PACC Committee Meeting

STANDING COMMITTEE ON PUBLIC ACCOUNTS

COMITÉ PERMANENT DES COMPTES PUBLICS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 6, 2001

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[English]

The Chair (Mr. John Williams (St. Albert, Canadian Alliance)): Good afternoon, everybody.

Today's business, pursuant to Standing Order 108(3)(e), is consideration of the public accounts of Canada for the year 2000-2001.

Our witnesses today, from the Office of the Auditor General of Canada, are Ms. Sheila Fraser, the Auditor General of Canada; Mr. John Wiersema, Assistant Auditor General; and Mr. John Hodgins, principal. From the Treasury Board Secretariat we have Mr. Richard Neville, Deputy Comptroller General; Mr. John Morgan, executive director of financial management and accounting policy; and Mr. Mike Joyce, assistant secretary, expenditure and management strategies sector. From the Department of Finance Canada we have Mr. Peter DeVries, director of the fiscal policy division.

Without further ado, we will turn it over to the Auditor General for the opening statement.

Ms. Sheila Fraser (Auditor General of Canada): Thank you, Mr. Chairman. It is a pleasure to appear before you today to discuss the government's financial statements in volume 1 of the 2001 public accounts and my report and observations thereon.

As you mentioned, I am accompanied by Mr. John Wiersema, Assistant Auditor General, and Mr. John Hodgins, the principal responsible for this audit.

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Mr. Chairman, these hearings on the public accounts are extremely important—

The Chair: If I can interrupt for one second, Ms. Fraser, Mr. Shepherd has a point of order.

Mr. Alex Shepherd (Durham, Lib.): Yes, Mr. Chairman.

I was surprised last week to receive a press release put out by this committee. I didn't understand that it was somehow the policy of this committee that every time you make a tabling in the House, you put out a press release. It doesn't seem that there's been any consent among the committee to undertake that task.

The Chair: The press release, Mr. Shepherd, was a process we used to go through every time we tabled a report in the House, and it stopped when we had a change in clerks. I reinstituted it. The press releases were written by the researchers and the clerk, not by myself, basically to bring the press gallery's attention to the fact that a report was available for them to read.

Mr. Alex Shepherd: Even given that, I would have thought that the process would be to seek approval from the committee. You're a creature of the committee.

The Chair: Okay. I can certainly make sure that—

Mr. Alex Shepherd: All future press releases will receive the consent of the committee.

The Chair: Yes. When we process the return, when we vote on the report, we'll circulate the press release at the same time. Is that okay?

Mr. Alex Shepherd: Thank you.

The Chair: Sorry to interrupt.

Ms. Sheila Fraser: Thank you, Mr. Chairman.

As I was saying, these hearings on public accounts are extremely important. They afford an excellent opportunity for the government to explain the key messages the financial statements contain. Committee members will then have an opportunity to understand the financial statements and the story they tell.

[Translation]

I congratulate Mr. Neville, indeed the entire financial community in the government/for the preparation and tabling of the Public Accounts earlier than at any time in the past 30 years. It is important to have the Public Accounts available on a timely basis. It is also important to note that my opinion on the financial statements is without reservation.

Mr. Chairman, I explained in some detail my report and observations at the briefing of this Committee when the 2001 Public Accounts were tabled in Parliament on 27 September 2001.

We have made available to the Committee the text of my remarks at that meeting. Those remarks covered a lot of material, including the following: the growth in the Employment Insurance Account balance and concerns with the 2001 premium rates; concerns with the accounting and accountability for over $7 billion in transfers to foundations; progress on the government's Financial Information Strategy initiative and implementing accrual accounting; concerns with the policy for the preparation of departmental financial statements; and unresolved observations raised in prior years.

I would be pleased to address the Committee's questions on any of these matters. However, there is a lot more material in my report and observations than the Committee may be able to meaningfully cover in one hearing. Therefore, I have decided to focus my opening statement today on the following two issues.

First, I will talk about the government's actions in creating and funding the Canada Foundation for Sustainable Development Technology. This issue, consistent with the observations of a Senate committee, should be of serious concern to the House of Commons.

Second, I will discuss the need, as part of the introduction of accrual accounting in 2002, to revise the government's accounting for transfers to foundations.

[English]

The first issue involves my concern about the transfer of $50 million to the Foundation for Sustainable Development Technology using a general contingencies vote before Parliament had approved either the initiative or the funding. In fact, the government's request for funding this initiative is included in supplementary estimates A, which were tabled in the House of Commons last week.

This committee could play an important role in enhancing the awareness of the House of Commons so situations like the creation and funding of the Foundation for Sustainable Development Technology do not occur again. As I noted in my observations, a Senate committee has already described the situation as “an affront to members of both Houses of Parliament”.

Mr. Chair, the second issue deals with my concern about the growth in the number of foundations being created and the accounting for public money that has been entrusted to them. Over $7 billion has been recorded as expenditures of the government over the years, but very little of that has actually been spent for the purposes intended. Including interest, almost the entire amount sits in the bank accounts and other investments of the foundations.

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I believe the government should in its financial statements be recording expenditures when the amounts are spent for the purpose intended. In the case of some of the foundations, this spending will occur over periods of up to ten years.

The government argues that it has followed its stated accounting policies in recording these transactions. It further states that the Public Sector Accounting Board, also known as (PSAB), is studying this issue, and that it would be premature to make an accounting change until that study is complete.

I agree that the government is following its stated accounting policies. However, I believe that those policies did not contemplate situations in which funds would be transferred to organizations and would not be used by those organizations for the government's ultimate intended purpose within the year of transfer or shortly thereafter.

The government will be introducing accrual-based financial statements this fiscal year. Accrual accounting will present the use of resources in the financial statements rather than the current presentation of cash used to acquire resources. The accounting for the transfers to foundations I am suggesting goes hand in hand with the move to accrual accounting.

While the government should closely monitor PSAB's work in this area, in my view this change would not be inconsistent with that work. PSAB already calls for financial transactions to be presented in accordance with their underlying substance.

[Translation]

In conclusion, Mr. Chairman, I would appreciate this Committee's support in recommending that the government change its accounting for transfers to foundations to ensure that Canada's summary financial statements present economic reality.

Mr. Chairman, the establishment of foundations with little accountability to Parliament for the billions of dollars entrusted to them, the timing and authority for their funding, and the recording of that funding in the government's financial statements are all issues that I think are of serious concern to parliamentarians.

In future reports, I will be reporting on the results of continuing work my Office is conducting on issues related to foundations.

Mr. Chairman, this concludes my opening remarks and we would be pleased to answer any questions that Committee members may have.

[English]

The Chair: Thank you very much, Ms. Fraser.

Now we'll turn to Mr. Neville.

Mr. Neville's presentation is a bit longer this afternoon, and I understand that it has been circulated by the clerk to everybody. Therefore, you are going to take us through this report, are you, Mr. Neville?

Mr. Richard J. Neville (Deputy Comptroller General, Treasury Board Secretariat): It will be my pleasure, Mr. Chairman.

[Translation]

Thank you, Mr. Chairman.

I am very pleased to discuss with you and members of this Committee the 2001 Public Accounts of Canada. With me is Mr. Mike Joyce, Assistant Secretary, Expenditure and Management Secretaries Sector, Treasury Board Secretariat; Mr. John Morgan, Executive Director, Financial Management and Accounting Policy Directorate, Treasury Board Secretariat; and, Mr. Peter DeVries, Director, Fiscal Policy Division, Department of Finance.

We have prepared for this Committee a presentation covering a number of areas that both we and the Auditor General believe are of importance to Parliament.

Mr. Chairman, we are very pleased that you support this approach and trust that both you and Committee members will find it informative. We would certainly welcome any feedback you have on this afterwards.

Mr. Chairman, on slide 2 we provide an overview of the presentation. This revolves around three broad themes.

The first will highlight some of the key financial results.

The second reviews the Observations made by the auditor General and provides you with our perspective our perspective on these Observations.

Mr. Chairman, I will do everything I can to be objective and try not to be too emotional during this part of the presentation.

The third theme...

[English]

The Chair: We wouldn't want you to become emotional.

[Translation]

Mr. Richard Neville: I will do everything I can, Mr. Chairman.

[English]

A voice: This isn't accounting, a meeting on accounting numbers, you know.

[Translation]

Mr. Richard Neville: I assure you.

The third theme: we will review some of the planned changes to take place under the move to full accrual accounting, what they mean and how they will impact the Public Accounts of the future as they are now foreseen.

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Slide 3 provides an outline of various types of financial results we would like to deal with. The following three slides relate to revenues and expenses along with the associated annual surplus and accumulated deficit.

The last two deal with interest-bearing debt as well as providing a few financial indicators relative to the economy that are, if I may say so, are very positive.

[English]

Slide 4 provides an overall summary of our revenues and expenditures over a three-year period, along with the annual surpluses and the accumulated deficit. Revenue and expenditure numbers are presented here on a gross basis. Reporting on a net basis is also presented in the public accounts and is of importance for budget and parliamentary authority purposes.

I'd like to focus specifically on the financial results in this slide. Look at the first set of data, under “Revenues”, “Tax”, and “Non-Tax”. If you look at the tax line, I think it's important to note that from 1998 to 1999 there was $155.8 billion of tax received. That increased by 6.4% to $165.7 billion in 1999-2000, and for 2000-2001 there's been another increase of 7.9% to $178.8 billion. There's a moderate increase in the area of non-tax revenues.

For expenditures, under “Transfers”—that's transfers to provinces and to individuals—in 1998-1999 there was $87 billion transferred. That decreased by 2.5% in 1999-2000 to $84.8 billion, and then there was an increase of 8.6% in 2000-2001 to $92.1 billion.

This slide highlights the growth in the annual surplus over the last three years as well as the resulting drop in the accumulated deficit. You can see for the surplus that in 1998-1999 there was a $2.9 billion surplus, moving to $12.3 billion in 1999-2000 and to a $17.1 billion surplus in 2000-2001.

The accumulated deficit is automatically adjusted by the amount of the surplus or deficit for the year. This is a bookkeeping entry and does not involve cash. If you look at the closing balance for the accumulated deficit, it goes from $576.8 billion in 1998-1999 to where we are today in 2000-2001, $547.4 billion.

Slide 5 provides more details on gross revenues. As you can see, relative to total revenues, the split between tax and non-tax revenues over the last three years has remained constant at 93% and 7% respectively. As a percentage of total revenues, personal income taxes have remained relatively constant while corporate taxes have increased slightly and employment insurance premiums have declined. In dollar terms, tax revenues have increased by about $23 billion over the last three years, from $155.8 billion to $178.8 billion, or by an increase of approximately 15%.

Non-tax revenues have also remained constant as a percentage of total revenues. Return on investments consists of interest from loans and of the profits from enterprise crown corporations, such as the Bank of Canada and the Canada Mortgage and Housing Corporation. This also includes the foreign exchange account.

Other non-tax revenues include sales of licences and privileges as well as revenues from consolidated crown corporations. The Industry Canada auction of radio spectrum licences for personal communication services raised $1.5 billion last year. Now, this has been recorded as deferred revenue and will be included in non-tax revenue in equal amounts of $150 million over the 10-year life of the licences.

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The sixth slide provides details on major expenditure categories. The split between transfer payments, other program expenditures, and interest has remained almost constant over the three years relative to total expenditures. And within transfer payments, the split between major transfer programs to persons roughly equals the sum of transfers to provinces and other organizations and individuals. Other transfers to persons of $11.2 billion include the child tax credit, the GST credit, and the fuel rebate program. Transfers to provinces include the Canada health and social transfer and fiscal arrangements. Other transfers include a variety of transfers to individuals and outside organizations, including not-for-profit organizations, such as foundations.

Departmental program spending increased about $1.5 billion last year. Defence declined $500 million subsequent to one-time funding to meet international commitments. Other departments increased about $2 billion due to the resumption of collective bargaining after a number of years of wage freezes, as well as increased operating and capital maintenance costs.

Interest expense increased slightly over the three-year period, but fell as a percentage of overall expenditures. It is comprised of interest of $31 billion on capital market borrowings, as well as interest of $11 billion on employee pension liabilities.

The next slide provides information on our interest-bearing debt. Interest-bearing debt has declined about $6 billion over the three-year period. However, you will note that while actual capital market borrowings have declined $14 billion, this has been partially offset by a $7-billion increase in public sector pension liabilities over the same period.

As a result of pension reform, our employee pension plans are now fully funded for all service after April 1, 2000. Therefore, this pension liability will not increase at the same rate it would have otherwise, and will decline over the longer term.

Approximately $2.7 billion relating to pension service last year was funded and transferred to the new Pension Plan Investment Board that is managing employee pension plan assets.

The percentage of our debt held in foreign currencies has remained relatively stable over the three-year period, and the amount of our debt held by non-residents has declined to 20.8%, which is the lowest ratio since 1988.

The total cash generated from operations amounted to over $20 billion last year. This was used to pay down capital market borrowings and to manage our foreign exchange activities. Over the same period, our ending cash balance increased from $4.9 billion to $15.6 billion. There was a slight increase in the average interest rate on our interest-bearing debt. This rate is influenced by a variety of factors, including market interest rate fluctuations, as well as the mix and amount of long- and short-term borrowings.

The next slide highlights a few financial indicators of interest. The net debt-to-GDP ratio now stands at 51.8%, down about 19 percentage points since its peak of 70.7% in 1996. This is a very positive trend. Net revenue has remained constant relative to GDP, at about 17%. The last indicators illustrate that for every dollar collected in revenues, less is now going toward interest on our debt. Only 21.9% of revenue is now servicing the debt, down from 24.7% just a few years ago.

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Let us not lose sight of the fact that when you have total expenditures at 100%, that is equal to your revenues; hence, there is no surplus or deficit. As the total expenditure decreases as a percentage, your surplus increases accordingly.

[Translation]

Mr. Chairman, I would now like to address the Observations of the Auditor Genera contained within the Public Accounts. There were four broad observations made and I would like to address each one individually.

First observation: the lack of compliance on the part of the government with the Employment Insurance Act.

Second Observation: the accountability and governance arrangements and second, the accounting for transfers.

Third Observation: the Canada Foundation for Sustainable Development Technology in terms of how it was created and second how it was funded.

Fourth observation: the Financial Information Strategy and Full Accrual Accounting regarding first the policy implementation and second departmental financial statements.

Slide 10 refers to the Observation on setting employment insurance rates. The Auditor General has been unable to come to a conclusion as to whether the intent of the Employment Insurance Act has been respected insetting insurance premium rates. The fact that the Auditor General can't come to a conclusion highlight

The Commissioners, representing labour, business and the Government, have followed the criteria set out in the Employment Insurance Act and have provided the Auditor General with their rationale. It is the Auditor General's view that the rationale was inadequate.

Nevertheless, the Government has recognized the difficulty in interpreting and applying the criteria as set forth in the Employment Insurance Act and last year suspended this section of the Act pending a review and consultations with various stakeholders in this matter.

On slide 11 it is noted that in 1999 the previous Auditor General expressed concern about the accountability and governance arrangements surrounding foundations. The current Auditor General is undertaking a review of progress in this area and has noted that at least nine foundations have been created since 1997. Three of the foundations identified by the Auditor General were created directly by federal legislation. The accountability and governance arrangements relating to these foundations were reviewed debated and approved by Parliament. The other six foundations were created by other organizations or individuals. The funding agreements with these organizations were approved by the Treasury Board and undertaken in accordance with existing legislative authorities.

We have made significant progress in improving the governance and accountability arrangements with foundations. The Auditor General has recognized the comprehensive funding agreements that have been put in place. She has also acknowledged this progress within the Canada Foundation for Sustainable Development Technology Act.

In further response to the Auditor General's 1999 concerns and the recommendations of this Committee, the Treasury Board Secretariat is finalizing a new Policy on Alternative Service Delivery to strengthen the management board role of Treasury Board; to improve reporting to Parliament on all forms of alternative service delivery and to ensure the public service learns from various forms of alternative service delivery.

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As outlined on slide 12 the Auditor General does not agree with the accounting policies the Government follows in accounting for foundations and would like the Government to change its policies.

The funding for these foundations responds to long term policy objectives such as for research, innovation, health and the environment.

Announcements for these initiatives are made once it is determined that resources are available. This can and has occurred at any time during the year and is not a year-end accounting exercise.

In many cases the funds are advanced during the year. To the extent that they are not and the criteria for accounting recognition are met, the Government respects Canadian accounting standards and recognizes these as liabilities at year-end.

These criteria were reiterated by the previous Auditor General in the 1999 Public Accounts and the Government has respected these criteria. Because these organizations operate at arm's length from the Government and are beyond its direct control, they are considered under accounting standards to be outside the Government reporting entity for financial statement purposes.

Other jurisdictions in Canada have interpreted these standards in the same manner. The Canadian Institute of Chartered Accountants has recognized that its current standards allow for considerable judgement in their application. A review of these standards is currently underway with the active participation of federal and provincial representatives.

This was the recommendation of the previous Auditor General. Any change in our policy would presume the outcome of this review. We believe a change at this time is inappropriate and are surprised the Auditor General would recommend such action.

[English]

Mr. Chairman, the Canada Foundation for Sustainable Development Technology, noted on slide 13, responds to a significant environmental climate change priority addressing the Kyoto protocol. There has been considerable confusion on how this foundation was created and the funding authorities that have been used. I would like to clarify some of the facts regarding this foundation and demonstrate to you that the process followed and the funding authorities used definitely respected all parliamentary authorities and practices.

Please let me begin, Mr. Chairman, by stating that the Minister of Finance announced this initiative in the February 2000 budget, not the 2001 budget, and provided funding for it within the 2000-2001 fiscal framework. Given the consultative process followed for the budget and the provision of funds for the upcoming year, this was hardly a year-end spending initiative. That's the first point.

A year after announcing this initiative, the government was able to sign a funding agreement with a not-for-profit organization. Mr. Chairman, the legislative authority to enter into this agreement already existed under the Energy Efficiency Act and the Department of the Environment Act, and it was not dependent on the passage of Bill C-4. Indeed, the requirement for all such agreements to be reviewed by the Treasury Board ensures that such authorities are all in place. That's the second point.

As I have noted earlier, there are different ways to undertake initiatives through foundations. One is by Parliament through direct legislation, such as the Canada Foundation for Innovation. The other, more common way is through existing organizations created by others, such as Genome Canada, created by individuals, and the Green Municipal Investment Fund, created by other public sector bodies. What made Bill C-4, the Canada Foundation for Sustainable Development Technology Act, unique was that it provided for both options. That's the third point.

Bill C-4 provided for the not-for-profit corporation to undertake the work of the legislatively created foundation. The bill, through its review, debate, and approval, enabled Parliament to directly determine the mandate, governance, and accountability arrangements for the foundation. That's the fourth point. The future tabling of the foundation's annual report in Parliament was one such outcome of the passage of the bill.

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Slide 14 addresses the funding authorities used for this foundation. The Auditor General noted that the payments followed an acceptable legal interpretation of parliamentary authorities. Mr. Chairman, I'd like to add that not only was this an accepted legal interpretation, but the use of the government contingencies vote, Treasury Board vote 5, to fund new grants or increases to existing grants has been an accepted parliamentary practice for decades. I am therefore surprised that the Auditor General would characterize this practice as unusual.

This vote provides the government with very limited funding authority. By using this as a temporary funding authority, the Treasury Board uses the vote in a much more restrictive manner than that authorized by Parliament and by what has been used under the British system. Only rarely—I repeat, only rarely—has the vote been used for permanent transfers without returning to Parliament for further parliamentary authority.

The vote is replaced by Parliament upon the approval of supplementary estimates. Full disclosure of the use of the vote is made in the supplementary estimates. Indeed, Mr. Chairman, the current reporting and disclosure follows practices adopted in response to recommendations of previous auditors general and Parliament.

The supplementary estimates recently tabled in Parliament provide full disclosure of the use of TB vote 5 for two separate grant payments of $25 million each. As well, these are clearly listed under the votes of the two concerned departments. Mr. Chairman, had the temporary access to Treasury Board vote 5 not been sought and approved by the Treasury Board, the funding for this initiative would have been delayed until the approval of a supplementary estimate almost two years after the initiative was announced. The $50 million advance enabled the government to honour its liability to the foundation and allowed work to start on this priority.

Slide 15 relates to the implementation of the financial information strategy and full accrual accounting. On April 1, 2001, we were successful in implementing the systems infrastructure to support the financial information strategy and full accrual accounting across government. Considerable effort has gone into the identification and quantification of all our capital assets and certain receivables and liabilities that are currently fully booked. We are making good progress on this initiative, but considerable work remains to be done, including the review of all of these changes by the Auditor General.

Mr. Chairman, I'd like to underline the fact that we have been working very closely with the Office of the Auditor General, and we certainly wish to continue to do so. We will take advice from that office on this particular initiative.

We are also making progress in the development of departmental financial statements, and some agencies are already producing full accrual financial statements. Because there are no explicit Canadian standards for departmental statements, we have had to adapt those applicable to the statements of senior levels of government. We are continuing to assist departments in developing their financial statements. As the initial implementation of the financial information strategy stabilizes, we'll further devolve to departments some of the central allowances that are not subject to appropriations.

Mr. Chairman, I'd now like to address the third and final theme, that of the impact of full accrual accounting on the public accounts of the future. Slide 16 identifies the questions I propose to address.

To start, I'd like to say a few words about accrual accounting itself, as noted on slide 17. Accrual accounting is a way of measuring and reporting activities based upon economic events and in accordance with objective accounting standards. It is more sophisticated than cash accounting and involves considerable judgment.

There are many different forms of accounting. Many developing countries operate at one end of a continuum and use cash accounting. Many developed countries, including Canada, have moved or are moving to the other end of the continuum to full accrual accounting.

The biggest change under full accrual accounting is the recognition of capital assets, such as buildings, as an expense when they are used or depreciated, rather than when they are acquired. This enables a much better measurement of the results achieved with the resources consumed to achieve those results. This is the method of accounting and reporting followed by the private sector.

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The government currently follows modified accrual accounting for its financial statements. With the move to full accrual accounting, capital assets will be expensed when used, tax revenues will be accrued in the period to which they relate, and certain liabilities not currently fully booked, such as environmental liabilities, will be accrued.

In accordance with Canadian standards, any change in accounting policy is applied retroactively, and as such requires a restatement of opening balances—in our case, the accumulated deficit.

In future, the net public debt and the accumulated deficit will no longer equal each other, as they currently do. Under full accrual accounting, the annual results will be measured as the difference between revenues and expenses, not the difference between revenues and expenditures.

It should be emphasized that at this time the implementation of full accrual accounting will have no impact on appropriations—the authority to spend from the consolidated revenue fund. Appropriations are focused on the short term and are cash-based, whereas full accrual accounting is focused on the long term and is more economically based.

[Translation]

Slide 19 highlights the direction of the anticipated impacts of the accounting policy changes on the calculation of net debt and the accumulated deficit.

As you can see, the various changes will have different impacts on the two measures. It also highlights that the difference between the tow measures will be represented by what are called non-financial assets, which include capital assets and prepayments.

As a final point it is worthwhile to note that accounting policy changes can occur at various times. In some cases they respond to the adoption of existing standards. In other cases they involve the adoption of new standards issued by professional standard setters.

Flexibility is provided in the timing of their implementation in recognition for the effort required to make these changes and the organizational state of readiness. We have made a variety of accounting policy changes over the years. With the support of the Auditor General, the implementation of future changes will respond to the existence of clear standards set by the Canadian Institute of Chartered Accountants as well as our state of readiness to implement these changes.

As noted on slide 20 and those that follow, the implementation of full accrual accounting will impact the Public Accounts of the future in a number of ways. The financial statements and related notes will change to report the new assets and liabilities and way of measuring the annual surplus or deficit.

Canadian standards have not yet been finalized in this area and as such we are awaiting these before finalizing our approach. Additional details will be provided in the unaudited back sections of Volume 1. This will include information on the various types of capital assets owned by the federal government.

And finally, the summary tables in Volume 2 Part 1 will need to be modified. Because the cash-based method of accounting for appropriations is different than the modified accrual basis of accounting used in the government's financial statements, these tables provide reconciliation.

A similar reconciliation will be required with the implementation of full accrual accounting for the financial statements.

[English]

In conclusion, I trust that this presentation has provided members of the committee with a summary of the 2001 financial results; responses to observations of the Auditor General on Public Accounts of Canada 2001, without being too emotional; and an orientation on some of the changes being made under full accrual accounting.

I hope you found this helpful, and I will welcome any feedback or questions you might have at this time.

The Chair: Thank you, Mr. Neville. You were able to contain yourself quite well, I found.

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Mr. Richard Neville: Thank you.

The Chair: The copy of the deck you have just explained will be deposited with the clerk, for anyone who would like to have a copy at any time.

Now we'll turn to questions, and I'm sure there is a multitude, based on that long and complex presentation. We'll start with Mr. Mayfield for eight minutes, please.

Mr. Philip Mayfield (Cariboo—Chilcotin, Canadian Alliance): Thank you.

First of all, I had a rather long day yesterday at meetings, and perhaps that's the reason I had a little trouble comprehending the presentation. But I don't think that's entirely the reason. I'm wondering why we were given a batch of slides to sort through, when we could have been reading along with you. I find that an easier presentation to comprehend than what we've had here today.

I must say that with the amount of material you've given here, I'm not quite sure how to condense it in such a way as to become engaged in a meaningful conversation with you about this.

I have some concerns about issues the Auditor General has raised, but perhaps the Auditor General would be able to make a response to your statement here. In particular, you mentioned that the Auditor General could not come to conclusions regarding Employment Insurance. There's also the significant progress that has been made since 1999 that you referred to in slide 11.

I'm wondering, Mrs. Fraser, if you could perhaps take that as your cue to lead into this and give us a response to what we have just heard today.

Ms. Sheila Fraser: Thank you, Mr. Chair. I would very much appreciate that opportunity.

First of all, I would like to commend Mr. Neville and his group for presenting the financial information in the way they have. I think this is the first time officials from government have come and gone through the financial statements, and it is a worthwhile exercise. I'd also like to commend him on informing the committee of the significant changes that will be coming in 2002. It is very useful information he has presented.

I have a couple of comments to make on his comments. First, on the accountability arrangement, it is Mr. Neville's belief that significant progress has been made. We have not done any audit work that has been published yet on accountability arrangements, since the 1999 work we did. An audit is underway, which we will be reporting on next spring. So in our observations we have made no reference to any progress, if any, that has been made since 1999, except for specific issues we found in the Canada Foundation for Sustainable Development Technology.

On EI, the Employment Insurance Act calls for the rate to be set to provide stability of the rate, but also to ensure there is sufficient revenue—and the term is “sufficient revenue”—over a business cycle. When we asked the commission how they had determined the rate, we got a great deal of documentation about stability of rate. We did not have any discussion about what was sufficient revenue over a cycle.

The rate that was determined was higher than the maximum rate the chief actuary of HRDC felt was sufficient, and we received no explanation for that difference. As we mentioned in our comments, the chief actuary indicated that a reserve of surplus in the account of somewhere around $10 billion to $15 billion would be sufficient to meet the requirements of the act, and the surplus is now $36 billion. We were trying to find some justification for that difference. We were not given a justification, so that's why we've raised that point.

I'd also like to make another comment about the accounting for the foundations. I realize this becomes very technical very quickly, but Mr. Neville has raised the issue of whether the foundations are at arm's length, which in effect excludes them from the government's financial statement.

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My predecessor has raised questions on that issue for several years. We comment on it, but we are not taking exception with that accounting policy. It is under review by the public sector accounting board, and we will wait for the deliberations of that body and the standard they will come out with.

I am bringing forward to this committee the fact that the government is recording as an expense amounts that are being transferred to foundations and are in bank accounts. As we move to accrual accounting, which Mr. Neville just explained, and the actual use of money, it is appropriate for the expense to actually be recorded when the money is given out to the intended recipient, so it is spent on innovation projects or given in bursaries to students. But when the money actually flows through for the purpose intended, that's when the expense should be recorded, and not when the money is transferred to a foundation.

On the last point, Mr. Neville could not understand why we found it unusual, in the transactions around the Foundation for Sustainable Development Technology, that the mechanism of a private corporation was used while the bill was in the House being deliberated. A corporation was incorporated very shortly before a funding agreement was signed, shortly before year end, and $50 million was transferred out. We got no explanation for the urgency or need for that money to be transferred to that foundation so quickly. That is why we found that particular transaction unusual.

I hope that has helped.

Mr. Philip Mayfield: Thank you.

I'd like to ask Mr. Neville a question. We're talking about a couple—

Mr. Richard Neville: Mr. Chairman, could I respond to the comments raised by the Auditor General?

The Chair: Do you want a response, Mr. Mayfield?

Mr. Philip Mayfield: How much time do I have left?

The Chair: You have a minute and a half.

Mr. Philip Mayfield: Go ahead. I'll get you next time.

The Chair: By the way, I'd like to point out that it is 4:30 already. We were late getting started because of the vote, so we may not be able to get everybody included today.

Mr. Philip Mayfield: Do you want a vote on that?

The Chair: There was a vote before.

Mr. Richard Neville: I'm trying to be helpful. I appreciate your comments. It is the first time we've shown this amount of information.

Mr. Philip Mayfield: I appreciate that, but it's a lot of information.

Mr. Richard Neville: We thought it would be beneficial, so you would have a better understanding of the financial statements and the content of the public accounts, and the observations raised by the Auditor General. But we will take those comments under advisement and try to improve on what we've already provided. We really certainly appreciate what you've shared with us.

In terms of some of the specific observations raised by the Auditor General, on the accountability arrangements there certainly has been progress. We had reservations a few years back in the financial statements—qualifications, to be specific. We do not have a qualification this year. So in that context we have tried to work with the Office of the Auditor General to improve on our approach.

On accounting for the foundations, we could spend a significant amount of time. I will try to be brief. We are following the Canadian Institute of Chartered Accountants Public Sector Accounting and Auditing Board standards. There's room for interpretation, there's no question about that, hence the CICA has undertaken a study to look at a more definitive way of determining the standards. In that context, we would obviously like to wait for the results of that study.

On the CFSDT transactions, we can probably discuss this at length, but we feel due process was followed. There were the legalities in place for the payments to have been made through the Canada Corporations Act, and then through a submission to the Treasury Board, which allowed us to use the TB vote 5. That in fact will be replenished through the supplementary estimates. So in that context, we are certainly of the view that the legalities have been respected.

Thank you.

The Chair: Thank you, Mr. Mayfield.

My apologies that this has taken eight or nine minutes extra.

[Translation]

Mr. Desrochers, Please, you have eight minutes.

Mr. Odina Desrochers (Lotbinière-L'Érable, BQ): Thank you, Mr. Chairman.

I also find that the numbers are fairly impressive. I have made a quick calculation in an area that interests me greatly, that of contributions to employment insurance. In 1998, they were of $19.4 billion, in 1999, of $18.5 billion and in 2000-2001, of $18.7 billion.

• 1630

In terms of expenditures, we are told that employment insurance cost $11.9 billion in 1998-99; in 1999-2000, $11.3 billion; in 2000-2001, $11.4 billion. By quick calculation, each year the Government has a $7 billion dollar maneuvering margin. What have you done with the surpluses in contributions to employment insurance, Mr. Neville?

Mr. Richard Neville: According to the Government's accounting standards, with which the Auditor General completely agrees with, this fund is part of the Government's Consolidated Revenue Fund. In that context we calculate the revenues as general revenues and we consider the expenses as general ones, and the difference is in the Consolidated Fund, which is available to the government for any other expenditure.

It is a fund that we present in the Public Accounts as a separate account for presentation purposes, but you have to understand that it is part of the whole and that the Auditor General entirely agrees that this is the way the Fund must be accounted for. Obviously the surpluses are part of the whole. On the other hand, if there were a deficit, it would have to be paid from general expenses.

Mr. DeVries may have a few words to say on this subject.

Mr. Odina Desrochers: Do you pay the debt with the contributions?

I will have another question to ask you later because the $7 billion do appear rater quickly. I will let Mr. DeVries make his comments.

[English]

Mr. Peter DeVries (Director, Fiscal Policy Division, Department of Finance): Mr. Chairman, as Mr. Neville indicated, because the employment insurance program is fully consolidated with the accounts of Canada, if the moneys are not required in a certain year to fund EI benefits, then they would go for other general government purposes. In that case, they could result in a higher surplus than we otherwise would have had, or be used to fund other types of expenditures. That is according to the generally accepted accounting policies. As the Auditor General has said in the past, the EI account, from a financial statements point of view, is a tracking account only.

[Translation]

Mr. Odina Desrochers: Still in this avalanche of numbers, Mr. Chairman, I have also looked at the overall income and expenditures. In 1998-99, the income was $167 billion and the expenses $164 billion. If we figure in the $7 billion from employment insurance, that means that if you had not used employment insurance, the Canadian government would have had a deficit. In 1999-2000, income was $78 billion and expenditures were $165 billion. There was therefore a surplus of $23 billion, but there are $7 billion from employment insurance.

My question is as follows. I understand that everything goes into a consolidated fund, but are employment contributions really used to pay a debt? That would mean that employees and employers are the ones paying it.

In 1998-1999—you cannot get around this statement—if you had not had the surplus from employment insurance, you would not have had a surplus in your financial statements.

[English]

Mr. Richard Neville: Mr. DeVries.

Mr. Peter DeVries: In this case here, yes, in those years there were excess revenues collected vis-à-vis the program costs, so they did positively affect the government's overall financial balance.

There have, however, been other cases when the revenues have not matched; in fact, they fell quite a bit below the program costs. In those years, it was the government then that had to go out and borrow the money in order to finance the shortfall.

[Translation]

Mr. Odina Desrochers: Mr. Chairman, I will continue with other observations made by the Auditor General about these famous foundations. You say we have legislated regarding three of the nine, and that six go to organizations and the private sector.

I am worried about the way the federal government spends money that way, especially in the case of the Canada Foundation for Sustainable Development Technology. We authorized $50 billion even before the creation of the Foundation was authorized. If you give money to foundations like that, how can you ensure that it is well spent afterwards by the foundations that receive it?

• 1635

We get the impression that this multiplication of foundations is a way for the federal government to give grants to them and make it easier for it to hide certain operations, if I may say so.

Mr. Richard Neville: Mr. Chairman, it goes without saying that there are agreements before we forward money to a foundation. If it is based on a bill, that is what determines how the money sill be spent. In that context, there is a debate. There are a lot of discussions and the bill dictates how the foundations should act.

When there is no legislation, there are very specific agreements and we consider financial management aspects to ensure that expenses are well defined and follow accounting standards. IN the same sense, we also ask that annual reports be presented to Parliament to ensure an adequate follow-up.

Mr. Odina Desrochers: In that case, what follow-up mechanisms have you foreseen for the foundation?

Mr. Richard Neville: That depends on the foundation. We would have to look at each agreement to determine the specific criteria.

Mr. Odina Desrochers: In that case, do they become periodic annual audits? Can you intervene at any time if you know that a specific foundation is having certain difficulties, or are you bound by specific schedules?

Mr. Richard Neville: Since these are individual agreements, it depends on the agreement. However, there are provisions in case there are financial problems to determine the distribution of funds. In that context, that demonstrates that there is adequate financial management.

Mr. Odina Desrochers: Where do the provisions come from? Your office?

Mr. Richard Neville: Yes, from the government. In that context, there are a lot of discussions and each agreement goes through Treasury Board.

Mr. Odina Desrochers: And this follow-up you are talking about is done annually?

Mr. Richard Neville: No. These are not necessarily annual agreements. There is an agreement at the start, and in that context we transfer money. Once we have transferred it, we rely on a follow-up such as an annual report, for example, to ensure that there is adequate financial management.

Mr. Odina Desrochers: Thank you, sir. Mr. Chairman, thank you very much.

The Chair: Thank you very much, Mr. Desrochers.

[English]

Mr. Shepherd, for eight minutes, please.

Mr. Alex Shepherd: Thank you.

Ms. Fraser, you level some damning comments about the accounting for these foundations, and I'm surprised. If you thought it was so bad, why didn't you qualify the financial statements?

Ms. Sheila Fraser: Mr. Chair, the financial statements have been prepared in accordance with the accounting policies the government has adopted.

My concern is that I'm not sure those accounting policies considered these kinds of transactions when they were made. When we adopted cash-based accounting, I'm not sure the people who wrote those policies thought funding would be given to foundations for ten years of granting.

My real concern is that next year, as we move to accrual accounting and the statements are to present the use of funds rather than cash accounting, the policy should be amended to properly reflect how those funds have been used by the foundations.

Mr. Alex Shepherd: If I understand it, what you're saying is there's nothing particularly wrong with the accounting treatment that's been used here.

Ms. Sheila Fraser: I must admit, I don't like it, but I can't qualify it, because the government's current accounting policy does permit this.

Mr. Alex Shepherd: And you suggested earlier that you would wait for the CICA recommendations.

Ms. Sheila Fraser: On the question of whether these foundations are truly at arm's length from government, there are two issues, if you will. One is, are those foundations really organizations that are independent and at arm's length from government? If not, they should be consolidated into these financial statements. The second question is how transfer payments are accounted for.

• 1640

Mr. Alex Shepherd: Having said that, you say in point 16 that you would appreciate the committee's support in recommending the government change its accounting for transfers to foundations. Why would we be in a position to make a statement like that when you're not?

Ms. Sheila Fraser: No. Next year we go to accrual accounting. As the government moves to accrual accounting next year and wants to present the use of resources, not the transfer of cash....

Mr. Alex Shepherd: But wouldn't it be appropriate for us to wait for the CICA recommendations?

Ms. Sheila Fraser: I would suggest the committee doesn't necessarily have to wait for the CICA recommendations.

Mr. Alex Shepherd: But you're the one who has to sign off, saying there are generally accepted accounting principles that cover this.

Ms. Sheila Fraser: No. If you look at it, it says in accordance with the accounting principles of the government, not in accordance with GAP.

Mr. Alex Shepherd: Okay.

Let's get into the aspect of being at arm's length. You've also made some comments in your writings that the residual moneys in the foundations do not come back to the government.

Ms. Sheila Fraser: That's correct.

Mr. Alex Shepherd: Isn't that tantamount proof the money does not belong to the government, therefore it's appropriate to write if off in the financial statements?

Ms. Sheila Fraser: Well, I think there are two issues. I think there's an accountability issue, and a use-of-public-funds issue, which we can perhaps park for the moment.

The question is, say there's a transfer of $100 million to a foundation this year. Is it appropriate to record that as an expense for innovation or for scholarships when the money is sitting in a bank account and has not gone out to the intended person? Even if the money never comes back, if it's not going to actually go out to the intended recipients for the next ten years, I would think it should be recorded in the financial statements of the government as it goes out to those intended recipients.

Mr. Alex Shepherd: But I could take that all through government accounting. In grants and contributions, what are we going to do at the end of our fiscal year, go out to everybody we've given a grant to and ask them whether they've spent the money? If they haven't spent the money, are we going to bring them back on our financial statements?

Ms. Sheila Fraser: Well, Mr. Chair, I would suggest there are not a lot of grants and contributions that are pre-funded for these periods of time. It is actually government policy that there not be pre-funding of grants and contributions. So I don't think there will be many cases where the grants and contributions are given out for such extended periods of time. That's why we say that generally, the money would be spent in the year of transfer or shortly thereafter. There wouldn't be pre-funding on the scale that has occurred here.

Mr. Alex Shepherd: Your complaint is with vote 5, yet in reality vote 5 has been used in the past for grants and increases to existing grants, has it not?

Ms. Sheila Fraser: I'd ask Mr. Wiersema to answer.

Mr. John Wiersema (Assistant Auditor General, Office of the Auditor General of Canada): If I may, Mr. Chairman, I think our concern with the use of vote 5 in this particular case is that vote 5 was used while Bill C-4, which created the related foundation, was still before Parliament, and it was a new type of transfer program from these two organizations to the newly created organization; it wasn't putting additional money into an existing program. These were new types of transfers to fund sustainable development initiatives. So it's a new type of program as opposed to an existing program. And we also didn't see the particular urgency of getting the $50 million of public moneys out the door before the bill had been considered by Parliament and before the foundation to be created by Bill C-4 had in fact been created by Parliament.

Mr. Alex Shepherd: But we have used that vote for this purpose in the past.

Mr. John Wiersema: The government has used vote 5, the contingencies vote, for grants and contributions. Whether or not it's used it in the circumstances where a bill is currently before Parliament to create a new type of program, as opposed to putting additional funds in an existing program, is what's open for debate.

Mr. Alex Shepherd: Mr. Neville, I have just one question coming out of my background in accounting.

On page 7, we show the accumulated debt, and the transition of that debt from 1999 to 2001. It goes down to $589 billion. The deficit at the same time goes from $576 billion to $547 billion. So the difference between $547 billion and $589 billion is about $57 billion. That's the difference between the accumulated deficit and the outstanding debt. So I'm assuming that $47 billion must be accounted for by some assets.

• 1645

Mr. Richard Neville: Yes. In effect, you would have to take the interest-bearing debt, the $589.2 billion, and add the accounts payable and our other liabilities of approximately $44 billion, which would give you a subtotal of $633 billion. You would subtract from that our assets, you're right, of approximately $85 billion and that will give you the $548 billion. That's your reconciliation. Fair enough?

Mr. Alex Shepherd: Getting back to the foundations, this particular piece of legislation is the Foundation for Sustainable Development Technology. This has been significantly debated in the House of Commons and passed by the House of Commons, and you're recommending that parliamentarians should have greater debate over this.

Ms. Sheila Fraser: No, I'm not recommending, Mr. Chair. If the bill has passed, Parliament has debated it. I find the procedure unusual, and I think that parliamentarians might want to discuss the procedure and how moneys are transferred.

The Senate certainly took great exception to the procedure.

Mr. Alex Shepherd: We sometimes take exception to the Senate.

Some hon. members: Oh, oh.

The Chair: Thank you, Mr. Shepherd.

Okay, Mr. Mayfield, we're on the second round.

Mr. Philip Mayfield: Getting back to the Auditor General's report, it seems to me that there was a review of the EI rates in process. Is that correct? Is that in the report?

The Chair: Do you want the Auditor General to respond?

Mr. Philip Mayfield: No, I'd like Mr. Neville to respond.

Mr. Richard Neville: Fine. I'll defer that to Mr. DeVries.

Mr. Philip Mayfield: Actually, it's very simple. I want to know if it is in process, and I want to know when it's going to be done and if the committee can have a copy of the recommendations. That's my question.

Mr. Peter DeVries: The two departments involved, the Department of Human Resources Development and the Department of Finance, are currently in the process of writing that paper for consultation purposes. We're discussing various forms in which this consultation should take place or could take place. And it is hoped that in the very near future the ministers involved will be able to present the paper and launch this consultation exercise. At that time, everything will be made public.

Mr. Philip Mayfield: Could you send a copy to the committee, then, please?

Mr. Peter DeVries: We can send a copy to the committee, Mr. Chair.

The Chair: When you say quite quickly, have you any idea when, Mr. DeVries? Are we talking about with the budget or after the budget or...?

Mr. Peter DeVries: I'll leave that open to the ministers involved, Mr. Chairman. It's their decision.

The Chair: Soon.

Mr. Philip Mayfield: The other question I have is perhaps a little more philosophical. We're talking about this money being dedicated, included in the expense column, and yet not being used for the purposes intended. It's in the count on these foundations. What is the reason for doing it this way? I haven't figured that out.

Everybody else has to fill out their income tax about when they get the money, where they spend it, how much is left over, in a current fashion. And yet this seems to be a big exception that not only Ms Fraser has taken note of, but also Mr. Desautels, previously. Can you give us a quick explanation of that? Why?

Mr. Richard Neville: I'm not sure I fully understand the question. You're referring to foundations. We've switched over from EI.

Mr. Philip Mayfield: Yes. That's right.

Mr. Richard Neville: Can you perhaps rephrase the question?

Mr. Philip Mayfield: I'd be happy to do that.

I want to know why the money is not being used at the same year or within the same timeframe as it's being shown as spent.

Mr. Richard Neville: Under the current standards that we follow in Canada, the expenditures are recorded, at this point, when the economic event has taken place. The key here is the economic event.

In this instance, the economic event included, obviously, the legal implications of an act of Parliament, if you are going to refer to that kind of a foundation, where we've approved it through Parliament. It has also met the criteria that the payment has been made prior to a specific date and that the agreement has been in place, which allows for that particular payment to be made. So we have to meet some criteria in order to allow that particular transaction to be charged to that particular year.

• 1650

We are very meticulous in making sure the criteria that we have set out and that have been agreed to with the Office of the Auditor General are in fact met before we charge it to that particular year. Once the money goes out, the foundation has its own plan on when it would expend the funds. From our perspective, we are at a point where the economic event has in fact been completed in that fiscal year; hence we charge it to that fiscal year.

The Chair: That was very clear. Right, Mr. Mayfield?

Mr. Philip Mayfield: I still remember somebody describing the government as a 600-pound gorilla that sits where it wants.

The Chair: There you go; that was very clear.

[Translation]

Mr. Desrochers, please, you have four minutes.

Mr. Odina Desrochers: Thank you, Mr. Chairman.

I am coming back to the issue of foundations, Mr. Neville. You were saying that there were three that were created through legislation and that six others were created by regulation.

Could you tell us which three were created by legislation?

Mr. Richard Neville: Give me two minutes and I might be able to give you that information.

[English]

Mr. John Morgan (Executive Director, Financial Management and Accounting Policy, Treasury Board Secretariat): Mr. Chairman, the three foundations created by legislation were the Canada Foundation for Innovation, the Millennium Scholarship Foundation, and the Canada Foundation for Sustainable Development Technology.

[Translation]

Mr. Odina Desrochers: In all three cases, I think that the sums of money were identified as expenses but that these expenses were not incurred in the year they appeared in minister Martin's budget.

[English]

Mr. John Morgan: The actual liabilities were recorded in the financial statements at the point in time when the legislation was authorized for that fiscal year. Agreements were in place. The actual transfer of funds took place in a subsequent year, or would take place in a subsequent year.

[Translation]

Mr. Odina Desrochers: Mr. Neville, what are the deadlines for the three legislated foundations to account to Parliament? Do these foundation have three, four or five year mandates or does the legislation a mechanism for a fairly rigorous follow-up?

Mr. Richard Neville: We are back to the bill, which determines very specifically how we must act. Once again, it varies from foundation to foundation. It is not the same for each one.

Mr. Odina Desrochers: And in these three cases, you don't know how it works.

Mr. Richard Neville: I am not in a position to describe the three foundations.

Mr. Odina Desrochers: You also said, in your comments on employment insurance, that Act C-2 had taken away the Commissioner's right to set the contribution rate. Who will do that now?

[English]

Mr. Peter DeVries: The Minister of Finance has that right for the next two years under Order in Council.

[Translation]

Mr. Odina Desrochers: Based on what criteria will he establish contribution rates?

[English]

Mr. Peter DeVries: In this case it will be criteria determined by the Minister of Finance. It's the Minister of Finance who has the sole authority to set whatever rate he wants to set for these two particular years.

[Translation]

Mr. Odina Desrochers: Will the rates be determined on the basis of the surpluses? There is so much surplus that it would be interesting if the unemployed paid lower rates than employers did. Will the minister of Finance take this reality into account?

[English]

Mr. Peter DeVries: The Minister of Finance will be taking all criteria into account. He will be looking at the provisions under the old EI Act as well as other emerging circumstances and he will be setting the rate for 2002. The rate for 2002 will have to be set fairly shortly.

[Translation]

Mr. Odina Desrochers: Do I still have some time, Mr. Chairman? It's finished?

[English]

The Chair: Thirty seconds.

[Translation]

Mr. Odina Desrochers: When will the Minister of Finance set the new rates? Do you know?

[English]

Mr. Peter DeVries: That hasn't been determined yet, but normally the rate would be set before the first week in December.

[Translation]

Mr. Odina Desrochers: That will coincide with the tabling of the budget, Mr. Chairman.

[English]

The Chair: It may.

• 1655

I have one question, Mr. DeVries. If the Minister of Finance takes all information into consideration, does he take the $36 billion surplus into consideration too?

Mr. Peter DeVries: He would be taking into consideration, Mr. Chairman, the whole rate-setting process as well as any other circumstances that would impact on his overall budget.

The Chair: That would include the $36 billion.

Mr. Bryden, you have four minutes, please.

Mr. John Bryden (Ancaster—Dundas—Flamborough—Aldershot, Lib.): Let me get this straight. There is $7 billion in these foundations, which, if it hadn't been transferred there, would be $7 billion less debt on which we're paying interest. Is this correct?

Mr. Richard Neville: Let me rephrase this.

If we hadn't paid the amounts of money, we would have, in effect, a reduction in the surplus that we have had today, which would reflect in an increase in the surplus that would be in effect a decrease to the accumulated deficit.

Mr. John Bryden: Mr. Chairman, I have to say I do not see the rationale of paying money out to foundations that are gaining interest on this public money, which if it were retained by the government would lessen the charge on the taxpayer in terms of indebtedness. I am totally mystified.

So here's my next question, Mr. Neville: Can we say to these foundations that we want this $7 billion back? Can we take it back from them, put it into general revenue, and keep it in general revenue until such time as they require it?

Mr. Richard Neville: Mr. Chairman, these foundations have been approved by Parliament through legislation, or are subject to comprehensive funding agreements approved in accordance with Treasury Board policies. I therefore....

Mr. John Bryden: So we can do it.

Mr. Richard Neville: Legislation would have to be introduced to change the current act and Treasury Board policies would have to be changed accordingly.

Mr. John Bryden: Mr. Chairman, that's a very fine recommendation, and it should come out of this committee, because I do not see the common sense of money going over to arm's-length foundations for them to gain the interest on it when it's a charge to the taxpayer.

I have another question, if I may, Mr. Chairman. Are the financial indicators going to be changed when we go to full accrual accounting—the debt-to-GDP ratio and all those kinds of things?

Mr. Richard Neville: Well, it could have some impact, depending on transactions.

Mr. John Bryden: Positive or negative.

Mr. Richard Neville: There's a possibility. Yes, there might be some changes to the financial indicators.

Mr. John Bryden: My final question, if I may, Mr. Chairman: Are these foundations outside the Access to Information Act and the Financial Administration Act?

Mr. Richard Neville: I believe they are, Mr. Chairman.

Mr. John Bryden: So we have absolutely no control over this money, $7 billion that's rattling around, gaining interest for other people and not for the taxpayer.

Mr. Richard Neville: Mr. Chairman, we made this point when we said they're not part of the entity and that's why we treat it as an expense, an expenditure. As a result, we are of the view that they should not be treated as part of the entity. This is the point we've been making. Their not being part of the ATI or not subject to any recall strengthens the argument as to the fact that they shouldn't be part of the entity.

Mr. John Bryden: I'm certainly not arguing with the accounting procedures you're talking about. What we have here, though, is a fundamental failure by Parliament, if you will. But we of course as MPs act on the recommendation of the government and sometimes don't study legislation in the depth we perhaps might want to. Clearly this is a case where we have $7 billion out there, sitting in bank accounts of organizations that are not responsible or accountable to the general public, and I'm scandalized.

If we're going to go into a state where we are short of money because of a major recession, the finance minister needs to look very, very hard at this money. If it requires changes in legislation, then let's do it.

Mr. Richard Neville: I just want to remind everyone, Mr. Chairman, that these were approved by Parliament—

Mr. John Bryden: Oh, I agree.

Mr. Richard Neville: —and/or Treasury Board policies. Thank you.

The Chair: It's been known to change its mind, I think.

Mr. John Bryden: I hope.

The Chair: Okay.

[Translation]

Mr. Bertrand, please.

Mr. Robert Bertrand (Pontiac—Gatineau—Labelle, Lib.): Thank you very much, Mr. Chairman. I have a lot of questions.

To come back to the questions on employment insurance quickly, I have made some calculations for this year, 2000-2001. There is a surplus of $7.3 billion in what I assume is called the general fund.

• 1700

Are the sums transferred to the provinces for labour training included in employment insurance or are they accounted for in the transfers to the provinces?

Mr. Richard Neville: Transfer funds to the provinces are accounted for as transfers per se. They are part of the Consolidated Revenue Fund.

Mr. Robert Bertrand: I am talking about the $7.3 billion that are in the account now. Previously, when the federal government was responsible for it, I assume there were monies transferred to the employment insurance account for training.

As you know, labour training has now been transferred to the provinces I don't know if all the provinces have signed an agreement, but I do know that...

Mr. Richard Neville: Many provinces have done so.

Mr. Robert Bertrand: ...many provinces have signed an agreement.

Mr. Richard Neville: Yes.

Mr. Robert Bertrand: Do the funds that are transferred to the provinces for labour training come from the employment insurance account or are they included in the transfers to the provinces?

Mr. Richard Neville: Those funds are accounted for as coming from the employment insurance account. In other words, they come from the employment insurance account. The revenues we receive are part of those amounts from which we transfer the amounts.

Mr. Robert Bertrand: So in those $7.3 billion, the transfer to the provinces for labour has already been deleted.

Mr. Richard Neville: Yes that's right. Agreed?

Mr. Robert Bertrand: Agreed.

[English]

The Chair: Ms. Fraser, did you have something to add here?

[Translation]

Ms. Sheila Fraser: Yes. I don't know if Mr. Bertrand that the Public Accounts indicate—you may not have the document but I can give it to you—that the transfers to the provinces are included in the employment insurance expenditures of about $11 billion.

Mr. Robert Bertrand: Agreed.

Ms. Fraser, you mentioned a while ago that the chief actuary of the Human Resources Development Department had mentioned a certain amount of money to cover our obligations. Unfortunately, I did not make a note of it. Could you repeat it please?

Ms. Sheila Fraser: Yes, Mr. Chairman. The chief actuary estimates that an amount of $10 to $15 billion would be sufficient.

Mr. Robert Bertrand: To cover our obligations?

Ms. Sheila Fraser: To cover the obligations stipulated in the legislation. He said that a surplus of $10 to $15 billion just before the recession would be enough to conform to the employment insurance obligations.

Mr. Robert Bertrand: I'm not very good with numbers. I'm not an accountant like you and my friend, but there is $7.3 billion for this year.

Ms. Sheila Fraser: Yes. The accumulated surplus in the account... I must say that it is an accounting total and not a real surplus in a bank somewhere.

Mr. Robert Bertrand: Yes, but hold on a moment.

Ms. Sheila Fraser: It is $36 billion, which includes the $7 billion for this year, those from last year and so on. It is $36 billion and the actuary says that a maximum of $15 billion would be sufficient.

Mr. Robert Bertrand: Yes, but hold on a moment. That's for three years, but Mr. DeVries said a while ago... As I said, I'm not an accountant but if we look at the situation from 1980 to 2000, if I understand correctly, there was a deficit for many years.

Ms. Sheila Fraser: Yes, but the total for all the years since the beginning of the program gives a surplus of $36 billion.

Mr. Robert Bertrand: That's since 1996, but is it since...

Ms. Sheila Fraser: It's since the very beginning of the account.

Mr. Richard Neville: It's not since 1996-97, but since the 1980s. Calculated from the beginning, on a continuing basis, the account now shows an accounting surplus of $36 billion. Obviously that include this year's surplus of $7.3 billion. Does that help you a little?

Mr. Robert Bertrand: Yes, that helps me a lot, but I would like to come back to it later if possible.

Mr. Richard Neville: Agreed.

[English]

The Chair: Mr. Neville, we have some supplementary estimates before Parliament at this point in time, including $50 million that has already been advanced to the foundation. What are you going to do if Parliament doesn't approve these supplementary estimates? How are you going to get the money back?

• 1705

Mr. Richard Neville: We discussed this possibility. There are at least three options we're aware of.

One option is to go to them and actually ask for the money back, since Parliament has said in this particular instance it's not appropriate to fund this amount of money. So option one is to go back and actually claim the money.

A second option is that nothing would prevent the government from reintroducing this request at a future point in time. So the second option is to get Parliament to approve it through its final supplementary estimates or through other means.

As a third option, we could actually charge the amount to the Treasury Board contingency vote 5 as a permanent charge. As I mentioned earlier, we don't do this as a matter of course. It's not done here very often, as other countries have done, but the regime does allow for us to do it. If we actually wanted to we could charge it as a permanent charge against Treasury Board contingency vote 5.

The Chair: How could you charge it against vote 5, which is a temporary transfer pending parliamentary approval, if Parliament says no to this particular transaction?

And as the Auditor General pointed out, this is not an add-on to an existing program; this is a brand spanking new program and no authority has been given by Parliament as far as spending approvals at this point in time. Therefore, I think you're on dangerous ground to think you can make it a permanent transfer from vote 5.

Mr. Richard Neville: Obviously, we want to get more information, but let's not forget Parliament has voted the amount in Treasury Board vote 5 by way of the estimate process.

The Chair: No, we gave it to the Treasury Board as a contingency. Treasury Board has taken this money and transferred it to the foundation. Parliament didn't say give the money, or transfer it, to the foundation. It hasn't done this, so don't lead us down that road.

Mr. Richard Neville: No, but the vote does allow us to charge specific amounts directly to it in certain circumstances. Again, it would be a legal decision, but you asked what the options are and it's one of them.

The Chair: Yes.

Now, you mentioned you have a very specific agreement with the corporation that became a foundation when Bill C-4 was passed. These are four Canadians. And if I take my money and go down to the store and buy something, then the store has my money—that is it. I have no recourse to getting my money back. I've made a purchase; I have the goods, the store has the money. You have this very specific agreement and you've already admitted you can get your money back if you want to....

Mr. Richard Neville: No, no, I didn't say that.

The Chair: Well, you said if we don't approve it, you can ask for it back.

Mr. Richard Neville: Oh, sorry; yes, we could in the case where it wouldn't be approved by Parliament.

The Chair: That's right, you can ask for your money back. Plus you have by this very specific agreement told these four individuals that they will spend this money according to our wishes, presumably.

Mr. Richard Neville: According to the agreement.

The Chair: According to the agreement.

Mr. Richard Neville: Which later became an act.

The Chair: I know. But the agreement between the corporation, the four individuals, was that you said here is $50 million, but you will spend this according to our direction and only according to our direction and no other way, right?

Mr. Richard Neville: Correct—spending can only be according to what is in the agreement.

The Chair: And are you calling this an arm's-length transaction?

Mr. Richard Neville: We have a number of agreements in place. All our grants and contributions work by way of agreements, and based on those agreements we transfer amounts of funds—

The Chair: But as the Auditor General pointed out, you don't pre-pay. It is therefore this concept of pre-paying the Auditor General has raised, and you're saying it's okay because it's an arm's-length transaction, but you are still totally and absolutely in control of the money: (a) you can get it back if you have to; and (b) even if you don't get it back, it will only be spent according to your specific and direct instructions. Is that correct?

Mr. Richard Neville: Well, certainly if the agreement states the conditions under which the money will be spent, then they have to follow them. In terms of our requirements, they've met those conditions—

The Chair: Of spending according to the way you want it to be spent.

Mr. Richard Neville: That's what's in the agreement. The agreement also has other specific components as to when we would make the payments, so we've met our part of the bargain in signing the agreement.

The Chair: Yes, but you dictated the agreement. You created a corporation, you picked the shareholders and told them they would only be around for a little while because Bill C-4 is going to be passed, hopefully, and at that point in time the corporation will no longer be a corporation.

Mr. Richard Neville: But there are many entities that become corporations as part of the Canada Corporations Act. Once they are incorporated through the act, they are legal entities with which we can transact business.

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The Chair: I appreciate that.

Mr. Shepherd.

Mr. Alex Shepherd: On that vein, what we often hear as a complaint from various sorts of organizations, foundations being one of them, is about the problem of stabilized funding. And to undertake something like sustainable development technologies, it's quite difficult if you're depending on getting money from government on a weekly or a yearly basis. So the question I would have would be isn't this in some ways an attempt—and I guess I'm reading my own thought processes into this—to do away with some of the problems that the lack of sustainable funding has as a consequence on organizations?

Mr. Richard Neville: To a certain extent that's a factor. I think the other factor one shouldn't lose sight of in this particular case for the CFSDT is that it had been many months that had gone by since the announcement was made in the budget, and the government wished to move on this important initiative in terms of environment. Hence decisions were taken to work with the corporation, and it had in fact been incorporated under the Canada Corporations Act. The legislation of the Ministers of Natural Resources and the Environment provided for them to enter into that kind of a transaction.

Mr. Alex Shepherd: To address the other issue, which is had this money been sitting on our books, and it lost the interest or we couldn't pay down on the debt or whatever, the reality is, I'm assuming at least, that these corporations would have the money invested somewhere and that they're earning interest and therefore in a sense it's increasing the of assets they have available to sustain these policies the government's given.

Mr. Richard Neville: That's correct. There's also the aspect that this would help the private sector leverage additional funds in the private sector with colleagues and other entities to increase the amount available.

Mr. Alex Shepherd: In other words, use their investment as a matter of leverage to actually increase the assets they have available.

Mr. Richard Neville: That's correct.

Mr. Alex Shepherd: That's a very good point.

The Chair: Mr. Bryden.

Mr. John Bryden: To follow up on my colleague's remarks, my vision of government involvement in organizations doing work for the government is not that I'm giving them money in order for them to invest it and make money. They are to deliver services. So I don't find myself in agreement with my colleague.

I'll say further, and this is in the form of a question, that when it comes to sustainable funding, or the anticipation of sustainable funding, surely if the government has committed itself to spending a certain amount of money for a foundation, that commitment is promise enough without actually having to transfer the money before that foundation is in a position to actually spend it.

Mr. Richard Neville: I'm not sure that's correct. I believe sometimes a commitment is not sufficient. It depends on the type of commitment. It depends on the documentation that's associated with the commitment, and it depends on the force of the commitment. I think it depends on the commitment.

Mr. John Bryden: Perhaps Ms. Fraser would have a comment there.

Ms. Sheila Fraser: Mr. Chair, I think that Mr. Bryden makes an excellent point, and I am sure that with all the intelligent people who work in government they would find a way to make an agreement that would be an ongoing commitment over several years.

The Chair: I think they've done it before, haven't they?

Mr. Alex Shepherd: Like health care.

Mr. Richard Neville: Mr. Chairman, I'd like to know the response of the Auditor General. If we had such a commitment, would we be able to book it in the year in which we made that commitment?

Ms. Sheila Fraser: No, because the cash hasn't been transferred out.

[Translation]

The Chair: Mr. Bertrand, you may ask a question.

Mr. Robert Bertrand: Mr. Chairman, I would like to go back to the question of employment insurance.

Ms. Fraser, a while ago I asked a question about funds transferred to the provinces for labour training. You told me they were included in the $11.4 billion and you referred to page 3.11 of the Public Accounts.

Ms. Sheila Fraser: But I was going to refer you to pages 4.19 or...

Mr. Robert Bertrand: It may be different in English.

Ms. Sheila Fraser: There is a financial statement...

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Mr. Robert Bertrand: The title of the column is “Employment Insurance Benefits.” In my language, benefits are funds given to individuals.

Ms. Sheila Fraser: What page are you on?

Mr. Robert Bertrand: Page 3.11. I don't have the English version.

Ms. Sheila Fraser: I do.

Mr. Robert Bertrand: What is the heading at the top of the column?

Ms. Sheila Fraser: In English, we say “benefits”, but I can assure you... The financial statements for the employment insurance accounts are on pages 4.23 and those following, and they clearly indicate that the payments to the provinces are included in the $11.4 billion.

Mr. Robert Bertrand: I was a little confused because of what is written...

Ms. Sheila Fraser: I know that the word 'benefits' is perhaps not the best.

Mr. Robert Bertrand: I have a final question, Mr. Chairman.

For the Department of National Defence, we find here an expenditure of $10 billion. I don't know if you can answer my question, but why is it not in the regular budget?

Mr. Richard Neville: It's because it's a significant amount and it's important that we show it differently; that's all. It's the only reason.

Mr. Robert Bertrand: Is it an increase in their budget or is it only for the purchase...?

Mr. Richard Neville: No. It's the amount that was spent for the Department of National Defence.

Mr. Robert Bertrand: Ten billion.

Mr. Richard Neville: Yes. In 2000-2001, Defence spent that amount.

Mr. Robert Bertrand: I don't understand why you put it separately. What is the budget, for example, of the Department of Human Resources Development?

Mr. Richard Neville: It's a lot less, but it depends. It is divided in two: there is an amount for the department itself, which is included with the other expenses and there is the amount for transfers, which are included in the section called 'transfers'.

It's simply because for the Department of National Defence it's an amount for salaries, capital, fixed assets and daily operations. It's so significant that we have always separated it from the others.

Does that help you a little?

Mr. Robert Bertrand: A little.

[English]

The Chair: Mr. Bertrand, do you have another question?

Mr. Robert Bertrand: No. It's okay.

The Chair: Mr. Murphy, please.

Mr. Shawn Murphy (Hillsborough, Lib.): Thank you very much, Mr. Chairman.

I have a couple of questions for you, Mr. Neville. On the agreements that set up the foundations we have, are you confident that if the boards of directors of these foundations defaulted under the agreements between the government and the foundations that were part of the transfer of funds, the government would be able to get the money back?

Mr. Richard Neville: No. Sorry. It's the other way around. I hope I didn't mislead anybody by that. The agreements, I believe in every instance, state that the funds would be distributed to the individuals based on a formula or based on previous allocations, but it would not come back to the government. That's part of the rationale for making it clear that they are in fact outside of the—

Mr. Shawn Murphy: Let's follow this question. Let's assume that the government makes the $50 million contribution to the Canada Foundation for Sustainable Development Technology and they default. They don't do what they're supposed to.

Mr. Richard Neville: Where there's a default in that sense—

Mr. Shawn Murphy: That's what I'm talking about, a default.

Mr. Richard Neville: Sorry. If you want to use the word “default”, there are provisions for recourse, where there was a default.

Mr. Shawn Murphy: That's my question. I may not have worded “default” properly, but if there is a default, is your testimony that there are provisions in these agreements that the money can come back to the government?

Mr. Richard Neville: I want to make sure we're clear on the wording here. Defaults, yes, there is provision for the government to have recourse.

Mr. Shawn Murphy: And the recourse is for the money to come back.

Mr. Richard Neville: Yes.

The Chair: I have one question and then I'm going to wrap things up, because we're coming to a close and I have to leave right at 5:30.

It looks like none of the money has been disbursed at this point in time. It's all in there, plus the interest. And you're saying it can only be disbursed to the recipients, but there haven't been any recipients. So who can get the money?

Mr. Richard Neville: The agreement specifies who the recipients are and as to how it would be paid. Obviously in some cases those foundations have not completed obtaining their full board of directors. Hence, they're not in operation yet. In other cases there's a process of decision-making that has to take place for the funds to be disbursed. But that's within the terms and conditions of the agreement.

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The Chair: Sounds to me like that agreement is not an arm's-length agreement, Mr. Neville.

Ms. Fraser, I'm going to ask you for some closing comments please.

Ms. Sheila Fraser: Thank you, Mr. Chair.

I have found the discussion today quite interesting and useful. I can see that many of the members are concerned by the accountability issues surrounding these foundations. We do have an audit under way by which we'll be reporting next spring on this, so I can say stay tuned. I look forward to further developments in government on the accounting issues regarding these foundations.

The Chair: Thank you very much.

I'd also like to thank Mr. Neville for the hard work that he and his department put into making that presentation. I know it was a little bit different and out of the ordinary, but since we are in essence the audit committee of Parliament, it was felt to be appropriate that presentation be made.

Do you have a quick comment, Mr. Bryden?

Mr. John Bryden: Yes, but it's committee business, Mr. Chairman, so you might release the witnesses.

The Chair: I want to notify you that there will be no meeting on Thursday. That meeting is cancelled. The next meeting will be on November 20, I believe, at which time we'll be dealing with chapter 10, Transport Canada.

Mr. Bryden, do you want to make your comment before I adjourn or after?

Mr. John Bryden: No, before you adjourn.

The Chair: So before we adjourn, Mr. Bryden, you have a comment.

Mr. John Bryden: Yes, Mr. Chairman.

I have two government responses. One is to the sixth report of the standing committee and another is the response to the fifth report of the committee. I'm not satisfied with the government's responses on both of these reports. Do we have a mechanism in this committee to consider the responses of the government to such reports?

The Chair: Yes. If we bring it to the steering committee, we'll get it on the agenda.

Mr. John Bryden: Then I'd like to recommend it, Mr. Chairman. I will bring it up at the next steering committee meeting. Thank you.

The Chair: This meeting stands adjourned at the call of the chair until November 20.