I will meet with the Speaker to propose to him that I will table a report in the Legislature on the millennium issues on June 16. I'm not sure whether you might want to take that into consideration. It will be difficult to report in detail on the 11th.
The Chair: June 18? The same day the auditor tables his report?
Mr Baird: That would be super.
The Chair: Agreed? Agreed.
This completes our agenda. Is there anything else, Madam Clerk, Mr Auditor? This is it.
Next Thursday, June 11, we'll be reviewing the Central Collection Service agency. That's chapter 5 of the auditor's report.
Mr Phillips: I wasn't sure of the process and I thought at the end of the witnesses there would be a chance to just ask the auditor a couple of questions. I didn't realize that we'd move on to the next part of the agenda.
The Chair: We have time. You're all welcome to grill the auditor.
Mr Phillips: I just wanted to follow up on some things. Something I'm concerned about is the flexibility in restructuring funds. It seems to me that a government -- actually, the federal government has done this with the millennium student fund, writing off $2.5 billion and then spending it two years down the road. Does the auditor have fairly clear guidelines of what things are permissible to write off in restructuring and what things are not permissible?
Mr Peters: Yes, we apply certain criteria. I'll read to you a sentence I found particularly pertinent that came out of Australia. Australia had this problem inasmuch as their accounting standards seemed to give some latitude to governments to include multiyear funding in one particular year. Admittedly it's a draft document, and I'd be happy to provide you with a copy. I'm quoting directly from it:
"The intention of a government to make payments to other parties, whether advised in the form of a budget policy, election promise or statement of intent, does not of itself create a present obligation which is binding on the government. A liability would be recognized only when the government is committed in the sense that it has little or no discretion to avoid the sacrifice of future economic benefits."
They go into some examples, but I may leave it there.
The criterion for the public accounts is essentially to determine whether a true liability exists at that point for the government. There are two particular stages we have to talk to. One is pension obligations. They're specifically covered by PSAAB. If you amend a pension plan, the government that makes the decision to amend the pension plan has to bear the brunt of that expense at the time when they make the decision.
The Emerging Issues Committee -- there are two issues that are pertinent to this. One is number 23. Number 23 essentially deals with personnel restructuring, that is, the people cost. If you announce layoffs, so many people, and you make that decision, at that particular point in time the government needs to recognize the corresponding liabilities. In this case, very clearly, severance pay is one issue. Also, if you introduce factor 80, then it actually falls into two issues: It falls both into the pension issue as well as into the Emerging Issues Committee pronouncement, EIC-23.
The 60 pronouncement deals essentially with a government ceasing to provide a certain service or part of a service. For example, let's take a look at the hospital restructuring, where the restructuring commission says, "We will continue to provide the service of having hospitals, but we want to take 850 beds out of the system." That would be getting out of part of the business. What EIC-60 recommends is that at that point the cost of doing so be reflected, when the decision is actually made. That would be the guideline in that regard that we would follow, and they could probably do that. Others are far more complex and we certainly need to look at them.
One of the points we are continually improving but I don't think we are quite there yet is that at the budget stage accounting issues are actually discussed with my office. This is why we are at loose ends, so we cannot bring to bear the criteria we are actually using at that stage of the process. In other words, where the government makes the budgetary decision, we're not quite in the picture or we have not been able to discuss with the Ministry of Finance the criteria we will be following when we assess the public accounts.
Let me make one last comment. I'm sorry, it gets a little bit long but it's an important one. When we issue these Public Accounts of Ontario, we deal with something called the "reporting entity." Where transactions are actually taken within the reporting entity and we discontinue a part of the service in one part of the entity and move it somewhere else, there's really no impact on these accounts. Where there is an impact is where the units are outside the reporting entity, and that's the other area we have to look at.
To give you an example in both cases, municipalities are outside the reporting entity. Therefore, if the government changes the service delivery, or discontinues something as a provincial program but now says it's a municipal program, for us that is a disposal of a part of the business outside the reporting entity. The same with school boards. School boards are not included in the financial statements, as they are under the current process. In other words, if the government has in the past funded certain aspects of school boards directly through grants but is now doing it in a different way, has devolved it, then we have to look at that as well. This is the other concept that is the reporting entity concept. I hope that hasn't confused the heck out of you.
Mr Phillips: Sorry to take the time, Mr Chair, but maybe I'm looking for help in the wrong area. I think for the public the key number is, how well are we doing on the deficit? That's the key financial number. They want to know, is the $5.2 billion real? It seems to me that what I heard today, in my opinion, is that it allows you right now to play significant games with that. If you can do it one way, you can do it the other way. But maybe I'm looking for help from you to say, "That is an accurate reflection of the real deficit," that they haven't taken expenses that are due three years from now and put them here so that you can accelerate it, because, as I say, another government can do it in reverse. Is that part of your role, or is your role much more technical, of, "Legally they can do what they did"?
Mr Peters: That is certainly, number one, a key question. We have to base it on some technical, but there is also the judgement area in that. There should not develop an opportunity for a government to shift expenditures between years without any rules or regulations. We are looking for two things. Do we have PSAAB support, accounting support for it? To give you an example, you held up the Ontario Hydro accounts. I think if you took a look at note 1 to the Ontario Hydro accounts, you would find that at least four times Ontario Hydro makes a very interesting statement at the bottom. It says, "These expenditures would be recorded as incurred when incurred" -- I think you'll find it --
Mr Phillips: Under "generally accepted accounting principles."
Mr Peters: Yes. There's a sentence I'm trying to paraphrase from memory here, but it's something along the lines that under generally accepted accounting principles these expenditures would be recorded when incurred and that they have only been moved on this. That gives you a little bit of the flavour of the judgement we have to follow. What we're really saying is that under generally accepted accounting principles expenditures should, the first principle, be reflected when incurred. There are certain criteria which can be applied where expenditures can be reflected, although they may be reflected in the future. We look at those very stringently. That's about the only assurance I can give you at this particular point.
Mr Phillips: This is my last comment.
Mr E.J. Douglas Rollins (Quinte): Just say you agree with it, Gerry, and that's all.
Mr Phillips: I agree we should use generally accepted accounting principles. I know you look at Hydro, and that will be of interest to me, at least, and the restructuring will be of interest. The pension thing is of interest to me. As I say, I've been told by the officials that the cash payment -- you can't comment on this because it's 1998-99, I guess -- in 1998-99 is $1.1 billion and the expense shown on the books is $62 million. I think the public would be surprised at that. The fourth one is education, which in my opinion we have to come to grips with. Again, you may not be able to comment on it because it may be a 1998-99 issue, I don't know, although I think some of it was in 1997-98.
Mr Peters: To the extent that it affects 1998, we will definitely be commenting on it. I can tell you that we are looking very closely at the Hydro situation, at the pension situation and at every single element of these restructuring and other expenses which were included in the budget.
The Chair: On that note, thank you, members, and a friendly reminder that on June 11, next Thursday, Central Collection Service agency. That's chapter 5 of the auditor's report. This committee stands adjourned.
The committee adjourned at 1152.