Thursday 12 December 1991

Financial Administration Amendment Act, 1991, Bill 156 / Loi de 1991 modifiant la Loi sur l'administration financière, projet de loi 156

Office of the Provincial Auditor


Chair: Akande, Zanana L. (St Andrew St Patrick NDP)

Vice-Chair: Sutherland, Kimble (Oxford NDP)

Christopherson, David (Hamilton Centre NDP)

Jamison, Norm (Norfolk NDP)

Kwinter, Monte (Wilson Heights L)

Mahoney, Steven W. (Mississauga West L)

Phillips, Gerry (Scarborough-Agincourt L)

Sterling, Norman W. (Carleton PC)

Stockwell, Chris (Etobicoke West PC)

Ward, Brad (Brantford NDP)

Ward, Margery (Don Mills NDP)

Wiseman, Jim (Durham West NDP)


Klopp, Paul (Huron NDP) for Ms Akande

Miclash, Frank (Kenora L) for Mr Kwinter

Sullivan, Barbara (Halton Centre L) for Mr Kwinter

Clerk: Decker, Todd


Anderson, Anne, Research Officer, Legislative Research Service

Beecroft, Douglas, Legislative Counsel

The committee met at 1018 in committee room 1.


Consideration of Bill 156, An Act to amend the Financial Administration Act / Projet de loi 156, Loi modifiant la Loi sur l'administration financière.

The Vice-Chair: My apologies for being late. I believe our business for the day is Bill 156, An Act to amend the Financial Administration Act. We just had some preliminary discussions as to how we shall proceed.

Mr Christopherson: Yes, we had a chance to chat before the formal meeting started. It would seem that the opposition members would like an opportunity to ask the Treasury staff -- and I believe there is also a representative here from the Provincial Auditor's office -- for some clarification, maybe some pointed questions and hold some preliminary discussions. Afterwards we would reserve time for questions, and comments from the Provincial Auditor. I understand he is available at 3:30. We agreed prior to this meeting to extend that invitation and I hope members are comfortable with that.

I guess we are just going to fly by the seat of our pants and give everybody a chance to ask some questions because of the shortness of time in which a lot of the details came forward on this act. I suggest that if the opposition is comfortable with what I have said we ask Treasury to give us a short overview to set the stage. Then we could throw it to the opposition members and go in rotation in terms of questions and comments.

The Vice-Chair: The clerk has informed me that the auditor has definitely confirmed for 3:30. Were there any other concerns? Is it acceptable to go with that procedure?

Mr Sterling: All I would like is to go. I have the explanatory notes for the bill, and my desire is to ask questions on the sections as to the philosophy or intent of the sections.

The Vice-Chair: Okay. Maybe we could have the Treasury people give us an overview. Before we begin, if each of you could identify yourselves for the purpose of Hansard and give us a brief overview of the act, then we will have some questions.

Ms Clitheroe: My name is Eleanor Clitheroe. I am the assistant deputy minister in the office of the Treasury and the Ministry of Treasury and Economics.

Mr Stoodley: Graham Stoodley, director of legal services for the Ministry of Treasury and Economics.

Mr Watson: My name is Robert Watson. I am a director in the office of the Treasury.

Ms Tysall: Wendy Tysall; I am a director in the office of the Treasury as well.

Ms Clitheroe: As I think everyone is aware, the Financial Administration Act sets out the responsibilities of the Treasury in managing the financial position of the government. This act has not been substantially revised since the early 1980s.

On January 1, 1990, pension legislation was reformed such that the Treasury did not borrow funds from the pension funds any longer, which had been the practice for many years. Now the Treasury was in the position of implementing a public capital markets borrowing program to replace the financing that had traditionally come from the pension funds. During 1990, staff and procedures were set up to do this, including some of the recommendations in the Financial Administration Act, which would facilitate the operations of the Treasury in implementing its borrowing program in a way that best allows the Treasury to use all the financial tools now in the marketplace and to minimize the cost of financing for the overall borrowing program.

One of the major focuses of the changes is driven by the change in practice for financing the government, and many of the changes in this legislation are to facilitate the public capital market borrowing program of the Treasury. The other area resulting from the budget initiative of last spring is the creation of the capital fund. The changes here are to facilitate the introduction of the accounting framework for the capital fund introduced in the budget last spring.

Finally, there are some changes here which allow the Treasurer, should the credit opportunities be there, to expand the support from financial institutions to non-bank financial institutions -- for example, trust companies -- so we could have enhanced competition for government business among a wider variety of financial institutions.

Those are the three major thrusts of the changes. I think the primary objectives of the changes are to facilitate the borrowing program, to implement the capital fund and to broaden the competition from whom we obtain the financial services for the government.

The Vice-Chair: Maybe we can open it up for questions now. Did anyone else want to comment from Treasury or is that it for now?

Mr Stoodley: That is it.

The Vice-Chair: Then we will open it for questions. We will start with Mr Sterling.

Mr Sterling: I guess if we go through the sections one by one, it would probably be most advantageous. The first section adds trust companies, credit unions and caisses populaires in which the Treasurer can establish accounts. The second section deals with listing investments and that kind of thing.

Whoever is making the decisions for the Treasurer, how is that individual going to be monitored? I have concerns when people are dealing with public money either on the borrowing or the lending end. How is this going to be monitored by perhaps the Provincial Auditor? Who is going to be watching this individual who is making these decisions?

Ms Clitheroe: The systems we have set up in the office of the Treasury, the division responsible for administering the investment of liquid reserves -- that is the question you are raising with respect to the expanded financial institutions' participation and with respect to the lending and borrowing practices -- has a set of policies which are authorized by the deputy minister. There are two committees in the office of the Treasury which examine borrowing strategy and policy. One examines borrowing strategy policy and one examines risk management and credit management; sets out a set of guidelines under which the Financial Administration Act provisions are reviewed.

With respect to your question about the Provincial Auditor, the Provincial Auditor will look annually at the financial statements and the practices that have been used throughout the year and comment. Of course, we are always conscious of accounting policies and proper reporting procedures, as well as appropriate risk management techniques, and so we do seek informal advice from time to time from the Provincial Auditor where we feel that some guidance is necessary.

Mr Sterling: How much would the Treasurer be investing in liquid reserves at any one time?

Ms Clitheroe: It depends through the year. The cash flows of the government are somewhat uneven in their demands. In the spring, for example, when we are making major payments, we would have more liquid reserves built up in advance of those higher obligations and we would invest them in short-term instruments such as T-bills until those demands were called upon. At any one time throughout the year, that could vary.

Mr Sterling: Can you give me a high and a low?

Ms Clitheroe: Can you give me a high a low perhaps on what the sort of maximum number on any one day you might have seen over the last 10 years or so?

Mr Watson: I guess it would be billions, $6 billion or $7 billion.

Ms Clitheroe: On any one day, in specific investment?

Mr Watson: Oh, no. In specific investment, I think, $500 million to $1 billion, something in that range.

Mr Sterling: So the maximum the Treasurer would have at any one point would be $6 billion or $7 billion. What about on the low end? What would the cash reserves fall to? You try to always keep them above a certain amount. What is the magic number now? Is it $1 billion or is it $2 billion?

Ms Clitheroe: If I could respond to that, we have two purposes for liquid reserves at this point in time. One is the cash management, and we would try to keep a liquid reserve level of about $4 billion to $5 billion throughout the year to keep liquid assets to pay necessary bills. On the basis of the size of the Ontario budget, that is quite an appropriate figure.

At the moment our liquid reserves are in excess of that amount. That is a policy which was adopted by the ministry with respect to this year's borrowing program. It was because markets have been very volatile this year that we would always like to be somewhat ahead on raising our borrowing requirements so that we have in excess of what we would strictly need for cash management purposes to have as a contingency should there be market conditions which would preclude us from raising money at an even pace throughout the year.

Mr Sterling: I guess the concern I have in terms of going outside of the Big Five banks or whatever is that we have had some trust companies fail. What is going to protect the taxpayer from -- you are talking fairly massive amounts of money in relation particularly to, I guess, smaller credit unions or caisses populaires or trust companies. If you walk in with $500 million, that may --

Mr Carr: You can start your own trust company with that.

Mr Sterling: Yes, maybe.


Ms Clitheroe: We have a controllership function in the division itself which is separate and apart from the group which actually does the investing or the borrowing, and its function is to monitor the practices of that group. The function of the controllership group is also to set credit limits and to have an ongoing review process of any of the prescribed institutions in which those that are actually executing the transactions are permitted to invest their money. So there are credit limits established around the institution.

The act allows for all of these institutions to participate in the business of taking deposits where their own particular legislation allows. In the case of some of the institutions, their own particular legislation would not at this moment allow them to be the recipient of those funds. Should that be the case in the future, our credit requirements for a particular institution would then set a standard by which we would be prepared to invest in them or not.

The Vice-Chair: Mr Sterling, just before you proceed, I would like to rotate around with different questions, because some of your colleagues would like to ask as well.

Mr Sterling: Okay.

The Vice-Chair: I will go to Mr Phillips next.

Mr Phillips: One of the aspects I am interested in is the capital account.


Mr Phillips: No, I want to deal with the capital, so I will thank Mr Sterling for his good suggestion, which is to continue on with any other questions in his area first.

The Vice-Chair: Okay, then Mr Carr, you are next.

Mr Carr: My question relates to the same area. You say we have had these people monitoring but that essentially we have been in such conservative institutions that there was not the need for some of this monitoring. Now you say we are going to be expanding that.

As you know, things happen very quickly notwithstanding the fact that you are monitoring them. The audited report that came out from the Northland Bank just before it went under said that this was a great risk. That was from the chartered accountants that audited it.

Notwithstanding that, I am a little bit concerned that we are going to be getting away from what we historically have done, which has been to say we are going to put it in very, very safe -- for want of a better term, the strategy had always been for what the investment people call "widows," where you have very safe investments in very safe institutions.

It would appear to me that the intent is to get away from that, both from the institution's standpoint and also in terms of some of the investments. We could be looking at foreign currency exchange now, puts and calls, whatever, and we are now becoming money managers in our everincreasing quest for more revenue.

Is that what you envision this bill doing, giving you a lot more flexibility to be more like money managers? Because, as you know, there is an up and a down side. The situation has always been that historically this province has been very conservative in investment and, as a result, has never faced any problems.

In the rapidly changing financial world out there, with institutions going down, and trust companies being one of them, I am very concerned. How will you alleviate the fear of the taxpayers that you are keep our investment safe in the two areas: first, in terms of the institutions, and also in the type of investments you are going to be investing in?

Ms Clitheroe: We do not envisage this moving or changing the conservative practices of the government as they have been over the last number of years. What we do envisage here with respect to the types of institutions is that, where there are institutions which are as secure and safe as the institutions we have traditionally dealt with, they would be eligible to participate on the same basis as those institutions.

Concerning the tools we are able to use in coming to our assessment of the standing of an institution, we use both the American and Canadian credit rating agencies, and set high standards which those financial institutions must have before we are prepared to deal with them. So we are not changing the credit practices; we are simply expanding the number of institutions that meet those credit practices in the Financial Administration Act.

I think you can rest assured that with respect to the deposit practices of the province, the same conservative practices will continue to be in effect.

With respect to the actual instruments that will be used to manage the financing of the government, there was not a need to have the variety of tools -- investment or foreign exchange or puts or calls -- the variety of instruments that you mentioned. This was for two reasons. One is that many of these tools have been developed over the last 10 years in the financial markets as a result of changing conditions in the markets, so that we are adding to the province's ability to protect itself and reduce its risk in using financial capital markets by adding to its ability to use these tools.

Without these tools the province is, in fact, taking a greater risk. Where it would be able to limit its risk by the use of one of these tools, it is now unable to do that. So I think that with respect to the sorts of tools that are being used, they are being used to implement a borrowing strategy and a subsequent investment strategy that is consistent with conservative practices, but is also allowing us to take advantage of the tools that are available in the marketplace in a prudent manner.

The Vice-Chair: Mr Carr, sorry; just one more and then I am going to move on, okay?

Mr Carr: Okay, I will get very specific, then. As an example, somebody like Royal Trust, which I guess a couple of years ago was one of the most secure in terms of its ratings and so on, sort of the shining star of financial institutions, made a purchase of a trust company in the United States to expand market share and globalize and compete, and has had some difficulties with that, as well as with some of its offshore investments.

Now their situation has gone from being a shining star to not doing quite as well. So again, an investment that two years ago had been put in long-term in a financially secure institution like Royal Trust, which I guess would be probably the most secure trust company -- not to say they are in any danger, but you can see how rapidly that changes.

That has not happened with the banks. The banks have not had that dramatic swing because they have been very conservative in their investments. They have not been allowed to buy offshore companies like Royal Trust did. So while it can be a tremendous bonus for companies to be aggressive, like a Royal Trust -- because the upside is they could have done very well with some of these investments. So here is something that two years ago we would have said, "A very conservative investment; Royal Trust is the best trust company you can get." Now, today, not everybody would be saying that.

You see very specifically my concerns, and I want to get very specific. What type of institutions? Can you be specific now? Are we going to be looking at how far we are going to go in trust companies? Can you name some of the ones you are looking at, that you are interested in seeing, with the caisses? Can you give some idea of what you are going to be looking at, or do we have to pass this bill and say: "Trust us. It is other institutions, but we are not prepared to say what they are today." Can we say it is, you know, these three trust companies in Canada we are looking at and so on? Can you be a little more specific?

Ms Clitheroe: I think we can provide you with some responses with respect to your concern on long-term investments. The nature of liquid reserves is that we do keep them very liquid. We do not put them in instruments that would meet the sorts of concerns that you are expressing.

Mr Carr: No, they change very quickly; even within months things change.

Ms Clitheroe: Large dollars would not be put into long-term instruments for cash management purposes. That would not be consistent with either the requirement of our cash management needs or with our current practices.

With respect to the lists of who would be eligible, the way we will frame the lists is with respect to their credit ratings.

Mr Carr: There are no lists yet?

Ms Clitheroe: We have not provided lists. Those lists would be reviewed on a regular basis, so the list of who is eligible or not for a 30-day investment, for example, would change as needed.

Normally one gets significant warning of concerns in the financial markets when one sets very high credit standards, and the sort of concern you are expressing with respect to a jump from a very high credit standard to a very low credit standard would be extremely unusual.


Mr Carr: But you do not have time to get out --

The Vice-Chair: Sorry, Mr Carr. I have to leave it at that and move on, okay? Mr Wiseman?

Mr Wiseman: I would like to go down the road on the borrowing side for a minute. I read an article a little while ago that indicated that --

The Vice-Chair: Is this still on the same issue, Mr Wiseman?

Mr Sterling: It is on borrowing and investment.

The Vice-Chair: Okay.

Mr Wiseman: I read an article that one of the situations the federal government found itself in was borrowing, short term, huge amounts of money and found that interest payments on the short term were very high compared to what it could have borrowed if it had gone long term. In fact, they were actually speculating in the market that they could do better and that interest rates would come down. This was on a sum of almost $110 billion that was part of the deficit over the last four or five years. This has added significantly to their debt problems in terms of the interest being higher than it needed to be, almost to the tune of approximately $3 billion a year.

How are we going to be able, to the best of our ability, avoid falling into the same kind of short-term/long-term borrowing trap the feds experienced?

Ms Clitheroe: If I can just make a point of clarification, the responses we were making with respect to short-term investments did indeed deal with short-term investments. In response to the question on short-term borrowings, I believe under 3% of our borrowings are in floating rate debt so we have an average term to maturity of our debt portfolio which exceeds 10 years. We have not implemented a borrowing strategy in managing our debt portfolio of shortening the term, so we have not taken on the interest rate risk you are referring to and do not have plans to do so. This act does not purport to provide that capability.

Mr Sterling: But your act does increase your temporary borrowing from $250 million to $4 billion. What does that mean?

Ms Clitheroe: Those lines of credit are usually thought of as standby lines of credit as opposed to part of the entire portfolio structure, so that on a $50-billion or $60-billion debt one looks for a certain percentage of that debt. On expenditure levels of, say, $40 billion or $50 billion, one looks for a certain percentage of short-term availability in the marketplace if, in fact, there was a financial capital markets crisis and it was prudent to look to your line of credit rather than to look to the public capital markets for financing.

The $4-billion number you are referring to, the size of that line, reflects maintaining prudent access to all sources of capital in the event that such a circumstance is necessary. On an ongoing basis, we do not use our lines of credit over $50 million, perhaps, and for those reasons we sometimes do that because it is more cost-effective to take an overdraft overnight than it would be to finance that short-term requirement in another fashion.

Mrs Sullivan: I want to follow up on some of the questions of Mr Carr relating to the investment side of the portfolio, and I am interested in seeing that the amendments to this act would include what are some, for governments, riskier propositions in terms of investing, including puts and calls, short sales, futures -- dealing in the futures exchanges or in futures investments -- not only limited to Canada but to other places. You have indicated that you would be investing with recommendations from the rating agencies. It seems to me that the rating agencies do not in fact look frequently at matters such as puts and calls, short sales and so on.

I wonder what place the syndicate has in assisting with your investment decisions. Who is a part of the syndicate in Canada, and who is a part of the syndicate in other countries? Presumably, you are not limiting those operations and those options to the Canadian situation, you would be using a syndicate in the United States, in Europe, perhaps in the Pacific Rim, in addition to the Canadian syndicate. I wonder if you could tell us who is a part of the syndicate in each of those or other areas and what role they would have to play in assisting Treasury officials in making judgements about the validity of what seems to me are fairly high-risk investment options for a provincial government.

Ms Clitheroe: We have structured our syndication arrangements so that we have a fixed syndicate for Canada for our foreign requirements in Canada that consists of the major Canadian firms in the management group. Currently, the firms in that management group are Wood Gundy, ScotiaMcLeod, Burns Fry, Nesbitt Thomson and RBC Dominion Securities.

There are a number of other firms in the banking group in the syndicate. We can provide a list -- there are another half-dozen firms -- if you would like.

Mrs Sullivan: I think it would be useful to have that information. What about other areas, for instance in Europe? Clearly there are European investment bankers involved in those syndicates. I think it would be useful for us to have an update, but I am particularly interested in how those firms on whom you rely to place our notes are involved in providing you with judgements and opinions relating to investments that Ontario would be making.

Ms Clitheroe: The way we have established our syndication arrangements on a global basis is that we have appointed for the province a global advisory panel of firms that have been selected representing, as you noted, different parts of the world.

In Canada, three of the managers in our Canadian syndicate are also on that global panel: Wood Gundy, ScotiaMcLeod and RBC Dominion Securities. In the United States we have a couple of American firms, Merrill Lynch, Goldman Sachs, Morgan Stanley and J. P. Morgan.

In Asia we have Daiwa Securities, Nomura Securities, Industrial Bank of Japan and Yamaichi Securities.

The Vice-Chair: Would it be all right if that list was left with the committee?

Ms Clitheroe: I am sorry, in Europe, there is only one additional and that is the Union Bank, Switzerland, UBS.

We use the Canadian syndicate to provide us advice in Canada on our borrowing requirements, on our borrowing strategies, and our general overall financial management. We have levels of contact with those firms from the president and chairman of those firms down to account officers. We meet with them regularly and my staff have daily contact with them.

On the global advisory panel, we have staff looking at different parts of the world at any given time for borrowing requirements and so we are in contact with those firms when we have an interest in that particular part of the world where we feel there can be cost-effective financing.

It is perhaps helpful to point out that while these firms would provide us also with some advice on the investment side, their primary function is to provide us with advice on the borrowing and syndication side of the business.

Mrs Sullivan: Where else would you receive advice relating to investments in, for example, puts and calls, short sales or futures markets?


Ms Clitheroe: We have a borrowing strategy committee and a credit and investment committee -- the risk management committee -- upon which there are technical representatives from our division and, in the case of the borrowing strategy committee, representatives from the Treasury staff at Ontario Hydro.

From there, we formulate our recommendations and our policies. We obtain the approval of the deputy minister and the Treasurer. In researching the areas in which we wish to make a move, for example a particular currency, we would go to the specialists in the field in our syndicate to have their research people provide us with both commentary on the particular instrument, location or whatever the issue was, as well as to provide us with some informal comment on the sort of proposals we would be looking at.

In respect of where we are going to have to deal with a financial intermediary, we would be looking at the rating agencies to provide us with advice on the credit worthiness of the particular institution with which we were dealing.

Mrs Sullivan: Would you not concur that moving into puts and calls and short sales is substantially a riskier approach to an investment program for provincial government than has been anticipated in the past, and why would you think that is a valid approach?

Ms Clitheroe: No, I would not agree with the comment that it is a riskier approach. By not pursuing all the tools available to us in the marketplace we would be taking greater risk for the province by not attempting to limit our risk, whether it be spread risk, interest rate risk, currency risk or term risk, and by not availing ourselves of the available tools in the marketplace to put parameters around our list, the actions we have to take in terms of financing the province either in the borrowing or investment side, we would in fact be taking more risk by not taking any action.

The Vice-Chair: Mrs Sullivan, I have Mr Sterling, Mr Phillips and Mr Carr. I was just wondering if we could wrap up this section and move on to a different section if at all possible.

Mr Sterling: Mr Phillips has not had an opportunity so I am going to yield to him and then come back.

Mr Phillips: I have one small question, then a larger question. I am sure you have consulted with the financial community on these proposals, the banks, the trust companies and the investment community, because we will undoubtedly hear from them. What has been their response to these proposals? Have they expressed concern in any area?

Ms Clitheroe: We deal with the five major banks and, as I noted, the syndicate and global advisory panel. We would not, of course, ask them to approve or not approve legislation. We also have to be very conscious that they are providing advice, being the very institutions with which we are doing business.

However, the overall reaction to the moves we have made over the past year and the recommendations we are making in the future has been that these are very prudent and conservative financing techniques which the government has entered into.

Mr Phillips: Can I assume from that comment that the financial community has been given copies of the proposal, been asked to comment on it and have expressed no concern?

Ms Clitheroe: With respect to the part of the community that is not the investment dealing community, the banking community, I would like to refer that question to Brian. Perhaps you could comment on the trust company and the credit union side.

The Vice-Chair: If you could come forward to a microphone, please, and introduce yourself for the purpose of Hansard.

Mr Cass: My name is Brian Cass. I am with the Ministry of Financial Institutions as assistant deputy minister and superintendent of deposit institutions and, as such, have responsibility for several of the trust companies that operate in our jurisdiction, as well as the credit union movement. They have for some time now come to us and asked for the opportunity to participate in the government financing, much in the manner as outlined in the proposals. They wish to take deposits from the government and they wish to be seen as investment vehicles as well. For some time now they have sought this type of change and I can assure you they would all be most welcome.

Mr Phillips: A just want to make absolutely sure I am clear on this. Has the financial community been asked for its input into these proposed changes? I am talking now of the banks, the trust companies, the investment community. Have they reviewed this bill and expressed no concern to the Treasury officials?

Ms Clitheroe: We have not provided them with a copy of the draft bill for comment. With respect to the area of the borrowing requirements, the changes with respect to the techniques for financing the government have been reviewed with our investment dealers over the period of the last year, as well as with our contacts in the banking community. With respect to issues on the capital fund, for example, those would not appropriately have been reviewed with the banks or investment dealers at this stage, having been part of the budget of last spring and part of the consultation process.

Mr Phillips: I am talking just the area we are talking about. Why would you not have sent a copy of the draft bill to these communities, knowing how consultative the government is, saying, "This is coming forward and we'd like any input you would have"?

Ms Clitheroe: If I can just comment with respect to the specific types of activities in terms of the borrowing strategy of the government, we have been in close contact, so that the issues raised here are not a surprise. It is simply that we had not provided the draft bill to them. But I would like Mr Stoodley, who is the lawyer, to comment on the normal procedure.

Mr Stoodley: It is not a normal practice in the case of a bill like this for us to have distributed a draft of it in advance for comments. In the case of the investment clauses that is particularly so, because as I was taking the instructions for drafting this bill and preparing the draft the two things that were clear to me were that many of the clauses, the powers and the agreements that are referred to here -- and some of them are repeats of provisions that are in the existing bill -- many of those are provisions being used by governments across the country that modernized their acts faster than we did.

Second, I was impressed by the fact that it was being suggested by the people with whom we deal financially, investment advisers and our partners in making trades -- I do not want to get too financially technical, because my field is legal and certainly not the esoterica of actually handling these instruments -- that their concern was that we did not have the ability to do these things, that we did not have the ability to make the hedges, as I understand, to protect the investments we were making, and that these authorities were overdue.

In fact, as I drafted the bill, and I think to be fair to us all, as we drafted the bill, we did not see that there was an area of conflict or of ambiguity in which consultation would have provided a better product.

Mr Sterling: Can I play the devil's advocate here for a moment? If I was the Treasurer of Ontario and I wanted to interfere with the investment policies of that $4 billion that are in my hands, how would the public become aware that I was meddling, or would they?

Mr Stoodley: I think you would have to be a little more specific about the kind of meddling you contemplate. It is almost too hypothetical.

Mr Sterling: Let's say I wanted to shore up a financial institution in which we could invest, so I went down to the person and said, "I want you to put $500 million in trust company X." Would anybody be aware of that? Even though, let's say, the person came back and said, "Well, you know, trust company X is not the biggest trust company in the world and that's going to double their cash reserves," or whatever. Would there be any way of the public knowing about that?


Ms Clitheroe: With respect to the reporting, the public accounts would be the normal way in which the administration of the liquid reserves would be disclosed to the public.

Mr Sterling: So that would be discovered, what, a year later?

Ms Tysall: We do have a division controllership function within the office of the Treasury. We monitor all of the investment activities that go on and, as has been described, we have some policies and rules set out by the risk management committee and the borrowing strategy committee as well. So we are watching all of those. It would be most unusual to have a variance from that and I think it would be brought forward. Now, I am not sure what the exact process might be, but certainly we have this function that is separate in the office of the Treasury from the people who are actually doing the borrowing and investing. I think at that stage it would be brought forward to some other party, if it was a very significant departure from our current policy.

Ms Clitheroe: There is a fourfold set of controls. One is obviously the annual audit and the relationship that we have with the auditor. One is the controllership function, which is an independent function monitoring the activities. The third is that we have outside of our division, in the government at large, an internal audit function which monitors our activities on a regular basis. The fourth would be the normal management practices within the ministry itself. So I think that one can look to four levels of control through which public disclosure would be effected. This is consistent with, and probably in addition to, normal practices for control of such funds in practice.

Mr Sterling: In effect your answer then is no, there is nothing which would alarm the public in the fact that the administration had been instructed to put a certain amount of money in a certain institution? There would be no alarm bells that would be rung?

The Vice-Chair: I was just wondering if we could have a quick answer, because time is passing us by and I thought there was a genuine interest in other aspects of the bill as well. I would ask everyone to be as concise as possible, please.

Mr Stoodley: Mr Chair, it is genuinely difficult to answer a question like that because it postulates a Treasurer who would be acting against sound and prudent management, contrary to the provisions of the act, and then the question is what we as civil servants would do if that occurred. One is extremely uncomfortable, because the situation has not arisen. One cannot assess the circumstances in which it would arise and I think there is no fair answer to the question.

Mr Sterling: It is a very important area. It is probably the most important area in terms of this whole investment scenario.

The Vice-Chair: We can continue on this. Accountability issues can be dealt with by a couple of other committees, can they not? Estimates?

Mr Sterling: But the bill is giving the Treasurer some more investment tools. Heretofore he has only been able, as I understand it, to invest money in certain kinds of institutions. We are now saying he can do it in other institutions which could possibly be weaker.

The Vice-Chair: Maybe, Mr Sterling, you could ask your question this afternoon.

Mr Sterling: The concern I have, Mr Chair, is that the present government has utilized other means; for instance, the Hydro issue, when we were talking about the buying of uranium in Elliot Lake. They said, "Okay, we'll use Ontario Hydro as a tool to implement what we consider a political purpose or a public policy purpose as far as the Ontario government is concerned." They said to Ontario Hydro, "You go out and buy that uranium for four times what it is worth to support the community of Elliot Lake."

What if, in order to get proper financing for Algoma Steel, part of the deal was that financial institution X had to have $500 million to lend to Algoma, and it did not have the $500 million. The Treasurer walks down the hall and he says, "Look, Joe, I would like financial institution X to have $500 million."

What I would really like, whenever the policy is changed, is some public promulgation of that change in public policy as to the investment policies. Is there any hope that can be done? Is that a practical suggestion?

Ms Clitheroe: I think the overarching principles in the Financial Administration Act are that the Treasurer of the day manage the finances of the Treasury in a prudent, responsible manner. I think the act does not purport to change that responsibility in any way, so I think the provisions there do not weaken the overarching requirement that the funds of the consolidated revenue fund are managed in a prudent manner. That principle has not changed.

Mr Christopherson: Just to follow up on the question and part of the answer you just gave, and maybe you could answer it another way or expand on it a little bit: What is being proposed is the changing of the schedule of institutions that can participate in the investment process with the government, or rather, with which the government can engage in investment. The mechanism, the checks and balances in the system to ensure that those investments are being done aboveboard and according to Hoyle, are not being changed, is that correct?

Ms Clitheroe: That is correct.

Mr Christopherson: So that the same rules that applied before will still apply in terms of those checks and balances?

Ms Clitheroe: That is correct.

Mr Christopherson: Are those checks and balances much different than other jurisdictions in North America, or even around the world for that matter? Do we have a dearth of checks and balances on a Treasurer that has run amock investing where he ought not?

Ms Clitheroe: In my experience, we have more than adequate controls. Wendy, perhaps you would like to comment if you have any other information with respect to comparative practices in other jurisdictions.

Ms Tysall: I am not really aware that there are many differences between what we are doing and what other jurisdictions are doing. I think they follow similar kinds of reviews and have these kinds of committees that we have set up, with the kinds of limits we have set.

We have tried to look at different kinds of institutions and different kinds of investments, and have indeed set dollar limits for each kind inside the policy committee. We have looked at the credit rating of each of these kinds of institutions and established the policy surrounding that, so we are very careful to check these every time and live within the policy limits that are established.

Mr Sterling: I trust you.

Mr Carr: As you know, Quebec uses a caisse as a tool of investment in certain industries, and for want of a better term, also to give greater government control to the economy. There is some talk that is what this government wants to do, and that one of the reasons this is changing is to allow them to invest in institutions that they may set up. Is that why this has been done? So if the government decides to start up -- for want of a better word -- a caisse, that would be an instrument of the government, it could in fact put its money into that particular institution?


Mr Stoodley: No, that was not the motive. The motive for expanding the institutions in which public money can be deposited was, as Mr Cass earlier pointed out, that it was unfair that the province itself -- and remember that this section also applies to agencies out there in communities across Ontario -- was prohibited by legislation from using even a safe trust company or a safe credit union for payroll or other deposits of public money. I think that has clearly been the motive for us in expanding the provision of this act so that, given the same concern about the creditworthiness of the institutions that applied when they were only chartered banks, there will now be the authority, the permissive power, for agencies in the province to deposit public money in trust companies and in credit unions.

It clearly does not mandate a deposit in an agency or a credit union or a trust company that is failing, because the primary goal for us, as for most agencies that have money, is protection of the money.

Mrs Sullivan: This is just the last question on the investment side, because I think we were anxious to get on to the capital account. I suppose that what our questions relating to the investment side of the government's portfolio are really concerned about is clause 2(c). The concern relates to the social policy of the government becoming the investment policy of the government. What I see here is the facility for the province to use dead instruments to bail out flagging companies as an instrument of social policy, rather than an investment policy decision. We have seen Ontario Hydro, for example, in the case of Elliot Lake, being directed to invest in the northern development fund.

We understand some of the difficulties of the credit union movement in Ontario that have been an issue over a continuing period of time. The question of checks and balances that Mr Christopherson raised is not the question. There is nothing here in 2(c) that limits investments to companies that are traded publicly. The investments could be private companies.

There is nothing in this section that would limit the government's use of the Financial Administration Act as an instrument of social policy. What we want to see is social policy coming through other places in government, and a guarantee that it is not going to be coming through the investment policies of the government as a whole. We want it to be coming through the Ministry of Industry, Trade and Technology or through a line ministry, rather than through this section. We want that assurance. I think that is where our unease comes from. We do not want to see social policy as part of this section.

Ms Clitheroe: I would make two comments with respect to the provision that you are referring to. One is that while each provision does not reiterate the overarching principle of prudent management, the overarching principle is there and needs to be applied to each provision separately. With respect to the specific section you are referring to, the normal practice would be that those sorts of investments would be done by way of an order in council.

The Vice-Chair: Maybe we could move on to the next section, and we have several. I believe the main issue that has been identified is the question of separation of capital account, and that is under section 7. We will try to focus some questions on that section. We will start with Mr Phillips.

Mr Phillips: I hate to say it, but I am always mildly suspicious, not of Treasury's motives, but of the government's motives.

Interjection: Any government.

Mr Phillips: Any government, damn right. I listened carefully to the Premier always saying he is going to balance the operating budget but put all the capital into debt. If this were a business -- and your paper suggests that it takes about $4.5 billion to $5 billion a year of capital refurbishing just to keep the infrastructure up to date -- in my opinion, you would be showing a $4.5-billion to $5-billion-a-year depreciation cost just to keep our infrastructure refurbished.

Maybe I am being unduly suspicious of this. I think you can clear it up very quickly for me by just imagining this legislation in place over the last five years. I assume from the comments the parliamentary assistant made yesterday that you would report the finances in exactly the same way as you are currently reporting them. In other words, you would say the deficit this year is $9.7 billion, made up of a $4.3-billion capital deficit and a $5.4-billion operating deficit, and that if this legislation passes, nothing changes, that next year's budget summary will be the same format that we see this year, that the financial numbers outlined, mainly on pages 68 and 69, would stay the same as you currently report them, and that all that this does is enable you to kind of have the legal framework to report the numbers the same way you reported them this year. Is that correct?

Ms Clitheroe: What this does is provide the accounting framework to implement the capital fund. With respect to the reporting in public disclosures, there would be, with respect to public accounts, disclosure of the capital deficit and the operating deficit in the normal course as we have seen it done.

Mr Phillips: I want assurances that the budget, if we pass this, will be reported in the same way as this year's budget, that it will be formatted the same way.

Ms Clitheroe: You are referencing the budget at this stage, and I think what we need to reference are the Public Accounts, which are the official reporting of the annual figures. They are the ones I presume you are going to be looking to the Provincial Auditor's office to look at this afternoon. In that case, the public disclosure accounting policies with respect to public disclosure would remain the same. With respect to the budget, over the years budget formats -- pages, tables and so on -- have as you know changed from time to time.

Mr Phillips: Can anybody give the assurance of this?

Mr Christopherson: No. I think the question, if I understand correctly -- and please correct me if I do not -- is, will the format be exactly the same in terms of how it is reported? I cannot give you any assurance at all. I do not think there has been much discussion about the actual format of what the document might look at. Now, there might be some people who have had those initial discussions, but I am not aware of them. I think that Eleanor is clear in saying that all of the accountability you are asking for will be there or it should be. But any assurance that the next budget will be presented in exactly the same format and the document will be exactly the same, except the year will change and the number will change, I do not think I can give you that assurance. I do not think there is anything sinister in that. It just means that the document may look different.

Mr Phillips: I am sorry to keep pursuing this, but I have not got an answer to my question. This is how you report the numbers this year. I think it is on, probably, page 1 of the summary. If we pass this, that is how you plan to report the numbers?


Ms Clitheroe: The Financial Administration Act does not change how a budget would be prepared or how a budget would be reported. It also does not change how the Public Accounts would be reported or public disclosures would be made.

Mr Phillips: But would the capital fund be reported as a $4.29-billion deficit?

Ms Clitheroe: The amount that would be in the capital fund for future budget presentations is something I could not comment on.

Mr Phillips: Who can?

The Vice-Chair: Mr Phillips, I am going to move on. We will have more opportunity. As I say, we want to rotate around, so there will be more opportunity.

Mr Phillips: I need an answer to my question.

The Vice-Chair: An answer was provided. Mr Carr.

Mr Carr: I will be going along the same lines. I do not know if I will help get an answer for you, Gerry. If not, I hope you get back to it. The big concern we have right now is this: We do not declare the unfunded liability in our statements of the Workers' Compensation Board, for example. We do not have Hydro's in there. The reason we take that out is the numbers look much better. The $9.7 billion, if you add the other ones in, would scare a heck of a lot more people, notwithstanding the fact that when we start talking these billions, everybody's eyes, including mine, glaze over. When you are talking about the money, nobody understands it. The concern we have is that we are going to be putting it into a capital account, not in terms of reporting, so that the public perception will be that the deficit is not running wild. From the standpoint of the public, I guess the double-digit figures are what scares them. There are certain marks they go over.

People now know we are at $9.7 billion. Next year, when the Treasurer comes up, for political reasons -- like Mr Phillips said, it is not you people; you are carrying out the wishes -- what may happen is we say we have an $8.7-billion deficit, which is what we were going to have, but that $8.7 billion does not include capital, which is another $5 billion, so we are up to $13 billion, or whatever. You see our concern is that this will be used as a process so that it can defer the public from understanding where we are going with this deficit, which I think everybody on all sides knows is going absolutely wild.

The big concern we have is that you are going to be doing these accounting changes -- and I will not call them manoeuvres, because that sounds sinister -- so that politically it will not look bad when the numbers come in next year. My question is this, and I think it is along the lines of Gerry's: Can we have some assurances that somewhere, even if you have to add two numbers together on piece of paper, that the total deficit, as reported this year, will somewhere be reported next year in the budget? Can we get that assurance from you?

Mr Christopherson: I can give you only as much as this bill deals with. The purpose of the provision in this bill for the capital accounting is to ensure that the part of Ontario's expenditures that is related to publicly owned infrastructure, that are capital in nature, will be separately shown. They will be separately shown as part of the total expenditures of the province, and they will be shown there in the public accounts so that everyone can understand what amount of the total annual expenditure is allocated to capital and what amount to operating. The provision of the bill goes no further.

Mr Carr: Is the definition of capital laid out very clearly in this bill, and if so, where? If not, how do we do that? Because, as you know, we get into definitions of capital and how it is going to be applied, and things that historically, accounting-wise, may have been classified as capital are not. Again, it can be moved around in that matter. How are you going to define capital, and is it defined very clearly in here? What section?

Mr Stoodley: It is in section 7 of the bill, sir. There are two sections that are added to the act. There is a short one, 15.1, and then there is the next one, 15.2, the one that is headed "Capital Account". It is subsection 15.2 (4). There is the definition of "publicly owned infrastructure," which is our attempt to define the capital, the expenditure for which will be treated as part of the capital account.

Mr Carr: When you did that definition, that was done more from a legal standpoint or from an accounting standpoint, presumably both, in your best judgement. Who, for example, was consulted on that? I guess the legal term is "standard acceptable accounting principles." Would that fall in with that, those definitions you have there in 15.2(4)?

Mr Stoodley: I think Ms Tysall, who was primarily my adviser on the expert basis of what should be included in capital, is better able to answer that than I. I found the words, but the concepts are hers.

Ms Tysall: My bias here is that I am an accountant. We were talking about these things setting up an accounting framework. So I was very much part of this.

Just to go back a little bit before I answer the question, the intent certainly was to provide a very clear distinction between operating and capital expenditures. This is a practice that is followed in many jurisdictions in North America, so it is not unusual. It does help with the accounting and the disclosure to the public. They can see more readily what our capital and operating expenditures are.

In terms of the definition, we did try and define them as best we could. We looked to other jurisdictions that were doing similar things and consulted with them. We had a working group set up within the Ministry of Treasury and Economics, and we worked with other ministries as well as the provincial audit staff. Somebody was there on our working group and did work with us on this definition. We were very concerned, as you are saying, that we got that definition into the act and that we tried to be as complete as we possibly could.

Mr Carr: So how would it work --

The Vice-Chair: We have to move the rotation around, Mr Carr, I am sorry.

Mr Christopherson: I just want to reiterate one thing and commit to something else for this afternoon. First of all, I think we are trying to stay away from partisan stuff as much as possible, but I think some of the previous remarks crossed over and require at least something for the record.

The purpose, from a political point of view, of separating the two is very clear and we make no bones about it. We believe there is a difference in spending money on the capital side of the budget versus spending money on the operating side. We think there is a difference in terms of debt and in terms of expenditures of taxpayers' money when you are building a school versus when you are spending money, for instance, on a drug plan or on welfare costs on a yearly basis. We will articulate what we think those differences are at the time it comes out in the budget. I think they have already been articulated to a large degree by the Treasurer.

But those differences we might have philosophically from a political point of view are very much different from the document that is here. The document provides the groundwork for that to be done, but it also ensures that everything is going to be accountable. I say again, as I said yesterday in the Legislature, this is not being done in an attempt to hide anything. It is being done to separate, as many other jurisdictions have done, many other governments, many of them Liberal or Conservative-type governments that recognize that there is a difference in the spending and the accountability of those two.

The other thing I would like to say, Mr Chair --

The Vice-Chair: I appreciate you wanting to get some stuff on the record. I would ask, though, if you could put forward a question as this is supposed to be question period. Hopefully later this afternoon we could have more of a debate after we have had this.

Mr Christopherson: Okay, although I am serving two purposes here, both as a member of the committee and also the parliamentary assistant to the Treasurer.

The Vice-Chair: Quite true.

Mr Phillips: We want answers from these people, not speeches.


Mr Christopherson: I realize what you would like, Mr Phillips. I believe I have the floor.

Mr Phillips: You do, but we have a half-hour to get through this. We do not need a speech from you. We can hear speeches any time.

The Vice-Chair: Please, no more cross-debate, Mr Phillips. Please try and place your question.

Mr Christopherson: I was going to make a commitment, but obviously they do not want it, so I am done.

The Vice-Chair: Okay, then we will move over. Mr Phillips.

Mr Phillips: You are only allowed one on one side at a time?

The Vice-Chair: We move around, Mr Phillips. We will come back.

Mr Phillips: I am very anxious to know how we are going to report the numbers. If this had been in place this year, would the capital fund be shown as $4.29 billion or does the paragraph "Allocation of expenditure over time" mean that the only expenses would be the amortization cost you apply? Which of the two would it be?

Ms Clitheroe: I am sorry, I am not sure I understood your question. Your question was, what portion would be in the capital fund and what portion would be in the operating fund?

Mr Phillips: If this bill had been passed last year and you were preparing the budget and you announced this budget, would the capital deficit you show in the budget be the $4.29 billion or would it be your amortization cost of that $4.29 billion?

Ms Clitheroe: I am not sure if I can get the years right on this, but I will certainly try. The idea is to show in the capital fund the total amount of the expenditures we are making on capital.

Mr Phillips: For that year.

Ms Clitheroe: For that particular year. What will be happening is that we will be amortizing those expenditures into the future, over the next, say, 20 years. So we will take a portion of those capital expenditures and they will show up in the operating fund.

Mr Phillips: The total actual expenditures, not what you are amortizing.

Ms Clitheroe: We will take an amortization of those capital expenditures and show that in the operating fund. The capital fund will continue to show the total amount purchased or acquired and the operating fund will show the amortization of that.

Mr Phillips: So basically we will have exactly the same reporting as we have in this year's budget.

Ms Clitheroe: The amortization was not included in last year's budget because it had not been enacted yet. We had not enacted the capital fund, so the amortization was not apparent in the operating fund for that year.

This is Tony Salerno here, by the way. He is with the office of the budget.

Mr Phillips: I am just saying that we will continue to see it reported in that format that is on pages 68 and 69.

Ms Clitheroe: With respect to the public accounts, the capital and operating fund will be as Wendy Tysall has described. When one is referring to the capital fund in a particular document, whether it is this document or a budget or another document, one would see the numbers consistent, references to the capital fund or to the operating fund. This act does not purport to prescribe the method in which that reporting would occur from document to document.

Mr Sterling: I guess I will ask this to Tony. If they come in and paint your office next year, does that show up as a capital expenditure?

Mr Salerno: I believe that would be an operating expenditure. That is regular maintenance. I do not know the technicality of exactly where the breakoff is --

Mr Sterling: Do you want your office painted?

Mr Salerno: -- but I believe that would fall under a regular operating expenditure and consequently would be part of the operating fund report.

Mr Sterling: Okay. The other part is, if they renovate a school out in the community, is that a capital expenditure?

Mr Salerno: It would depend on the degree of renovation. If it extends the useful life of the building by a significant amount of time, then it would be a capital expenditure.

Mr Sterling: Who is going to make these decisions?

Mr Salerno: Essentially, what enters into the capital fund is the amount that is being deemed to be capital expenditure of the school board and the amount of the grant being provided by the province for that purpose.

Mr Sterling: But all renovations are capital, according to --

Mr Salerno: Significant renovations would be capital.

Mr Sterling: All renovations, as far as I know, is it not? I guess our concern here is that if we are going to present this as a real thing, first of all, the tendency is going to be for everybody to shove it in capital. That is the political advantage of this thing. That is the easier sell. If I were the Treasurer, I would want to put everything in capital I could get in capital. Whether it is an accurate reflection of what is happening or not is another thing.

In terms of the plant that is in place now in Ontario -- the schools, the sewers, the highway system -- we know they are deteriorating. Every day that goes by, the roads break down. Is it fair to say, "We're spending this on capital," without putting something in the budget saying there is going to be depreciation over the next year of the capital stock of the province?

Mr Salerno: Essentially, past capital expenditures have been expensed already, because that amount, past expenditure for capital purposes, was expensed in the year in which it was incurred. So for the purposes of reporting, that expenditure has happened. That is part of the problem with the current system of capital reporting, because there is not a good sense of what is being used in the current period and what is adding to the capital stock.

As you know, most other jurisdictions do report capital in a way that will expense it over some semblance of its useful life. All the US states have a separate capital fund. Many of the Canadian provinces have a capital fund to different degrees. In the case of Ontario, we have not done it in the past. In fact, that makes interprovincial comparison and interjurisdictional comparisons very difficult.

Mr Sterling: Listen, Tony, I do not think treasurers in any of the states or any of the provinces are any different than they are in this province. I do not know how much this is going to really improve the accounting to the public in terms of what is really being done, because notwithstanding what you say, that there is a capital stock there, the fact of the matter is that we have to face the fact that there is deterioration taking place over the next year as well and that to accurately reflect whether any government is putting back enough to overcome the deterioration that is taking place is really the question for the public to understand, in my view. I would like to know if $1 billion a year or $2 billion a year is enough to keep our highways up to what they were before in that whole scenario.

At any rate --

The Vice-Chair: Mr Sterling, I am going to have to move the rotation around.

Mr Klopp: Maybe it got partly answered. I guess I come from a small business point of view, a farm. We have capital expenses and we have day-to-day expenses. I do not see a big problem with that. In fact, maybe in my way I find it almost bizarre that the government of Ontario does not even follow a simple practice I was doing on my farm to make sure I am investing -- what I understand of this kind of deal here, it is to maybe make us understand where we are investing on good things that are going to be around for a while or we are just spending on short-term things. Is that why you want to get this more cleared up by this section?

Mr Salerno: That is part of the results that are hoped for in this new way of reporting capital, segregating capital from regular operating expenses.

Mr Klopp: So people like me who get elected who have to help make decisions for my riding and for the whole province can maybe then look at these books and understand where I am investing in good things that are going to be around for a while versus making sure that the welfare roll is getting paid up, and maybe making it clear for me to see, as an MPP?

Mr Salerno: I cannot make that judgement, whether operating is good or bad.


Mr Klopp: No, but for me to help in the decision-making process.

Mr Salerno: It will help in making a distinction between the regular ongoing operating expenses and the things that are going to be around for a longer period of time. In fact, with this approach it will more clearly identify the capital that is being used up in the current period, which is part of the concern that Mr Sterling was identifying a minute ago.

Mr Klopp: I agree too. There is no point in trying to hide things or smooth it around. In a simple thing like my own operation, the bottom line is that the bills have to be paid. But it helps if I separate them: Did I spend money on a tractor or did I spend money on going to a party or on a short-term trip? Still the bills all have to be paid and that is still going to be showing up in the accounting system, right?

Mr Salerno: Right. In fact it makes the decision whether to spend the next dollar on capital or operating -- it puts them more on an equal balance, because you know that in that year you will be reporting, as any good business person will, only that amount of capital that you are consuming in that year. Consequently it puts the decision between capital expenditures and operating expenditures on an even footing. In the past, there is evidence, looking at the capital expenditure over a number of years, that in tough times capital expenditures suffer, because they are easier to defer and you get a bigger impact on the bottom line by deferring capital in any one year when you need to report the total capital expenditure in the year in which the asset was acquired.

Mrs Sullivan: I too want to ask questions relating to the write-downs and how they will be determined. There are several questions I have relating to them. The bill indicates that each expenditure reported in the capital account shall be written off over a number of years yet to be determined. Does that mean, by example, that if the capital investment is in a hospital there might be a different period of years for the write-down of that particular expenditure than there would be for the write-down of another capital expenditure such as a school or something which is wholly owned by the province rather than something in which there is municipal or another level of government involvement? That is one question.

The second thing is whether there is consistency in the write-downs. How will the announcement of the determination of the Treasury Board be made? Why would a consistent write-down or depreciation level not be included in this act? It seems to me that has been the nature and approach in the private sector in terms of business write-downs and depreciation allowances and so on. Why would that not be the situation here?

I am interested in the remaining capital. If, by example, the write-down is 20% in one year, which means the purchase or the expenditure would be made over five years, where will the remaining four years show in subsequent years, in the capital account or in the operating account? We know where the amortization costs are going to go, but are you going to continue showing the capital in the capital account? I am interested that there is no reference to a capital reserve and I wonder why not.

Ms Tysall: The amount for the write-down has not been determined. As you had mentioned, it will be decided by Treasury Board, but I think the intention would be that we would look at different kinds of classes of capital and perhaps, as you say, with school buildings, write them down differently from hospitals if there were any significant differences in that area.

The other approach might be to sort of put them all together and come up with an average, which is certainly simpler from our perspective and something that is followed by some other jurisdictions as well.

I do not know whether Treasury Board has spent very much time on this as yet to determine what that write-down might be. Tony, have you any --

Mr Salerno: No, that has not been considered yet.

Mrs Sullivan: I think that is highly problematic in terms of access to information and the understanding of the information that is provided to the public. If there is a different write-down, a different approach in each sector or in each capital purchase or definition, how is anyone going to know --

The Vice-Chair: Mrs Sullivan, I think you had asked three questions. You had one answered, and now you are on to another one. Maybe we could get the first three answered first and then an answer to your last one.

Ms Clitheroe: I think the second question was, why would one not have a consistent write-down? Why would one be one percentage --

Mrs Sullivan: The statutory.

Ms Clitheroe: -- and another be another percentage. Perhaps, Wendy, you might wish to comment, but with respect to business practices in this area, different types of assets have different useful lives, and the attempt is often made to try to match the write-down over some matched principle. So that would be one argument in favour of different classes. As Wendy mentioned, an argument in favour of some sort of average which would take all that into account but come up with an end result number which one could then say is the number would be simpler. On the other hand, it would not provide the advantage of being able to know, underneath that one number, what the formula was on each class of asset. Those would be the two alternatives.

With respect to recording how those numbers -- when the Treasury Board makes that determination, Public Accounts would be reflecting what the amortization was over the year.

Your third question was with respect to how, once you have written off -- you, I think, used an example of a useful life of about five years, so that in year one, you would be writing off 20% of that asset; in year two, you would be writing off 20% of that asset, and so on.

The capital stock reported in the public accounts would certainly reflect that the original asset had been purchased, but in the budget of course we are looking at current capital expenditures, and it would be those that you would then start to see reflected in amortization in the operating account.

Wendy, you can perhaps correct me.

Ms Tysall: I think that is fair.

The Vice-Chair: Okay. The question you just asked as a supplemental, has that been answered as well?

Mrs Sullivan: I was just expressing a reservation, but I did ask about a capital reserve.

Ms Clitheroe: Yes, the fourth question was with respect to a capital reserve. Could you assist me by identifying what exactly you mean by a capital reserve?

Mrs Sullivan: Expenditures that might be put away for future years' use for capital purposes.

Ms Clitheroe: Sort of like a little savings account for future purposes.

Mrs Sullivan: The municipalities have this as a requirement in their act. Why would not one have been considered for the province?

Ms Clitheroe: If I understand the question correctly, you are talking about something like a sinking fund, to accommodate those reserves in future years. Wendy, was a capital reserve considered during the deliberations?

Ms Tysall: I do not think we did, no. There is somebody here from the staff who might be in a better position to answer that question.


Ms Clitheroe: Could we come back to you on that question?

Mrs Sullivan: Sure.

Mr Sterling: I have two quick questions. During the year, you issue quarterly financial reports. If we had had a capital account this year, would you have shown the sale of the Dome -- I forget what the figure was, $130 million -- as a revenue in the capital account or the operating account?

Ms Clitheroe: This is with respect to the sale of the domed stadium?

Mr Sterling: Where you got $112 million -- I forget what the exact figure was.

Ms Clitheroe: That would be reflected as income in the consolidated revenue fund.

Mr Sterling: So, on the one hand, you are saying you were spending this amount on capital, but when you sell an asset you are not going to count it off against the capital fund. Is that right?

Mr Klopp: I would not call that an asset.

Mr Sterling: You may be right on that.

Mr Siddall: I will introduce myself. I am Robert Siddall, the acting assistant director in Treasury.

With respect to that, because the staff co-expenditures would have been made prior to the setting up of the capital fund and would already have been spent --

Mr Sterling: No, no. I am talking about if this happened next year.

Mr Siddall: Are you saying it is set up and included in the capital expenditures that we have put into the capital fund?

Mr Sterling: Either way. I mean, it is a sale of an asset.

Mr Siddall: It does make a difference. Let's say we make an expenditure within the capital fund this year to purchase a piece of land. If that land is resold in the future, then you are right, it will be taken out of the capital fund. But if the land was purchased prior to the adoption of a capital fund, it more appropriately belongs in the operating fund for where it originally was charged.

Mr Sterling: So you are saying if it was a blank piece of crown land, you have to sell it and buy it back before it gets in the capital fund?

Mr Siddall: It goes back to the fact that we have made expenditures for capital in the past that we are not putting into the capital fund at this point in time. The capital fund starts at a specific point in time.

Mr Sterling: But the philosophy behind this is to say to the people, "We spent this amount on capital." If you have an unusual revenue from the sale of an asset, be it a blank piece of land, be it a building or whatever, surely to God, you want to indicate to the public that you did not get this from taxation or from licensing revenue or whatever. If it is accurately reflecting what has happened in that year, it should be shown as capital revenue.

Ms Clitheroe: You are accurate, in terms of maintaining appropriate accounting standards, that the revenue originally was identified with respect to the capital fund as well. In the capital fund that is being established, there is not an attempt to go back 100 years, or whatever, and reclassify all of the assets that the government has owned until that point in time. The decision was taken to implement the capital fund as of a specific date, so with respect to expenditures that are being made on capital and are identified with the capital fund, you are correct in saying the appropriate accounting principle would be to match any revenues that came from that sale to the capital fund. But it would now be misleading to identify something that had not originally been part of the capital fund as part of the capital fund in subsequent years.

Mr Phillips: There must have been a lot of debate around Treasury about Mr Klopp's suggestion of treating this like a business and showing depreciation costs -- which are, I do not know, $4 billion or $5 billion a year -- as an expense, because that is, frankly, how I look at it. My concern, not unlike that of my colleague here, is that this will end up destroying all sorts of stuff. I mean, you would be a fool to lease stuff now. You are going to put in capital because it keeps it off the operating deficit.

Why did you reject the concept of showing some form of depreciation costs on an annual basis to give us the feeling of what are the true expenditures? What this will do -- do not make any mistake about it -- is that for the next five years all you will show will be the interest payments on the capital fund. You will not be showing the real cost of the refurbishing of the infrastructure. Why did Treasury reject the concept of some form of depreciation?

Mr Siddall: The concept of depreciation has not been rejected. In fact, the capital that is being acquired this year will be depreciated, starting next year as the first year. So in the next year, if this concept continues, you would see the first depreciation on the capital that was undertaken this year.

Mr Phillips: I know that. I am saying, why did you not consider the $5-billion-a-year infrastructure amortization as a cost? I know you are going to show $200 million next year as amortization costs of the capital fund.

Mr Salerno: That is a process that is in place right now, or until this year, that in fact capital was expensed in the year in which it was acquired. And this process, the process that was in place, has a lot of drawbacks that I think were already identified. It is felt that the new approach will more accurately reflect the long-term nature of the capital expenditure and will tend to place the decision on capital expenditure or operating expenditure on a more equal basis, not to mention the fact that many other jurisdictions, including all businesses --

Mr Phillips: No, no. All businesses show a depreciation cost.

Mr Salerno: Depreciation -- but they do not depreciate. When a business acquires a new office building, it does not expense that on its financial statements.

Mr Phillips: Of course not. It shows the depreciation cost.

Mr Salerno: Well, it capitalizes it and depreciates it over time, which is the process that is being adopted through the capital fund.

The Vice-Chair: We have run out of time.

We want to thank everyone from Treasury and the other ministries who have been in this morning to respond to questions. It is greatly appreciated.

Mr Christopherson: Will the Treasury staff be here this afternoon also?

Interjection: We can be.

Mr Phillips: If you would, please.

The Vice-Chair: So we will have some Treasury staff here this afternoon. Great. And we are having the auditor -- I do not know if the actual auditor, but representatives of the auditor's office -- in here this afternoon at 3:30. We are adjourned until 3:30.

The committee recessed at 1159.


The committee resumed at 1548.


The Vice-Chair: This is the standing committee on finance and economic affairs, dealing with Bill 156, An Act to amend the Financial Administration Act, continuing our hearings from this morning, when we heard from Treasury and Economics.

This afternoon we have representatives from the Office of the Provincial Auditor and the auditor himself. Welcome to the committee. We appreciate your being able to appear and respond to questions on such short notice. Just for the purposes of Hansard, would you introduce yourselves. Have you any opening general comments you would like to make? If not, if you are just here to answer questions, then we will begin that process.

Mr Archer: I am Doug Archer, the Provincial Auditor of Ontario. Ken Leishman is from our office and is in charge of the public accounts audit branch in our office.

As for opening comments, we do not have any, but we are certainly prepared to answer questions with regard to the act. The only section of the act we have really had an opportunity to review thus far is the one dealing with the capital account, so if any of you have any questions on that section, we would certainly be glad to give you our comments or views.

Mr Sterling: I would like to thank the Provincial Auditor, as well as the Treasury staff who are here, for responding to very short notice in coming before the committee. We should thank the Treasury staff for doing that this morning.

One of the interesting parts of all of this is that, having phoned you late last week, I was somewhat surprised that the Treasurer had not even consulted you with regard to how the capital account was going to be set up, in that you would be the person who would, I guess, make some comments on the outcome of it. Is it normal practice for an auditor to have some kind of response? Is that not really the role of the Provincial Auditor?

Mr Archer: With regard to amendments to the Financial Administration Act?

Mr Sterling: Especially when you set up a new style of books, so to speak.

Mr Archer: I think that in those situations it would be normal practice to consult with the Provincial Auditor. As for consultation in this case, we had many talks with the Treasury officials early in the game -- probably last January or February would be about the timing -- and we thought we had a pretty good feel for the type of change they were trying to make with regard to capital expenditures. We realized at the time there was a good possibility that the changes they had in mind would ultimately require some change in the Financial Administration Act. We were not sure of that, but there was a possibility that it would, so the fact that ultimately changes appeared in legislation was not a surprise.

What was a surprise was that the first I heard that it had actually reached the stage of being in legislation form and had had first reading was when you called me, I guess it was last Monday, to get my comments.

Mr Sterling: I do not know the reasons for that, but the Treasurer seems to have less ability -- it is not just this Treasury. They just seem to be less prone to following the process through in its normal way.

At any rate, I am disturbed at that. The bottom line of any change in the budget format or the accounting should ultimately make the financial matters of the province appear to the public in an easier and more understandable form. That has always been my goal.

Just before we get to the capital account part of it, I know you indicated in your opening remarks you have not had the opportunity to look at the other part of it. I think it would be fair to sum up the other part of the act as giving the Treasurer more flexibility in dealing with investment and borrowing powers. He is given the right to invest in trust companies and credit unions and those kinds of things.

One of the concerns of the committee this morning was that if the Treasurer is given these powers, given what appears to be the desire of the government to implement social policy through other instruments -- ie, Ontario Hydro buying uranium at four times the price from Elliot Lake, thereby helping Elliot Lake, without debating the issue of whether Elliot Lake should have gotten help or not -- I guess it is the position of our party that it should have been done via a grant or something like that so that it is clear on the books what is happening and that certain taxpayers, via Ontario Hydro, should not benefit.

What we are a little concerned about is, if the Treasurer walked down the hall and said to the people who are investing this money, "We need $500 million in trust company X," how would we be alarmed to the fact that this was happening? The answer was that there was no alarm and that if the alarm bell did ring, it might ring a year later when somebody was reviewing those matters.

If the policies of investment are changed dramatically, I would like there to be some mechanism for this to come to light. At the present time, when the province invests money in Treasury bills, does it report to you on a regular basis as to where it is putting the money?

Mr Archer: They certainly do not consult with us beforehand or report specifically to us, but to the extent that orders in council, for example, are required, we would become aware that way, because we get copies of all such documents. I think we would be aware of the type of situation you are describing, but it would just be from an information standpoint, not from a standpoint of giving our blessing or otherwise condoning the action.

Mr Sterling: I do not think your function is to bless, and I think it is the right of government to make those decisions, but what I am obviously concerned about is that people have knowledge of that. That is the only question I have on the investment end of it.

Mr Archer: Certainly the investment function, along with any function of Treasury or any ministry for that matter, is subject to audit from a value-for-money standpoint. We may periodically go in and review the investment activities of Treasury to see if, from our view, they are conducted in the best interests of the taxpayer.

Mr Sterling: It is just that this act gives them a lot of other options in terms of what I think they described as covering themselves. I think it is probably good as long as it is done in a small-c conservative manner in terms of the risks taken. That is all I had for you.

Mr Phillips: Along the same line, before we get on the capital side, I realize you have not had a chance to review the bill. We play a similar role to you but in a different way. You are probably always looking for things that could better be disclosed for the public and made more informative. I would appreciate, if your staff does have a chance to look at it, any comments you do have for us. It really cannot be done today, and I think there is a commitment that the bill go back to the House next week, but if you have any suggestions for the Legislature in terms of prudent disclosure that should be there but is not there, I would find that useful.

Mr Archer: We would be pleased to do that.

Mr Christopherson: I would just like to reaffirm, so I am very clear on the issue, that you said you receive a copy of the order in council. Correct? Do you normally review it to the extent that it comes in and somebody actually looks at it and acknowledges it is in and there is some kind of tracking of it, or is it just something that comes in and it is in a file should you then decide to do an in-depth review in that area?

Mr Archer: Basically it is the latter, although we do analyse every order in council -- there are quite a number, as you know -- just from the standpoint of keeping abreast of what is going on and being alert for special happenings, if you like, that maybe we should turn our attention to earlier than we would in our normal audit cyclical approach.

Mr Christopherson: I have one last question on that. I thank you for the answer. The "special happening," to use your phrase, which I think is a nice way to put it -- are you comfortable that in your office -- and with your successor, who will accept most of the methods that are built in now -- most special happenings would come to someone's attention were there irregularities or something that unusual, that there is enough check and balance at your end of it that it would probably come to the attention of yourself or your staff?

Mr Archer: I am not sure what you mean by an irregularity. If you use the example that Mr Sterling offered of the Treasurer walking down the hall and saying, "I think we should put $500 million in trust company X," if we saw that in an order in council, I do not think we would see that as a special happening. We would be aware of it and would take it into account in our audit of the public accounts of that year, but I do not think it would be likely to trigger any suspicion on our part.

Mr Christopherson: I am just going to pursue that a little more, because I think it really is important. Under the existing rules, aside from Bill 156, if a Treasurer, any Treasurer, were investing funds in an institution that he really should not -- using the example of Mr Sterling, in a small-c conservative approach to husbanding the finances of the province -- would that twig in some way? In other words, is there some way that someone would look and say, "Why is $500 million in there? That doesn't seem kosher," and that it might be looked at a little more under the current setup?

Mr Archer: Ken, could you comment on that?

Mr Leishman: Yes. Under the current setup, an investment in an instrument that was not authorized under the current Financial Administration Act would be picked up as part of our annual test audit. It might not be picked up at the time it was made, but it would be picked up at the time we did the test audit and it would be reported on.

Mr Christopherson: I do not want to take up all the time, but I will cast this even further, through to our Treasury staff, if need be. There will obviously be certain criteria. Is it fair to say that there would be stringent criteria as to what would be an authorized institution, so that if there were any extension of where it could properly go, there should be a fairly high comfort level on the part of the opposition and the taxpayers if it meets those criteria?

Mr Archer: A lot depends on how specific the legislation is as to the discretion the Treasurer has in investing. In addition to that, Treasury itself as an internal operating guideline, would probably come up with specifics on what institutions investments should be placed in and so on. So we can audit to both of those, to the act itself and to the Treasury's internal mechanisms, but if both of those are so broad that they would allow investment in almost anything, there is not much we can say as an audit group.


Mr Christopherson: Eleanor, do you have anything to add to that?

The Vice-Chair: Could you come forward, please? I know you were here this morning. Reintroduce yourself. Ms Clitheroe: My name is Eleanor Clitheroe, assistant deputy minister, office of the Treasury. With respect to the internal controls Mr Christopherson and Mr Archer are referring to, those controls are indeed very specific and are, in regard to itemized lists, as Mr Archer would be aware, with respect to our current investment policies. We would be continuing that practice under the amendments to the new legislation.

Mr Christopherson: Thank you.

Mr Sterling: Perhaps you could stay for a moment. I would like to interchange between you, if Mr Archer does not mind. This legislation goes to the extent of allowing the Treasurer to invest in debt instruments of corporations doing business in Canada. Would it be possible to set up some kind of reporting mechanism which would have to be produced by the Treasurer on a timely basis, I do not know whether that is quarterly or monthly or whatever, for the public to see where you have been putting this money? Is there a problem with that in terms either of commercial confidentiality or of the practical job of doing it? Would that be possible on the investment side?

Ms Clitheroe: Certainly there are situations where for cost purposes we do not wish to disclose to competitive forces in the marketplace what our activities are going to be or are so that we can participate in the marketplace in the same competitive fashion all the other market participants do. So your caveat with respect to operating in a normal business practice -- the case is now that, as Mr Archer mentioned, the books are always open and the information is always available to anyone who would wish to know at any given point in time what the investments of the government are.

Mr Sterling: Sorry, but the two statements seem to be contradictory. On the one hand, you say there is some need for confidentiality, and then you are telling me the books are open.

Ms Clitheroe: We would not necessarily, if we were going to carry out a transaction of some nature, announce it to the marketplace at large until we had completed the transaction, for confidentiality purposes. If the market were aware that we wished to transact a certain transaction, it would then raise the rates against us or something in that nature. However, after the fact when our transactions are completed, we are always able to disclose them to Mr Archer or to whoever needs to have access to that information.

Certainly we are always subject to audit. We have both the controls of Mr Archer and the internal audit controls of the finance and administration branch as well as our own internal divisional controllership function. So they are always being scrutinized, always available and prepared and ready.

Mr Sterling: I was not suggesting that you reveal what your negotiations are. I was talking post facto the investment being made. Mr Archer, I am always concerned, having been very much involved with the Freedom of Information and Protection of Privacy Act and finding out how useless it really has become. With so much information the public is facing, the form of the information in my view is as important as the information itself, perhaps more important. Is there some form of information we could ask the government to produce on a timely basis which would readily reflect what the investment policies of the government are at that point in time?

Mr Archer: I would think so. You could even include it in the Financial Administration Act I would imagine. But certainly the public accounts themselves would be one vehicle. They tell you now where the money is at the end of the year. I think what you are suggesting is you would like, in addition to knowing that, to know where it has been during the year. The quarterly financial report that the Treasury now produces would be a vehicle that could provide the type of information you are seeking and could tell you where the money has been in the last quarter, for example, as opposed to waiting a whole year to find out.

Ms Clitheroe: Certainly the investment policies of the Treasury are always available at any time.

Mr Sterling: What concerns me a little bit here is that our auditor is getting his information piecemeal from the Ontario Gazette. Is that correct?

Mr Archer: We are getting it automatically, on a piecemeal basis, but there is nothing to prevent our office from going over to the Treasury at any time and getting it.

Mr Sterling: I understand that, but what I am concerned about is that while that information may mean nothing to you, the $500 million going to trust company acts, it may mean very much to a member of the public or a member of the Legislature in putting two and two together as to where that money has eventually been invested.

I ask the Treasury staff to consider an amendment to the act that we might consider -- in terms of being reasonable, I do not know how large your investments are -- requiring the Treasury to produce that on a quarterly basis. I can draw the amendment, but I would prefer you to draw the amendment so that we can debate it and it would be done in a normal manner. We could do that in committee of the whole House. We do not have to consider that this afternoon, but I would like to put forward that kind of an amendment when we get back to the House.

The Vice-Chair: Any further comments on this specific issue regarding the investments? Seeing none, the other issue we wanted to deal with was section 7 regarding the establishment of the capital account, that is, section 7 of the bill regarding subsections 15(1) and 15(2) of the actual act. We will start with Mr Phillips this time.

Mr Phillips: You have had a chance to look at it. I do not know whether it is best just to let you comment on it and then ask questions after that or whether you find it easier for us to ask questions and comment on the questions.


Mr Archer: I could give a preliminary comment. We are not quite sure how to interpret the content of that section ourselves, but we were certainly given to understand right from the beginning that there was no intention of trying to capitalize physical assets. There was no intention of trying, through that mechanism, to hide -- I think "hide" is the expression used -- part of the deficit of the province. It was just a matter of trying to break expenditure into two components, one being the amount spent on capital items as defined here and one spent on other operating items. So you have two expenditure figures which would be added together, then subtract the revenue and you come up with an overall deficit for the province.

We were certainly given to understand that in our discussion with Treasury officials, and when the budget came down I thought it was very specific on that point with regard to the 1991-92 year, that in fact that would be the case. As long as that was the case, we as an audit office could see no problem.

When I read this I wonder if they are not intending to go further. When you set up a separate account and you start taking action that looks as though it might be writing off on a depreciation or an amortization basis, I get a little suspicious that maybe in the long run they are thinking of capitalizing fixed assets and thereby reducing the annual deficit of the province that way. As I say, we have not had a chance to sit down and talk with the Treasury people specifically on each of these clauses so that we have a better understanding of why they were written that way and what the intent of the particular clause is particularly in the long run. In the short run, I do not think there is any problem, because the budget tells you what is going to happen for 1991-92, but for 1992-93 and thereafter we are not sure, based on our reading of those clauses.

Mr Phillips: I guess it is just being in opposition, I get more suspicious. I listen carefully to the Premier all the time and he uses the line, even in the budget, "determined to eliminate the operating deficit by 1997-98." Whenever he is out talking to the business group, "We are going to balance the operating budget," I am suspicious that this is being set up to, in my opinion, not state the financial picture as clearly as it should be. That is why I need people like you who know this stuff.

I can understand the merit of a capital account. I can understand the merit of wanting to show there actually is a need for a more straight-line capital expenditure that is not subject to the vagaries of economic ups and downs. In fact, I think the capital account report says we need to spend about $5 billion a year to refurbish the infrastructure of the province. I would have thought a better way of illustrating to the people of Ontario the costs of their government would have been to show, on an annualized basis, the cost to refurbish the infrastructure as accurately as they could, much as a company would show an annual depreciation cost and say that is about what they need to write off each year as our cost of keeping our operation furbished.

This, I believe, starting April 1, 1992, is a very different way of accounting for the provincial books. It will show that there is a capital account and the only operating expense will be a little bit of amortization on that capital and the interest payments on it. For about the first four or five years, the province will show quite a low deficit and then it will climb as the capital account builds. To me at least, there is another way of looking at it, and I would not mind your comment on what is the best way to illustrate capital expenditures for the people of the province.

The other point I would make is, and I see this all the time, the debate between for example leasing something and building something. I know for a while there, because it was so tough to get capital money, it was easier to put it on leasing, so in my opinion that may have driven governments to lease more than they should have perhaps. I do not know. You may see it around here in government accommodations.

This may have the opposite effect, where it is far less painful to get it over into capital because all you really have to show is a little bit of interest charges on it and some amortization. As you get into a year when you may want to spend a lot on capital, you have the flexibility to do that because you will be showing a relatively small amount.

Those are just questions I would appreciate your comments on in terms of what is the best disclosure for the public. By the way, the Treasury people I know give us all the right information. I am looking for the most helpful formatting for the public.

Mr Archer: I think the accounting system of the province right now is the best way of disclosure. What that entails is that all the money spent on capital items in any given year shows up in expenditure for that year. The problem with that is the one you cite, that some years you may have to spend, let's say, $5 billion on physical assets and the next year only $1 billion. You have the ups and downs or blips and it is going to affect the net expenditure or the net deficit of the province.

If that in fact happens, it does not bother me I guess maybe to the extent it bothers you, because I look upon expenditure on capital items no differently than expenditure on social benefits, health care, education, or whatever. It is just another expenditure for a service provided to the people of Ontario, and in a given year you might, because you have created some new social benefit like child care for example, spend an extra $1 billion that you did not spend last year and will not spend next year. I do not think there is any suggestion we should try to even that out, so I wonder why we should be worried about evening out expenditure on physical assets.

Mr Sterling: The part I have difficulty with is one of the arguments the Treasury officials used this morning, which was that a lot of other jurisdictions have done this. Quite frankly I do not find it surprising, because I would be very tempted as a Treasurer to do it myself if I can disburse. I have heard Brian Mulroney, for instance, talk often about the fact that he is more than paying for his operating expenditures. What he is not paying for is the debt-carrying charges that were incurred, most of them before he got there, or at least half before he got there.

Mr Phillips: You are doing fine with those answers.

Mr Sterling: I have heard that argument. Basically what I am concerned about here is confusion of the issue for the public. I think we have a difficult time understanding a budget document to begin with.

Having said that, there is the advantage that Gerry identifies, and I guess the advantage too of what I would call the wealth-creating ministries, if there are such things, for instance, the Ministry of Transportation. If they build a road, then there probably is some wealth created as a result of that, if you have better transportation. There may be more benefit to ministries like that to be able to come in and get a fair share of the pie. They have been continually cut down over the last 20 to 25 years.

But in terms of keeping the accounts, what I see as patently unfair in setting this up is that we are freezing the situation as of April 1, 1992. You are not taking into account, or there is no liability shown, for the deterioration that is going on over the year. I think last year's budget was $900 million for the Ministry of Transportation, and there may be some more in terms of that $700-million fund, but a lot of that $900 million is used to replace roads that are already there. Is that a capital expenditure or is that a maintenance expenditure? To me, it is a maintenance expenditure. If you are only replacing something that is there and you are starting from April 1, if you spend any money on an existing structure or an existing services, then you cannot say that is new capital. That is not a new structure or whatever.

I asked Treasury if they would subtract the sale of an asset, and they said no, not unless it was created after April 1, 1992. I think the account will look good for the four, five or six years and then the poor Treasurer who has to deal with it, 10 and 15 years down the road, is going to want to do away with this capital account.


Mr Wiseman: It will still be Floyd.

Mr Sterling: I hope things turn around enough so that it would be Floyd, but I do not think that is going to happen. I think it is a shell game at least for the first three or four years.

Mr Archer: I read into your comments the belief that commencing with the 1992-93 year they will in fact be capitalizing physical assets and thereby reducing the deficit of the province accordingly. Our discussions with Treasury to date would indicate that there is no intention of doing that. I admitted earlier that after reading the content of this act, I am not quite as sure of that as I was seven or eight months ago. We would like to sit down and talk to Treasury people and get a better understanding of why they have written the legislation this way. But we are still operating under the assumption that they will not be capitalizing physical assets even in 1992-93.

Mr Phillips: Can Treasury give us an answer to that?

The Vice-Chair: Please identify yourself for the purposes of Hansard.

Mr Stoodley: I am Graham Stoodley, the director of the legal branch for the Ministry of Treasury and Economics.

I think I can respond in part to Mr Archer's comment. I recognise I do not have an accounting degree so I will try not to play accountant. But playing lawyer, the provisions of the section we have written simply provide that the public accounts are to indicate year by year what expenditures have been approved by the Legislature that are capital expenditures. The section tries to point out or give some definition, some guidance as to what will be considered capital expenditures.

I do not fully understand the meaning of "capitalize the physical assets." As I believe this legislation reads, it means that if the Legislature has appropriated, say, $4 billion of the $8 billion -- you recognize I am not using real figures -- voted in the estimates and that $4 billion relates to the creation or acquisition of capital assets, then that $4 billion will be in the capital account to be maintained in the public accounts.

In subsequent years, an amount will also be shown that will recognize treasury board's assessment of the -- "amortization" has been the word that has been used earlier this morning, although my accounting colleagues tell me that is not the accounting term that should be used but neither is it "depreciation" -- it is an attempt to indicate over a period of years the writing off of that initial capital expenditure. Each year there will be new capital expenditures and the account will record those.

I cannot keep in my head the sort of where you are in five years, but where you should be, I think, is that the public accounts will show the total amount of the province's money that has been spent to create capital assets and it will show an estimate of the writing off over the useful life, or whatever other test is adopted for those assets.

I do not understand this section in the least to only show a portion of the actual capital expenditure in a fiscal year.

Mr Sterling: Will there be an equal amount of debt appropriated to the capital account which will equal the capital account?

Mr Stoodley: I do not think this section deals with the appropriation of debt to the capital account. It is simply an attempt, as I believe was indicated in the budget, to show what portion of the total expenditures each year by Ontario brings into life the enduring capital assets.

As Mr Salerno pointed out this morning in speaking to the committee, the current method, as I understand it -- and Mr Archer can certainly speak far better than I about this procedure -- is that there are estimates. They are voted. There is no clear delineation in those expenditures of whether the expenditure is going to create a capital asset or be used for operating purposes, to use those terms. All of those expenditures, or a portion of those expenditures, may have to be provided by borrowed funds.

This section does not address that. It simply addresses the issue of providing what we hope to be an accurate accounting of the expenditures made annually for capital assets acquired by the province or brought into existence as a result of those expenditures. So I do not understand that there will be an allocation of debt to the account.

Mr Sterling: Under budget paper D on page 82 it says: "The capital fund will invest in Ontario's infrastructure through payments for capital projects approved during the estimates process. Money will flow into the capital fund from the operating fund through loans from the operating fund required to finance capital projects." The example given on page 83 for the 1991-92 year shows all of the capital fund being financed by a loan.

Maybe Mr Archer can correct me if I am wrong, but is the concern not that the Treasurer in the future will say, "We only have a deficit of $50 million and our cumulative deficit has been falling, but we have a capital deficit of $40 billion," and therefore give the impression to the public out there that our deficit is falling when it is not? Is that not what is going to happen?

Mr Archer: These are the areas that we would like to discuss with Treasury a little bit more. You, Mr Sterling, and some of the other members might remember the days when we used to have capital aid corporations in Ontario.

Mr Phillips: Before my time.

Mr Archer: They were really just a mechanism, in my view at any rate, for spreading capital costs of universities and so on over a long period, as opposed to hitting the deficit in the one year, the year that the expenditure was made. When I see terms like "loans from the operating account to the capital account," it brings back the visions of the capital aid corporation that maybe the same type of thing is in mind.

As I said, we would like to discuss that with Treasury. But just to get back for a moment to Mr Stoodley's example, I think he said if we had a budget of $8 billion and $4 billion was going to be spent on physical assets, I guess the point I am trying to make is that $4 billion is the -- let's say there was no revenue, to keep the example simple. Is the deficit for that year going to be $8 billion or $4 billion? That is what I mean by capitalizing the physical assets. If you capitalize the physical assets, the deficit will be $4 billion; if you do not, it will be $8 billion. This is what we are not sure of at this point.


Mr Sterling: Maybe the Treasury official can --

Mr Siddall: Yes. It is Robert Siddall for purposes of this afternoon.

In looking at the accumulated deficit, that number is shown in the Public Accounts of Ontario and, as the capital fund paper says, the financial statements of the province or the consolidated revenue fund will be the same as they have been in the past, so that the accumulated deficit will show as a combination of the operating deficit and the capital fund deficit. If one is going down and the other is going up, the net effect will show up in the accumulated deficit and you will be able to clearly see if the accumulated deficit is going up or down.

Mr Sterling: There is no choice. As soon as the deficit drops below $5 billion in this province, the operating deficit, the government is going to claim all kinds of wonderful things. That is the debate we are in here. That is a political problem. I find it unreal.

Mr Siddall: I am not sure if I understand where you are coming from, because I am saying the total combined deficit will be what will be charged to the accumulated deficit in the public accounts. What happens between the capital and the operating account, the actual impact of what is in the public accounts, will be the combined deficit of both the operating and capital fund.

Mr Phillips: I do not think there is any doubt about how the books would like to be illustrated. If I were the Treasurer I would love to do it too. I think Mr Archer has his finger on it, that the focus by the government will be on the operating deficit because that is a neat thing and the Treasurer said they are going to have an operating surplus by 1997-98. There is no doubt the capital program will be put into debt, but I do not think the public has near as an emotional attachment to debt as they do to deficits. Deficits they understand because they know if you spend more money than you raise over a long period of time, you eventually go bankrupt. I think all of us understand that. I think the government, if it is politically smart, will say, "Our operating deficit now is only $4 billion." The public will think, "It was $9.7 billion last year; it's down to $4 billion," and it is spelled out on page 55 of the budget.

Our question to the auditor, and I think he has given us the answer, is that from your view, in terms of the public array of the finances, would you prefer a continuation of capital being shown in the year it has occurred, as opposed to capital being shown on an amortization basis? By the way, Mr Archer, it may give you a hint about how they are planning to do it on page 55. There are words -- "gross of amortization" -- in here you may want to look at. Have I interpreted you properly in terms of what your wish would be, which is to show capital for the year it has occurred?

Mr Archer: Yes, certainly. If the decision were up to me, that would be the way I would go. However, just to clarify the reference to amortization, as an audit office we would have no objection to the Treasury department internally maintaining a subledger or subaccount or whatever, which gives in historical-cost dollars the useful life left in physical assets. To do that you would need some kind of a write-off period of 20 years or whatever. If they want to do that for their own purposes or even put a page in the Public Accounts or in their budget giving this information, that is all in the interests of further disclosure.

However, our point is that any of this type of thing should not affect the net deficit of the province for the year. It should be total and cover both the operating deficit and the capital deficit.

Mr Siddall: I know we are having a lot of discussion about this but page 82 of the budget does say, "The public accounts for the 1991-92 fiscal year will show the consolidated financial position" With respect to what Mr Archer said about showing expenditures in the year in which they were spent, the current plan in the capital fund in coming up to the combined deficit of $9.7 billion still does that. It is not changing that strategy which has been used in past Public Accounts to show capital expenditures in the year in which they were expended. What is happening is just what Mr Archer is requesting. We are showing, for purposes of trying to stress the importance of capital, a breakout of capital expenditures within a subsection of the Public Accounts of Ontario.

Mr Sterling: I guess that goes back to my original concern about what the capital accounts says.

The Vice-Chair: Sorry, you were next, Mr Wiseman.

Mr Sterling: I am sorry.

Mr Wiseman: I have been listening all afternoon and the bottom line here is that I think they are trying to get at whether any government, now or in the future, is going to be able to hide what is going on in terms of revenue in and revenue out. The bottom line for me is that when the budget comes out, it is going to say: "This is the amount of money that's going to be spent. This is the amount of revenue that's going to come in." As far as I can see, I do not think you can hide the difference between the two. Is that correct?

Mr Archer: That is a straight cash approach. You are going to get so much money and so much money going out. Sure.

Mr Wiseman: Is there no way to hide that?

Mr Archer: No.

Mr Wiseman: Okay. So whatever the difference is, that is the deficit and it does not matter. If I read you correctly on this section -- and you can correct me if I am wrong -- you are trying to say, at least through this, that there are assets the province has accumulated and they have some kind of value whether it is absolute or diminishing depending on depreciation. Is that also correct?

Mr Archer: I am not trying to say that. I think the reference was made, perhaps by Mr Sterling with reference to the accumulated deficit, that what has happened in the past is that we have a lot of physical assets out there that, if the Treasury could get a handle on them and wanted to capitalize physical assets, will take an awful lot of work.

Mr Wiseman: You would have to sell them all off.

Mr Archer: No. I think, first of all, you have to identify what you have, try to determine what you paid for it, what the expected life was and what the value is today. It would be a tremendous job to try to isolate the portion of the accumulated deficit, that is, the deficit to date represented by physical assets. There would be an awful lot of work. It would be nice to be able to do it because then you have got a starting point. As Mr Sterling said, the way we are doing it here, we are forgetting about the past 100-odd years the province has been in business and we are just to worry about the future. I think that is the only practical thing you can do, frankly.

Mr Wiseman: I think I understand what you are saying there, that whatever assets we buy in the future will have value but they will also have cost in terms of buying them --

Mr Archer: The purchase cost, yes.

Mr Wiseman: -- and that is going to show up in whatever difference there is between the revenues and the expenditures.


Mr Archer: That is true, yes. The budget will always have to show total revenue, total expenditure and whatever the difference is, and assuming it is always in a negative position, you are going to have to borrow money to cover it.

Mr Wiseman: Or it will be in surplus and you can be paying down the accumulated deficit. I have been listening all afternoon and they are trying to say there is going to be some shenanigans or something, that some magical accounting trick is going to turn out at the end of the year and they will say, "Oh, look, because we have amortized this, depreciated that, capitalized that and done this, we don't have any deficit at all." Anybody who is blind can tell that if there a difference between your revenues in and your expenditures, you have a problem.

Mr Archer: That is right. The term "deficit" --

Mr Wiseman: I apologize. I did not mean that, I am sorry.

Mr Stoodley: I can tell the difference too, yes.

Mr Wiseman: I am sure you can. I find your information extremely useful. I apologize for that comment.

Mr Archer: I guess we have been using the term "deficit" primarily from the standpoint of an accountant's definition of the term. I think the term you are using is really a "cash shortfall" and is probably a better term to put on the difference between revenue and expenditure. There is no way you can hide a cash shortfall or a cash overage. However, how that translates into financial statement presentations is something else again.

I think this is what we are talking about here, how that cash shortfall -- assuming it continues that way -- gets reflected. Is a cash shortfall in total going to show on financial statements as the deficit or is it going to be broken down and so much will be a deficit and so much will be expenditure on physical asset?

Mr Sterling: I guess my concern on this whole thing is the different interpretation of an asset -- a capital asset owned by the government and by the private world out there. The private world out there, when they own a capital asset, can sell it or produce real value with it.

Under this fund, as I understand it, if we spend $1 billion on roads next year it is going to show as a capital asset. It is not saleable. It is more of a negative than a positive. For a government, when it is owning property, it is usually more of a negative than a positive. This building we are seated in today might be worth $500 million -- let's say it is worth that -- but the government has no option in selling it.

Mr Wiseman: Except we do not own it.

Mr Sterling: We own a long enough lease to sell it for $500 million. But I guess I am concerned that as we progress over the years, according to the way this will happen, either with this Treasurer, or if Gerry Phillips or I am the next Treasurer, we will put all our deficit against the capital, all we can. If we spend $5 billion and our deficit is $3 billion, we will put $3 billion against that particular part.

What will happen over the years is that we will say: "Okay, we have a capital accumulated account of $120 billion and there is owing against that $85 billion of debt against the operating side. We have been lowering our debt and we got in when it was $80 billion and now it is $23 billion. We went down by $5 billion." All the people out there interpret that in relation to their personal, private home. They say: "Oh, Jeez, they've got a $120 billion worth of asset and they only owe $83 billion against it. They are lowering the operating. I feel comfortable," and we march on. That is what this game is all about.

People, in my view, will relate government property, capitalized property, with what is property in the private world. In the public sector, property is a pain in the you-know-what, because it attracts all kinds of costs to keep it up and maintain it. If government could, for instance, close an institution, it would save money. So it is very different. That is what I see in this. Is that not what is going to happen?

Mr Siddall: I think that brings out what we were trying to do with the capital fund and the importance of trying to separate capital expenditures, because if people cannot see what has been spent on capital expenditures, then they cannot do the next step which you are requesting, which is to try to determine how much is required to maintain that capital expenditure or how many operating costs are associated with that capital expenditure.

On page 83 of the budget this year we tried to point out the point you are making so clearly, that there is an operating cost associated with capital expenditures and that the decision process on a capital expenditure has to include not just the capital expenditure itself but the impact on future operating costs. That is the reason why I think the government felt it very important to try to isolate capital expenditures, so that better decisions can be made on capital expenditures.

Mr Sterling: I am really worried about this now in terms of seeing how it spins out.

The Vice-Chair: Mr Sterling, I want to move on and then we will keep the rotation going. You will be next. Ms Ward.

Ms M. Ward: I think I have clarified what I was wanting to ask, because the witnesses were saying one thing and I think Mr Sterling's questions were suggesting to me that they were saying something entirely different.

Basically it was what Mr Wiseman addressed. If there is a shortfall, it is going to be reported if there is a difference. So I would like to pass.

The Vice-Chair: I am going to go to Mr Phillips and then come back to Mr Jamison.

Mr Phillips: That is all right. She did not ask a question.

Mr Jamison: There seems to be some concern here today about the methodology of separating capital from operating. That seems to be the whole evolution of the discussion here, and some people would almost think there was something sinister trying to be done here.

Mr Archer, are you aware of other jurisdictions that surround this province that operate in that fashion as far as their accounting practices are concerned? For my understanding, why would the majority of those jurisdictions be separating those costs?

We have heard earlier today that you can really see the operating costs and capital costs of a jurisdiction very clearly when this method is put in place. We have also heard that the cumulative costs, both capital and other, are going to be shown clearly. To me, it would indicate that it would show clearly the expenditures that are being made in two very separate areas: the ongoing business of government and the capital cost or the investment that is being made in the infrastructure of the province.

I think it is important that it be separated. As I said earlier in my preamble to this, other jurisdictions do it, and it would also put us on a level system with other jurisdictions as far as comparisons are made, because there is quite a misunderstanding out there at this point that other jurisdictions account differently. Certainly there is some misunderstanding on the actual per capita debt in those cases. So I would say it would bring it in line. What would you say to that?


Mr Archer: If I can attempt to respond, the Office of the Provincial Auditor certainly has no disagreement whatsoever, and in fact would support the splitting of expenditure between operating and capital from the standpoint of giving more information to the people as to where their money is going. So there is no dispute there.

As the discussion has evolved, I may have misinterpreted at the outset what Mr Sterling's point was. I thought he was concerned that through the possibility of capitalizing physical asset purchases, we may reduce the overall deficit of the province for publication purposes -- not the cash shortfall; the accounting deficit of the province.

As I listen further to him I think his concern is not so much that. He seems to accept that there will be no change, that all expenditures will be reflected in the deficit. What he is concerned about is the split of the deficit between operating and capital and a belief on his part that there will be a tendency to push as much as you can, using the broad definitions of what is capital, into the capital deficit, so that the government could come along and say: "Well, from an operating standpoint we're really doing great. If it weren't for all these capital assets we're giving you as people of the province, we'd be in great fiscal shape."

As for other provinces, I can get other people here to comment on that who are more familiar with what is happening, but from my own general knowledge I think some provinces have gone so far as to capitalize physical assets in effect by setting up crown corporations that handle the fixed or physical assets of the province and get the accounting completely off the books of the province. So in that sense I do not think they are giving a fair picture. If you consolidate the financial statements of all these entities, you might get the right picture, but I think either Rob or Ken can talk more specifically about what is going on in this area in other provinces.

The Vice-Chair: Would either of you like to comment?

Mr Leishman: I could comment and Rob could certainly comment further. One concern, and I hope it does not happen, is that after the 1991-92 fiscal year they will do something similar to what I believe was done in British Columbia: They will offload debt and reduce the deficit by creating a new real estate corporation or physical asset corporation or whatever you want to call it, through which all fixed assets will be purchased and through which all grants to school boards that relate to capital and grants to municipalities will flow. They will have a huge accounts payable or loan payable to the consolidated revenue fund. It will look as if the province in essence might have really a $10-billion deficit, but by offloading that debt into a separate crown corporation it would look as if the province's deficit were only $3 million or $4 million.

I believe a variation of that has been done in Saskatchewan, although Rob Siddall would know more than I would on that. That is a concern. I hope it does not happen, and under what I presently see, I do not think it will happen.

Mr Siddall: As Ken and Doug mentioned, some of the other provinces have created various crown corporations to deal with such things as realty corporations. I believe British Columbia and Saskatchewan have done that. Alberta has set up a capital fund for which it includes items of a similar nature to what Ontario is considering in the capital fund.

As Doug mentioned, their accounting policy in terms of the financial statements is to consolidate those back into the financial statements of the province, which is what the capital fund in terms of what is proposed here in the budget paper is trying to do as well in Ontario: to ensure that Ontario is presented on a consolidated basis so that it is comparable with other provinces, but still allow for some sort of segregation of capital and operating expenditures.

Mr Jamison: If you will clarify for me, it is your understanding that in a number of provinces greater debt is being carried than is being shown right now. Is that what you are saying?

Mr Leishman: On their unconsolidated statements, right.

Mr Siddall: If you took into consideration their unconsolidated financial statements and looked at them separately versus looking at the consolidated financial statements, you would get a different impression of the debt.

Mr Phillips: The reason I stay on this is that I think even the members opposite, if they look at their issue-speak on this issue, will find that one of the answers is, "And we will balance the budget in 1997-98." I have heard the speeches in the House. That is ex the capital. I have heard the Premier say that to business groups: "We are going to manage the finances well, we are going to balance the budget ex the capital." So I do not think --


Mr Phillips: That is a fact. He said that. But that is a misstatement of the facts. The auditor would say, I think, that it is not a true picture of the finances of the province. Historically we have said the $9.7 billion included the capital expenditures, and I think the auditor's concern is if we use this device to create a new set of books that allows the demonstration of a balanced operating budget when in fact we are spending another $5 billion a year on capital that does not get reported, the people of the province will be -- so my question really to the auditor is, how would you respond to a government that said, "We now have a balanced budget," without reporting the capital expenditures?

Mr Archer: Certainly my understanding of the term "balanced budget" as it is used today, to use the current year's budget as an example, I would expect that instead of having a 9.7 deficit we would have a zero or a surplus situation.

With this split between operating deficit and capital deficit, if they were to come along to me three or four years down the road and tell me that because the operating deficit has now gone into a surplus condition they have done what they said they were going to do in 1991-92, I would say, "No, the game has changed." In order for you to be able to say you have a balanced budget today, you have to include the deficit in the capital account as well.

Mr Phillips: I would really appreciate it if somehow you might find the time to meet with the Treasury people to either assure yourself that the finances will be reported in a way that is consistent with what your understanding is or not, because if it is not, at least we should know that. The problem is, we are going to be dealing with the bill next week in the Legislature.

Mr Wiseman: Clauses 15(4)(b) and (c) talk about land and buildings and structures and so on. If we were to go in the direction that they are saying and start writing off the value of physical assets against the borrowing, would you not as an auditor -- and I am really fishing for this one -- start to say, "Well, you built that road but not only does it have a value but it also has a depreciation in value," and would you not also want to see that start to show up in terms of a depreciated value? That would then show up again as part of the deficit. Would that not be a way to do it?

Mr Archer: It depends what they did with the cost of the road in the first place. If they wrote that off completely to expenditure, then we would not expect them to incur any additional charges for depreciation. It is all written off initially. However, there would be additional costs for just maintaining the road in normal operating condition. That would go through as it does now, as just a regular road maintenance expense.


Mr Wiseman: It would still show up in the deficit?

Mr Archer: Yes.

Mr Wiseman: I am really having a lot of difficulty because they are saying you can hide this and I am saying I do not see how you can. No matter how you slice it, if any Treasurer tried to say that we have all these assets out here -- we bought machinery, we bought trucks, and all this sort of thing -- without talking about the depreciated value of that at the same time as talking about the purchase value, I think you, as the auditor, would have a lot of difficulty with that.

Mr Archer: It may be that you have the same misunderstanding that I had as to Mr Sterling's concern. I thought he was worried about hiding part of the overall deficit of the province, but later I came to see that he really was not concerned with that. He was more concerned with getting the split of the overall deficit of the province between operating and capital, that there would be a natural tendency to push as much as you could into the capital deficit so you could tell the people of the province that from a pure --

Mr Wiseman: I understand that. In fact, Ontario Hydro is sitting out there with a $30-billion deficit guaranteed by the coffers of the province.

Mr Archer: Right.

Mr Wiseman: If I understood you correctly earlier, what you are saying is that other provinces have done the same thing with crown corporations -- funnelled an awful lot of this off and said, look, we only have a $4-billion operating deficit -- but there is $38 billion over here in capital deficit that you have not "consolidated," I think the word is, into your sheet.

Mr Archer: Exactly. But based on what I have heard today and what I see in front of me, Ontario would not be doing that. The entire deficit would be in the financial statement of the province. They would not have to bring in financial statements of crown corporations, like a real estate corporation or what have you, to show you the true deficit position.

Mr Wiseman: Then Mr Sterling's fears about this are not written in here, if I understood your last statement.

Mr Archer: Well, I think his fear is -- he can talk for himself here, but as I interpret it, I think he feels the definition of "physical assets" in the act here is so broad that it gives the government an awful lot of flexibility as to what it can put in there, and that naturally, in order to make this operating surplus look as good as possible, it is only human nature to try to put as much as you can into the capital.

Mr Wiseman: My last comment is this then. Let us say all of that was to take place, but the other balancing force within this is the amount of money out of every dollar that the province would still have to pay to service the debt. In other words, the federal government is paying roughly 34.2 cents out of every dollar that it collects to pay for its debt, and the province is somewhere around 12 cents of each dollar of revenue that is collected.

The result would be that even if you were to try to hide all of this, that expenditure would still show up in the budget document in terms of how much money is being spent on interest. So there really is no way this bill would allow future Treasurers to hide the financial affairs of the province, to separate it off or to segregate it out into different areas.

Mr Archer: I do not know that the bill can be interpreted broadly enough that the government could set up a real estate corporation, for example; in other words, transfer the capital account out of the accounts of the province into a crown corporation. If the bill allowed them to do that, then they could hide it to some extent. However, at some point in the game, if you are trying to get the entire picture of the province, you have to consolidate, bring together the financial statements not only of the government proper but of all the crown corporations that the government has as well. Once you do that, to use your expression, you cannot hide. The true deficit has to out eventually.

Mr Wiseman: Okay, this is the last one.

The Vice-Chair: No, I am sorry. I cannot let you do that. Mr Sterling, you can speak for yourself now.

Mr Wiseman: I am just getting warmed up now.

Mr Sterling: I do not have a problem with them stating what is being spent for capital. I would prefer a much more definitive description of what "capital" or "non-capital" is, and I would really like the definition to say -- if you are creating a new asset and not replacing an existing asset which is required for you to continue on serving the people of Ontario, that could be considered new capital to me. If you are putting in a brand-new road, you could consider that, but if you are replacing a road, I think there is a different kind of description.

At any rate, I think the accumulated debt now is about $50 billion. If you went back through the years, and we had done this -- I am just trying to guess off the top of my head, but probably you could say $35 billion to $40 billion could have -- if all the debt in the years they ran deficit was attributed to capital, probably you could say that right now the capital deficit is $40 billion and the capital assets are $80 billion, that have been created over those years -- post 1975 or 1977, or even 1971. I am not sure how far they go back. But if you add it all, if we had been keeping the books this way, my concern is that right now a government could brag that it had created since -- when did we start creating deficits? Jimmy Allan probably was the last surplus, but --

Mr Phillips: No, no, here it is: 1989-90.

Mr Sterling: Oh, 1989-90, right. Save and except --

Mr Phillips: The first time in 20 years.

Mr Sterling: Yes, right. Save and except for that one bright year of 1990, if we had accumulated all of the capital assets and continued to add them on and depreciate them down, or amortize them down, and added the deficit, I think what we would have is that a ratio of about $40 billion of the $50 billion debt now would be against what we would call capital assets, and you would probably have on the books about $100 billion in assets that they could have said they had built over that period of years.

My concern is what conclusion people would draw out of that. They would say, "Jeez, you know, it's only a 40% mortgage, and therefore we can incur more and more debt without really being concerned about paying it off." It is the nature of the assets which concerns me, that in creating this capital account, which is wrong and false in terms of what you are telling the people -- are there any other provinces or states, which run it this way?

Mr Siddall: Which actually capitalize and depreciate?

Mr Sterling: Yes, like we are talking about here.

Mr Siddall: In terms of the capital fund or of what you are talking about in terms of private sector?

Mr Sterling: No, in terms of capitalizing the assets each year and amortizing them over a period of time. You mentioned that there were a whole bunch of states and a whole bunch of provinces that have capital accounts.

Mr Siddall: Yes, but I am not aware, and I do not know if anyone else is, of any government that is actually capitalizing and depreciating its physical assets at this point in time.

Mr Sterling: And that is what you are doing here.

Mr Siddall: No, that --

Mr Sterling: You are amortizing them over a period of time. Does any other state or province do it as you are talking about doing it here?


Mr Siddall: Alberta does it as we are talking about here, through its capital fund.

Mr Sterling: Not the capital corporations. I am not talking about capital corporations.

Mr Siddall: No, in terms of the capital. They have a capital fund similar to what we are talking about.

Mr Sterling: And it accumulates year after year?

Mr Siddall: Yes.

Mr Sterling: And they march all their debt against that? Of course, they have not had much debt.

Mr Siddall: The debt applicable to the capital expenditures in that fund, yes.

Mr Sterling: And they are appropriating all of their debt per year, as much debt as they have, against all of their capital expenditures?

Mr Siddall: In the capital fund, yes. The difference there is that capital fund is not included in the consolidated revenue fund. It is outside and then it is consolidated, as Doug said, at a later stage into the financial statements of the province of Alberta.

The Vice-Chair: Next on my list is Mr Christopherson.

Mr Christopherson: Well, I guess just to keep coming back, and I know that --

Mr Phillips: We all come back.

Mr Christopherson: Thank you. My question is very brief. Both sides seem to be coming back to a central point, and so I would like to just do the same thing, to get a message clearly to all of us.

The intent, as I understand it, Mr Archer, is that the consolidated financial position will be reflected in the public accounts. I would ask you directly: As long as that is maintained, regardless of the ability to show a subheading breaking the operating and the capital, will the people of Ontario, through looking at the books -- will anyone, including yourself, be able to get a realistic picture of the provincial debt?

Mr Archer: Oh, yes. If the books are kept the way we understand they will be, there is just going to be additional information beyond what is available now to the taxpayer or the reader of the financial statement.

The only fly in the ointment, I guess, is the one that Mr Sterling raises. In seeing the deficit now in two pieces, and a large part of it being in capital or physical assets, a reader might say, "We really don't have to worry about that because we can sell that and get our money back." Maybe you could in the private sector if you were dealing with a similar type of thing, but I think his point is that much of what the province has, you cannot sell. There is no resale value. There is a concern, I guess, on his part that the public may be misled by that. The extent to which this happens is speculation, but certainly from our standpoint I think this approach is just giving more and better information into the public.

Mr Christopherson: Is it fair to say that if a Premier or Treasurer of any political stripe were to attempt to do that very blatantly or too blatantly -- is the information readily available for yourself or opposition parties to counter with a position that can show the actual debt of the province, based on the way that you understand this is to be set up?

Mr Archer: I think the actual debt of the province will be accurate. I guess the only point is, and again I am trying to interpret Mr Sterling's concern here, that somebody might read the capital deficit as not being of as much concern as the operating deficit because we have hard assets here that maybe we can sell and retire that portion of the debt. Other than that, I do not see any problem at all. Everything is disclosed the same way it has been up till now, with the additional feature that the total expenditures for the year are now split into two pieces, operating and capital.

The Vice-Chair: We are going to have to go to Mr Phillips.

Mr Phillips: Thank you. On page 82 of the handout on the capital budget, in the middle, it says: "The public accounts for 1991-92 fiscal year will show the consolidated...." Can we assume that the public accounts for the future as well will show them, for 1992-93 and 1993-94? That is more like a Treasury report.

Mr Archer: It is our understanding that they will be. I think that question was addressed to Treasury people earlier. I do not know whether even they could guarantee it, but that is the intention, I think, at the moment.

Mr Phillips: I just want to go through this thing on page 83 as well, because it says in one of the paragraphs about halfway down, "By providing an operating surplus/ deficit position...." Nowhere do I see, "By providing a capital deficit number." Is it your intention to continue to show a capital deficit number equivalent to whatever you are spending on capital? That is where, I guess, the Treasury people --

Ms Clitheroe: As I understand your question, and I think it is one that has been answered several times, it is, will the accounts show capital and operating surpluses or deficits?

Mr Phillips: Yes.

Ms Clitheroe: Mr Archer and others have all said that the accounts of the province will show capital surpluses or deficits and operating surpluses or deficits. I think this question has been answered a number of times in terms of how the financial statements of the province will be reported.

Mr Phillips: Okay, but it does not say it in the document here.

The Vice-Chair: I am looking at page 83. Under the table there, the first sentence indicates that, does it not? Just as a point of clarification for you.

Mr Phillips: Okay, because we are dealing with stuff in the future. So it will all be reported the same way that is reported?

Ms Clitheroe: I believe Mr Archer concurs with me.

Mr Archer: Yes, that is certainly our understanding. Not only will this method of presentation apply to the 1991-92 year, but thereafter. This act applies basically to thereafter.

Mr Phillips: Yes, I know.

Mr Archer: Our concern is to sit down with the Treasury people and make sure the wording that is here does not change the intent.

Mr Phillips: If you could do that, that would be very helpful.

Mr Sterling: I do not quite frankly know the answer to this, but I guess I said it before: If the government gives to the municipality or directly spends $1 million to replace a road that has been in existence, served the public, and the government really has no option to close that road, is it fair to call that a capital expenditure?

Mr Archer: You raised a similar question several times throughout the proceedings here. You are identifying a problem which is a problem in the private sector as well. When does a repair or regular maintenance become a renovation or a re-creation, if you like? Usually there are in-house rules set. If it is a road, maybe if you spend up to $50,000 it is a repair, if you spend beyond that it is a renovation, so in that case you capitalize it. If it is under $50,000, you just treat it as an operating expense. You would have to come up with some reasonable house rules to distinguish between normal operating repair versus long-term re-creation or resurfacing or whatever.

Mr Sterling: If the province sells a piece of crown land, should it have to include that as capital income against the borrowings or the deficit which is going to be created in the capital fund?

Mr Archer: I think that would be a reasonable course of action. If it is an asset that has been created subsequent to this new approach being taken, yes. If we have set it up in the capital fund at the time of purchase or creation, then I think the revenue from any sale of it subsequently should be credited to the capital fund.


Mr Sterling: Can I take an example then, just for the purpose of discussions? SkyDome was sold this year for some $100 million. I am not sure of all the machinations or whatever, but would you expect that if it had been sold in the next fiscal year that would be shown or should it not be shown?

Mr Archer: If the $100 million, when it was originally disbursed, appeared in the capital account --

Mr Sterling: So you are in agreement with them. It only counts as a sale if it was brought in originally.

Mr Archer: Right. That is how I would treat it.

Mr Sterling: Then if a bridge is constructed -- and I think they have said they are going to amortize these over 20 years. Is that correct?

Mr Archer: Yes, everything is being amortized over 20 years.

Mr Sterling: Or straight-line depreciating.

Mr Archer: Is it just a straight line?

Ms Clitheroe: The treasury board would be looking at classes and determining the useful life of classes of assets. Whether or not that would then be translated into one number that was some sort of average number or whether a more complex system of different classes with different percentages would be created is yet to be determined by the treasury board, but it would be in that manner that would be created. That would be consistent with what your expectations would be.

Mr Sterling: If the bridge falls down after five years, would you expect it to come off the capital account?

Mr Archer: This is a judgement situation. I am sure that would be balanced by situations where the asset lasts much longer than, say, 20 years.

Mr Sterling: So you would not require them to keep accurate records of each asset.

Mr Archer: Not unless it was a major situation. I would say just consider the average situation, that it is going to last 20 years, and not bother with individual adjustments.

Mr Sterling: If we are talking about capital, I am concerned about liabilities as well that are created over the year. Should the budget of Ontario state -- I do not know whether in the capital fund or wherever -- increases in liability in workers' compensation and in Ontario Hydro as well as what is being reported now?

Mr Archer: I am not quite sure I understood the question.

Mr Sterling: We have lost $1 billion in workers' compensation this year, unfunded liability. Should that be reflected in terms of something associated with -- we are saying on the one hand what is in capital, and there is a fairly large expenditure in government; $4 billion or $5 billion is 10% of the budget. But we are also creating a number of other liabilities which are pretty big numbers too. We seem to be getting close to a balance sheet. We are creating a capital account on the one side, and if we are going to do that, should there not be a liability side as well if liabilities are increasing?

Mr Archer: I do not know if the two questions are related. Take the Workers' Compensation Board as an illustration. Whether the net position of that fund should be included with the province's assets is a bit of a moot point, because the philosophy is that it is a liability of the employers in the province, not the province of Ontario. I would not want to get into a debate on that subject.

The Vice-Chair: My understanding is that we were to go to 5:30. I have two more people, so I am going to ask them for questions and then we will proceed with our debate as a committee.

Mr Wiseman: I have a really quick question because it is something that interests me. When the capital part is put in the budget, is it the intention of Treasury to list land purchases X amount, machinery purchases X amount, etc, so that you can see where you actually spend the money? For example, if you build bridges and highways, would it be included and would that make sense from a point of view of allowing people to see exactly where their dollars are spent and how much and so on? I would be interested in seeing that.

Ms Clitheroe: The Public Accounts of Ontario, as you know, are extremely detailed.

Mr Wiseman: This would have to be a précis of that.

Ms Clitheroe: There would be an explanation at some point of what the capital fund consists of. How detailed that would be, whether it would get to Mr Sterling's bridges in particular locations, I think is unlikely. But certainly one would be able to understand the general classes that would be involved in the capital fund.

Mr Stoodley reminds me that of course the estimates would always identify the capital expenses in detail as well.

Mr Wiseman: I know, but it goes back to my other question on depreciation. You could then say what could be, in a business sense, automobiles, machinery that was purchased, etc. You could see that and understand that could be depreciated in a real way and in a normal way, as opposed to a highway or a bridge or something that could not be.

Ms Clitheroe: If the question is, will it be understandable, the types of assets that are in the capital fund and what is being done with them, yes.

Mr Wiseman: You asked the question much more succinctly than I did.

Mr Phillips: Just in case I do not get a chance, I want to thank the auditor very much for being here on short notice. I look forward to his comments over the next couple of days as we meet with the Treasury people.

I gather the reason for passing this bill is to permit them to change the reporting mechanism. What prevents them right now from just reporting in the fashion they would like to. I assume that in the 1991 budget, capital was split from operating? What is the legislative need for change?

Mr Archer: Mr Stoodley I am sure can answer that. Frankly, I was surprised we would require legislation in order to do this, but presumably there is something in the Financial Administration Act that requires it.

Mr Stoodley: The main reason for legislation in this area was to attempt to establish guidelines for how an expenditure would be a capital expenditure, to set up the requirement of allocating those expenses -- this is, as I understand it, a notional allocation in the accounts -- of which ministries the expenses that are shown in the capital account came from, and principally to establish a process for the writing off of the capital account. Finally, to provide a definition of capital in the hope that would give some certainty to what expenditures would be in the capital account.

It was mostly the definitional problem and the assigning to treasury board of the role of determining the amortization procedure that required the legislation in my view. Much of it could indeed have been done as an accounting change.


Mr Phillips: In terms of one prime use in there, I hope the auditor might look at the process for amortization and writing off. That is where it gets a little bell going off in my head, because I am just curious about the need for the legislative change. That was a very helpful explanation the lawyer gave. Mr Stoodley: The amortization, sir, is mostly to allow the treasury board to have the authority to decide whether there should be an average of all classes or whether you should try to set different periods for different classes of expenditure, questions to which I do not have an answer.

The Vice-Chair: Again, I want to thank the auditor and his assistant and the Treasury staff for coming in on such short notice. To the auditor, on behalf of the committee, I thank you for your service to the province and wish you all the best in other endeavours you may be taking on. Again, thank you to everyone for coming in.

Mr Archer: Thank you.

The Vice-Chair: I guess now that we have been able to have a great deal of questions asked, both to Treasury staff and to the auditor and his staff, we are at the point that was agreed upon, that we would spend one day discussing this and then have a vote and have it go from there. So at this time, I would like to ask if there are any amendments and, if so, to which sections at this time. None at this time.

Mr Phillips: The one thing Mr Sterling did mention was whether the Treasury people would consider quarterly disclosure of their range of investment. I do not know whether they have had a chance to think about that.

Mr Christopherson: I heard the request and talked it over with the staff. My understanding is that the information is available. If you want it on a quarterly basis, all you need to do is ask for it and it can be made available. We would rather not build it into the legislation, simply because it is a fair bit of paperwork, and if it is not going to be used, we are again putting more pressures on a system that is already facing a lot. I am assured that the information is there for anyone who would like to request it, so if you would like to request it every quarter, you are welcome to do so and we will supply it.

Mr Sterling: I will want that amendment in the legislation and I will either put it in my form or whatever. I do not buy the answer. If it can be produced for me, it can be produced for everybody. I think it should be produced in a public document.

The Vice-Chair: Okay, but you said you were going to wait until it gets back in the House in committee of the whole?

Mr Sterling: Yes.

The Vice-Chair: All right then, if that is the case, I will call the question. Shall the bill carry?

Bill ordered to be reported.

The Vice-Chair: This committee is adjourned until next Thursday at 9 am, when the Treasurer is coming in to discuss various issues, including his views on consultation around the budget.

The committee adjourned at 1736.