PACP Committee Report

GOVERNMENT RESPONSE TO
THE STANDING COMMITTEE
ON PUBLIC ACCOUNTS:
“CHAPTER 1, A STUDY OF FEDERAL
TRANSFERS TO PROVINCES
AND TERRITORIES OF THE DECEMBER 2008
REPORT OF THE AUDITOR GENERAL
OF CANADA.”

August 2009

Cooperation and collaboration between the Government of Canada and provincial and territorial governments have been critical to the development of the Canadian federation. Working together, governments have created a network of programs and services covering health, education, social services, infrastructure, justice and a range of economic and social policies designed both to improve the quality of life of Canadians and to enhance the economic performance of the country.

The Government provides significant financial support to provincial and territorial governments to assist them in the provision of these programs and services.  Given the importance of this support, the Government appreciates the efforts of the Standing Committee on Public Accounts to assist Parliamentarians and Canadians in furthering their understanding of the nature and conditionality of Government transfers to provincial and territorial governments, as well as the Office of the Auditor General’s role in auditing these transfers.  The Government also appreciates the efforts of the Standing Committee to strengthen the Government’s accountability to Parliament with respect to transfers. 

As federal and provincial roles and responsibilities have evolved, so too have federal transfer arrangements.  Current federal transfer arrangements reflect a long history of Canadian governments working together towards shared national priorities, and recognise the fact that, in areas of primarily provincial jurisdiction, provincial and territorial governments are best placed to determine program priorities, and design and deliver programs in response to them.  Current transfer arrangements also reflect the fact that, in these areas of responsibility, provincial and territorial governments are accountable directly to their citizens for outcomes achieved and dollars spent.

RECOMMENDATION 1

That the Government of Canada, when announcing transfers to provinces and territories, clearly explain whether there are ongoing conditions for the use of the funds and if not, explain why not.

In announcing new transfers to provincial and territorial governments, or in renewing established ones, the Government makes every effort to ensure that the purpose of transfers is well understood and that the objectives and conditions associated with each transfer are clearly communicated.  For example, at the time of the last renewal of major transfer programs in 2007, a separate budget document entitled “Restoring Fiscal Balance for a Stronger Federation” was tabled that outlined the detailed plan for renewal and provided background on conditions where appropriate.

In designing transfers to provincial and territorial governments, the Government must take into account a number of factors, including the balance between conditionality and public accountability.  Different designs and mechanisms are more appropriately aligned with different objectives and anticipated outcomes.  The level of conditionality attached to each specific transfer, whether implicit or explicit, is a key design feature.  As deemed appropriate for each purpose, these conditions can have varying degrees of specificity and enforceability.  The Government remains accountable to Parliament and to Canadians for its decisions on the design of transfer programs. 

Conditional transfers require the recipients of funding to fulfill certain commitments; there may also be consequences for not meeting those conditions.  In the case of major transfers such as the Canada Health Transfer and the Canada Social Transfer, the purpose and objectives of each transfer are clearly outlined in the legislation, and are supported through political commitments and accords.  In addition, these block grants have limited conditions attached with withholding provisions.  Both are laid out in the enabling legislation and serve to uphold shared national priorities.  For example, the Canada Social Transfer is a block transfer that provides support for social programs, post-secondary education and support for children, and has one condition: that recipient jurisdictions not have a minimum residency requirement.  The Canada Health Transfer supports the provision of health care in the provinces and territories.  Provincial and territorial governments have to meet the conditions in the Canada Health Act, including the five criteria that apply to health services (universality; comprehensiveness; portability; accessibility; and, public administration), as well as provisions relating to extra-billing and user charges. Should a provincial or territorial government fail to meet the conditions of each transfer, deductions can be made from CST and CHT payments under the legislated withholding provisions.

In a mature federation such as Canada, however, the Government can often achieve its objectives without stringent conditionality measures.  Transfer arrangements have evolved, and over time more emphasis has been put on political commitments and public accountability by recipient governments for the use of federal funds.  As such, the Government establishes clear objectives and expected outcomes for each transfer, clearly states the purpose of the transfer, and reports to Parliament on the funds transferred to provincial and territorial governments.  Provincial and territorial governments are then accountable to their citizens and legislatures for outcomes achieved and dollars spent, since they have the responsibility to design and deliver programs in response to those objectives.

The 2003 First Ministers' Accord on Health Care Renewal and the 2004 10-Year Plan to Strengthen Health Care are examples of this public accountability approach, where First Ministers made political commitments to objectives for health care renewal.  The 10-Year Plan, for example, includes an agreement to develop evidence-based benchmarks, comparable indicators, clear targets and transparent reporting to the public on access to health care.  In addition, all governments agreed to report to their residents on health system performance including the elements outlined in the 10-Year Plan.  Other examples of this approach are Equalization and Territorial Formula Financing, two unconditional transfers.  Provincial and territorial governments are able to direct funds to their own priorities to ensure reasonably comparable levels of services at reasonably comparable levels of taxation. 

In the case of trust arrangements, the Government has established clear and precise eligibility conditions that must be met before the trust is established and the funds transferred.  Detailed monitoring and reporting requirements are the responsibility of the recipient partner governments.  

In the case of a transfer of funds by individual federal departments in support of specific program areas, conditions are explicitly stated in agreements between the Government and provincial or territorial governments, and can include financial and compliance audits, progress reports, program evaluation, and/or public acknowledgement of federal support for the program.  For example, through the bilateral Labour Market Agreements between the Government and provincial and territorial governments, the Government provides funds for provincial and territorial labour market programs and services, particularly for low-skilled workers and unemployed individuals who are not eligible for EI benefits.  In exchange for increased flexibility accorded by the agreements, provincial and territorial governments agreed to an accountability framework that encompasses planning, financial reporting and auditing, performance measurement, public reporting of results, program evaluation, participation in a joint committee, and public acknowledgement of federal funding.

Going forward, the Government will continue to ensure that, when announcing transfers to provincial and territorial governments, the design of the program, including conditionality, meets the objectives of the initiative, respects the roles and responsibilities of both orders of government, and is clearly communicated.

RECOMMENDATION 2

That when designing future trust agreements, the Government of Canada ensure that mechanisms are in place to verify results achieved.

The Government has periodically used trust arrangements in partnership with provincial and territorial governments in order to respond to pressures on a one-time basis.  Trusts have been established in support of areas such as housing, public transit, and the reduction of wait times for health services. 

These arrangements enable the Government to make use of available funding and ensure agreement on the objectives of the trust, while at the same time providing provincial and territorial governments with enhanced flexibility, both in how they design programs and provide services and in the timing of investments under the trust.  Trust arrangements are a clear and transparent financial vehicle in these circumstances.  The trust arrangement design, however, cannot include enforceable withholding provisions.  The Government, therefore, established new accountability mechanisms with respect to these vehicles through a political commitment and public accountability approach.

All Canadian governments are committed to responsible fiscal management and to ensuring results for taxpayer dollars.  Governments have accountability instruments that ensure proper monitoring, auditing and reporting on the use of public funds.  In a federation, governments often share these functions.   In the case of trust arrangements, the purpose and objectives of the trust arrangement are clearly articulated by the Government.  Provincial and territorial governments, in accepting to participate in the trust, agree to the trust’s objectives and take on the responsibility for auditing and reporting to the public on the use of those funds. 

To clarify the objectives of each trust arrangement, the Government also develops Operating Principles setting out the intended use of the funds.  These are public documents.  In order to become eligible for the trust, provincial and territorial governments must confirm their understanding of the purpose of the trust, and make public commitments consistent with the Operating Principles on how they will use the funds.  Once they have received the funds, provincial and territorial governments are accountable to their citizens and legislatures on how these funds were spent, and they report publicly on their activities and the results achieved.  This is then subject to scrutiny by provincial and territorial Auditors General.  These reporting arrangements have worked well since the trust mechanism was first used by the Government, and reflect the evolution of federal-provincial fiscal relations from government-to-government reporting to a public accountability approach of reporting directly to citizens. 

Actions to enhance public accountability have been taken through the new Treasury Board Policy on Transfer Payments, and its supporting Directive, which outline the accountability requirements for transfers to other orders of government.  The new Directive requires that appropriate accountability mechanisms are in place to identify the monitoring and reporting of the transfer payment within the recipient government.  The Directive specifies that transfers to other orders of government are to “take into account and, to the greatest extent possible, rely on the accountability regimes of these governments, including audit, evaluation and direct reporting to citizens”.