NOVA SCOTIA HOUSE OF ASSEMBLY
Wednesday, January 18, 2012
January 2012 Report of the Auditor General
Printed and Published by Nova Scotia Hansard Reporting Services
Public Accounts Committee
Ms. Diana Whalen, Chairman
Mr. Howard Epstein, Vice-Chairman
Mr. Clarrie MacKinnon
Mr. Gary Ramey
Mr. Mat Whynott
Mr. Brian Skabar
Hon. Keith Colwell
Mr. Chuck Porter
Mr. Allan MacMaster
Mrs. Darlene Henry
Legislative Committee Clerk
Mr. Gordon Hebb
Chief Legislative Counsel
Office of the Auditor General
Mr. Jacques Lapointe, Auditor General
Mr. Alan Horgan, Deputy Auditor General
Ms. Ann McDonald, Assistant Auditor General
Ms. Shelley Creighton, Audit Principal
HALIFAX, WEDNESDAY, JANUARY 18, 2012
STANDING COMMITTEE ON PUBLIC ACCOUNTS
Ms. Diana Whalen
Mr. Howard Epstein
MR. HOWARD EPSTEIN (Chairman): Good morning. As Vice-Chairman of the Public Accounts Committee, I would like to call to order today’s meeting. We are dealing this morning in open session with the Report of the Auditor General to the House of Assembly that was tabled, or deemed tabled, with the Legislature today.
I would like to welcome the Auditor General and we’ll start by having the members of the committee introduce themselves.
[The committee members introduced themselves.]
MR. CHAIRMAN: Thank you very much. Mr. Lapointe, would you care to introduce your staff.
MR. JACQUES LAPOINTE: Certainly. Mr. Chairman, I have with me today Alan Horgan, the Deputy Auditor General; Ann McDonald, Assistant Auditor General and in charge of the financial audit; and Shelley Creighton, the Audit Principal for Financial Audit.
MR. CHAIRMAN: Thank you very much. We have already had an in camera session with you that immediately preceded this so to a certain extent, of course, we are briefed already on this report that we have just seen this morning. However, if you wish to make an introductory statement, I would invite you to do that now, before we start the questioning.
MR. LAPOINTE: Thank you, Mr. Chairman, I will very briefly just mention again that I presented earlier this morning a copy of this January report to the Chief Clerk and since the House is not in session today, the report is deemed to be tabled. It is being distributed to the members of the House now and is also now available to the public.
As I mentioned earlier, this is not our usual report. We’ve provided you today with a new report that we hope to continue providing annually, if it suits you. It’s a specialized report focused on financial issues. It incorporates, in one report, all the work we do on financial auditing during the year. It includes a chapter that discusses our financial audits and reviews, particularly on the revenue estimates, and the consolidated financial statements. A chapter provides the results of an audit we conducted on governance and control frameworks related to the Treasury function. We have chapters on financial indicators, particularly on sustainability; on our reviews of agency external audit opinions and management letters; and our follow-ups on our financial recommendations dating back to 2005.
I mentioned that the staff with me today, Ann and Shelley in particular, are responsible for the work presented in this report. I’m sure we’ll be able to answer any questions you may have. I realize that this is a short time for you to consider what questions you may want to ask us. I understand, too, that the committee is planning to have a further session on this at some point in February, so you’ll have another opportunity to ask us or the department any questions that may come up in your further analysis of this, in a few weeks coming. We’re pleased to answer the committee’s questions.
MR. CHAIRMAN: Thank you. That’s a very high-level and general comment. Did you want to draw our attention to any particular aspects of the contents of the report, before we move to the questioning?
MR. LAPOINTE: I would point out, I guess, that aside from the chapters providing the details on the work we’ve done in the various audits and reviews during the year, the report includes responses from the department. We have mentioned that we have some concerns with the responses we’ve received.
We have also included an introductory chapter in which I do make some introductory comments, basically my commentary on my opinion on the status of long-term debt in this province. I don’t want to get into a lot of detail on the content of the report, I guess, and just leave it to you, whatever questions you may want to ask us about it.
MR. CHAIRMAN: Thank you. I issued the invitation mostly because I was thinking about the audience watching at home, but we’ll move to the questioning.
We’ll move first to the Liberal caucus. The tradition of the committee is that each of the caucuses is initially afforded 20 minutes of questioning time. We’ll start with the Liberal caucus, Ms. Whalen, for the first round of 20 minutes.
MS. DIANA WHALEN: Thank you very much. I wanted, first off, to say thank you for the report this time, Mr. Lapointe, because I realize this is your first time of gathering all of the financial audits that you do into one audit for us. Usually it’s a chapter attached to the back of one of your performance audits.
I know that as members of the committee, we tend to gravitate our questions and our interest towards the departments and programs that you are auditing, and very often the financial information is - maybe not overlooked but it certainly doesn’t get the attention it deserves, so it’s helpful to us to have it all here at one time.
At the same time, many members of the committee are not nearly as well versed in finance as, of course, the auditors are. Some of it is, I guess, not our usual area of expertise. I have got an accounting background and I also find it hard to sometimes go through this, especially in the short period of time we have.
There were a couple of comments you’d made in the beginning session that we had in camera that certainly pointed out areas that we should be looking at and the very first chapter talks about revenue estimates; I guess it is Chapter 2, the first one that was included in the discussion. In looking at revenue estimates, what I took from that was that over the years there has been a disagreement between the Department of Finance and the Auditor General’s Office about consolidating all of the revenue estimates when we get a budget for revenue for the year so that it would be comparable to the actuals at the end of the year that we see in the Public Accounts. Is that correct?
MR. LAPOINTE: Yes, I can ask Ms. McDonald to speak to that one.
MS. WHALEN: Just to see that we’re framing it correctly.
MS. ANN MCDONALD: Yes, that’s right. The revenue estimates are presented on an unconsolidated basis and the financial statements are presented on a consolidated basis. At the end of the year, in preparation for the Public Accounts, there is a reconciliation in the Public Accounts document, which goes from the revenue estimates and reconciles to ultimately the consolidated. It takes, if you will, an unconsolidated position and makes the adjustments to bring it to a consolidated position.
What, I guess, our disagreement has been and why we continue to recommend is that the revenue estimates themselves can be prepared on a consolidated basis. I guess to highlight, it’s not just an area of disagreement. It’s an area, with respect to our opinion, that it has to be qualified because they are not presented on a consolidated basis.
MS. WHALEN: So in other words, every year when the auditor is asked to give an opinion on the estimates, you always have a qualification on that because you disagree that it’s not complete. You claim it’s not complete because it doesn’t have everything consolidated.
MS. ANN MCDONALD: It simply is not consolidated so the opinion is qualified. The other thing that we have to qualify for is, not only are the revenues not in there on a consolidated basis, there is also no estimate made of them. So we can’t even figure out whether the dollar amount of what’s missing from those revenue estimates is significant to them being able to assess materiality.
MS. WHALEN: Can you say really what the impact would be on this? You don’t know if it has a material impact on the province by not following the recommendation that the Auditor General has been making since, I think, 2001?
MS. ANN MCDONALD: I can tell you that in 2009, the government hired a consultant, Deloitte, to look at this issue and in the course of preparing a report, that consultant listed third-party revenue, so these are numbers from the 2007-08 financial statements of these entities. For example, in these results for 2007-08, regional school boards and the Nova Scotia Community College had revenues of $342 million, so they are significant revenues. Not nearly as significant to the total as the revenue in the consolidated fund, however the revenues of these entities do represent a significant balance.
MS. WHALEN: Absolutely. When you say that, it puts it in a different light because that’s hundreds of millions, so that certainly is material in the circumstance of the province.
What I wanted to ask you about specifically was around the petroleum royalties. You have a recommendation there asking for an independent review of their forecasts of royalties, and I guess that would be the income from our offshore petroleum activities. Can you give me a little bit more background on that, about what is missing and perhaps what the government’s response was on it?
MS. ANN MCDONALD: With respect to the petroleum royalties, the issue is that there is a model that is used to produce the royalties for the year and that there are inputs to the model that come from economic assumptions. I know that the government gets the information from the producers and these inputs go into the model, calculations are done, if you will, and then there’s an output which is ultimately the petroleum royalty.
Because we had found some errors in the inputs, we recommended that there be an independent review. I think in hindsight perhaps the word “independent” may not have been the best word to use. What we simply meant was that the Department of Finance find a second individual to take a look at the inputs, to make sure that they were accurate because, again, we found some errors and to look at the output for reasonability.
MS. WHALEN: Could you indicate what kind of errors you found; again, how material were those errors and how did you find them?
MS. ANN MCDONALD: The errors were not material, it’s mostly a process situation. With many of our recommendations, because we’re issuing an unqualified opinion on the financial statements of the province, we’re not finding material errors as we go through. During the financial statements audit, when we looked at the inputs, an input was inaccurate so the result is not significant, however, the process should be undertaken to review those inputs.
MS. WHALEN: And I understand you’re saying that there should be somebody outside of government who has a look at it, maybe just another opinion - you said it’s not necessarily an expert opinion?
MS. ANN MCDONALD: No, actually it doesn’t even have to be somebody outside of government, just another staff member can look at it. Again, perhaps the word “independent” was not the right choice, but I think it’s a fairly simple process.
MS. WHALEN: The reason I gravitated to that recommendation was also because this year the Auditor General’s Office made an attempt to do an audit of the Canada-Nova Scotia Offshore Petroleum Board, is that right? In doing that there had been a question about proprietary information and the answer from - in fact, you weren’t able to do it because of lack of information.
So going back to the government’s answer for Recommendation 2.3, they again talk about, it includes proprietary information so the government is saying they wouldn’t go for an independent review because it’s, I guess, secret information from the companies. Is there an overlap on those two issues?
MR. LAPOINTE: Yes, I can answer that. The issue of proprietary information here is not relevant, as Ann stated. We’re saying that the information is prepared by people in the department and we’re saying that someone else who is not one of the preparers looks at it; it’s just checks and balances. We need someone who didn’t prepare the numbers to look at the numbers to see that they’re reasonable. We’re not talking about taking proprietary information and giving it to an outsider at all, we’re saying to keep it within government.
MS. WHALEN: Okay, I understand. So that really means their answer could be amended if they understood that you didn’t want it to go outside to somebody who wasn’t within the - I guess someone who would keep it confidential within government, that’s right. Okay, that makes some sense. What kind of materiality is there in the revenue we get now from petroleum? Can you give us a rough idea how much revenue is coming in from petroleum? I know it was going down over the last number of years.
Maybe while she does that, Mr. Lapointe, I’ll ask you a couple of questions because time is flying. In your first chapter in this report it was quite unusual actually that you did offer some personal opinions on the financial health of the province and some of your concerns. It doesn’t have any recommendations; it’s more of a discussion around long-term debt. I’m wondering if you could just explain why you put that chapter in. I don’t think we’ve seen it in any other reports.
MR. LAPOINTE: No, that’s correct, I’d be glad to speak on that. My concern with the debt of the province stems from initially seeing what is happening in the financial crisis that we’ve been experiencing in Canada and, in fact, across the world. The crises primarily seem to go back to problems of household debt, as we’ve seen in the United States with the mortgage problems and government debt, and there are other issues involved. People talk about the impact of spikes in oil prices and so on and how that affects the economy, but primarily what we’re seeing today is a crisis of government debt.
When we stop to think about how did we get to this point when governments like in Greece are potentially talking about going bankrupt, how is this even possible? This is the western world and these are advanced economies.
The concern I have with the way we spend in this country and in this province is really the issue. We have a conventional wisdom that has evolved over the decades that government is allowed, in fact, to spend money it doesn’t have, to use borrowing as a way of paying for current expenditures, to use borrowing as a way of paying for capital expenditures. I’m questioning all of that.
I’m saying now that we have to consider that if you continue to spend beyond your means, your debt continues to increase. At a certain point you can’t sustain that anymore. It’s just common sense, in fact. So there’s a financial issue involved of financial responsibility of governments in Nova Scotia, over decades, of continually adding to the debt, with the focus usually being on whether we have deficits or surpluses and are they manageable or not.
I’m saying that our focus is on the wrong issue. Our focus should be on whether we’re adding to the debt or not. So are we borrowing to spend? If so, we are saying that we will spend the money today and we here, today, all of us, will derive the benefits from that government spending. The people who will ultimately have to pay for that spending are those who will, one, pay the interest on the borrowing in the future and, two, will someday presumably have to pay it back. It won’t be us, it will be our children. It won’t be any of us in government because we’ll be long gone. Who will be accountable for paying this back will be other people, it won’t be us. To me, that goes beyond questions of sustainability of spending and goes beyond questions of fiscal responsibility.
I think we have to consider, anyway, whether it’s fiscally responsible to act that way and I personally believe that it no longer is. Whether it ever was 30 years ago, it is not today. Beyond that, I believe that it comes down to a re-examination of our beliefs of what is appropriate for government spending. I think we need to ask the question of whether it is at all ethical for us, as citizens, to ask the government to spend on our behalf but not ask us to pay for it, to defer the spending through debt and ask our children to pay for what we receive today in medical care, health care, or anything else.
The other ethical question is whether it’s simply right for governments to borrow and to defer and not incur accountability for the money required to pay for the spending, rather than spend out of current money and to live within our means, to simply defer raising the revenue for that spending to the future, when other governments, presumably, will have to raise taxes to pay back that debt. In fact, I think we defer - if you look at what happens, we do not pay back, we defer almost on a permanent basis. We cause ourselves difficulties, as well, with the very fact that we have to pay interest on that debt.
I mentioned that our statistics here show that with net debt of almost $13 billion, gross debt is closer to $16 billion, and that means that every man, woman, and child in this province is indebted to the tune of over $15,000. If you’re a family of four, what does it mean? It’s not a fictional number, it’s a true number. There are less than a million of us and we have $16 billion in debt. We are paying $861 million in interest, as well, on that. Sorry, I’m going on too long.
MS. WHALEN: Can I ask you just where the trend is? I’ve got your philosophy on it now, that’s for sure. I agree that we carry a high level of debt in this province; we’re probably the first- or second-most indebted province in the country, on a per-capita basis.
MR. LAPOINTE: That’s correct.
MS. WHALEN: You make the point in your report that it’s certainly growing faster than our population, so that means the impact or the weight on each person in Nova Scotia grows. On the per capita, I think you gave the figure of $13,841 per person in 2010, so that’s on a per-person basis.
You give quite a few measures in here, so I think for the few minutes I have left I’ll just look at the debt. You’ve got a number of measures about debt as a percentage of provincial revenue or debt as a percentage of our GDP, which shows our ability to pay it down or to look after it. Which one do you think is most critical for the province, in terms of looking at our overall health?
MR. LAPOINTE: It’s hard to say which one particular statistic might be the most critical, they all measure different forms of sustainability. I think the net debt per capita is certainly a critical one because it brings it down to per person, comparing by province, how we’re doing. It also makes it very real as to what each individual in the province actually owes and actually, for instance, is paying in interest.
MS. WHALEN: In most of the measures that I see here, the trend seems to be rising. Without a doubt, the debt is rising; it’s rising on a per person basis, it’s rising as a percentage of our gross domestic product. The only thing going down a little bit was the interest rate and I think it’s because we’ve been having very favourable low interest rates in the country; internationally as well. Our annual cost is down a bit, but it’s still close to a billion dollars, isn’t that right?
MR. LAPOINTE: Yes, $861 million at the current time.
MS. WHALEN: So overall, I guess in focusing on sustainability, you wanted to point out the fact that the trend is getting less sustainable?
MR. LAPOINTE: It’s less sustainable as long as you’re adding to the debt. You can only be either reducing or increasing the amount that you owe and we had a period in which we did reduce the debt in this province, unlike most other provinces. We had that period of time, but it was a very short period of time. We are now back to basically the same trend that we’ve had for a very long time of continually gradually adding to it.
Now, it doesn’t necessarily provide worse statistics in relation, say, to the economy and so on because the economy continues to grow, but what can fool you into thinking that you’re okay is if your debt increases but it looks all right because in comparison to GDP or in comparison to other provinces and so on, it looks like it’s remaining relatively stable so that you’re apparently in good shape.
I think those kinds of statistics can be deceptive. We’ve been fairly stable in terms of our debt for some time and certainly, as you notice, our interest has been, in fact, decreasing for various reasons. But the fact remains that as long as you’re adding to the debt, over time, you’re gradually deferring more and more spending, and gradually putting yourself more and more at risk.
MS. WHALEN: At the current rate that we’re paying on interest - and even with very favourable interest rates everybody’s been able to get access to - what percentage of our revenue is going towards just paying down interest every year? We’re just paying interest; we’re not paying down debt.
MR. LAPOINTE: The interest on the interest, as a percentage, is roughly about - I believe - 9 per cent.
MS. WHALEN: So 9 per cent of all of our revenue going just to service our debt.
MR. LAPOINTE: Nine cents out of every dollar of taxes - if you want to put it that way - taxes under revenues, goes to paying interest on spending that accrued in the past and is not available for other programs today.
MS. WHALEN: In the last two years, have we added to our net debt, on any of these measures - gross debt, net debt?
MR. LAPOINTE: We’re adding - to go into the statistics now - about a billion dollars a year to gross debt, to the long-term debt. The net debt is a more complicated figure and includes deferred revenue, accounts payable, accounts receivable, cash and accumulated deficits, so it appears to be more stable. Nevertheless, we keep adding to our borrowing every year.
MS. WHALEN: So the trend is definitely what you see is a major risk for our province when you look at sustainability and the future of Nova Scotia.
MR. LAPOINTE: I do. I’m taking a long-term view because I’m not looking at what happens this year or last year. I’m saying that over the decades, we’ve accumulated a debt which I find very hard to imagine how we can pay off and which is costing us $861 million a year just for interest, and we are at a very low interest period. I remember 18 per cent interest in my life . . .
MS. WHALEN: That’s the risk I see coming too, yes.
MR. LAPOINTE: . . . and I don’t know what would happen if interest rates doubled or tripled, which they will, at some point, do.
MR. CHAIRMAN: Thank you. We’ve used up the first 20 minutes available for the Liberal caucus. We’ll move now to the PC caucus for a round of 20 minutes. Mr. Porter.
[10:25 a.m. Ms. Diana Whalen took the Chair.]
MR. CHUCK PORTER: I want to thank Mr. Lapointe and your committee for the very detailed report and the comments that we’ve had a chance to go back and forth with this morning so far. A lot of work has gone into this and I look forward to a future date, as I said earlier as well, coming back and having had the time to go through it in more detail, and ask questions certainly, worthy of the work that has gone into it.
I’ll start on the long-term debt. You’ve been speaking throughout the last 20 minutes a lot on this whole piece around the debt, the potential ethics around that and our spending methods over previous years. Can you talk a little bit about - as we did earlier - the growth annually in the debt. I asked a question about what looked to me as $1.3 billion in debt over the last two and a half years or so. You clarified that a little better so I would ask maybe now that we’re in the public domain if we could just have that discussion again?
MR. LAPOINTE: Yes, I can ask Ms. McDonald to speak in a little bit more detail on this, but I can say that the statistics are, looking back over the last several years, that we did have a short period in which we were able in Nova Scotia to actually fight the general trend in the country and pay down some of our debt. Since, I guess, the onslaught of this financial crisis and the recession have begun again to add to our borrowings and in the last few years it seems to be - depending on what figure you look at, but if you look at the long-term debentures of the province - about $1 billion a year that we’re currently adding to the long-term debt. The net debt as I say is more complex. Did you want to add something?
MS. ANN MCDONALD: The exhibits in Chapter 4 outline the trend and you are right that between 2010 and 2011, the long-term debt has increased by $1.1 billion and the net debt of the province has actually decreased by about $200 million, but again that debt is an all-encompassing number, long-term debt is what is owed to creditors.
MR. PORTER: And the projected long-term debt in that table you have here shows a slight upward, if I’m looking at that correctly - continues to grow and not decline in the next, well, through 2015 if that’s accurate on the chart. The number is small there for me to see, but I think that’s what it says.
MS. ANN MCDONALD: That’s right. The information for the projections comes from the budget for 2011-12. The net debt is included with the budget forecast for the next several years. The net long-term debt is derived from a table which shows financial market debt projected over the next few years.
MR. PORTER: I’m just going bounce around a quick bit and then I’m going to pass it over to Mr. MacMaster who also has more questions. I just want to bounce around to district health authorities as is listed on Page 69. Just for clarity, that top paragraph talks about, “. . . the Cape Breton District Health Authority felt it was important to bring to the attention of the Board that there was a significant amount of overtime being paid to individuals.” In a couple of circumstances, “. . . employees were paid overtime equal to their regular salaries; these two were among 35 who were paid overtime in excess of $25,000.” Is this a trend that we see through - although they’re not detailed out here - the various health authorities or was it specific to the Cape Breton District Health Authority?
MR. LAPOINTE: I’ll ask Ms. McDonald to answer that question.
MS. ANN MCDONALD: Again, this chapter provides the results of our review of auditors’ management letters and opinions. The Cape Breton District Health Authority was the only health authority that this situation had been noted. I don’t have information on whether overtime is an issue in other health authorities.
MR. PORTER: So those weren’t assessed specifically, those were offered to you by way of those management letters and that’s just what came forward from the authority?
MS. ANN MCDONALD: Yes and also just to point out that the auditors indicated in the letter, as we have done here, that it was a matter they wanted to bring to the board’s attention, they didn’t indicate whether there was any issue with that overtime.
MR. PORTER: I just want to touch on one other thing before I hand it over and that was the estimating going ahead, and we talked about that a little bit earlier, if you want to clarify some of that by way of your language. I think it was not labour-intensive, it could be easily done, and the importance of those projections and how the numbers - I think Mr. Lapointe also stated in those comments that they were fairly stable going in past years so looking ahead, they would be fairly easy to predict. I think my question was around how simple is that to do and where does that labour come from that does that and puts this into place, how do you see that?
MS. ANN MCDONALD: Again, I think the first year that this was undertaken would be more labour-intensive, as anything is at the start. I just want to highlight again, though, that the concept of a schedule that has the revenue estimates included on it completely is one that the government-hired consultant proposed back in 2009. So I guess ultimately it’s not our idea but we certainly suggest that that schedule is a reasonable approach to resolving this matter.
MR. PORTER: Thanks very much. I’m going to pass the rest of my time over to Mr. MacMaster.
MADAM CHAIRMAN: Thank you, Mr. Porter. Mr. MacMaster, your turn.
MR. ALLAN MACMASTER: Thank you, Madam Chairman. Thank you for being here today, it is a very important topic that we’re discussing.
I had asked a question earlier and I’d like to ask it again, just to put it on the record here, and I know you’ve commented a bit on it already. It was on Page 2 of the Summary report where you referenced the fact that the government’s practice of borrowing to pay for current expenditures raises ethical questions, in that is it right for Nova Scotians to expect and receive government services as a group, that they, as a group, do not completely pay for, deferring part of the payment to future generations. Could you just put that on the record, what we spoke about before?
MR. LAPOINTE: Yes, I’m glad to speak to that one. I guess the questions that I’m raising in the introductory chapter, include commentaries that I’m making, which are my personal views, I must add, on this, derived from my last few years of looking at the activities of government and being closely involved with the finances of government. When I see the current situation I find myself thinking, is it beyond just numbers? What we have to look at with our approach to government spending is whether we have to reconsider what we think is appropriate and what we think is not.
Given our view of what has happened in government spending over the last few decades here and elsewhere, I now look at the approach to funding government spending by borrowing, not just for current activities but capital activities. I believe we have to, as parts of government but also even as citizens of the province, ask again whether this is an ethical question and whether it is actually ethical for us, as residents of this province, to ask the government to spend money on us for programs that benefit us but that we do not necessarily pay for - or not fully pay for - to defer the spending to the future, in which case we’re not paying for what we receive but we’re deferring it so that our children pay for it.
Beyond that, the individual question, as forming part of the government of this province, we have to consider whether it is right for government to behave in a way that includes spending for current benefits, without incurring the sacrifice of raising funds to pay for that spending now, to defer the payment to the future and not necessarily even to our children but if you look at the history, we have deferred permanently. What gets paid in the future is not even a repayment of the debt to pay for that spending but paying an ongoing cost annually, the interest to sustain the past spending. So, for instance, we are paying $861 million this year to pay for spending that occurred to benefit people in the past.
My feeling is that this is an ethical question, not a financial question. My personal belief is that it’s not ethical to do this; my personal belief is that it’s wrong. You may feel differently but I guess what I’m saying is that we all have to ask ourselves that question and reconsider again what is right and what is wrong for government to do, in terms of how it finances what it spends.
MR. MACMASTER: Just keeping on that topic, considering that we haven’t been facing any wars - you mentioned any wars or natural disasters you had commented on, maybe instances where governments can look at deficit spending, considering we weren’t facing that back in 2009 and considering that also in some of your past reports you indicated that right up until 2009 there had been eight balanced budgets. Recognizing that there was an amount for universities left out of the 2009 budget, could not the government, back in 2009, have made a choice, with modest cost control, to bring the budget back into balance almost immediately, certainly within a year, instead of now being on the track we’re on, which we’re not going to be balanced until 2014?
MR. LAPOINTE: I guess to answer that question I’d have to say that my commentary is taking a very long-term view. I mentioned that where we are today is a result of several decades of spending decisions by a lot of different governments. I’m concerned about what happens in the long term, so I’m not particularly commenting on government policy, certainly, or on this particular government or previous governments.
The other thing I’m trying to get away from in terms of focus, with the issue of debt, is that I’m thinking that we have for a very long time in political discourse, focused on government being in balance - being in surplus or deficit, having balanced budgets. I’m saying that that can be deceptive, if that’s your focus. You can certainly have a balanced budget and be adding to the debt, through capital budgets.
The issue of being in balance is not sufficient. If you want to pay it back some day, you’re going to have to incur very large surpluses to accumulate money to pay off the debt. So the focus on balancing budgets or surplus or deficit, it’s okay but I’m saying to let us re-focus as well. I’m not saying look at that, but look at whether you’re simply adding to or decreasing the amount of long-term debt that you have. My belief is that you need to look at that first and consider the ethical question, not around balanced budgets but around long-term debt.
MR. MACMASTER: I think that’s an excellent point but I also know you mentioned that it’s unfortunate when governments run operating deficits because they’re adding debts to the books that is really of no future value and that there’s no asset that’s owned by the province, like a road or a bridge or a hospital.
Has it been ethical for this government to be adding operating deficits the past number of years?
MR. LAPOINTE: I seriously don’t think it would be appropriate for me to be commenting on the ethical right or wrong of any particular government decision.
MR. MACMASTER: I can appreciate that.
MR. LAPOINTE: I’m looking at the general concept that we have to consider. Any particular situation can actually be fairly complicated. In fact a government can be running a surplus in its spending and apparently be doing fine but, at the same time, adding $500 million to debts through capital spending.
There are times where that can be appropriate. I mentioned that as a general rule I believe we need to live within our means but, on the other hand, you can have emergencies. What happens if you have a hurricane or a crisis? You can have a large project that you have to undertake for the long-term good, and it’s just simply too large to be able to afford if you have to have the money for it today. You can have what we’re experiencing now, in effect a short-term economic downturn in which there is no choice. If you maintain government spending at a certain level, because of your commitments, if your revenue drops you will find yourself in a deficit situation.
The question then becomes, what happens when you get out of it again? Is it sufficient then to say that you’ve balanced the budget? I’m saying that it may not be if, in that period of time, you incurred debt to finance those deficits. Then in straight, Keynesian economics, you should be looking at running surpluses to pay off what you just incurred.
MR. MACMASTER: If we look at royalties - and I noted on Page 57 of the main report - if you look at Newfoundland and Labrador and Saskatchewan - which is nice that you compare us to other provinces, whether by population or geography that we’re close to - they have natural resources, which I think you’ll see is what is bringing down their debt. We don’t have anywhere near the royalty potential that they have. Would you consider it irresponsible of this government to be making decisions to run deficits when we don’t have that kind of opportunity in our future, certainly not to the degree that they have to help pay for those cost overruns today?
MR. LAPOINTE: Now you’re asking me to comment on the ethics of this particular government’s decisions.
MR. MACMASTER: Right. Maybe I should rephrase that.
MR. LAPOINTE: That’s really not my concern.
MR. MACMASTER: Let’s take it away from Nova Scotia and if you just spoke about a government in general that doesn’t have the kind of future potential to earn those kinds of royalties to pay down debt, so there’s no real future plan to be able to pay it down. Is it not irresponsible for governments - unless it’s a time of real extenuating circumstances - to be running deficit budgets, especially in an economy like Nova Scotia’s that’s very defensive; we’re not cyclical?
MR. LAPOINTE: I guess I would have to say that I have used the term ‘fiscal responsibility’ in the report. My belief is that as a general rule, living outside your means and borrowing money is fiscally irresponsible, but then you have to consider whether you’re into one of the exceptions that I mentioned. There are times when really it is a right decision. If it is right for a government to borrow money for particular spending - let’s say it is a disaster or it is an economic downturn in which you need to maintain your spending regardless. What you have to do then to be fiscally responsible is once you get out of that situation, you have to then consider if you’ve incurred X millions of dollars of debt to get you through that period of time, over what period of time do you plan to pay it off? You should have a plan to pay off debt. You may get to the point where you can’t figure out a plan to pay off debt if you get in too deep - if you accumulate such an amount of debt that you don’t see your way out - but you still at least have to consider some way to do that.
Some provinces have been, in fact, very lucky to come into, in effect, large sources of funding through natural resources. That doesn’t necessarily mean that they pay off debt with it. If you look at Saskatchewan, for instance, I think they could be out of debt today. They’re not. Why is that? Is it more difficult here in Nova Scotia because we don’t have those large sums?
MR. MACMASTER: If we look back to the Atlantic Accord - I think you had kind of referenced this in some of the reading here - there was $830 million that came to the province from the federal government for offshore royalty; royalties that had been really accrued over years but hadn’t arrived to us yet. At that time, Dr. Hamm was Premier and that was negotiated for the benefit of the province, and he did what I thought was something very responsible at the time - he put that money on the debt. Looking at the financial position of the province today, has that benefit essentially been lost to the province in that we’ve since added to our debt in the last couple of years and we’ve essentially lost the benefit of that prudent decision?
MR. LAPOINTE: It’s hard to say and it’s how you look at it. The fact is that additional revenues came into the province and they were, in fact, used to pay off debt, which is commendable from the point of view of what I’ve been saying. What has happened since can perhaps be seen as quite a separate situation in that we’ve then become embroiled in what is, in effect, a global financial crisis, so government has to make decisions on how to deal with that. The impact of that is that we have added to our debt, but I certainly hesitate to link the two things and we’re into a situation in which government had decided it needs to borrow in order to just maintain its services and, in fact, to deal with a crisis. I can’t make judgments on that, but my comment on that is that once we get out of this situation, the rule should be that once you incur debt, you need to consider over what period of time you intend to pay it back.
MADAM CHAIRMAN: Thank you, Mr. Lapointe. Mr. MacMaster’s time has elapsed. I’m going to turn the floor over to Mr. Epstein for the NDP caucus for 20 minutes.
MR. HOWARD EPSTEIN: Mr. Lapointe, I would like to tell you a story. It is set long ago and far away - as far away as Ottawa and as long ago as almost 40 years ago when I, as a very young lawyer in my very first job, was working for the federal Department of Justice. I was assigned to a particular branch of the Department of Justice and I was asked by my boss to prepare a memorandum that had to do with certain aspects of incarceration of individuals in the federal penitentiary system.
I took this assignment away and I produced for my supervisor - who was a very experienced lawyer - a document in which I discussed a philosophy of incarceration and questions of the treatment of prisoners in certain circumstances. My boss, the late Jack Hollies, invited me into his office and he waved the memo at me and he said, very interesting but who asked you?
Now this is a relevant point with respect to the report that you’ve given us. As you pointed out a couple of times, what you’ve treated us to is your personal views on government debt. Now you’re not a young professional, wet behind the ears, on your first assignment. The question becomes whether it’s appropriate in any way to have used the opportunity of being the Auditor General - being mandated to give a report that surveys the accounting practices of a province - to have strayed into what is fairly clearly a matter of general economics and of public policy that seems to go well beyond the remit of what it is that we expect from our auditor.
The worry I have is that given the language that you’ve chosen to use, having once chosen to embark upon this discussion, has the potential to scare the population of Nova Scotia unjustifiably. That concern flows from your concentration particularly on the sovereign debt crisis, which is a real problem in Europe. The repeated focus on this tends to suggest that Nova Scotia cannot manage its debt. I want to take this opportunity to assure all Nova Scotians that our province is not about to go bankrupt; we are simply not in that condition. I feel it necessary to make such a pure and bald statement along these lines, given the way in which you have chosen to set out your personal views in this document.
I have to say to you that I find it highly problematic, not just that you’ve embarked upon this discussion, but the way in which you have done it. I have found it not to be balanced, not to be sufficiently detailed, and not sufficiently researched if, in fact, you wish to embark on this kind of discussion. I want to lay out for you what I find to be problematic, so that if, in fact, as you’ve suggested, this is the first of similar documents that are going to be presented to us, I would invite you to think about the comments that I am about to make. I hope they do inform any future document or part of a document that makes an excursion into the general political life of the province and particularly deals with economics questions that seem to go somewhat beyond the remit of someone who is dealing with accounting and audit functions.
Let me start first with the language of ethics; that was apparently central to how you characterized what the problem is with debt. “Unethical” is a highly problematic term. It’s certainly true that in analysis of debt or analysis of environmental issues there is a concept of intergenerational equity in which one is invited to be aware of the implications of what we do today on future generations, no one doubts that, but whether we’re actually dealing with a situation that could be characterized in any way as unethical is, in fact, a serious judgment call that I think is beyond what it is that we should have been offered.
There are other words that are much closer to things like an audit function that might have been used and on the positive side. For example, the words “conventional” or “unavoidable” or “precedented” could also have been used. If you wish to stick with the issue of something critical you might have said something like “it is imprudent” or you might have said “it might have been incautious.” You might have suggested if, in fact, you could show that it’s out of line with what goes on in other provinces or the federal government, but the analysis that might lead to any of those words seems to me to be exactly absent from this document and, I suggest to you, the evidence is not there either.
Let me move to the next point, which is an example of how it is that I find this document to be inadequate in its explanation of the historical context within which we find ourselves. What is glaringly omitted, just to start, is the recognition that this government, in fact, is engaged in a back-to-balance exercise in which it has dedicated and has laid out a plan to get the Government of the Province of Nova Scotia to eliminate its deficit and to have a balanced budget by the beginning of the fiscal year in 2013. That’s exactly what this government is engaged in doing.
This is exactly what the back-to-balance tour, conducted by the Minister of Finance a couple of years ago, was all about. It generated a plan, that plan has been adhered to; we’re moving in the direction of getting the government to eliminate deficits. No mention of that in the report at all, none at all. What seems to be missing is a recognition that what you’re sounding the alarm over, in fact, is being engaged with in a very painful and, I would say, difficult way by this government.
I’m a long-time member of the Legislature; I spent many years in Opposition. I was not thrilled to find myself and my Party in government at a time when we were forced to both raise taxes and cut services in order to bring the budget back into balance, but that was the situation in which we found ourselves and that is the situation with which we are grappling, have been grappling with for the last two and a half years, and will continue to grapple until the beginning of the 2013 fiscal year when the plan to get back to balance will have been accomplished. That’s the plan, it’s present, it’s being acted on and it wasn’t mentioned even remotely in this document.
Let me turn to another problem I have with your document and it has to do with your analysis of the source of the so-called worldwide financial crisis. What I suggest to you is that your analysis of the cause of the worldwide financial crisis is not only inadequate, it’s probably basically wrong. Here is what you say, “. . . much of the world has been immersed in an economic and financial crisis, the roots of which may be said to lie primarily in excessive household and public sector debt.” Well, you know, many people would not agree with that.
Many people would, in fact, remind themselves that the so-called world economic crisis is not one that has really brought Canada to its knees; although we’ve certainly suffered through part of a recession, we’ve done very well and we’ve gotten through a lot of it quite well. Many of us, when we think about how it is that the world got into the fragile economic state in which it finds itself, would note with interest all the analyses that have been done that have suggested that it was a combination of inadequate regulation of U.S. banks and financial houses and, in fact, in some circumstances, outright deregulation - and in that, I have in mind some amendments to the Glass-Steagall Act that the U.S. Congress put in place - leaving things like credit default swaps that are essentially an unregulated financial instrument, combined with outright instances of fraud and greed. Those seem to be the major factors that have actually led to the world financial crisis, not the accumulation of household debt and not the accumulation of government debt, which are problematic, but are not really the causes - I think most analysts would say - of the nature of the financial crisis that we have.
So if you’re going to stray into questions of economics much more than questions of accounting, I have to ask myself why it is that we’re not getting the kind of comprehensive analysis that might be useful. Now it’s true that the provincial government doesn’t have control over banking - under our Constitution, banking is a federal matter. But if you’re wanting to identify and educate the public about issues that are problematic, it’s fine if you mention debt, but it’s not - and I think most commentators have agreed - the main cause of our international financial crisis.
MADAM CHAIRMAN: Mr. Epstein, if I could interrupt you for a moment. More than 10 minutes of your time has elapsed and we certainly have heard a number of your opinions - and strong opinions. I’m wondering if you have questions so that the auditor has an opportunity to respond.
MR. EPSTEIN: I have no questions for the auditor except an invitation to him to think carefully about the points I’m making - and I’m now going to continue.
MADAM CHAIRMAN: That’s good for the other members of the committee to understand.
MR. EPSTEIN: Now, what I was touching on is what I regarded as being highly problematic in this document and its dealing with debt. I mentioned the historical context and I mentioned that there was a failure to set out that the current government is engaged in a process of bringing our budget back into balance in which we are now two and a half years into it, but further on the question of historical context, what is not present is the underpinnings of setting out exactly how it is that the Province of Nova Scotia got into the difficulties that we now have with respect to debt; how we even accumulated the debt. I’m not disagreeing with you that debt is something on the public policy agenda to be tackled, but it’s only one of many topics to be tackled and it’s only one of many budget and fiscal topics to be tackled and there are a variety of different ways of doing it. I would have thought that if you were going to focus so heavily on debt, you would have laid out the historical context.
Early on in my time as a member of the Legislature, I was the Opposition Critic for the Department of Finance and I went back and I looked at every year’s budget. I pulled out starting in 1974 and went through every year up to 1998, and then I’ve continued to do this for all the years since then - the statements about provincial debt. What emerged from my examination of that is that around the early 1970s, the Province of Nova Scotia had trifling amounts of debt - maybe $500 million - but what has happened every year since then, is that the debt has been added to.
Indeed, the really heavy, notoriously heavy spending years were through the 1980s and 1990s, in which successive governments - and, essentially your report now puts us in the middle of a highly political process, I have to point out - successive governments, especially Tory governments followed by some Liberal Governments, accumulated our debt. The Tories accumulated debt at a rate of about three to one over the Liberals during that time, and year in, year out they over-spent their revenues by about $300 or $400 million dollars. Some of it had to do with support for Sysco, but most of it had to do with simple overspending that did not match revenues year to year.
I agree with you that this is not something that can go on forever. Of course it can’t go on forever and that’s why we’re trying to get it under control. What I would have looked for in this kind of document that focuses so strongly on debt, would be a longitudinal backing up with statistics of what actually happened over time. I would have thought you might have been sensitive to the fact that these kinds of, as you say, personal-view comments that come forward, are exactly the kind of comments that could be used for political purposes aimed at the present government. Being aware of that, I would have thought you would have liked to have gone back and included in this kind of report the historical evidence of exactly where the debt came from and what it is that the money was used for, if you wanted to push that far.
Speaking of how the money is being used, if we take your criteria, that is, think about your criteria in which you suggest that there are times in which overspending is appropriate, then let’s consider whether, in fact, any of these particular circumstances are being met. Well, top of the list, since I understand you to have advocated some form of Keynesian economics approach in which overspending is appropriate in times of recession or crisis, in order to stimulate the economy, then we have to ask ourselves whether, in fact, we are in such a position. Indeed, it looks as if we are. We are not in such a crisis as the Europeans but, nonetheless, we are and have been, since 2008, maybe as early as late 2007, in a situation in which we are either grappling with recession or trying to avoid recession. I think all economists and all responsible ministers have acknowledged that. It’s common currency in the language of economics.
Indeed, the federal Finance Minister, Mr. Flaherty, when he recently announced that the federal government won’t be able to get itself back into balance in the timeframe that they had originally announced, and decided that they had to put it forward an extra year, which will put it at least two or three years behind the Province of Nova Scotia, justified this action by saying that there are still some fragilities in the economic state of Canada and therefore, he felt it was justified to take a longer term to get back to balance. In other words, he felt that the stimulus was still necessary in order to promote the economy.
Indeed, that’s one of the things that this government has been doing. If you look at the capital plan that we put forward, we were interested in trying to spend on capital projects in order to stimulate the economy. This is a responsible thing and actually happens to meet the criteria that you’ve set out in your report, but which is not commented on in the report, that is it’s not commented on that the government is actually engaged in doing exactly what it is that you are suggesting was necessary.
If you have a problem with the capital spending of this government, which was most recently announced in its capital budget, it might be useful if you explained what is problematic about it. Is there something about a particular school or road or hospital renovation project that you think should be taken off the list of capital spending? I don’t hear that, I don’t hear anything coming to grips with this issue.
Another point that arises in your report that I find highly problematic is the interest rate scare. There is a suggestion made by you that the level of debt that the province has may be unsustainable because interest rates could go up. Well, you know in the abstract, of course that’s a perfectly good point, but we live in the real world, where we have to look ahead at the next year or two. Here is what is actually going on with interest rates; interest rates are very low and furthermore, one of the consequences of the international economic crisis that you point us to is that European debt has been downgraded and now we encounter that investment phenomenon known as the “flight to quality”.
The flight to quality - I hope this is a term you are familiar with - is when investors, people who buy stocks or bonds invest in the best they can find. Canada has AAA rating and it’s going to be even more attractive for bond holders to invest in Canada and it means we can command lower interest rates.
MADAM CHAIRMAN: Thank you, Mr. Epstein. That’s exactly 11:06. Thank you very much for your comments - I’m sorry to see there were no questions. If you would, Mr. Epstein, I’d like to change places with you for the next round of questioning. I’ve allotted 15 minutes, if that is necessary for the members of the committee.
[11:05 a.m. Mr. Howard Epstein took the Chair.]
MR. CHAIRMAN: Second round, Ms. Whalen. It’s now 11:06 a.m.
MS. WHALEN: Mr. Lapointe, we’ve just had 20 minutes of a bit of a diatribe from the member of the committee. It’s unprecedented, I will use that word. It was certainly a vigorous defence of the government’s position and that is what the members of the committee are here for if they are representing the government, I guess. At the same time, I appreciate that your role here is as a member, an independent advisor, and independent person who is a servant of the Legislature and I would like to offer you some time now to respond, if you would like, to the last 20 minutes that we’ve just heard. I believe that it’s respectful to give you the opportunity to speak on this issue, so if you would like, I would like to share my time with you.
MR. LAPOINTE: Thank you. I would respond only briefly to what I heard and that is, one, I’m certainly pleased that my commentary has stimulated comment and dialogue, and if it stimulates dialogue, then that is my intent and I’m very glad to see that. Clearly, the honourable member and I have some differing views and I appreciate the advice as to how I should have written my report. However, I stand by my report and I stand by the things I said. I believe that I’m operating, in fact, within my rights as an Auditor General to report to the House anything that I feel should be reported to the House. In this case, it’s some thoughts on long-term debt and our approaches to it. I stand by the things I’ve written about the use of the word “ethics” and I believe that these are ethical questions, but that’s fine. Again, I’m just presenting my viewpoint on these issues.
I’m presenting to the House what I’ve said in the report really in the interest of my concern for the well-being of the province and what’s in the best interest of the people. However, I am certainly pleased to see that the comments in the introductory chapter are generating some interest.
MS. WHALEN: I appreciate your comments on that too. I think it’s just a very unusual situation to have a member of the Legislature lecturing our Auditor General about the contents of the report.
I think in raising the issue of debt, what you’re really trying to do is to bring it to the attention of all members of the Legislature. This is not a new situation, as the member for Halifax Chebucto has said; it has been existing for many years. As the Finance Critic for the Liberal Party, when I first was appointed in 2003 in that role, I also looked at the debt and realized that in the period of low interest rates, we are able to sustain this and not cut our services. But should that change - and again, my first mortgage was at 14 per cent for a home - I know mortgage rates and interest rates will rise. It is a risk and your job is to point out to us risks that exist.
I would ask, under the debt question just now, if you see any evidence of a debt management plan for the government. I don’t know if you looked at that in measuring debt, but that would be, how is the government responding? Is there a debt management plan that you know of? If not, we’ll ask the people from the Department of Finance when they come later.
MR. LAPOINTE: I would say this is not something that was part of any of the audits that we did, so I wouldn’t really have a comment on that.
MS. WHALEN: It would be something that we can raise. As you mentioned in your opening comments, we will be scheduling a time for representatives from the Department of Finance to come and discuss with us their response to the report.
I’d like to ask a few more questions directly about the government reporting section of the report, I think that was Chapter 2, Results of Financial Audits and Reviews. I wonder if you could characterize your reaction to the response from government, there’s quite a long response at the end of the chapter. It was indicated in the beginning, on Page 11, that you published it verbatim, everything that the Department of Finance responded is included in that. Did you think it was adequate? Does it answer your recommendations?
MR. LAPOINTE: I can speak to that and maybe I’ll let Ann add a little more detail. Our reaction to this particular response - as I have mentioned as well to the deputy minister - is I don’t believe this is an adequate response. It doesn’t answer the questions that we asked which is whether, when we make a recommendation to government on internal controls which is primarily what this is, we want to know from the department whether they agree or disagree with the recommendation and if not they can say why not, they are at liberty to disagree with us. If they agree, do they intend to implement or do they not intend to implement and if not, again, why not but if so, when and how? That is really what we want to know and that’s what we’re looking for in terms of information to publish. That allows us to follow up in two years to see whether that was implemented.
These responses quite often - we’ve read them several times - it really is not possible to say in many cases whether you can answer those questions and, in fact, some of the responses obscure the issue. There were issues of accuracy, I think I might ask Ann to add something to that.
MS. ANN MCDONALD: As Jacques indicated, I guess from our perspective there are two issues. The first issue, as Jacques noted, was the inability in a number of situations to determine whether or not there was agreement with the recommendation, let alone whether it was going to be implemented. I guess I also have a problem with the tone of several of them, not in terms of rudeness, but there is almost a questioning of the factual nature of the information that went into making the recommendation.
I’m disappointed because all this information is provided to the department well in advance looking for input. Part of the management letter process for the financial audit, there are several departments who we might have issues that we want to discuss and that there are findings. We provided information to the Department of Health and Wellness, for example, and they corrected the information we provided where needed. Those issues were not terribly significant so they didn’t end up in this chapter, but that’s what we’re looking for. If there is an issue with what we’re reporting, we want to know. We want what we report to be accurate and we’re more than happy to change details to reflect if we’ve made a mistake in how we interpreted something, more than happy to correct to make an accurate presentation to the House on these matters. So disappointing from two aspects.
MS. WHALEN: So in looking at these - and I believe there are 19 recommendations - a few of them that I just looked at did say that they were accepting them, but are there one or two in particular that you think are problematic? Where you’ve made a solid recommendation, something that’s a clear recommendation to government and their answer is just unclear about whether they are going to accept it or agree with you or just what their opinion is? I’d like to know just so we can focus in on those recommendations that might be requiring more clarification when we get the opportunity.
MS. ANN MCDONALD: For example, Recommendation 2.5 as a specific. The recommendation deals with an issue of completeness and accuracy of information that comes to us while we’re performing the audit. I certainly know that government accounting does go through a process to determine these, it happens to be in this case contractual obligations. We suggested that more work be put into it with the departments to determine whether what departments are providing to government accounting and then ultimately to us is complete and accurate. By the response here we can’t actually tell whether or not the department or the government accounting division is going to verify the accuracy and completeness of that information.
MS. WHALEN: Is there another one that you’d like to point out as well, again, for our future reference?
MS. ANN MCDONALD: Sure. There are a couple of recommendations - 2.10 and 2.12 - that deal with the project and deal with the issue of internal controls. I’m quite at a loss to understand or to know whether or not the recommendations that we’ve noted, whether or not the response addresses what the recommendation is specifically dealing with. It’s hard to determine.
MS. WHALEN: In your findings on internal controls, just to go to that one, you had mentioned it in the presentation we received, on this section, in camera; you reference weaknesses in internal controls and risk assessment. Could you talk a little bit about the controls that you found might be deficient, specific control deficiencies? That was one of your points in the presentation, on Page 3.
MS. ANN MCDONALD: On Page 25 of the report we have some comments about some specific control activities. They’re detailed there under the headings: Model-based revenue, so that mostly - it completely deals with tax revenues that are determined by models; Debt amortization and deferred foreign exchange; System access; and Reconciliations.
In each of those areas, during the course of the audit, we found either in looking at controls specifically or in looking at transactions and in balances that we found errors. So we’re backing that up and saying okay, what’s causing these errors? Is there a need - and we think there is - for some improvements in the controls that go around determining these revenues, for example, or the amortization and in a review of the support for those transactions, before they get posted to the general ledger, to make sure that the information in the general ledger is complete and accurate?
MS. WHALEN: Okay, so again your answer to that would be - I guess you’d be looking for greater accuracy from the department in the information they give to you, is that right, and the information they report to the province?
MS. ANN MCDONALD: In this particular case we’re looking for improvements in controls. We’re looking for, I think - we’re recommending a need to look at controls over how information is determined. In other words, the calculations, if necessary, prior to it being put into the GL and just recommending that those controls be looked at, are they adequate, do improvements need to be made and, on a go-forward basis, how they are monitored.
MS. WHALEN: Well, you do refer to the volume of errors you found, which should have indicated to government and to the Department of Finance that this is needed. As you say, you hadn’t focused on the individual areas, you’ve focused on what caused them and that means a need for greater control.
Could you speak to the risk side as well? I note in our presentation earlier on, you talked about the overall level of risk needing to be assessed by every department. That way, efforts can be placed where the risk is greatest, some mitigating factors could come into play or you’d be able to mitigate the risk.
MS. ANN MCDONALD: Sure. One of the things we do as auditors, we are required by audit standards to look at the internal control environment. One of the areas we look at is whether or not there has been a risk assessment to financial reporting, looking at various risks that might cause inaccuracies, assessing the risk, and maybe there wouldn’t be any inaccuracy resulting from the risk at all - I guess, basically an identification of the risk and assessment to see that controls are in place to mitigate the risk.
We mentioned this in here because it’s part of our audit process. It’s not that we are commenting on the need for these risk assessments for any reason other than as part of the audit process. We need to find out whether or not risks to financial reporting have been assessed, whether or not, for example, control activities and monitoring activities are known by departments. We asked for their feedback and we found that risk assessments were not being prepared related to financial reporting specifically.
MR. CHAIRMAN: One more minute, Ms. Whalen.
MS. WHALEN: Could you just comment briefly, Ms. McDonald or Mr. Lapointe, on the recommendations that have not been acted on? You have a new column called “Do Not Intend to Implement” and there are about eight items in there, from 2005 onward to the 2008 audits, where the government has said they don’t intend to implement. Could you perhaps just talk about the importance of those items?
MR. LAPOINTE: Again, I’ll ask Ms. McDonald to address that one.
MS. WHALEN: There are only a few minutes, or a minute . . .
MR. LAPOINTE: Yes, quickly.
MS. ANN MCDONALD: I guess the main recommendation that will not be implemented is this recommendation related to revenue estimates. I think we’ve made that recommendation each year, maybe save one since 2006, and they appear in the government financial reporting chapter, so there’s an indication that recommendation will not be implemented. Because of that, there are some similar and related recommendations that talk about the preparation of information in accordance with Generally Accepted Accounting Principles and basically all information coming from government, including the revenue estimates. But because the revenue estimates are not prepared on a consolidated basis, they’ve indicated that they don’t intend to implement other related recommendations on full GAAP compliance.
MS. WHALEN: Thank you very much.
MR. CHAIRMAN: Thank you, I have to interrupt.
We move now to 15 minutes for the Progressive Conservative caucus. Mr. MacMaster.
[11:20 a.m. Ms. Diana Whalen resumed the Chair.]
MR. MACMASTER: My first question is on debt and GDP or productivity and the future prosperity of the province. I think debt can be a real problem and I know you’ve stated that in your report. I know that some people disagree with that and I was listening to some of the comments by the honourable member for Halifax Chebucto and there were a couple of points that I thought I would insert in there, as well, which have caused the economic crisis throughout the world.
One was household debt, because the government in the United States, through Fannie Mae and Freddie Mac, was starting to give loans to people. They called them NINJA loans: people who had no income, no jobs or assets. The government was deciding to give people - encourage people - to load up on debt in their homes. Of course, we had record-low interest rates at the time; we still do. That was one of the reasons that caused the collapse. Of course, that’s what caused the collapse in the size of credit default swaps. You had these toxic loans that were mixed in with probably good loans and they had a good rating stamped on them by the rating agency. But as we all know, nobody wanted to own those loans because nobody could pay them back, so household debt was a problem.
I know that government debt is a problem now. If you look at Europe, we saw that countries - they refer to them as the PIIGS: Portugal, Ireland, Italy, Greece and Spain. Those countries, as we know, when they joined the EU, had access to borrowing under the good terms of being included with countries like Germany that had outstanding economic records and better status. Anyway, I’m going to get to my point, but I just wanted to put those two points on the record, that I think government debt and household debt do impact the prosperity of a province.
If we bring it to this province, over the last couple of years we’ve seen the loss of 6,500 jobs. We’ve seen higher taxes; we’ve seen higher power rates that are obviously going to impact on our cost competitiveness. One of the components in your analysis is the debt-to-GDP ratio and my question is, despite the federal government providing our province with a contract for shipbuilding - which is really a once-in-a-lifetime opportunity of $25 billion - based on what you’re seeing right here and what you’re reporting today, do you see the productivity of our province relative to our debt, do you see that number declining, or at best flat because of the conditions that we’re in right now?
MR. LAPOINTE: You’re really asking me to comment on areas that are really beyond my expertise. In fact, it’s beyond what we normally do. This is looking ahead and projecting what might happen in the province and I’ll admit - aside from my commentary on the philosophical issues around debt - the rest of our report is just based on facts and things that we look at and things that we find, and that’s where we need to keep it. So there’s not really any way that I can answer that question.
MR. MACMASTER: Okay, I appreciate that. I really don’t know if there’s any other way I can rephrase it to make it useful, other than that, I guess, as we look at that figure, it’s an important one. Would you say that as our debt grows, it does impact the ability of our productivity as a province and our positive trends in GDP direction for the province?
MR. LAPOINTE: It can have various effects on the economy over a long period of time. If it continues to grow, then it starts having impacts everywhere, but in the short term it’s really hard to say because all the factors all relate together. The concern I had, that I was expressing, was a very long-term issue, what happens far into the future as opposed to what happens right now or even in the next few years.
MR. MACMASTER: One of the other figures I was looking at in the financial indicators is the cost of debt in the province and the interest that we are paying each year. I believe it is on Page 60 of the report. Would you say that the trend seems to be that the cost has been going down a bit. Would you say that one of the factors in that is the interest rates and the fact that they are low now? I know when I was reviewing the budget and looking at the debt, oftentimes a $0.5 million bond would mature and the province would go out to market at the new interest rate. I’ll let you answer.
MR. LAPOINTE: Yes, given that really we’re - without having done a lot of analyses of what is behind these figures, we are presenting the statistics and the trends, just for information, the reduction of overall debt costs. I can see two factors that stand out there: one, of course low interest rate, period; and two, a reduction of total debt over a period of time and these might impact it. I wouldn’t be in a position to say that definitively here’s why the interest costs have been decreasing over these particular years.
You can see the trend. That’s not to say I have no idea, from looking at that, what will happen in the next few years. I can only say that this is what has happened in the past and these are potentially, if you look at some of the other indicators, some of the ones that might feed into that.
MR. MACMASTER: I’m going to try to move to maybe more of a practical question that I think a lot of Nova Scotians would have in their minds. Last year when the new budget was brought in for this year and a report on the previous year’s budget - and I’m asking this because, of course, as the Auditor General you look at the budgets, you look at how things are put together and whatnot. We saw a projected deficit and then a glowing surplus, pretty well the next day, between the update on the previous year and then going into the new budget year.
I think that causes people to question, well, what is in the numbers. I know that’s part of your job as the auditor, to make sure that numbers are presented accurately and that they give a true picture, so that over time we can compare past budgets to future budgets and make sure that we’re holding the government accountable - I guess as Opposition that is my job - to make sure that we’re trying to move the province in the right direction. Does the way that the budgets are put together now leave room for governments, for lack of a better term, to play with the numbers, to maybe distort the real image of what is going on?
I think of a couple of examples. I know HST projections are way off, I know the minister has said well that’s because we have to wait to get the numbers from the federal government. I mean you could project HST, based on consumer expenditure and the rate of inflation. I also know that full-time equivalents, the number of people employed by government - oftentimes the numbers are budgeted for but the actual people aren’t hired. So it’s almost allowing the government a pot of money to play with.
Back to my question, does the way the budgets are put together now leave room for governments to distort the numbers year to year?
MR. LAPOINTE: Well I need to clarify, I guess, that when it comes to the budget, we review the revenue side of the budget. We do not look at the overall production of the budget or the expenditure side at all, that’s quite a different animal.
We review the revenues precisely to ensure that, within a reasonable level of assurance, the numbers on the revenue side are based on reasonable assumptions and that they can be relied on to a reasonable extent. So I believe likely the original intent of having this province have its auditor look at those numbers is to provide some assurance as to the reasonability of what you’re looking at on the revenue side.
Beyond that is definitely not part of our mandate to comment on the expense side or, therefore, on the whole. We do give an opinion, precisely. This is the issue of our qualification, we give an opinion on the reasonableness of the revenue estimates so that, in fact, it can be relied on.
MR. MACMASTER: With respect to FTEs, has your office ever done an audit on the accuracy of those numbers, how they’re reported back into the Department of Finance?
MR. LAPOINTE: I would say within my recent memory, no.
MR. MACMASTER: Would that be something that you might consider doing in the future?
MR. LAPOINTE: I’ll take anything under advisement.
MR. MACMASTER: My next question, I notice something in your report about monthly SAP reports or monthly reports using that data that’s collected under the SAP system. Would they not be a good measure to keep numbers up to date and accurate throughout the year to help a government understand exactly where it is at any point in time, at least on a monthly basis?
MR. LAPOINTE: Do you want to take that?
MADAM CHAIRMAN: Ms. McDonald.
MS. ANN MCDONALD: I think you’re referring to the information that’s on Pages 28 and 29, dealing with the preparation of budget forecast, updates . . .
MR. MACMASTER: That’s it.
MS. ANN MCDONALD: I guess what our thoughts are on this is that the general ledger records the government’s transactions. We’ve found in looking at how information is in the general ledger, we’ve noted there that there are some balances that are not recorded in the general ledger during the course of year. That is not to say that there’s not an awareness by government of what these revenues - it’s mostly revenues - are. There is a forecasting process, but it’s our thought that a good financial management practice is that the general ledger support the forecast so that these items should be recorded on a regular basis throughout the course of the year.
MR. MACMASTER: I think the accuracy of the numbers is so important for everybody involved, whether it’s the government, the Opposition or, of course, the auditors because the more accurate the numbers are the less incidences you have of people complaining that, oh, we’ve come into government and the numbers aren’t the way we expected at all. If the numbers are accurate there shouldn’t be any big surprises, should there? Based on the information technology we have now if the information is being collected properly and presented properly there shouldn’t really be big surprises, should there? I know there are incidences where, say, I’ll give you an example, offshore royalties may decline, but even something like that we often hear that exploration activity has declined. I’ll let you answer the question, I think I’ve given you enough perspective to answer.
MS. ANN MCDONALD: What we’re talking about in Pages 28 and 29 is basically the general ledger needs to be updated. We’re not saying that the information in the forecasts as they’re produced throughout the course of the year, I believe there are four times that a forecast is presented, that we’re commenting on the accuracy of the forecasted information. We don’t do work on the forecast during the course of the year so it really is a financial management issue, it’s that a general ledger should support the forecast and it should be up to date, so it’s more of an accounting records issue, if you will, as opposed to commentary on the accuracy of the forecasts.
MR. MACMASTER: Right, but it should make the accuracy of the forecasts better if everything is lining up, shouldn’t it?
MS. ANN MCDONALD: I don’t necessarily think that one depends on the other. The forecast is based on economic assumptions at the time and information et cetera, but certainly what is produced by the forecast should be reflected in the general ledger.
MR. MACMASTER: Sure and I know that makes sense. I’ve actually done my own projections on the provincial budget and I often use the historical record, whatever the trend is, if there’s something happening in it. I’ll give you one example that I noticed was a bit of an anomaly - and there was a number of them - one was in tobacco revenues. I think it was the year before last they were down 13 per cent and I was projecting them to be maybe down 1 per cent because if the incidence of smoking in the province is going down we should see a gradual decline, but it was down by 13 per cent. The next year it was back up by 14 per cent which was basically flat which is kind of what I was projecting. I guess the reason I’m probing is just to get a better understanding of the systems that are in place to make sure that they’re working because sometimes we do see anomalies and they raise questions for people. I think I have time for one last question?
MADAM CHAIRMAN: You have about 45 seconds.
MR. MACMASTER: I’ll make it quick. On Page 10 of the Summary document, “It recommends that government provide projections of the sources and uses of resources over a longer term, and provide commentary on the main risks impacting these projections.” That has to do with future sustainability of government. Could you offer some quick comments on what that might look like?
MR. LAPOINTE: We’re making suggestions here on additional information that might be useful for government to provide, which are, in effect, suggested by the Public Sector Accounting Board. These would add to longer-term projections of sustainability.
We’re not making recommendations in this respect but just suggesting that this is new information that is coming out and guidance has been provided as possible useful information. So the department should consider taking a look at this and see if there’s anything useful that could be added to the financial information of government.
MADAM CHAIRMAN: Thank you, Mr. Lapointe. We will turn the floor over again to the NDP caucus. Mr. Epstein for 15 minutes.
MR. EPSTEIN: Thank you. Mr. Lapointe, I have only a few more items that I want to go through with you. When we left off a few minutes ago we were discussing the issue of global interest rates. I was interrupted, I think, in the point I was making so I want to just be completely clear. I’m looking at Page 2 of your Summary document, there you say, “ . . . government becomes vulnerable to swings in national and global interest rates.”
The problem I have with this statement is not that it is inaccurate, as a general commentary - of course, everyone is potentially vulnerable. The question really, though, is whether the public is going to be scared when they find the Auditor General using words like “vulnerable”. The question that I have to ask myself is whether this is anything like an accurate description of just how exposed we are in Canada, in our province, to swings, as you say, in national and global interest rates.
What I want to suggest to you is not just that interest rates are now very low but, in fact, they are likely to stay low for quite some time. There is absolutely no indication that interest rates are really going up or, if they are going to go up, will go up very much at all. I was pointing out to you that where they have gone up, which is in a number of the European countries that have been regarded as being in danger of sovereign debt default - that is, essentially going bankrupt and being unable to pay their bondholders - they are the ones who have had to pay higher interest rates in order to get people to take their bonds. That means Portugal, it has meant Greece and, to a certain extent a little bit, Italy, but it doesn’t mean anyone in Canada.
I think if you’ve had a chance to see it the other day, the Globe and Mail had a very good survey of the credit ratings for Canada and for nations around the world. Canada is in a position of AAA when it comes to solidity of its ratings by rating agencies and by bondholders. What this means is that Canada is one of about 12 nations in the world where it is particularly attractive to place money if one wishes to be safe. If bondholders are looking for returns that are safe, Canada is the place to be, and that is well worth emphasizing. I didn’t see it emphasized anywhere here.
It is furthermore the case that given the instability in many other places, like many countries in Europe, entities that wish to put money into bonds will be rushing to put their money in Canada. That will mean that sub-national entities like provinces and our federal government will be able to offer their bonds at interest rates, paying interest rates that are less than they might otherwise have to offer because there will be a rush of currency into Canada, looking to buy those bonds. That’s what the analysis is at the moment and I see no reason to differ from that.
Myself, I think that is well worth remembering and I see no exploration of this. Instead, I see language that is highly problematic because without any kind of suggestion that there is another dimension to the problem or any suggestion as to what the timetable might be on how so-called “vulnerable” we are to these so-called “swings”, then we’re really left with an abstract statement that one could not disagree with, but is not helpful. So that’s the problem I have with that and I now want to move on to a couple of other points.
The next item that occurs to me, of course, is the problem, another way of thinking about this question of debt. You’ve identified for us that you think debt is problematic; you’ve gone so far as to suggest that there is an element of immorality or unethicalness about it. The question is, I don’t see what it is that you’re suggesting to us - if anything - that we do about it. That’s not something that really comes out of your document. There’s no suggestion of what we do about it beyond what we’re already doing, which is being on track to stopping, putting down the shovels since we find ourselves in the hole. We’re stopping digging, we’re moving towards back to balance. I mean, I don’t see that there’s a suggestion because there are other ways to deal with debt. One is, you can raise taxes, but I don’t see you advocating for that; I don’t see you discussing it; it doesn’t come in to the report. It’s not there.
I also don’t see you, for example, identifying that one of the main ways in which governments have managed to get debt - even where it has been problematic - under control, is through growing the economy. The historical example in Canada that is frequently cited in articles and text books is the position of Canada after World War II. The federal government took on enormous debt in order to finance the war effort during World War II, and I’m sure you’re aware of this because you mentioned in passing the problem of the justification of borrowing in times of emergencies and wars. Well, that’s what the federal government did, but you know what? The main way in which the federal government came to grips with that national debt was by growing the economy through growth in the economy after World War II. It’s not that the debt was paid down. What happened is that the Canadian economy grew enormously in the post-war years and so the ability of the economy to carry the debt that had been accumulated in wartime became much more manageable.
Well, the same thing applies to a sub-national government, to a provincial government. We can look at it and say our economy is growing and then the ability to carry debt becomes less serious of a problem. Well, if you’re going to talk debt at all, you have to talk about this particular point. You have to talk about what the prospects are for the growth in the economy, you have to talk about it - as you keep saying - long term. If it’s a long-term problem that you’re talking about, then you have to look long term. I agree that we have something of a stagnant population here, but nonetheless, there has been growth every year in some aspects of our provincial economy in terms of the gross domestic product, and so the situation, although difficult, is not impossible. Again, I don’t see a discussion of this and we’re left with the impression that this is an overwhelming problem to the exclusion of other policy initiatives that could be taken.
Finally, what I don’t see highlighted in your initial approach to this question is the idea of where we stand in comparison to the federal government and the other provincial entities. Now, when I turn to the actual details of the report, there are tables in which this actually appears; in which the information about the indicators of the financial condition of the province can actually be pulled out on a comparative basis, but somehow the good news that is there doesn’t find its way into the general discussion that you offer us at the beginning. So this is what I have to remind you and remind our observers and listeners - what you actually say.
Here’s your Table 4.11, “Net debt as a percentage of total provincial revenues.” As you point out, over the past five years, this ratio has fluctuated in Nova Scotia from a high of 149 per cent in 2007 to 129.6 per cent in 2011. Well, the point is that the trend is down. The point is that that number is less than it was before and you give us comparators to other provinces and when we look at the other provinces, when we look at the actual table that you lay out for us when you compare Nova Scotia, New Brunswick, Newfoundland, P.E.I. and then Saskatchewan and Manitoba - we find that when we look at that in terms of where Nova Scotia is, we’re doing perfectly well with respect to New Brunswick and P.E.I. and, really, not far off where Manitoba is, despite its advantageous position. It’s Saskatchewan and Newfoundland and Labrador - as was pointed out elsewhere - that have very good natural resource bases where they’ve managed to do better, but our comparative position is not bad.
Then Table 4.12 - “Net debt as a percentage of provincial GDP”. Well, you point out that the overall trend has been a declining ratio from 39.1 per cent in 2007 to 35.7 per cent in 2011; again, an improvement in the position and that ties into, I think, partly growth in the provincial economy.
“Debt servicing costs as a percentage of total revenue” is another one of your tables, Table 4.16. In Nova Scotia, this ratio has decreased from a high of 11.6 per cent in 2007 to a low of 8.7 per cent in 2011. Again, what we see is a decline in the number, and when we look at the comparative provinces - and I would add, we should probably also look at all the provinces and the federal government - we’re doing quite well. My recollection is that, in fact, when it comes to debt servicing costs at a percentage of total revenue, we’re doing much better than the federal government.
Then in Table 4.17 - turn to “Accumulated surpluses/deficits as a percentage of provincial gross domestic product”. Again you say the ratio for Nova Scotia declined from 27.2 per cent in 2007 to 21.9 per cent in 2011.
This is yet another reason why I find that I have problems with what it is that you have offered to us as commentary about the position of Nova Scotia vis-à-vis debt. Debt is only one of a number of issues that are being grappled with. Other concerns, of course, have to do with our need for infrastructure, the need for stimulus, the need to grow the economy, the need to have taxes at a level that people can afford and the need to deliver general services that people actual need. The real picture is that, in fact, we’re moving towards a situation in which we are going to stop accumulating debt. That’s the objective. That’s the path that the government has been on. It is the plan that has been adopted as Back to Balance.
My plea to you, Mr. Lapointe, is that if we are going to see future analysis from your office that makes commentary on the general economic position of the province that goes beyond what is the traditional auditing function, then I think it has to be done in a slightly different way. I’m asking you to think, please, very carefully about what else might have happened in this document and what could happen in future documents. It’s not that it’s wrong entirely for you to think about the problem of sustainability of the economy; I think that is, in some sense, fair ball. But to pick out one aspect - the debt aspect - and then to give what I have to say is a fairly narrow and unamplified explanation of the problem serves none of us in the Legislature very well and doesn’t serve the public well because it tends to frighten the public into thinking that Nova Scotia is in a much worse financial position than we are.
With that, I again repeat my invitation and my plea to you to take these comments in what are intended to be both critical but also constructive fashion. I hope that what we’ll see, if you decide to embark on this again, is something that will be more fleshed out, more detailed and, I have to say, more balanced. Thank you for your attention.
MADAM CHAIRMAN: Thank you very much, Mr. Epstein. Your timing was good; you’re finished your 15 minutes. I’d like to turn the floor over to Mr. Lapointe for any closing comments that you would have for today on your report.
MR. LAPOINTE: Thank you, Madam Chairman. In closing, I’d simply like to thank the committee for this opportunity to discuss our report on government’s financial operations. While I can understand that some members may not appreciate all the things we were trying to say in the report or the general approach, I trust the committee and the House will find these reports and this approach to reporting on our financial management issues to be informative in future. Thank you.
MADAM CHAIRMAN: Thank you very much, Mr. Lapointe. There are just a few items of business today for the committee if we could just turn our attention to that. Everybody will receive information that was given back from the December 14th meeting, it’s on diabetes care and there are some pamphlets there that are going to be given to every member of the House so that they can be circulated, they have to do with home dialysis. So that’s in front of us today.
We also have an updated list of our record of decisions, the upcoming meetings. These have all been agreed to by the subcommittee and by the committee here. We have no meetings for the next two weeks, so that’s one thing I wanted to point out, because of caucus meetings out of town. Our next meeting is back here on February 8th and it is intended to be a session where we are learning more about the Public Accounts, the sort of nuts and bolts of it. It isn’t intended to be a session where we will be discussing the Auditor General’s Report and it is worth noting that the Auditor General will not be there because of a conference that day so I’m hoping that the questions related to this report will hold off until February 29th, when we confirm that members from the Finance Department will be in to discuss this Report of the Auditor General. I think that covers all of the business before us today and with that, I will ask for a motion to adjourn.
MR. EPSTEIN: So moved.
MADAM CHAIRMAN: We are adjourned.
[The committee adjourned at 11:52 a.m.]