PACP Committee Report
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Mr. John Williams, M.P.
Standing Committee on Public Accounts
Wellington Building, Room 641
House of Commons
Ottawa, Ontario K1A 0A6
Pursuant to Standing Order 109 of the House of Commons, and on behalf of the Government of Canada, I am pleased to enclose the Government Response to the recommendations of the Sixth Report of the House Standing Committee on Public Accounts.
I would also like to take this opportunity to thank you and the members of the Standing Committee for your efforts in improving financial reporting by the Government of Canada.
GOVERNMENT RESPONSE TO THE SIXTH REPORT OF THE STANDING COMMITTEE ON PUBLIC ACCOUNTS
That the Employment Insurance fund be used for the intent it was set up for and not for any other purpose.
Based on the annual audits conducted by the Government and the Office of the Auditor General, the Employment Insurance Account has only been used for the purposes that it was set up for: that is, paying eligible program benefits and costs as set out in the Employment Insurance Act.
However, given that the premiums and eligible program costs are fully consolidated in the federal government’s overall financial statements, differences in the annual flows between premium revenues and eligible program costs directly affect the budgetary balance for that year. To ensure that this impact will be relatively neutral on a going forward basis, Budget 2005 proposed a new annual rate-setting mechanism, whereby premium rates would be set in such a way that expected annual premium revenues would match expected annual eligible program costs.
That the Government of Canada complete, without delay, a report outlining the competing premium-setting methods and mechanisms being contemplated for the Employment Insurance Program. The government should also indicate which mechanism it favours. Once completed, a copy of the report should be immediately submitted to Parliament and, in particular, to the Public Accounts Committee.
In the 2003 Budget, the Government launched a public consultation process on a new permanent rate-setting regime and put forward the following five principles as underpinnings of a new permanent rate-setting process:
- Premium rates should be set transparently;
- Premium rates should be set on the basis of independent advice;
- Expected premium revenues should correspond to expected program costs;
- Premium rate-setting should mitigate the impact on the business cycle; and
- Premium rates should be relatively stable over time.
Throughout 2003, the consultation process heard from a wide variety of stakeholders, including business and labour, economists and technical experts, Employment Insurance Commissioners for Workers and Employers, and individual members of the public. Summaries of the results were posted on Finance Canada’s website in December 2003.
A new permanent rate-setting mechanism was announced in Budget 2005 that meets all of the five principles and takes into consideration the views of stakeholders and the views of the Standing Committee. As proposed in Budget 2005, the Employment Insurance Chief Actuary would annually determine, on a forward-looking basis, the estimated break-even premium rate for the coming year, based on the most current forecast values of those economic variables relevant to the determination, which will be provided by the Minister of Finance. In matters related to rate-setting, the Chief Actuary would have a functional reporting relationship to the Commission, strengthening the independence of this process. The Chief Actuary would provide a report to the Commission, which the Commissioners would then make public and use to consult with their respective constituencies.
Beginning with the 2006 premium rate, the Budget Implementation Act 2005 (Bill C-43) proposes that the Employment Insurance Commission would have the full legislative authority to set the Employment Insurance premium rate. In setting the rate, the Employment Insurance Commission would take into account the principle of expected premium revenues matching expected program costs, the report from the Chief Actuary and input from the public, which would increase the transparency of the rate-setting process. There would no longer be a requirement for the Government of Canada to approve this rate. However, the Government would have the authority to override the rate, if it was in the public interest to do so. The Commission would also be able to obtain, on an as-needed basis, the services of those with specialized knowledge in rate-setting matters. This meets the principle of independent expert advice.
The Government is also proposing to introduce limits on changes in the premium rate from year to year so as to mitigate the impact on the business cycle and contribute to stability of premium rates. In this regard, the extent to which the premium rate could change from one year to the next would be limited to a maximum of 15 cents. This provides protection against sudden large increases in premium rates in the event of an economic downturn. As a measure to provide rate stability during the period of transition to the new rate-setting mechanism, the Government has guaranteed a premium rate ceiling of $1.95 per $100 earnings for 2006 and 2007.
These new measures increase the independence of the Employment Insurance Commission in Employment Insurance rate-setting and strengthen the transparency of the process.
That the Government of Canada explain the notional nature of the employment insurance account in any and all of its future discussions and public statements.
All money paid to, received or collected by the Government of Canada is deposited into and paid out of the Consolidated Revenue Fund in accordance with the Financial Administration Act or other statutes. Similarly, revenue and program costs under the Employment Insurance Act are credited or charged to the Employment Insurance Account and deposited or paid out of the Consolidated Revenue Fund. The Employment Insurance Account is consolidated within the Accounts of Canada and its nature remains unchanged – it is a statutory bookkeeping mechanism that adds up annual revenue and expenditures, it is not an account containing cash. In this sense, the Employment Insurance Account is a notional account. The practice of the Government of Canada has been and will continue to be to explain the Employment Insurance Account in this manner.
That, for the purposes of open and transparent discussion, the Government of Canada refrain from wording that implies that the accumulated notional surplus in the employment insurance fund can somehow be used to stabilize premium rates.
The new premium rate-setting mechanism proposed by the Government meets all of the five principles as set out in the public consultation process launched through Budget 2003. The Employment Insurance Commission will annually set a forward-looking break-even premium rate, taking into account expected premium revenues matching expected program costs, the report from the Chief Actuary and input from the public. Limits on premium rate changes from year to year will mitigate impacts on the business cycle and provide stability in rate-setting. This increased transparency and independence in the rate-setting process will mean that the annual premium rate will be set independently of the Employment Insurance Account.
That the Office of the Auditor General and the Office of the Comptroller General immediately prepare a report detailing the progress achieved in clarifying the guidance of the PSAB concerning the accounting treatment for reporting entities and transfers to these entities, particularly regarding the accounting treatment of foundations.
The Government will discuss its assessment of the evolving PSAB accounting standards with the Office of the Auditor General and submit a progress report to the Committee. It is important to note that while the accounting standard with respect to the government reporting entity (those organizations controlled by government that are to be included within the government’s financial statements) has been issued, the revised standard relating to government transfers has not. Preliminary discussions indicate widely different views amongst both the auditing and accounting communities. As such, there is a need to proceed cautiously with respect to any changes to the Government’s accounting policies.
Both through acts of Parliament and their funding arrangements, it was intended that foundations be independent from, and not controlled by, the Government. The Government does not control the financial operations and budgets of foundations. These budgets and operations are currently not included in the Government’s budgetary balance. If foundations are deemed to be controlled by the Government for accounting purposes, then the foundations’ budgets and operations, which the Government does not control, would be included in the Government’s budgetary balance, placing the budgetary balance of the current and future Governments at risk.
That the federal government, as part of its effort to improve the accountability of foundations, table the necessary amendments to the appropriate pieces of legislation in order to allow the Auditor General of Canada to conduct value-for-money audits at foundations with assets in excess of $100 million.
The Government agrees with the development of a performance (value-for-money) audit regime to complement the audit and evaluation regimes already in place. Amendments have already been made to a number of funding agreements to provide, to both Ministers and the Auditor General, the right to undertake such audits. The Government undertakes to amend other existing agreements and to implement this as a standard requirement for future agreements. In this regard, it will work closely with the Auditor General.
In addition, the Minister of Finance has tabled amendments to the Auditor General Act, as part of the Budget Implementation Act, 2005, to provide the Auditor General with the necessary legislative authority to audit the use of federal funding. However, the Government’s proposals go beyond that recommended by the Public Accounts Committee. The legislative authority would extend to more organizations than just those identified as foundations by the Auditor General. It would cover auditing for compliance, performance (value-for-money) and the environmental impacts of expenditures. In general, it would apply to most not-for-profit and similar organizations that have received at least $100 million in any consecutive five-year period. The proposed legislation was developed in consultation with the Auditor General to ensure it would satisfy her objectives.
That the Government of Canada provide Parliament with a scorecard or some other measure of its progress in its efforts to fully implement full accrual accounting. The scorecard should be based on a benchmark full accrual accounting system or best practices found in other countries that have made the transition to full-accrual accounting.
Accrual accounting was implemented in all departments for April 1, 2001 as part of the Financial Information Strategy. In the run-up to this implementation, scorecards showing each department and agency’s progress were posted on the web site of the Treasury Board Secretariat.
The Government does not believe that the use of a scorecard and benchmarking is needed since full accrual accounting has been implemented, and the financial statements of the Government of Canada were prepared and presented on a full accrual accounting basis in the 2002-2003 Public Accounts of Canada. As the Auditor General has noted, Canada is a recognized world leader in financial reporting. This leadership was recently recognized with an award for excellence in reporting from the Canadian Institute of Chartered Accountants.
The implementation of full accrual accounting was a major challenge requiring significant effort. Despite the overall success, there remain a couple of residual issues in two of the more complex areas of accrual accounting: the accounting systems and practices for inventory at National Defence and tax revenues and receivables at the Canada Revenue Agency. The Auditor General states in her Observations in the 2003-2004 Public Accounts of Canada, the issues at National Defence and Canada Revenue Agency are not significant enough to conclude that the government’s financial statements are not fairly presented.
At both National Defence and the Canada Revenue Agency, interdepartmental working groups, with representatives from the Office of the Comptroller General and the Office of the Auditor General, meet regularly to discuss the remaining issues associated with the implementation of accrual accounting and to monitor the progress in resolving them.
That the Government of Canada move quickly to identify, record and quantify its contingent liabilities including, notably, its environmental liabilities.
Section 64 of the Financial Administration Act requires that contingent liabilities be included in the Public Accounts. A process is in place and guidance is available for the identification, quantification and presentation of contingent liabilities. Management’s estimates of these liabilities are reviewed with the Office of the Auditor General throughout the year.
Contingent liabilities are classified into five categories, including a category for liabilities for contaminated sites. Information on these categories was presented in Note 13 to the Financial Statements of the Government of Canada, with further detail in Section 11, in Volume 1 of the 2003-2004 Public Accounts of Canada.
That the government extend full accrual accounting to budgeting and appropriations and set a firm timeline for its completion. The Committee further recommends that the government report back to Parliament annually on the progress being made in this respect.
Since the impacts of adopting accrual budgeting and appropriations are major and far-reaching, Treasury Board Secretariat continues to believe that a prudent and thorough approach to introducing changes in budgeting or appropriations is the most appropriate approach. Although the rate of change is slower than the Standing Committee on Public Accounts or Auditor General would like, progress is being made in the area of accrual budgeting.
As announced in Budget 2005, the Government will be implementing a more rigorous approach to capital planning, beginning with a few pilot departments this fall. Parliament will be asked to consider multi-year appropriations of capital funds for these pilot departments. Eligible departments must have a long-term asset plan conforming to a new Long-term Asset Management Policy, and must display resources on both an accrual and a cash basis.
Treasury Board Secretariat is also examining the feasibility of conducting the Annual Reference Level Update exercise on an accrual basis, as well as the cash basis on which it is presently based. Achievement of this objective would represent the most significant step yet taken towards across the board implementation of accrual budgeting. A specific objective would be for the Treasury Board to approve reference levels for all departments and agencies on an accrual as well as a cash basis. This should represent substantial movement to address the Standing Committee of Public Accounts’ specific concern that expenditure authorities provided solely on a cash basis are an impediment to departments’ full incorporation of accrual information into their financial planning and management.
Treasury Board Secretariat views the issue as a priority and will report back to Parliament annually, through its Departmental Performance Report, on the progress made in this area.
That the government should, as a priority in its discussions and publications about debt reduction, clearly tell Canadians how much of its interest-bearing debt was paid down at the end of every fiscal year. It should further refrain from saying that the “federal debt” was “paid down” by the amount of the budgetary surplus. Rather, the federal government should say that the accumulated deficit was reduced by the amount of the budgetary surplus.
The Government has noted the concerns raised by the Auditor General regarding the “paying down of federal debt”. Since these concerns were first raised, the Government has been careful to note that paying down debt refers only to interest-bearing debt and not the accumulated deficit or federal debt.
The Annual Financial Report contains a breakdown of the accumulated deficit into its components parts: interest-bearing debt, other liabilities, financial assets and non-financial assets. In recent volumes, explanations on the changes in the major components have been provided.
The Economic and Fiscal Update of November 16, 2004 included Table 1.1, which showed the decline in the major components of the federal debt (accumulated deficit) since 1993-94. In addition, the Government tables annually in Parliament two reports containing details on the Government’s debt management operations and strategies (Debt Management Strategy and Debt Management Report).