Thursday 8 October 1992

1992 budget


*Chair / Président: Hansen, Ron (Lincoln ND)

*Vice-Chair / Vice-Président: Sutherland, Kimble (Oxford ND)

*Caplan, Elinor (Oriole L)

Carr, Gary (Oakville South/-Sud PC)

Christopherson, David (Hamilton Centre ND)

*Jamison, Norm (Norfolk ND)

Kwinter, Monte (Wilson Heights L)

*Phillips, Gerry (Scarborough-Agincourt L)

Sterling, Norman W. (Carleton PC)

Ward, Brad (Brantford ND)

Ward, Margery (Don Mills ND)

*Wiseman, Jim (Durham West/-Ouest ND)

Substitutions / Membres remplaçants:

*Wilson, Gary (Kingston and The Islands/Kingston et Îles ND) for Mr Ward

*In attendance / présents

Also taking part / Autres participants et participantes:

Leishman, Ken W., executive director, reporting and special audits, Office of the Provincial Auditor

Otterman, Jim F., acting Provincial Auditor

Stockwell, Chris (Etobicoke West/-Ouest PC)

Clerk pro tem / Greffière par intérim: Manikel, Tannis

Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service

The committee met at 1546 in committee room 2.


The Chair (Mr Ron Hansen): Okay, I'd like to bring this committee to order. I'd like to start off by giving a little bit of background on why we're here today. I received a letter on July 22 from Mr Phillips, and I'd like to read out the letter to give a little bit of background to some of the members who are new on the committee and maybe refresh some of the members, since it was a while ago. It says:

"Dear Mr Hansen:

"This letter is to formally request that the finance and economic affairs committee request the Provincial Auditor to give the committee his formal opinion on how the government has chosen to report its budgetary figures in the 1992-93 budget.

"My concern was dramatically heightened when Treasurer Laughren informed the finance and economic affairs committee on June 25, 1992, that the government had been required to pay at least $2 million more in interest payments than necessary in return for the teachers' pension agreeing to `rescheduling' a $500-million payment due January 1, 1993, to the first day of the next fiscal year (ie, April 1, 1993). The only reason to do this was to show the deficit $500 million lower (ie, to get it below $10 billion). This will cost the taxpayer at least $2 million in unnecessary expense (see exhibit I: minutes of the finance and economic affairs committee meeting of June 25, 1992).

"My leader, Lyn McLeod, has consistently expressed concern about the accounting practices that the government has used in its 1992-93 budget. We tried to get the Provincial Auditor to investigate our concerns (see exhibit II: open letter to the acting Provincial Auditor, May 4, 1992).

"The Provincial Auditor said that he would be happy to, but required the Legislature to ask him (see exhibit III: auditor's response, May 8, 1992).

"We then asked public accounts committee to have that happen (see exhibit IV: motion put forward by Mr Greg Sorbara).

"The public accounts committee refused because the NDP majority rejected our request in spite of assurances by Treasurer Laughren that he was quite prepared to have the Provincial Auditor examine the budget (see exhibit V: minutes of the public accounts committee meeting of June 18, 1992).

"While the unnecessary expenditure of $2 million has upset us most recently, as you can see from the attached exhibits, we believe there are several matters of major concern.

"In closing, I look forward to having an opportunity to raise this matter with the Provincial Auditor. I await your reply.

"Yours sincerely

"Gerry Phillips

"MPP, Scarborough-Agincourt."

A copy went to the clerk, Todd Decker, and to the Honourable Floyd Laughren, Treasurer of Ontario.

Since we were on the break at that time, I talked to Mr Phillips and I said the first chance that we'd have when the House came back. I had talked to the clerk, Todd Decker, and the response that I got from him at the very beginning was:

"This is to get your direction on when the committee should meet.

"You asked me to arrange for the Provincial Auditor to be scheduled to meet with the committee to discuss the issues Gerry Phillips raised in his letter to you dated July 22.

"As you probably know, the public accounts committee dealt with selecting the new auditor this summer and made their recommendation on Monday of this week. In the meantime, there is no Provincial Auditor, so Gerry Phillips's request really can't be carried out just yet.

"Is there something else the committee could consider at a meeting, or should we just hold off for now?"

I'll read the letter that was sent to Mr Jim Otterman.

"Dear Mr Otterman:

"At the instruction of the committee's subcommittee and the Chair, I am writing to request that you attend at the committee's meeting at 10 am in committee room 2 of the Legislative Building on Thursday, October 8, 1992.

"The purpose of this meeting is for the committee to discuss with you the issues contained in the letter of Gerry Phillips, MPP, to the Chair of the committee, a copy of which is attached.

"It is the intention of the committee formally to request that you prepare a response to the issues raised by Mr Phillips and perhaps to solicit from you the methods that might be used to respond to these issues and the possible time frame involved.

"Todd Decker, clerk of the committee."

We had a subcommittee meeting last Thursday and at the subcommittee meeting we made arrangements for the auditor to come, agreed by all three subcommittee members. Another letter came from Todd Decker to me. It said:

"I made arrangements for the acting Provincial Auditor to come into the finance and economic affairs committee at 10 am this Thursday. However, he has a previous commitment to meet with the public accounts committee that same morning. I would suggest that we simply reschedule the meeting for Thursday pm, at which time he is available."

That was Todd Decker. So this is the reason we are in an afternoon meeting: We didn't meet this morning. That gives everybody a little bit of background on where we're at today. I would like to welcome Mr Otterman to the committee here. I see he's just sitting there, waiting to answer questions. I know the first member sitting in the room here waiting for a response was Mr Phillips, so I think we should get on. Would you introduce your colleague also? I see you have some other colleagues. As they come forward, if you need some help, would you just introduce them to the committee? Go ahead, Mr Otterman.

Mr Jim Otterman: Thank you, Mr Chair. With me here at the table is Ken Leishman, our executive director, who is our resident specialist on the public accounts and the accounting practices of the province of Ontario for our office.

The Chair: I want to take some direction from the committee here on how we would like to wind up asking questions of the auditor. Do you want to go for 15 minutes and go to each party, and then see how much time we've got and go back again?

Mr Gerry Phillips (Scarborough-Agincourt): Just so you know what initiated this and what I'm looking for out of this, when the budget came out, we had several concerns about the way the finances were reported. Fundamental to it all is that I think the public expects to get an accurate and fair assessment of the finances of the province. If it were a private corporation on the stock exchange, there would be a consistent way it would have to report so the public could see, in a consistent, fair manner, how the corporation was doing.

We raised several questions around the accounting practices in the budget. What I'm looking for -- this is, I think, a role of the Provincial Auditor: to objectively advise the Legislature on the reporting of the finances. We have, I hope, the right to ask the auditor to give us those opinions.

Specifically, my leader raised three major issues. One was something called the rescheduling of cash payments, on page 73. My view is, that's not a rescheduling of cash payments; it is a loan. The government has borrowed $500 million from the teachers' pension. In fact, the Treasurer, in a document, calls it a loan. If that is the case, the budget should have reported it as a loan and the deficit would have been $500 million higher. I would like the auditor, not necessarily today, to inform the committee of whether, in consistent accounting practices, we are accurately, consistently reporting that as a loan.

As I say, I was further worried by this because we are required to pay 11 1/4% interest on the $500 million. If we went to the market and borrowed it, which is what really should happen, treasury is paying less than 8% now for money. The only reason we're borrowing the money from the teachers' pension is because it will allow us to call it a rescheduling of cash payments, not shown on this year's books, put it on next year's books and, in my opinion, artificially understate the deficit by $500 million. That's my opinion and I'd like the auditor's comments on that now or in the future.

My second major concern is, in the budget, there is, under revenue on page 81, something called "Payments from the federal government. Other." There is approximately $1.2 billion in there, a revenue from the federal government called, "Fiscal stabilization money, $1.2 billion." I don't think there is a hope in heck of that money coming this year. If this was a private corporation and this was an accounts receivable, there wouldn't be an auditor in the world who would ever sign the books and say, "This is a legitimate accounts receivable due and payable this year." The federal officials, when the budget came out, said: "They're not getting that money. I don't know what they're talking about."

That would be my second point: How can we determine whether that is a legitimate source of revenue to be put into the budget and on what basis it can be put in there? As a matter of fact, as you know, I think, I've asked, dating back from December, for the application of the fiscal stabilization. I said, "Just show it to us." Remember, I think it's in our notes here, each time we've been told we can't see that.

That's my second major question. It is a huge amount of money. As I say, if this were an account receivable, you would hear back from that person saying: "I'm sorry. Tell your client they're not getting the money this year."

The third issue is, again on page 81, you'll see something called "Sales and rentals," in 1991, $97 million; 1991-92, $93 million; 1992-93, $1.2 billion. This is two things. One is the plan to transfer a bunch of government land over to the Ontario Land Corp and get the Ontario Land Corp to give us back the money and, secondly, what a cynic might call a kind of tax scheme whereby we're going to sell trains and buses and stuff to offshore investors who will give us the money and then we'll repurchase the things over a 20-year period. That's just the first of the schemes. This is the tender here, the GO Transit request for proposals.

That's for almost $1 billion of revenue this year. I think that's just the first of the schemes. I think we're going to see a whole flood of similar things like selling off government buildings and leasing them back, that sort of stuff.

Those are my three major ones. As I say, I don't know where else to turn but to you and your staff to give us advice on whether this is legitimate, consistent accounting, and whether this accurately reflects the finances of the province and fully discloses to the public on a consistent basis or not. You can tell by the tone of my remarks that I don't think the public is being accurately told the fiscal situation of the province.

These are the specific issues I think we should be dealing with. There then is a longer-term issue that I don't want to cloud, but I think a role this committee might play is in helping to determine how the finances should be reported on a consistent basis that is most helpful to the public, because this isn't the only government that has ever done things like this.


Mr Kimble Sutherland (Oxford): What was the last government to do that?

Mr Phillips: I think you'll see the provincial auditor in either Alberta or Saskatchewan has just issued a very major report on similar matters.

Mr Sutherland: I thought you meant here, Gerry.

Mr Phillips: I suspect in the past each government has advanced payments to pensions and what not, but my point is I think the public has to understand what we're really dealing with here. Many people in the investment community said, "Oh, the deficit's under $10 billion; maybe that's a step forward." But if it's artificially under $10 billion because of just pure accounting trickery, then it isn't really accurately helping the people understand the climate in the province.

I would appreciate the committee instructing the auditor to give us his opinion on the three major areas I've raised and whether that is accurately and consistently reflecting the books of disclosure to the public, and if it isn't, how should it be reported? If it is, I'll understand.

The Chair: I take it that's the question we're here for, but I'm just going to go around. Mr Stockwell, is there an additional question you'd like to put out, or would you like it to unfold as the answers come in from Mr --

Mr Chris Stockwell (Etobicoke West): No, I'd much prefer to hear the answer.

The Chair: Same thing, okay?

Mr Sutherland: No, no. I have a couple of comments. First of all, while the auditor's office has been asked here, I'd just like to get clear, because I don't know for sure. I mean, I have some familiarity with the office of the auditor, but I'd like you to explain, first of all, the official mandate of the auditor's office and how you see these questions fitting into that mandate; then maybe some question about what the priorities of the office are right now and, in terms of how this fits into the priorities of the office, how soon you think responses could be given.

I'd like to make one other note. Mr Phillips brought up the question about the GO train rolling stock and seemed to be questioning whether that was an appropriate procedure or not. He should be aware that the reason that is allowed is under federal law. They allow that at least for the airlines as well, so it's not an unprecedented practice here in this country.

The Chair: I believe Mr Kwinter has a submission.

Mr Monte Kwinter (Wilson Heights): I'd like to comment on the remarks that were just made. I'm not saying they're intentional, but if we were to follow those remarks, it would totally misdirect what we're here to talk to the auditor about. We're not interested in finding out what the role of the auditor is and how he sees his priorities. We're saying, "Here are some concerns that we have." If he wants to say to us, "That really isn't my purview to comment," that's fine, but I don't think we should be spending our time delving into the role of the auditor.

The Chair: I think he was asking for a summary.

Mr Sutherland: With all due respect, that's what I'm really getting at in terms of whether it's in the purview. I know the auditor comments on a lot of things in his report. Usually it's on the actual spending issues, so that's really I guess what I was getting at.

Mr Kwinter: Really all we want to do is ask the questions and he'll tell us whether or not he can comment on them.

Mr Sutherland: Okay. That's fair enough.

The Chair: Mr Otterman, maybe you could comment on the questions put out so far. Start off with Mr Phillips's questions that were put before the committee, since they were the first ones in.

Mr Otterman: Okay. However, in doing that, I'm going to lead pretty quickly into the mandate, which was raised in the latter question. I think we have to clarify for the purposes of this discussion today that the Provincial Auditor does not have a mandate to audit the budget or what is in the estimates. We have the responsibility to audit the financial statements of the province after the money is spent, after the accounting is made.

However, having said that, when Mrs McLeod wrote to me previously, requesting that we do some work in this area, I did say I would be pleased to attend at either the public accounts committee or any other legislative committee that may wish to ask questions about the accounting practices as they are currently conducted. In doing that, I guess we could put a hypothetical thing on this: that it's a year later from now and you can ask whether these events, if they occurred, would be accounted for properly. That would be a kind of starting point. We'd be pleased to discuss, within that framework, the three items Mr Phillips mentioned: the deferral, the equalization fund and the sale of assets.

Mr Phillips: What is called in here a rescheduling of cash payments but the Treasurer calls a loan: Under normal accounting practices, would you not be required to show that as a loan?

Mr Otterman: The key thing is the basis of accounting, which is a cash basis of accounting. In the cash basis of accounting you wouldn't record that loan until you actually received the proceeds. Similarly, on a disbursement you're not going to record the disbursement of whenever it's deferred to, that date, until you make that payment. What you have to compare here is the accounting basis, which is cash basis versus some other form of accounting basis, which is commonly referred to as accrual basis of accounting or modified versions thereof.

That's where I thought that by agreeing to come to the committee, this would be of some assistance. In much of the debate that's gone on so far, I see this difference coming up about accounting practices, which suggests to me that perhaps the cash basis of accounting versus the other forms of accounting, which are normally found in the private sector, are causing some misunderstanding.

If it were an accrual basis of accounting, that would have to be set up as a liability; there is no question. But it's not; it's a cash basis of accounting.

Mr Stockwell: So what do you set it up as?

Mr Otterman: You don't record it at all. There is no record until it's actually paid, which would be the April 1 period.

Mr Phillips: I think if you get in behind it, the Treasurer said they have lent the money from the teachers' pension, just as they would have lent the money from -- and they've given them a note that they will pay 11.25% on it. If they had borrowed the money from a bank, you would have had to show that as a loan.

Mr Ken Leishman: There's no cash inflow. Based on the modified cash basis of accounting that the province follows right now, if its loans are set up as payable as a result of a cash transaction --

The Chair: Could you speak into the mike, please?

Mr Leishman: Yes. Here, there is no cash transaction. They have just agreed to defer the payment of that, which was originally due, I believe, on January 1, until April 1. That being the case, under the cash basis of accounting, that isn't recorded as an expense until April 1. It's a variation in reverse of what has happened the last three years in a row. There have been preflows; now this is a deferred flow. In essence, it's the exact opposite, which is allowable under the modified cash basis of accounting.

There is a question there, if you sit back, that it's in accordance with the accounting principles of the government. But more and more one might have to sit back and think, are these accounting principles appropriate?

Mr Phillips: The Treasurer has said it was a loan, and I can understand the rescheduling of the cash payments. But in my opinion, when he said it was a loan it meant they had essentially paid the money to the teachers' pension and reborrowed it at 11.25%.


Mr Leishman: No. I think the Treasurer headed it up in his budget as a rescheduling of cash payments. So all they have done under the cash basis of accounting is deferred that payment, as well as more minor payments to the public service pension fund, from January 1 to April 1. That being the case, what would normally be charged as an expense during the fiscal year ended March 31, 1993, will not go through as an expense until the fiscal year beginning April 1, 1993.

Mr Stockwell: That's shameful.

Mr Phillips: How do we get at the abuse of taxpayers' money? We're going to be required to pay 11.25% on this. Just for the optics of rescheduling the cash payment, we will spend over $3 million in extra interest payments when we could have raised this money in the open market for $3 million cheaper.

The Chair: I don't know if that's a question for him to answer, because I think it's a treasury decision and he's the auditor. I don't know: Is this your role?

Mr Otterman: It's their decision. If you look at it, I think it has a net cost to the Treasurer of -- I forget how long the period was, but it's a difference in interest rate of almost 2%.

Mr Phillips: More than that.

Mr Otterman: However, that's no different than if you preflow the money, which has been done in earlier years. There's a net effect of that. It's really a decision of the government, how it wants to spend the money and when it wants to spend it. So really, from a value-for-money point of view, I think it could be questioned and looked at that way, and I think it would be clear it cost them more interest expense. However, there are probably other transactions which gain them interest revenue the other way.

Mr Kwinter: Mr Otterman, you just raised the point that I wanted to raise. That was, you are empowered to do a value-for-money audit. You do it all the time. You could quite reasonably, if you were auditing the budget -- which you don't do, because that isn't in your mandate -- point out the fact that there was a cost that could have been avoided had they gone another route.

The question about the budget -- and I take your point about how the government has the right. It certainly, whether it's an accrued or cash basis, can make this decision. But the question that we raised is that the budget is a road map of where this government hopes to be one year down the road from a fiscal point of view. That's really what it is; it's an estimate and it's a best-kind-of-guess estimate.

The point that we're trying to make is not to question whether or not the government has the right to do this. But certainly if it is stating -- and this is a political document -- that the deficit is $9.9 billion when in fact it has changed the type of allocations that it has made or it has mixed up the accrual and the cash basis and it has made that decision, then what you have is a political statement that the deficit for this year is $9.9 billion. Whether or not it's proper that they can do these things, what it does is it does not compare apples with apples. It doesn't say: "If we had done it on the same basis that we did last year, which we chose not to, our deficit would have been $11 billion or $12 billion. But we have made the decision, and it's quite within our right and quite within accounting principles to do it this way, and as a result we are telling you that the deficit is $9.9 billion when in fact if we had used the same process we'd used last year and if we were to compare this year with last year it would be up in the $12-billion-plus range." Is that a fair statement?

Mr Otterman: Yes, that happens, and we've tracked these in our annual reports in the past. When they're fairly major adjustments that way, where plans change during the year whereby funds were either preflowed or in this case will be deferred, when we get to our next year's report we would point out that these funds were not flowed as they normally would be. But it's caught, usually, in the financial reporting end of it, at the end of the fiscal year.

The other case is that I think in the past they've always been highlighted by the treasurers in whatever quarter it works, in their quarterly fiscal report. So it's not as neat and nice as it could be, but these disclosures are made and a reader can find them out and work that in to adjust for comparability purposes.

Mr Stockwell: Firstly, let me just say that I don't agree with what you said just a minute ago. This particular issue, the rescheduling of cash payments, was absolutely buried and hidden -- almost deceitfully hidden, in my opinion -- during the budget process. I even asked the question in the House of the Treasurer, "Are you going to pay a premium for this borrowing?" and the answer was, "No, we're not." I'm going to say he didn't know, but frankly, as an auditor and a value-for-money auditor, it would seem to me it's absolutely incumbent on you not only to point this kind of thing out but to rail on about exactly the expense to the taxpayers for nothing.

Mr Kwinter: His mandate is not to deal with the budget.

Mr Stockwell: I know his mandate is not to deal with the budget, but he's a value-for-money auditor. This is going to take place, and if the question is put to you, "It's going to happen," I would expect to hear that it's silly to defer this for three months for no other purpose than to keep your debts at below $10 billion, if it's value for money. Where is the value in this? What's the value in doing this? Maybe that's the question: Where's the value in your mind in doing this?

The Chair: Maybe just for all committee members, you're doing it as an accountant, taking a look at the accounting principles here, regardless of what the treasury does. That interest does not show up until April 1 and it's accounted in the next year. I'm not a chartered accountant myself and --

Mr Stockwell: I'm just asking, where's the value in this trickery? Where's the value to the taxpayer?

Mr Otterman: It's very difficult to comment on any item or decision that's taken in the budget. We don't have the authority to audit the budget, how it's prepared. Actually, we tried several years ago and I think a legal opinion by the then treasury people clearly indicated that we did not have the authority or the mandate to question anything in the budget, in its preparation.

For example, we were concerned with the estimates made for the major sources of revenue. To do a value-for-money audit of that area, just to take your example of this $2 million, you would have to be privy to the reasons the Treasurer had, all the choices, assumptions or whatever that were available to him to make the decision whether the net cost of this transaction was good value for money, and we clearly wouldn't get access to that information.

Mr Stockwell: This is not an estimate, sir. This is not a revenue projection. This is very simply a deferral. It's a deferral of a payment. If you pay on January 1, it costs you X; if you pay on April 1, it costs you X plus Y. Where in this is the value to the taxpayer? I'm not asking about estimates, I'm not asking about revenues; I'm asking a simple accounting question. By deferring this to keep the deficit below $10 billion, what is in here that's valuable for the taxpayer?

Mr Otterman: My answer is that it's not the accounting question you're concerned with. I think we've handled the accounting question. Just like any other item in the budget, whatever reasons the Treasurer has, we're not going to get at that. We don't have the mandate to get at it.

The Chair: You just make sure all the nickels are in there at the end of the year.

Mr Stockwell: I understand what he does.

Mr Phillips: Can I just ask a question on the fiscal stabilization thing? I think it's a bogus accounts receivable. The problem is, it's only at the end of the year we find out and then we're on to the next budget. I think they had $570 million in last year's budget. Surprise, surprise, they didn't get it. Whom can we call on to help us determine whether in fact this is a legitimate item to put in as an account receivable? As I say, if we were in the private sector we would ask our accounting firm to confirm that this is legitimate. We're counting on you, I guess, to give us some assistance here. How can you help us on this?

Mr Otterman: I guess if you go to the cash basis of accounting, he's not considering it as an account receivable. He thinks it's a payment that he is going to receive in the 1992-93 fiscal year.


Mr Stockwell: What do you call that? It's not an account receivable?

Mr Otterman: Not on the cash basis of accounting because no cash has changed hands at this point. You've got to switch gears between the two types of accounting, but let's not belabour that part of it.

Again, you're into getting access to the information that the Treasurer would have had to say: "I think this is a good estimate. I think we are going to get it," and where, of course, as I explained, it'll have access to that. How you get that I think would have to be through your questions to the Treasurer and his people. Invite them in, ask them those questions. I think the disclosure is there --

Mr Phillips: I'm sorry, we've tried. We've asked them for 10 months to give us the application. They won't.

Mr Stockwell: You're the last line of defence.

Mr Kwinter: I would like to pursue the same issue, again hypothetically. I understand your role and where you can't comment.

In a public company, if you were to find there was an amount that was included in the annual statement of the financial affairs of the company, an amount of $1.2 billion, which is a substantial amount of money, that was an expected revenue during that fiscal period, you would think there would be some effort on the part of the auditor to verify that those funds were forthcoming, and if not, there would be a note to the financial statement saying these funds are there but there's no indication, no verification, in fact, that they're going to come. Is that a fair assumption?

Mr Leishman: Yes, that's absolutely a fair assumption when you're dealing with their financial statements at the end of the year. If they had an account receivable of $1.2 billion there which could not be confirmed and it was doubtful whether it was going to come in, you would no doubt qualify their financial statements because their revenue had been overstated. But what we're dealing with here is a budget which is prepared based on the cash basis of accounting, and it was the Treasurer's best estimate that the whole $1.2 billion would be received during this coming year.

Our job as auditors of the province, under the modified cash basis of accounting, is fairly simple. If, in fact, that money comes in, then we confirm, "Yes, indeed it did come in and it came in at the amount they applied for." If it doesn't come in, then that should not, under their current basis of accounting, be set up in the financial statements for the year ended March 31, 1993 as revenue at all.

If this were a private company, then what we would be doing would be exactly as Mr Phillips stated. We would be examining that application, making sure the application was valid and at the correct amounts. We would be confirming with the federal government, "Yes, indeed, you do have a valid payable to the provincial government," but under the modified cash basis of accounting we, as auditors, are only interested in what comes in cashwise.

You're right, there is a chance that a portion of that $1.2 billion might not be received this year. Perhaps the whole thing won't be received. If it isn't, when the financial statements come out their budget will be over what their actual is by $1.2 billion.

Mr Otterman: I'd just like to add two points to perhaps further clarify that.

In your private sector example, Mr Kwinter, you used the financial statements, if we were auditing the financial statements. Also, if in the private sector we were auditing a prospectus for that company, that they're going out to try and expand their operation and get more money from lenders, there the auditor is looking at some of the reasonableness of the figures they've put into their financial projections, and that forecast would be like examining the budget.

Mr Kwinter: If I could just --

The Chair: We've got Mr Sutherland --

Mr Kwinter: Just a supplementary.

The Chair: A short one.

Mr Kwinter: That's exactly the point I want to make. The budget of Ontario, which is not an accounting document per se because it's a projection, is a prospectus. It is being put out to entice people to invest in Ontario. It is being put out to try to get support for the fiscal policies of the government. If these things are put out and say, "We have a $1.2-billion receivable and we are going to defer costs," and everything else, it really misrepresents the financial status of the province.

We as members of the Legislature have to take on the role that an auditor or a securities commission would take on if it were a prospectus with a public offering or an auditor in a financial statement. I think we have the right and the obligation to take a look at revenue projections where there is no basis for assuming that those revenues will ever be received. Our concern is that when we try to get some kind of indication, some sort of verification that yes, an application has been made, yes, there has been a response that was favourable and yes, there's every indication and every expectation that during this fiscal period ending March 31 we will be the recipients of $1.2 billion in federal transfer payments, and when we don't get that, when we don't get any comfort that this is going to happen, then I think we have a problem.

I think we have an obligation to people who are looking to the fiscal position or stability of the province to let them know that there's some gerrymandering going on, or whatever you want to call it, there's some creative accounting, and these are areas that should be open to question, which is all we're doing.

The Chair: Any response?

Mr Gary Wilson (Kingston and The Islands): That wasn't really a question.

The Chair: I don't know.

Mr Sutherland: So I guess, to summarize here, we've had the Liberal members ask three questions. But basically, if I can summarize correctly, you have indicated that at this time you're not in a position to make any statements on that because you will have to wait until the financial year is closed and the actual financial statements are presented. Then you'll be able to make some comment in terms of whether their concerns are valid or whether the Treasurer has put forward an accurate position of the financial statements.

Mr Otterman: I think it'll be self-evident. The events themselves will be disclosed at that point and we'll simply audit the validity of those events. That's correct.

Mr Sutherland: So in terms of right now, though, again what we have here is speculation on how the events may turn out and we have to wait and see how the events actually turn out.

Mr Stockwell: My question now is more on procedure. There are clearly bold-faced untruths, in my opinion, in this budget. There's just no doubt in my mind that they are simply in there --

Mr Sutherland: Excuse me. A point of order, Mr Chair: Could I ask, for the record, since this is the second time Mr Stockwell has used such language, whether we are under the same guidelines as the House in terms of what type of language we use?

The Chair: I believe we are.

Mr Stockwell: Which word were you upset about -- "bold"?

Mr Sutherland: No. I think "untruth" is the one I want to take out and challenge you on.

The Chair: Okay. Just use another word there, Mr Stockwell. You've got many.

Mr Stockwell: Lies.

The Chair: No, no. Come on.

Mr Stockwell: I guess that's not a good word either. I guess I feel very strongly about this. I'll say they are just unbelievable.

The Chair: Okay. That's a good one.

Mr Stockwell: It's just unbelievable that this should be brought forward in this fashion. The $1.2-billion fiscal stabilization account is a pipedream. We all know it. Maybe they don't, but they will know it soon. The sales and rentals are, in my opinion, a little sketchy. That one can almost be acceptable, but the $500 million now being pushed off for three months is absolutely unbelievable.

I guess my question to you is: The treasury department can't help us, simply because it is not allowed to speak out against the government. That's very clear, because no accountant would sign this. You as the auditor can't help us, because you're on a cash audit system where the moneys have to actually appear before you can make a determination, or not appear or the year has to end, so you're of no use. So who is it that we go to as protectors of the taxpayers, as stewards of the taxpayers, from a professional basis in the huge bureaucracy of this place, to announce to the public for their own protection that these numbers are cooked? Who has that responsibility?

Mr Otterman: A general answer to that is, I believe you as members, under your ability to use the tools you have --

Mr Stockwell: But there's no professional staff, in essence, none; no professional staff hired by the taxpayers.


Mr Gary Wilson: I think you're the professional staff. You're the guys who are supposed to be doing that.

Mr Stockwell: I'm not asking you to provide these numbers. Why would I ask you anything? My question is, there's no professional staff we can approach who would give an unbiased, professional opinion on whether these numbers are cooked. That's all I'm asking. You're of no help. Who is it? Who's supposed to do this?

The Chair: Mr Stockwell, I think he answered the question before. He counts all the nickels at the end --

Mr Stockwell: I'm asking him who is the staff who can help us. Is there anyone who can ferret this out? You know they're cooked, I know they're cooked, the Treasury staff knows they're cooked, but nobody can say it.

Mr Sutherland: Mr Chair.

The Chair: Just a minute. Mr Sutherland.

Mr Sutherland: First of all, I resent the implication that the books have been cooked here. Okay?

Mr Stockwell: I'm saying it, categorically: They're cooked.

Mr Sutherland: Mr Stockwell, you've had your opportunity. I'd like to have mine here for a couple of seconds, please. The point of the matter is, Mr Stockwell has indicated that we have no basis for a claim to the fiscal stabilization account and I don't think that's the case. I think there is a legitimate claim Ontario has for this and that we deserve that. Now the question may be as to when we're going to receive that and that may be an issue that comes up.

Mr Stockwell: You must have fallen off a turnip truck.

Mr Sutherland: Just a minute here: There has not been a process put in place for this type of assessment of a budget to go on. The auditors have said, and they've said it several times here already, that at the year-end, when the financial statements are presented, they'll be able to make some type of judgement, but probably by that time we will know anyway because as events unfold the information will be presented. The information has been presented. The auditors have answered. I'm not sure what else we're going to be able to do at this stage this afternoon regarding the assessment.

Mr Stockwell: I just asked a question.

The Chair: I know. You made a statement. There was one --

Mr Stockwell: Can I get an answer to my question?

The Chair: I just want one question. I know the Chair usually doesn't ask a question, but it is for a little clarification so I understand all the issues here too. This procedure has been carrying on for how long, what we're doing right now, on the auditing? This is not something new in the last year or two years; this has been going on for years, so there hasn't been a change in auditing, has there?

Mr Otterman: I don't think it's a change in auditing.

The Chair: Or accounting.

Mr Otterman: Are you asking, is it a change in accounting?

The Chair: Yes.

Mr Otterman: There's been no change in the basis of accounting, to the best of my knowledge, going back to --

The Chair: Just maybe give the whole committee a little clarification.

Mr Otterman: Maybe since 1968 was the last major change.

The Chair: Fine. Can you answer Mr Stockwell's --

Mr Stockwell: The only question I have left is, is there any professional staff, bureaucrats who are hired, who can come in and get an honest accounting, a person-in-the-field submission, as to the validity of this? Is there anyone?

Mr Otterman: If you're asking, is such an estimate capable of being audited? the answer would be yes, it's capable of being audited.

Mr Stockwell: So unless the Treasury department agreed to release that report there's little, if anything, we can do?

Mr Sutherland: Public accounts committee.

Mr Stockwell: Somehow this --

Mr Phillips: We were turned down at public accounts.

Mr Stockwell: Yes.

Mr Phillips: We were voted down by the NDP. They wouldn't let us look at it.

Mr Sutherland: You look at it and you look at the --

Mr Phillips: We took it there and we were voted down.

Mr Sutherland: At public accounts, though, you look at the financial statements after the year is over and review them.

Mr Stockwell: No, I'm asking now. Just like if you were going for a public offering, like Mr Kwinter said, there is some validity to the numbers. All I'm asking is, is there any avenue or any area open that could measure the validity of these numbers? Because in my opinion they're cooked. How do I get that out to the public? It's shameful.

Mr Otterman: I would just comment that when you say the books are cooked, I think you've got to be careful of that, too. It's a little generic. If you're talking about the budget and the estimates therein, fine.

Mr Stockwell: That's what I'm talking about: They're cooked.

Mr Otterman: But if you're talking about the financial statements of this province, they haven't been cooked.

Mr Stockwell: That's what I'm talking about, the budget: The numbers are cooked.

Mr Otterman: Okay.

Mr Stockwell: No more questions.

Mrs Elinor Caplan (Oriole): First of all, I appreciate your being here today. I think the questions we have about the accounting practices in the formation of the budget are ones which are of interest to people who are looking at the province's budget for the purposes of deciding on future investment opportunities and so forth, in judging our credit rating and generally, after the fact, the competence of the government or ultimately how good it was in not only predicting but making decisions from policy, both economic and fiscal, as well as social policy decisions. So the question we have around the accounting practices is a real one.

I'm not going to engage in the kind of rhetoric of my friend Mr Stockwell, but there's such a thing as generally accepted accounting principles and generally accepted accounting practices when a corporation establishes a budget or an estimate, and the questions we have are very serious and very legitimate, and that is, are the practices and the principles that have gone into the formation of the budget in line with those which are generally accepted for large corporations which are developing perspectives, or is there something different about this?

Are the assumptions that are being made in this budget realistic and legitimate so that people can count on them, or have they been sort of selectively taken in a way which would give us -- we do expect that the year-end results are going to be very different than the estimates the budget put forward, and that causes us great concern.

Mr Otterman: Perhaps I can go at this, to try to be helpful, in this way: On your first example of the private sector, referring to the terms of generally accepted accounting principles and so forth, probably for the last 15 years, various governments around the world, and primarily in Canada the Canadian federal level and some of the provincial levels, have been looking at the various bases of accounting they've been using over the years.

It's probably to say that most started with the cash basis of accounting. In many parts of the world today and in most parts of Canada, some modified version of the cash basis -- which I don't want to get into, it'll only get confusing, but it means you hold the books open a few days. You don't cut off cash receipts or cash expenditures right at the end of the fiscal year, and they use that term "modified" there.

There has been very much work done in Canada by the CICA, the Canadian Institute of Chartered Accountants, through its public sector accounting and auditing committee, and even around the world, Australia, New Zealand the United Kingdom and several other governments have been working towards trying to improve the financial accounting and reporting systems in an attempt to improve overall accountability.

You could tie that back to the budgets. Once you change your basis of accounting, you'll likely apply that same basis in preparing your budget. You may not. If you don't, then you've got some reconciliation to do, and that could be confusing, I suppose, too.

But it may be useful to the committee, and also to the public accounts committee, if they wish to delve into this matter, to take a look at a study that was done by the International Federation of Accountants, which is comprised of the major accounting bodies around the world, in a report it released in March 1991. It probably gives the best explanation of the various bases of accounting that exist, from the cash basis on the one end to the full accrual, generally accepted private sector basis on the other end, with various versions in between. It's probably the best laymanized -- as accountants can get, anyway -- version I've seen and I'd recommend it.

Mrs Caplan: It's not too boring. Is that what you're saying?

Mr Otterman: Yes, I think it's fairly readily understandable too. It won't get you into a whole bunch of fancy jargon that'll put you to sleep right away. I think that would be a useful thing for you to consider in response to the other member's question, who I would seriously like to help, but this might be the more useful way of helping.

I think these various forms of the basis of accounting generally regard that the more you move up the ladder from cash basis to the other forms up to the full accrual basis, the thinking is anyway that it is an improvement in accountability to be able to demonstrate your stewardship for the funds than the lower end.


Mrs Caplan: Where would you place Treasurer Laughren on that scale from zero being cash to 100% being accrual?

Mr Otterman: The province essentially follows the full cash basis of accounting except expenditures -- you can pick me up on that --

Mr Leishman: It's modified from about three.

Mrs Caplan: Three?

Mr Leishman: Towards the cash basis.

Mrs Caplan: Say that again.

Mr Leishman: About 2 or 3 out of 10, leaning towards the not fully cash basis, but almost fully cash basis.

Mrs Caplan: That's the least level of accountability in public administration and that falls short of where the international community is recommending governments should be.

Mr Otterman: That's what the accounting communities are recommending.

Mrs Caplan: The international accounting community has recommended greater --

Mr Otterman: Yes. They see it increasing the accountability such as the earlier questions. It would cover things like loans receivable and loans payable. Undoubtedly, as you go up into the full accrual accounting, the items have to be set up when the transaction occurs versus when the cash flows.

Mr Leishman: I'd just like to make one statement. Whether you follow full cash accounting or whether you follow full accrual accounting -- I think we commented on this in our report last year, the year before last and the year before that. Whatever basis you follow, when it's followed with integrity, that's fine. But where accountants and auditors begin to have a problem is when, in their opinion, the integrity aspect isn't there. I'm not making any comment about this year or last year. It's just a general comment.

Mrs Caplan: I'm going to yield to my colleague Mr Phillips.

The Vice-Chair (Kimble Sutherland): I'm sorry; I've got to go to Mr Jamison and then come back, okay?

Mr Norm Jamison (Norfolk): If we bring this back into perspective, Mr Phillips has asked the auditors to come here today to answer some questions. Due to the way the Provincial Auditor's function exists, I think the auditors have put it very clearly that their role is one they have to be very careful about in their answers.

On the rest of the conversation, it should become painfully aware on the part of the Liberal Party in this committee, it should become very clear that as with any budget, there are projections. I think this is what Mr Phillips is talking about: the projections. We have talked, even in the latest round of the Canada talks, about certain commitments being upheld by the federal government, about certain payments and certain duties the federal government has not being negated at certain times. I think the Treasurer has answered some of those questions in direct questioning from Mr Phillips in the House.

I'd like to say this: As with any budget, and certainly the Liberals should be aware of this, their projections were well off, given one certain projection in around 1990, I believe, to a great extent. That deals with economic factors that are projections in any budget, and those we should be aware of, especially sitting on this committee. As we've talked to economists, for example, over the last two years and listened to projections on the economy based on renowned economists in this province, all of us have been saddened to come to understand that none of them has been right. It's a very deceptive kind of art in itself, trying to predict what will happen in the future. So I would say to you that in the context of Mr Phillips's letter, your abilities to answer those questions you described are very limited in their scope.

Mr Phillips: Just on the point Mr Jamison made, I appreciate the auditors' report on the deficit in which they said there was only one surplus in the last 20 years in Ontario, and that was the final Liberal budget. Then it goes in detail to explain what happened after the NDP took over and the $3-billion deficit. As I've said in the House, if the Premier dares to use that $8-billion number again, I will challenge him to a very public debate.

I'm back to the audit, and I hope you can understand our frustration, because we can't seem to get any help in terms of dealing with the issues. We started with this thing when the budget came out. We asked the auditor, and he said, "Well, I'll have to get a committee to ask me." We tried to take it to public accounts; public accounts turned us down.

Last year in the budget there was, I think, $570 million receivable from the fiscal stabilization fund. It never came in. Did you, on hindsight, examine that and comment on the legitimacy of that claim and whether that was realistic to have in revenue?

Mr Otterman: No, I don't believe we did any work on that claim.

Mr Phillips: Could you do that? I gather you're saying you can do nothing about the one that's in this year's budget, but you could give us an opinion on whether there was reason for it to be in the budget last year.

Mr Leishman: Mr Phillips, I believe it wasn't in the budget last year. The first time it appeared was as of --

Mr Phillips: An estimate, okay.

Mr Leishman: -- the December 31 Ontario finances that came in.

Mr Phillips: Yes, that's right.

Mr Leishman: Had it come in for the year, had it been received, then we would have audited it. I believe somewhere someone has made a statement that with those claims, the federal government has a period of 30 months upon which to act. I think the claims were made in December 1991 and February 1992. So you can take it from that as to whether it will be received this year. I don't know. We aren't privy to the discussions that are going on between ministry of treasury and treasury in Ottawa, so we wouldn't know.

Mr Phillips: You can see why I'm getting frustrated here. It was in the revenue estimates last year. It didn't come in. You do the audit, but you can't comment on it because it didn't come in. You will never, ever be able to give us a comment on whether it should ever have been included, then?

Mr Leishman: If the government changed its basis of accounting to the accrual basis of accounting, then things would be different.

Mr Phillips: But aren't, then -- for the public -- your hands totally tied and you can't comment on the fiscal stabilization?

Let me tell you what's going to happen. The government is desperate to get the deficit down. There will be so many different schemes down the road that your head will spin. The first one we see is to sell the GO trains; then there will be a bunch of buildings sold; then they'll probably take sewer and water off the books; then they're going to take training and what not, and take it off the books; then there will be just a series of things. So the public, without somebody like yourself -- we can try to do it in opposition, but we need some help -- is not going to have a consistent basis of comparison. I'm getting the feeling from you people that you can't help us.

Mr Otterman: There is one thing that we shouldn't overlook. As we've mentioned in previous reports, we've tracked the kind of unusual or abnormal cash flows that have occurred in here, whether they were included in the budget or not. After the year-end, we can comment on the variances from budget, if we wish to, and look into those. At year-end, we would give further scrutiny to ensure that the financial statements are correct, that the integrity is there in terms of, for example, this equalization-stabilization payment; as we would do for, say, the personal tax revenue -- that's under an agreement -- and how that flows. We give it some scrutiny to see that they got the money they were supposed to get, that the variance is not all that far off.

Under the cash basis, the thing that we're always looking for in accounting at year-end, if you really want to get into the integrity part, is that there were no deliberate attempts to stop money from coming in, like putting it into the next year and stuff like this. We look at that. It's not going to be the easiest thing in the world, maybe, to find, but we would do that.

But beyond that, no, we'd be back into looking at the budget items again and we're not privy to that.


Mr Kwinter: I'd like to comment on Mr Jamison's comments and maybe get a reaction from you. I think it's quite apparent that we are not critical of the fact that, given the uncertainty of our economic environment, the projections are not right on an income and expenditure basis. Because of the depth of the recession, because of certain things that have happened on a global basis, those things change.

We have no problem with that, and we're not criticizing anybody for saying, "Our revenues were supposed to be this, our expenditures were supposed to be that and we didn't meet our targets." That happens all the time in many organizations.

What we are critical of and what we are trying to get some sort of handle on is when they take $500 million and delay the payment for no reason. It isn't as if the province is strapped for money on the long term. They have access to $500 million any time they want it, so it's obvious that the three-month delay was strictly cosmetic; it was strictly so that the $9.9-billion figure could be held, because in the minds of the Treasurer and the cabinet and the Premier, "We don't want to go over $10 billion, so whatever you do, do some creative accounting to keep it under the $10 billion."

What they've done is taken $500 million and said, "Instead of paying it in January, when we normally do -- we certainly don't have to go and beg on the streets to get the money; we have the money, because there's always a turnover," they have agreed to take the $2-million penalty, or whatever the amount is, and delay it until April 1. They have set up a receivable of $1.2 billion, of which there is no real, concrete confirmation that it's going to be forthcoming. They have set up internal sales of assets to a crown corporation so that they can also show it.

The concern we have is that if it weren't for the politics of it, what they would do is let the figures go. Whatever they are, they are. Businesses are faced with exactly the same obligation. These are the figures, with a footnote to the budget, "We have applied for stabilization transfer payments, and if they are forthcoming, we will reduce our deficit"; not the other way around, of including them and saying, "These funds are coming, and as a result, here's what our deficit is going to be."

That is the problem I personally have. The tail is wagging the dog. The number is $9.9 billion; your responsibility is to come up with that number. How you do it -- just make it so that it sounds feasible and come up with these various scenarios and, "This is the one that seems to be the most palatable and the one we can sell the best."

That is my concern. I'm not asking you to make a political comment. What I'm saying to you is, do you not agree that the way it should be done is to state the financial condition, and if you want to put some of these other things in, put them in as potential changes as opposed to, "These are the facts; this is what it's going to be, and we'll worry about it next year when it doesn't happen"?

Mr Otterman: That is an alternative way of handling it. But again, not being privy to what went into the decision-making for doing it the way the Treasurer did, I can't comment further.

Mr Gary Wilson: I guess one thing that occurs to me here is that the auditor and his colleague have been very patient in explaining the kind of accounting system that's used here, and the Chair brought out that it has been in effect for a good number of years. I wonder why, if the Liberals are so exercised about it now, they didn't immediately proceed to change it to the accrual type of accounting rather than what's called the modified cash basis of accounting. As we've heard, there are the two ways of doing it, and that has been in practice for a long time.

The other thing is, as Mr Phillips mentioned, that the surplus was brought in by the Liberals under, it seems to me, the same kind of arrangement. Then you'd have the accountants drawing to the attention of the Legislature, perhaps, how that was achieved: by downloading on the municipalities, for instance, and other ways of keeping the money here rather than fulfilling responsibilities.

Pay equity is another example, the things that weren't done, where the money might have been spent, which would have run up a deficit or at least taken down the surplus. Those are political decisions, and I think they've been quite clear that this is where our responsibility lies. I just wanted to make that comment, Mr Chair.

The Chair: That's a comment. Okay. Any questions? Mr Sutherland.

Mr Sutherland: I think Mr Wilson is right in terms of the types of political decisions you make. Mr Chair, though, I think we've had the auditors here for an hour, we've gone through questions three or four times. I think we understand.

The auditors have commented on what they can at this stage, so unless there are new questions outside the teachers' pension plan issue, the stabilization account and the Ontario Land Corp, I'm not quite sure what the need is to continue questioning this afternoon. The auditors have commented on what they can comment on, and beyond that, it is going to have to be left until the end of the fiscal year, coming back probably from a public accounts standpoint.

The Chair: Okay. Want to wrap it up, Mr Phillips?

Mr Phillips: Well, I'll try. It's been a frustrating experience, and if you've commented on the fiscal stabilization last year anywhere, I'd like to see it, because that seems to be the only area you can comment on. I think we'll have to pursue it in whatever way we can. I guess we can't get much assistance from the auditor. I think my concerns are real and are valid, and I'm concerned that the public is not being given the full picture.

I think there's another long-term issue we may want to look at as a committee, and that is the suggestion from the auditor of whether we can initiate a new way of reporting for the province.

I think people are cynical, and I'm not saying this is the first government ever to do these things, because I think every government looks for ways to try to make itself look better. Every single government does it. But the members of the public get very cynical when they see they can't trust the numbers, and therefore I'd like perhaps to get copies of the report that you've got. I would like perhaps some time on our committee, Mr Chairman.

The Chair: Yes, maybe the committee could get a copy of that.

Mr Phillips: I think all of us perhaps could agree that it's in our best interests to try to find ways to update our provincial reporting systems, because otherwise it will be the most creative artist out there who -- this GO thing is just the start of it. There are going to be some of the most harebrained schemes over at Treasury to try to make the numbers look better. Quite understandable. I think the whole financial community has been alerted to it. It's, "Bring forward the schemes," and I understand that.

So I would request perhaps the report, a chance on this committee for discussion. I appreciate your coming here today and I appreciate that you can only do what you have the authority to do and that we're railing at you when we're railing at something else. I hope you take it in the way that I certainly meant it and I hope we all meant it. I'm frustrated, but I don't think they can do much more for us.

The Chair: Okay, Mr Phillips. I'm glad that we were able to have the auditor come at your request and that the committee agreed to have the auditor come before this committee. Being frustrated, maybe you'll become an accountant in the end, to figure out how to --

Mr Phillips: Oh, it's better than politics.

The Chair: That's why I asked a few questions. Normally as a Chair I don't ask the questions, but I like to get a little bit of clarification. It is a special field and takes many years. My assistant's dad owns a firm in St Catharines and that's why I had him in here for a while, in case I got lost with some of the terminology. But I didn't have to run back to him.

Mr Otterman, you explained everything quite clearly, and as I've heard Mr Phillips say, you're one of the the bean counters out there so you make sure all the beans are in the jar at the end of the year. I don't think there have been any missing that I can see, but maybe there are a few still growing out there that haven't been picked until the next year, as Mr Phillips has said.

I appreciate your attendance here, and maybe as a committee we'll take a look at welcoming you back again after the fiscal year. Maybe there are going to be some changes that can be made. As you say, you've been doing the same old job for years the same old way, but maybe there are better ways to do it. Thank you for coming.

This meeting is now adjourned until we have another subcommittee meeting.

The committee adjourned at 1700.