I'd like to introduce my colleagues at the table. Dr. Mostafa Askari is the assistant parliamentary budget officer for economic and fiscal analysis. Mr. Sahir Khan is the assistant parliamentary budget officer for expenditure and revenue analysis. And two of our senior officers at the Parliamentary Budget Office are the principal authors of the reports we're talking about today. Peter Weltman, who works for Sahir Khan, is the principal author of the infrastructure study. Ashutosh Rajekar is the principal author of our study on sentencing reform.
Good morning, Mr. Chair, vice-chairs, and members of the committee. Thank you for inviting me and my colleagues to speak to you today regarding three issues: the budget 2010 departmental operating budget freeze; the PBO report on the Truth in Sentencing Act released in June 2010 by my office; and an update on the PBO report on the infrastructure stimulus fund.
In my presentation to this committee on April 12, 2010, regarding the budget 2010 freeze on governmental operations, I offered three key messages, which I believe are still relevant in the context of the committee study.
First, the fiscal context is challenging. Notwithstanding Canada's relatively strong fiscal performance when compared to some other countries, parliamentarians are facing two large fiscal waves. First will come large federal budgetary deficits caused by the economic downturn and the implementation of a deficit-finance stimulus package. This short-term wave will be followed soon after by growing costs for baby-boom retirees who will draw elderly benefits and health care services and by weaker budgetary revenues due to declining growth in labour supply.
Two, there is no fiscal consolidation without pain. To avoid large unsustainable budget deficits over the long term, parliamentarians may need to choose between higher taxes, changes to statutory transfer programs and less spending on direct program expenditures.
Three, there is both a strategic opportunity and need to strengthen the estimates review process. Recent improvements in expenditure management information and the implementation of strategic reviews help set the stage for new levels of fiscal transparency and involvement in a decision-support capacity of the Government Operations and Estimates Committee and indeed all standing committees that support the review of departmental activities.
With respect to the Correctional Service of Canada and the operating budget freeze, in budget 2010 the Government of Canada established a new fiscal anchor that targets the rate of growth in operating expenditures. As part of this new regime, departments will be required to reallocate internally to meet the 1.5% increase in annual wages for the public service in 2010-2011. In addition, for 2011-2012 and 2012-2013, operating budgets of departments will be frozen at 2010-2011 levels.
While the overall operating budgets of departments and agencies are expected to be generally flat in 2010-2011 compared to those of the previous year, there will be specific departments that will grow or shrink more than others. For instance, against the backdrop of stable operating spending, the Correctional Service of Canada is forecast to have average spending growth of 12.8% over the next two years. As noted in CSC's report on plans and priorities, this is linked primarily to increasing staff and capital spending in the custody program activity. All included, there will be over 4,100 new FTEs, full-time employees, over the next two years, which represents a 25% increase.
There are some considerations for parliamentarians with respect to the first item. In the view of the Parliamentary Budget Office, the budget 2010 operational restraint measures are not fully defined. From a fiscal vantage point, committee members need to know the risks related to achieving the proposed fiscal targets. Are the savings realizable or cashable? Are they dependent on reasonable levels of demand for programs or services? Are there potential downstream fiscal pressures resulting from cost deferrals related to an operational freeze? If new policies require a significant increase in expenditures in one department, will other departments need to compensate with a corresponding reduction in their reference levels?
From a service delivery vantage point, committee members need to know the risks and impacts related to service levels for Canadians from a speed-of-service, quality, or cost perspective. Are there risks and impacts to the longer-term service capacity of government related to changes in employment, processes, or capital levels? In our view, Parliament needs information and analysis in a structured and timely fashion in order to examine the risks and impact of restraint measures.
Our second item, the PBO report on the Truth in Sentencing Act, was in response to a request from the member of Parliament for to determine the funding requirement and financial impact of the Truth in Sentencing Act on the correctional system across Canada. The PBO report does not make any comment on the policy merits of the legislation.
Briefly, the Truth in Sentencing Act amended the Criminal Code to limit the credit a judge may allow for any time spent in pre-sentence custody in order to reduce the punishment to be served at sentencing, commonly called credit for time served. In general, a judge may now allow a maximum credit of one day for each spent in pre-sentence custody. However, if and only if the circumstances justify it, a judge may allow a maximum credit of one and one-half days for each day spent in pre-sentence custody.
I have four key issues to highlight. One, the Truth in Sentencing Act will have a significant impact on the correctional system across Canada. Two, parliamentarians should be concerned about whether the fiscal framework and the budget fully reflect cost pressures arising out of this bill or legislation. Three, parliamentarians should be concerned about the lack of transparency to Parliament in the costing of the Truth in Sentencing Act by the Government of Canada. Four, parliamentarians should be concerned about the operational and cost impact on provincial and territorial jurisdictions.
Over the course of this project, PBO encountered a number of challenges. Other than the initial communication between PBO and the Correctional Service of Canada, which is available on PBO's website, the PBO was unable to secure a single meeting with CSC officials in spite of repeated requests. Moreover, the PBO was unable to verify the government's own estimates, assumptions, or methodology for the various figures presented publicly. Much of the data used for the PBO report was sourced from the annual surveys by the Canadian Centre for Justice Statistics, Statistics Canada, and provincial and territorial correctional departments themselves.
Put simply, the bill directly results in longer stays for sentenced inmates and increases the inflow of sentenced inmates into the correctional system. This in turn results in increased daily head counts resulting from an increase in the average time spent by inmates in sentenced custody. The increase in daily head counts results in a significant impact on operating and maintenance costs, annual life cycle capital costs, and the cost of constructing or expanding correctional facilities.
PBO has used two approaches to estimate the impact of Bill C-25, one being a simple financial model and the second being a probabilistic simulation model. The PBO's efforts also involved an independent peer review panel comprising domain experts across corrections, justice, facility and capital management, and statistics and financial modelling.
Using statistical data for fiscal year 2007-08 as the sample case, the PBO estimated the impact on the federal corrections system had Bill been enacted in fiscal year 2007-08.
About 8,600 inmates were admitted to federally sentenced custody and spent an average of about 560 days in custody (1.5 years) prior to being sent on parole, community supervision, statutory release, etc. These inmates had already spent on average about 160 days in remanded custody prior to entering federal sentenced custody.
Bill , if enacted in fiscal year 2007-08, would have added about 160 days to the average stay, increasing it to about 720 days (close to 2 years); and this would have resulted in an average increase of about 3,800 inmates.
Based on CSC's estimates reports to Parliament, the average annual operation and maintenance (O&M) cost per inmate in federal custody amounted to $147,000.
Therefore, Bill would have resulted in an extra $620 million per year in O&M and capital expenditure assuming a status-quo occupancy ratio of 90%.
Given that CSC had only about 14,800 cells to house federal inmates, assuming the same status-quo occupancy ratio of 90% would have resulted in the expenditure of $1.8 billion over five years on the construction of new facilities or expansion of existing facilities, or about $360 million per year.
This would have resulted in an increase of $620 million plus $360 million amounting to almost $1 billion in expenditures.
If CSC chose not to expand existing facilities or construct new facilities, this would still require an additional expenditure of $620 million for O&M.
The projected total funding requirements for CSC, federal level, from the second financial model are presented in table 3 in the annex to this statement. It includes the increased funding requirement to implement the Truth in Sentencing Act.
CSC's latest reports on plans and priorities show the department's annual reference level at about $2.5 billion for 2010-11, $2.9 billion for 2011-12, and $3.1 billion for 2012-13. When compared to PBO's projections for the same fiscal years, it appears that there's a gap of about $1 billion annually as to what the PBO projects to be the requirement, and what is shown as CSC's annual reference level.
However, if only the O&M components--operations and maintenance--of PBO's projections are compared with CSC's annual reference level, then they appear to fall in the same ballpark. This could be interpreted to mean that CSC would possibly choose to house--double-bunk--multiple inmates within the same cell and not invest in any new facility constructions or expansions.
Thus, should the Government of Canada choose not to build or expand correctional facilities, the increased funding requirement, based on O&M and recapitalization for the increased inmate population, will nevertheless have to be incurred. It must, however, be noted that the increased annual reference level for CSC does not clarify as to whether or not results of any of the new and/or proposed justice legislation, including are included.
Here are some considerations for parliamentarians.
When parliamentarians debated and subsequently voted on , the financial impact was not made available to senators and members of Parliament. Parliamentarians may wish to request the cost estimate for the Truth in Sentencing Act, including key assumptions, sensitivity analysis, capital budgeting model, methodology, and data sources.
Parliamentarians may wish to request the same type of financial information and analysis as part of their deliberations and debate on subsequent pieces of legislation, which would support the scrutiny of the government's estimates, as well as provide a better understanding of the impacts and risks on the fiscal framework.
With respect to PBO's update on the infrastructure stimulus fund, the third and final item, PBO has provided a performance update in accordance with the third round of claim and progress reports received under the infrastructure stimulus fund as of March 31, 2010. The third round included 3,486 claims for 2,902 different projects representing 74% of all infrastructure stimulus fund projects.
PBO analysis has identified a noticeable delay in project start and end dates against the original projections. This trend highlights potential risks to the infrastructure stimulus fund program outcomes, including projects not being completed at the March 31, 2011 deadline, and a potential lapse of program spending authorities.
PBO developed a high-level forecasting model to predict potential outcomes of the infrastructure stimulus funding program. In the best-case scenario, all projects are expected to be completed by the program deadline. A mid-case baseline scenario results in 936 projects not being completed by deadline, with a potential federal lapse of $293 million. In the worst-case scenario, 1,814 projects would not be completed, and the potential federal lapse would amount to $500 million.
Members of my staff met with Infrastructure Canada officials, who expressed their disagreement with some of the methodology used to forecast these lapsed figures. I welcome these interventions. I believe it creates an environment for debate and discussion.
In the fall of 2010, upon the release of the fourth round of CPR by Infrastructure Canada, PBO will provide a subsequent performance update that will include an update of the forecasted lapse analysis. PBO will also publish findings with our survey of infrastructure stimulus funding project recipients undertaken over the summer.
Here are some considerations for parliamentarians on the third item.
The claims data sets PBO has received from Infrastructure Canada include data inconsistencies that affect the relevance and accuracy of PBO performance analysis. Coupled with the fact that a significant number of projects have not yet submitted progress reports, it is impossible to draw authoritative conclusions about the program performance at this time.
Parliamentary monitoring and program performance would be better served by a more consistent reporting regime with appropriate incentives to ensure timely and accurate progress reporting.
Thank you for time and patience as I work through these three complex issues. I would be pleased to answer questions from committee members.