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3 mars 1999
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Public Accounts Committee -- Wed., Mar. 3, 1999

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8:30 A.M.


Mr. Howard Epstein


Mr. Hyland Fraser

MR. CHAIRMAN: Good morning and welcome. The committee now has a quorum present. I am informed that Mr. Leefe will not be able to join us today. I would also like to welcome Mr. Delefes who is substituting for Ms. Godin in today's session.

The purpose of today's meeting is to hear from the Auditor General with respect to his report for 1998. We have present today Mr. Salmon, the Auditor General; we have his deputy, Mr. Claude Carter; and we have the two Assistant Auditors General, Elaine Morash and Alan Horgan. So welcome all of you. Mr. Salmon.

MR. ROY SALMON: Thank you very much, Mr. Chairman. I apologize for the quality of my communication this morning. I think I have been fighting this cold all winter and it has gotten worse in the last few days, but I will attempt to struggle through. We have a fairly lengthy presentation for you this morning but feel free, as we go through, if you wish clarification, I am quite willing to accept interruptions. Also with me this morning, to try to keep us straight with this presentation and material, is Darlene Langille from my office who is going to deal with the technical side of our presentation.

What I would like to do first is just run through the content of the report in a very sketchy way and then we will focus on individual chapters as we go along. I will start with some overview comments and, once we get into it, some very general comments that are contained in the report. Then we will go to three, what we call government-wide issues,


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focusing on the quality of accountability reporting and information provided to this Legislature, actions that have been taken and are being taken. Then to a very topical issue, readiness for Year 2000. We were quite pleased with the catchy title that one of our staff came up with for this chapter. Then third, more a survey than an audit, an assessment of environmental management practices in a number of departments.

We will then move to a series of audits that were done in departments, starting with Community Services and an ongoing review we are conducting of homes for special care. Then some comments on the economic diversification agreement in Economic Development and Tourism, some brief comments on public-private partnership initiatives. We dealt with those in a special report during the year but we provided some additional summary comments this year. Secondly, in Education and Culture, a special audit we did at the request of the School Boards Association of the teachers' salary continuation plan.

Moving then to Finance and comments on the very significant new system that has been established by Finance across government, the corporate financial management system. Turning to Health, a review we did of the computer environment and the adequacy of controls in the system administered by Maritime Medical. The second phase on homes for special care, as you are aware, the responsibilities for administering the Homes for Special Care Act is administered by two departments so we have split the audit into two.

Number 12, regional health boards, we have already dealt with in this committee and I wasn't proposing to deal with at all, just essentially skip over that one. Perhaps a controversial one in Justice, the Alternative Dispute Resolution Program for Compensation of Victims of Abuse. Then turning to Crown Agencies and Corporations, the Alcohol and Gaming Authority. We did a review of their operations relating to Part II of the Gaming Control Act. We will skip over the QE II.

Another special audit that we did during the year, actually that we contracted out to a firm of consultants, Grant Thornton, a review requested by the Minister of Labour to do a full review of the workers' compensation system and that report was released late last fall. Then the rest of the report is the standard comments resulting from a review of financial statements and management letters and some other audit observations. I don't propose to spend time on those. So that is kind of an overview of what we are planning to do this morning. As I say, as you see from the handout material, we have a fair amount of material to cover. I will go as quickly as I can, subject to your questions for clarification.

Let me turn to an overview. This is divided, really, into three points that I wanted to emphasize, mainly the first two and then a comment on the third. We note that during 1998 the government continued its efforts to improve management processes. In particular, public reporting has been improved. Government By Design, a document that was launched several years ago, continues to evolve and the content continues to improve as a basis for members

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of this Legislature to assess what the government is planning to do, what its priorities are and where it is going.

The major improvement came in that for the first time the government tabled, in effect, a report card, a document that said this is what we did accomplish against what we said we were trying to accomplish. That document was called Nova Scotia Counts and it was tabled in this Legislature for the first time in the fall of 1998. Both of these documents are initiatives that are recognized now nationally and internationally and put Nova Scotia in the forefront of being accountable through providing the right kind of information. I will have more to say on that later on but I do want to make the point that progress continues to be made.

The second point is more one of warning than anything else. We have said this in a number of reports now. Clearly, efforts to address government program priorities, particularly in health care and education, while attempting to maintain a balanced budget, create strains on the system and we have all seen that and we are aware of them. What it says to me is that when you are going to try to launch these initiatives in a balanced way, addressing priorities while balancing the budget takes very careful planning, takes very careful and thorough risk assessment. If anything, that is where we have fallen down in this government and we believe that our comments through this report illustrate the risks of planning but not careful enough planning, not long-term enough planning in how these issues are to be addressed and we will continue to monitor those things.

Finally, just a comment about my office. You are all aware that amendments were passed to the Auditor General Act in June of this year. It finally dealt with the issue of my mandate, particularly with respect to the audit of the province's financial statements with the first year being this upcoming March 31st year-end and the fact that during the year we had to respond to special requests for three audits that strained our resources, strained our capacity. I must say that we had support from the government, particularly with regard to the one on workers' compensation where additional resources were provided to us but it put a load on my staff. At the same time, we were trying to move forward the deadline for reporting of this annual report. We did not quite achieve the target of December 31st, but January 11th was, I think, a reasonable result for us for this year, and we certainly will be earlier in December in the future. So, I just want to acknowledge the contribution my staff made over this past year to these efforts, and I believe that we are well-situated, well-organized, well-staffed now to continue to respond to the needs of this Legislature and that is our goal.

Let me turn then to accountability information and reporting. We have said this before, if there is to be an effective accountability framework, it should provide, and result in, an appropriate balance of information and reports to this Legislature. Those have to focus on the plans and on the performance of government overall and on the plans and performance of individual departments or agencies. That is both from a financial perspective and from a

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program perspective and, certainly, the initiatives with Government By Design bring forward the program perspective, balanced with the budget which is the financial perspective.

So, what we are saying is, the goal is better information, not just more information and that is the balance we are all trying to achieve. There have been a number of initiatives taken to do that, and we have mentioned those, Government By Design and now Nova Scotia Counts, and the business planning process that is going on and continually being improved within departments and agencies. Finance, in conjunction with Priorities and Planning is continuing to move forward to improve the nature and quality of information that is being provided.

I come back to the major step being the continuing improvement of Government By Design and the release of Nova Scotia Counts, but I want to emphasize, these things are discretionary, there is no legislative requirement for this government, or any government, to provide that information or produce those reports. Although it is a good initiative, it can be stopped at any point in time at the whim of the government for whatever reason, and we would strongly recommend that this Legislature take action to inscribe those requirements in legislation, and make it a statement from this Legislature that that is what they want and that is the way to do that.

Summary comments. We provided our annual report on the revenue estimates that was tabled with the budget in June 1998. We continue to be the only jurisdiction where a government sees it is appropriate to be accountable by having the revenue portion of the estimates reviewed by the Auditor General and an opinion provided on them that they are reasonable and we continue to do that.

Secondly, for the last time, a firm of public accountants issued an opinion on the financial statements of the province and those were released in July, and that is very early in comparison to most jurisdictions, and Nova Scotia should take credit for being timely with the release of its financial statement. For your information, in addition to the short form audit opinion on those financial statements, the firm issued a management letter to the Department of Finance making recommendations and comments. We have reproduced that in this report. It is there. I do not intend to get into the detail of it, but it is there for your edification. In conjunction with that, the government has continued to make improvements to those financial statements so that the financial position and results are presented in a more complete way, a more understandable way, and we support those initiatives.

A comment on financial accountability, and I cannot emphasize this too strongly. In June with the budget, the Minister of Finance tabled a document called Blueprint for Success. It is a plan to take this province forward in terms of appropriate financial reporting. It sets goals and the timetable to bring about the necessary improvements that we have been recommending for some time.

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There has been some discussion of having the Department of Finance come forward to this committee to discuss those initiatives. I strongly recommend that you do that. I think it would be an opportunity for the government to demonstrate that they are doing the right things and have a plan to get this province forward to even more of a leadership role in financial reporting in this country. I think it is a no-lose situation for everybody, if I could put it that way, because it is an initiative we strongly support. The plan is out there, it is a public document and it is a good plan from our perspective.

A little bit of a complaint, I guess, from us. Additional spending authority requires approval of this House. There is still outstanding unauthorized spending authority existing for the year ended March 31st, 1998. There are expenditures recorded in that year that have never been approved by this Legislature and that is inappropriate. If we believe in the principles of parliamentary control, nothing should be charged to an appropriation or spent without the authority of this House, and that has not happened. That has been a long-standing problem in this province, but it was very significant in this past year.

MR. CHAIRMAN: Excuse me, I am sorry, Mr. Salmon, may I interrupt. I think Mr. LeBlanc wants to raise a point.

MR. NEIL LEBLANC: May I ask a question in regard to the overexpenditures. Part of the problem I have with this is that we are getting into a situation that we are asking for additional appropriations subsequent to the event happening. So, this is basically a paper transaction rather than an actual. You are trying to comply with the legislation, and I am going back to the fact of whether the legislation should be changed whereby governments, if the financial statements are kept up on a regular basis, should have a good indication whether they would need additional appropriations before the fact, rather than try to react when you add up all the receipts after the year end and say, my God, I am over and I need an additional appropriation. Do you have any comments as to whether or not some changes should be made whereby the Legislature or the Cabinet, as such, should make these decisions in advance or in a very close proximity in time, rather than three or four months after the fact?

MR. SALMON: Well, at the present time, as I understand it, there are two levels. The Executive Council can approve certain levels of expenditure as additional appropriations, and even that process is late. It seems to me that it becomes a matter of priorities and time to deal with these things, and the legislative agenda overtakes some of these things that are viewed more as housekeeping. From my perspective, these are more than housekeeping.

I agree with you, it would be great if planning and budgeting processes were such that you could identify what you needed in advance of spending it and get authority. Unfortunately, this House only sits twice a year for relatively short periods compared to the total year and so it is not always possible to achieve that. It is quite possible that you could make changes and maybe this Legislature should consider making changes to the approval processes so that these situations that, from a technical point of view, are illegal, to find a way

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to deal with it. We might be able to help with some research along those lines to attempt to achieve that. I am not suggesting that this is a problem unique to Nova Scotia, but it seems to repeat itself more often and to last for longer periods of time in terms of non-approval. That is what we are trying to emphasize.

MR. CHAIRMAN: Mr. Salmon, this is a difficult problem. I think what has been gotten at is that on the face of it, Section 13 of the Expenditure Control Act seems not to be a very practical provision, because what it seems to require is a resolution of the House before that money is spent which would, in effect, mean before the end of the fiscal year. I would think that it is almost going to be impossible that you would know exactly before the end of the fiscal year what the amounts are to be spent in each department.

MR. SALMON: I would agree with you in terms of the word, exactly, but I would suggest to you it should be possible, given the improvements in the forecasting processes that have taken place over the past few years that, in the fall, the government should have a reasonable idea of where the overexpenditures are going to occur and could at least make an estimate of those additional requirements, and get that through the House in the fall session; that would legitimize the process.

MR. CHAIRMAN: If that is the case, have you any information for us as to why it is that these resolutions do not come before the House until the next fall? For example, I do not think we saw that resolution appear in front of the Legislature until November 1998 with respect to the 1997-98 year.

MR. SALMON: I can only speculate and my speculation would be that there were too many other priorities the government was trying to deal with, and this was not high on the agenda because it was viewed as housekeeping.

MR. CHAIRMAN: So it is not that the information wasn't available, it is that it didn't make it onto the agenda, is that the situation?

MR. SALMON: That's my speculation. I believe it was available.

MR. CHAIRMAN: In fact, the situation is that it still hasn't been passed, because it wasn't called for a vote.

MR. SALMON: Exactly.

MR. CHAIRMAN: Mr. Dexter.

MR. DARRELL DEXTER: Mr. Chairman, I just wanted to ask a theoretical question. This kind of resolution presumes that parliamentary democracy will go along as it usually

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does with a majority and these things will simply be passed. What would happen if the resolution was defeated?



MR. SALMON: Well, the money is spent, it is gone. You are not going to get it back. So I am not sure what defeating the resolution would accomplish other than perhaps bringing down the government, because it is a money bill. I am speculating again, I am not a constitutional expert.

MR. DEXTER: Well, no, it is a very interesting point, isn't it? You are quite right, it is a money bill and the defeat of the resolution would mean that in that year they had exceeded their actual spending authority. In company law that would simply be illegal; you could be sued by your shareholders, I guess, if you had made an appropriation that hadn't been . . .

MR. CHAIRMAN: Perhaps we could recover the $184 million from the Cabinet members personally. (Laughter)

MR. DEXTER: There is an idea. That's fine, thank you.

MR. SALMON: It is an interesting question. So, again, we just want to emphasize that, in the purest sense, the system would best operate if these things were approved in a timely manner.

Just a brief comment that there are opportunities to improve reporting on the procurement process. Initiatives have been taken. There are plans to continue to improve that process.

That's Chapter 2 and we can move to Chapter 3. I gather, Mr. Chairman, we are going to schedule a more detailed briefing session on this subject in the near future. So I will probably skip over it fairly quickly.

MR. CHAIRMAN: That's fine.

MR. SALMON: We want to acknowledge that the government has continued to make progress in dealing with the Y2K issue. But, again, there were plans put forward in the fall of 1997 and we must acknowledge that things are still falling behind. I don't want to overstate this risk and be a fear-mongerer but it is a real risk. Since we discussed this a year ago, the window of opportunity has been cut in half. We had two years; now we have less than a year. That deadline is not going to change; December 31st is December 31st and January 1st is

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January 1st, the calendar doesn't change. So, that should be on the minds of people and we assess it now that it is not possible, with the resources that are available or the time that is available, to ensure full compliance. What we need to do is make sure that we have contingency plans so that when things do go wrong, minor or major, we have plans to deal with those situations.

MR. CHAIRMAN: Excuse me, Mr. Salmon, Mr. MacKinnon has a point.

HON. RUSSELL MACKINNON: Through you, Mr. Chairman. Mr. Salmon, to what extent is this Y2K issue beyond the purview of the provincial jurisdiction? I know there are some overlapping areas.

MR. SALMON: There is no question.

MR. MACKINNON: I personally see opportunities to resolve certain issues at the provincial level if they were resolved at other levels; at the corporate level - some of our large national and multinational corporations - as well at the federal level and internationally, other government jurisdictions outside of Canada. So I am just wondering, have you given consideration as to what extent this issue extends beyond the purview of the provincial?

[9:00 a.m.]

MR. SALMON: Well, it certainly does and there are overlaps. Perhaps, Claude could comment on that in terms of the reviews we have done.

MR. CLAUDE CARTER: If I understand your question, certainly, Y2K is a global issue and each entity, whether that is a provincial government, federal government or corporation, has a responsibility to deal with the issue as it relates to themselves, both internally and their relationships with parties external to their organizations, clients, customers, stakeholders, whatever categorization. Certainly, there are issues related to Y2K that could have an impact on an entity like the province that the entity, the province, doesn't have direct control over. So, yes, as a provincial government, you would have to look to whether our major third party relationships are dealing with the issue appropriately and if not, do we have to take steps to protect ourselves and so forth.

MR. SALMON: If I could just make an additional comment and this is sort of offside and is not meant as a criticism of the legal profession, but I have heard public statements made. (Interruption) Entities are being given guidance to obtain certificates or undertakings by their suppliers and others who have relationships with them, undertakings that they are compliant and can continue to provide services to the entity. These entities are being advised by their lawyers to seek that confirmation in writing. At the same time, the legal profession is telling those other entities, don't sign because you will be at risk. So you have this dilemma of ongoing conflict in this Y2K situation. I don't blame the lawyers for doing that, that is

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good advice to both parties but that is the dilemma we are all in, that the risks are great and the efforts to achieve compliance and be ready are very real and entities are moving at various levels of preparedness in this issue and Nova Scotia is not alone.

MR. MACKINNON: Mr. Chairman, if I could just conclude my question. I don't believe I have received quite the answer because I guess maybe I am looking to quantify when perhaps it is not possible because of the overlapping and the intricacies and the complexities of some of the issues related.

We are dealing here at the provincial level, Y2K, it is a problem and the perception that is being conveyed to the public is that the provincial government is not Y2K compliant and really hasn't done everything it should have done to be prepared. If it is not prepared then there could be some dramatic consequences when, in fact, on the big picture, with all issues in Nova Scotia, we haven't really measured as to what percentage of this Y2K is within the control and the purview of the provincial government.

MR. SALMON: Yes, but I would suggest to you that the reports that are now coming forward and are on the Internet from the provincial government deal with the areas in which the provincial government is responsible and that's the extent to which they could report. But yes, there is the bigger picture and there are lots of examples of the bigger picture where inter-jurisdictional cooperation is essential. You take the power grid as a perfect example. I guess all of us looking at it in hindsight would say, we didn't start soon enough and now we are trying to recover and we are all in the same boat. Nova Scotia is no different than anybody else from that point of view.

MR. CHAIRMAN: I think Mr. Dexter and Mr. Fage both have points they wish to make. If these points are both on Y2K, don't forget we have a lot of other material to hear from the Auditor General this morning and we are going to focus specifically on Y2K.

MR. DEXTER: Well, the question was fairly asked by the minister and I just wanted to follow up on it. My understanding is that insurers have notified their customers that insurance is for unplanned events or unanticipated events and that because the Y2K problem is a known problem, insurance policies are void with respect to the results of anything that happens as a result of Y2K.

MR. SALMON: That's my understanding.

MR. DEXTER: They knew this was coming and they ought to have planned for it to have avoided the risk. If they didn't do that, then they bear risk themselves. So, the question, as I understood it was, to what extent is this within the purview of the provincial government? Regardless of how much control the government has, it is the risk that defines where the responsibility lays. Would you agree with that? They are the ones who are ultimately going to have to shoulder the burden of whatever happens as a result of this.

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MR. SALMON: Whoever bears the risk will have to shoulder the responsibility, yes.

MR. DEXTER: And that's going to be the provincial government.

MR. SALMON: Not totally. Only with regard to those activities that the provincial government is responsible for.

MR. DEXTER: Yes, of course, departmentally, with respect to all the systems.


MR. DEXTER: So jurisdictions really don't matter, do they? It is the question of what you are responsible for.

MR. SALMON: What you are responsible for, yes.

MR. CHAIRMAN: Mr. Fage, you have a point.

MR. ERNEST FAGE: Yes, and I just wanted to re-emphasize. It is the degree of risk we are talking about here and when we examine the different audits, the program that was set out two years ago, it is whether the provincial government is doing conceivably what is within their resources and their power to make sure those risks are diminished. As we look at the reports coming in, we see - as this report says - they are flagging a bit, that inventories have been done in some systems and, hopefully, essential systems are going to be ready. But whether it is Health, whether it is Education, whether it is any other government department, they will show a high priority rating but a low compliance or completion list. Over the last two months where they are showing 5 per cent to 25 per cent, the target government set for themselves two years ago is 75 per cent at this time-frame. I think that is the backdrop that citizens of this province are concerned about; is not that it is foolproof, what is going to be there, but you are diminishing the risk. Government is taking the steps that would provide the maximum protection, the least amount of risk to the citizens. That's the measure I feel we should be working with.

MR. SALMON: Yes. Shall we move on?

MR. CHAIRMAN: Please continue, thank you.

MR. SALMON: I just think it is clear that we already have re-emphasized that this is a unique problem and given the risk situation, it bears scrutiny by this Legislature and ongoing monitoring by this Legislature. We have strongly recommended that the Year 2000 Project Office continue to provide periodic reports, and they are doing so and the interest in that site is there. That started in November.

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We really want to emphasize that the focus should be on the future and what the priorities are and what needs to be done and let's forget about what we failed to do in the past. Hindsight is not going to help us in this situation.

Moving then to, Environmental Management. We will only take a very few minutes on this one. Essentially, what we were trying to do was conduct a survey of the existence of a government-wide policy framework for environmental management and to try to understand the policies and the systems that are being applied, without doing an audit of all of that. Certainly, it is clear that environmental stewardship has been recognized as a priority. It is part of government's top-level planning but there is no broad, formal government-wide policy framework. We are not talking here just Nova Scotia.

There is no generally accepted model of what an environmental management system should look like or be. So, we are kind of dealing with something in a vacuum here and everybody is trying to do the best they can to deal with this very important issue. Certainly, it was clear to us that the departments that we dealt with were aware of their responsibilities and they had developed systems, policies and procedures designed to manage those responsibilities, but none had implemented what we would view as a comprehensive environmental management system.

We are not attempting here to be critical of what is going on. We are simply saying, there isn't a broad framework, people are operating in various departments with their own understanding of what needs to be done and doing the job to the best of their abilities. I think that is a fair summary comment, but this was a very interesting assignment to do. It gave us a better understanding and I would say it gave us a level of comfort about how we are managing environmental issues.

Community Services, homes for special care. I was trying to boil down to simple terms what the distinction is between what goes on here in the Department of Community Services and what is managed by the Department of Health. The simplest terms that Elaine and Alan could give me was, those areas that are managed by the Department of Health involve provision of nursing services, and those areas that are managed by the Department of Community Services do not involve nursing services and that is the distinction.

In this audit, just some very specific but focused comments in terms of the financial situation. In November 1997, per diem rates for nursing homes were increased by 2 per cent after having been frozen for four years. That was a move to provide additional funding, but countering that is that the per diem rate that is used in setting rates for support to these facilities has not been updated since the last 1980's. So, it is a real question of whether we are dealing with real cost and real dollars in establishing per diem rates.

The issue of new licences for homes for special care have been frozen for five years. There have not been new licences issued. There is a process of doing annual inspections

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before a licence is renewed and deficiencies are addressed before the renewal is granted. That is an effective control on the quality of service being provided. These homes are required to have emergency plans in place as part of the licence renewal project.

So, just in summary comments, we believe that the licensing and inspection function is generally adequate, and is in compliance with the Act and the regulations. It is clear to us that management of the Department of Community Services does not see its role as ensuring that these homes for special care are financially viable. That is a responsibility of those who run the homes. So, any review they do of financial planning within a home for special care or a facility is only for the purpose of approving any increases requested in per diem rates, not more broadly focused on the operation of the home for special care.


MR. FAGE: Just a couple of quick questions. During last fall's session of the Legislature and the months around October and November, we had many situations across the province where the regulations that were applied to homes for special care under Community Services, limited to three, residents that could be cared for and a fourth that was a family member. Many of the institutions that were out there that had to comply with this new regulation would have 5 to 10 residents. We were receiving intervention from these owners, these communities, almost on a daily, weekly-type basis. That has since been slowed down, but any comment on that process of re-licensing, basically, what happened there?

MR. SALMON: Alan, could you comment on that one?

MR. ALAN HORGAN: The homes to which you refer are generally referred to as community-based options homes. The community-based options homes do not come under the mandate of the Homes for Special Care Act; however, the Department of Community Services has developed some standards specifically for community-based options homes. They have developed these standards, but with the understanding that community-based options homes are still under the responsibility of the municipalities. The municipalities fund the homes and regulate the homes; however, the cost of the homes is billed back from the municipality to the government. So, with respect to the number of people who are in the homes, this audit did not really address that issue and there is not too much I can comment on in that regard.

MR. FAGE: Many of the concerns expressed hinged upon that very spot that before it was basically a boarding home arrangement, or any type of arrangement that you would virtually want to call it. There was no restriction on number, only safety and fire marshal. Then you had guidelines brought in on the three and four residents and it was creating situations where it was not financially viable for the operators to run those facilities. There did not seem to be any accommodation for them or any redress. It was three or four residents and that was it.

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MR. CHAIRMAN: Mr. Fraser has a question, then Mr. MacKinnon wants to clarify something for us.

MR. HYLAND FRASER: Roy, you indicated here the licensing, or the approval of a licence to operate for another year, is done by the Department of Community Services. If they recognize that changes have to be made to allow them to have a licence to operate for the next year, but they do not feel they have any responsibility to ensure its viability, how does that work or how can this not work?

MR. SALMON: Well, there are a number of preconditions. I would presume that you assume that the per diem rates being paid are adequate to support the operation of the facility. Certainly, there is a problem if that is not true. Clearly, first and foremost in the minds of those within the Department of Community Services, is quality of care and that means there are standards established that must be applied, and if you can't meet those standards, you do not get a licence. Financial viability is a consideration and that is dealt with through the per diem rates. So, there has to be that other side of the negotiation of acceptable appropriate per diem rates.

I can only presume that the Department of Community Services is saying, if you can't operate a facility up to our standards in a financially viable manner, given those levels of rates, then you should not operate.

MR. FRASER: They treat both privately-owned and publicly-owned facilities the same?

MR. SALMON: That is correct, yes.

MR. CHAIRMAN: Mr. MacKinnon and then Mr. LeBlanc.

MR. MACKINNON: Mr. Chairman, just a point of clarification for my colleague with regard to the number of residents that would be allowed. As I understand, once you go beyond three, it becomes an issue of the fire marshal's office. The Department of Community Services allow for a larger number, but it is the restriction imposed by the fire marshal's office for safety reasons, because of, in many cases, the immobility of the individual residents or tenants we are dealing with. There are very detailed explanations as to that and I do not want to take the time of the committee, but that is essentially the issue. It is not with the Department of Community Services, it is with the fire marshal's office.

MR. CHAIRMAN: Good point. Mr. LeBlanc.

MR. LEBLANC: I was looking at what you reviewed in this whole concept for homes for special care. I find myself, coming from Yarmouth County where, a lot of times, we have a disproportionate amount of senior citizens in comparison to the rest of the province. We

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have always been asking whether or not the departments that are doing long-term planning for the distribution of these beds, because you stated here that new licences have been frozen for five years, and in our area we seem to be coming apart at the seams for people trying to find placements. They are saying, well, there are placements in the Valley and there are placements in Queens and there are placements in Halifax and so forth. It is very difficult when you have somebody having to move 100 miles, 150 miles or 200 miles away from home to find a bed.

The feeling, from the professionals that we have spoken to, is that across the province the average is reasonable; however, they have been put in places that through events which have transpired subsequent, have left overcapacities in some parts of the provinces and undercapacities in others. Can you clarify whether or not the department is looking at that and whether or not that is true? People at meetings that I have been attending are saying that that is the case.

The second question is, whether or not the department is trying to address that or are these taboos, that they don't want to discuss them because someone has a licence that you can't review ever again and other places suffer because of it?

MR. HORGAN: Our audit did take a look at the whole planning process with regard to the future for homes for special care and that includes, as well, community-based options homes. We found that there is some long-range planning that had started just before we did the audit. A committee has been formed and the planning goes well beyond just the Department of Community Services. There are representatives on this committee from the Department of Health, the Department of Community Services, the Nova Scotia Association of Health Organizations, as well as an entity referred to as the Associated Homes for Special Care. They are doing some strategic planning, looking to develop a mission/vision statement and stuff like that. One of the things that they have on their plan is to take a look at future capacities as well as future needs for homes. At the time of our audit, they did not have anything to tell us with regard to what their findings were to date or will be with regard to capacities.

MR. LEBLANC: Did you say the long-term planning started the week before you did the audit?

MR. HORGAN: Not a week before, but not too long before we had started the audit.

MR. LEBLANC: Maybe you should have done the audit sooner. Thank you.

MR. CHAIRMAN: Moving right along.

MR. SALMON: Economic Development. This was a review of one aspect of the operations of the Department of Economic Development and Tourism related to a specific

[Page 15]

agreement with the federal government, the Canada-Nova Scotia Cooperation Agreement on Economic Diversification. That agreement, jointly funded, provides significant funds designed to promote economic development in the province and it identifies strategic priorities so that the efforts can be focused on areas of importance and payback.

One of the major issues in economic development is how to measure success in the money you spend and what results from that. So we believe that the department should be making more effort, better efforts to identify the outcome measures to know that, yes, when we do this we get a certain result, compared to when we do this and get a different result. More of that measurement needs to go on within the department.

Secondly, we believe that this Legislature should receive appropriate information on what is going on in terms of how this money is being spent and what is being achieved. There is a requirement that the department prepare an annual report under the Act; it hasn't done so and we believe it should make efforts to report to this Legislature.

There was a need identified by the department and the government to improve administrative processes and the management of this agreement. They did make changes back in August 1997, so we saw improvements from that point of view.

Every project proposal that comes in has to be evaluated before it can be funded. That is done but we found that the documentations supporting those assessments really weren't adequate for us to determine whether or not the appropriate analysis was done. But that, again, was improved after August 1997.

There are adequate controls in place within this program. Some of them aren't operating as they should because there isn't adequate documentation. Although they have designed controls, we weren't comfortable that they were all being appropriately applied. They are making sure they get what they are entitled to from the federal government in terms of expenditures incurred.

MR. LEBLANC: Mr. Chairman, on the EDT, we have made some requests for information through the Freedom of Information Act and have gotten copies of agreements and so forth. A lot of times the department is saying that they don't want to release the information because of so-called confidentiality or competitive criteria. I use the example of the Sable fish plant down in Shelburne County whereby the province provided a $3 million loan just basically to continue the company's operation into the future and a lot of the clauses were whited out so I couldn't read them. I couldn't reason as a former accountant, why this would put them at a disadvantage. It isn't any special provisions and they are competing in the business world. I am asking you, perhaps as an Auditor General, if you could come up - and I know you don't have the particulars - are there reasons for, in your opinion, as an accountant, why this would put the company at a disadvantage if people knew that they had monies coming from the provincial government?

[Page 16]

MR. CARTER: Mr. Chairman, I am not familiar with the particular project that is being referred to. I know that it is a sensitive issue in Economic Development and Tourism about the specifics for individual projects. I will try to get it as specific as I can but I think it is important to recognize that many of the projects that are done by Economic Development and Tourism are very unique. It is not a factory where you are just punching out widgets, there are special circumstances, with special considerations. I guess if I was Economic Development and Tourism and I had to deal with one organization, I would be reluctant to make that fully public because every other organization that comes knocking on the door would be looking for those, plus something else. If you assume that there is a negotiation process involved in how individual projects are put together and packaged between the provincial government and the external party and federal involvement and so forth, then I can see some merit for saying, look, the specific details should be kept confidential.

To come back to the issue of accountability, and that is our primary point, a request under the Freedom of Information Act, as I understand it, is sort of the last resort. For members of this House to have to use that, so they can get information to assess the performance of a program in Economic Development as opposed to an individual deal, would be of concern to us. That is why we are saying there is a need for better accountability information and reporting on the activities of Economic Development and Tourism. One of the key vehicles is the annual report that is required under the Act for that department.

MR. LEBLANC: Which has not been tabled.

MR. CARTER: No, it has never been tabled. I was trying to recall yesterday the last time that I saw an annual report tabled by Economic Development or one of its predecessors. Certainly, the Business Development Corporation that is required to table its report is tabled. They do prepare that annually, so that's part of the department's activities. Prior to that, in history, back when it was just Economic Development as one department and Tourism separately, the Department of Tourism had annual reports that were tabled. So we are going back to the 1980's now and early 1990's.

MR. LEBLANC: Rather than take the time of the committee, I will send you a copy of that, if you wouldn't mind so I can get some input, because we want some information and we feel that it should be made available. However, at the same time, we want to respect the rights and privileges of anybody who does apply but rather than take the time of the committee, I will send the specific one I was referring to and from that maybe we can have a better understanding.

[9:30 a.m.]

MR. CHAIRMAN: I think you can pursue your point with the Privacy Commissioner, Mr. Fardy. Mr. Dexter.

[Page 17]

MR. DEXTER: I don't want to get too much into the minutiae of this because I know that we will have another chance. My research was that the last thing that looked like a report with respect to economic development came from Mr. Thornhill back in 1992, I think. So it has been throughout the history of this government, at least, there has been no economic development report issued.

Recently, in the last year, we saw a significant loan in the order of $25 million which was written off. Is there a mechanism for changing the status of a loan from when it is made as a loan and when it becomes a grant or the reasons for writing it off?

MR. SALMON: Normally, the process is that when the original agreement is negotiated and a loan is authorized, there are provisions in that agreement that under certain conditions, the loan will be written off or forgiven so that it becomes automatic then, later on, that if the borrower meets those conditions, he gets his loan forgiven and my understanding is that in this situation that is what happened. Is that correct?

MR. CARTER: As far as I know, again not knowing the specific deal you are talking about, I think the important thing from an accounting point of view and accountability point of view, when there are concessionary terms in loans, and we are talking about something beyond an economic diversification agreement here, the accounting policy is that you recognize those as expenditures when the arrangement is approved. If you give a loan that has reduced interest rates or doesn't require principal repayments for a long period of time, you do, in fact, end up having an expenditure in the year that the loan is issued.

Going to the other end of it, in terms of when there are conditions in an agreement that specify that if the borrower meets certain conditions, either at a point in time or over time and then something else happens, then again, those are negotiated terms and government has the authority under the Industrial Expansion Act and the Business Development Corporation Act to do those types of arrangements.

MR. DEXTER: Of course, but I can't imagine that that is what happened in this case. There was a letter on file in which the company asked to have it deferred and instead it is written off and the explanation that was offered was that because it was an interest free loan, the value of the money was actually decreasing each year anyway. So eventually it was not going to be worth anything, so you may as well write it off; I mean, it is bizarre reasoning as far as I could make out but . . .

MR. SALMON: We have not examined that in any detail.

MR. DEXTER: You haven't examined it.


[Page 18]

MR. CHAIRMAN: Mr. MacKinnon.

MR. MACKINNON: Mr. Chairman, of course we know where the NDP stands when it comes to Michelin but that is another issue. I wonder, for clarification of all those interested, the Department of Economic Development and Tourism, if you would be kind enough to explain the real difference, in layman's terms, between this department and its lending and its funding processes and programs as opposed to traditional chartered banks and financial institutions as a government entity and our obligation to the taxpayers.

MR. CHAIRMAN: I would like to hear the answer to that, too.

MR. SALMON: I would suggest to you that the fundamental difference is that the Department of Economic Development and Tourism is providing funding in a variety of ways, whether they be loans or contribution arrangements in which they simply fund costs incurred or they make grants but their fundamental purpose is economic development in the province. That is the government's objective: create jobs, stimulate economic growth, improve the economy. That is the objective of the department and so its motivation is different than a chartered bank's would be. Its assessment of risks would be different than a chartered bank's would be. The objective of a bank is to loan money and get it back and earn interest. So it assesses risks in terms of ability to repay and ability to support a funding arrangement. That is very different in terms of motivation and objective and risk assessment than what the government would do.

MR. MACKINNON: So the fundamental difference is the social responsibility.

MR. SALMON: Public responsibility. It is more than social, it is economic.

MR. MACKINNON: Yes, well, all embodied in one . . .

MR. SALMON: Okay, yes.

MR. MACKINNON: . . . whereas with the financial institution, the bottom line is we give you money, we want it back plus interest.

MR. SALMON: That is correct.

MR. MACKINNON: Period. Thank you.

MR. CHAIRMAN: Do you wish to continue, Mr. Salmon?

MR. SALMON: Yes. We will turn very briefly, I hope, to P3s. We have spent a lot of time in this forum discussing public-private partnership arrangements for school construction. We have issued special reports and so on. This is really just a summarization of

[Page 19]

what we have done to date and comments on the status. At the time we did the audit, only two final leases had been signed. I see in the press this week a third one has. They had also reached development agreements for four of the original eight schools. In November, a development agreement was signed for 13 schools for three school boards. Then again in December, another development agreement for 13 schools in Cape Breton-Victoria and the Strait.

What troubled us in the course of this audit was what we perceived as not a conflict but a different application of stated government policy and that was the stated government policy was no funding, no shovel in the ground until the lease is signed. What has been happening is that development agreements have taken the place of leases and although they contain, in general terms, the financial arrangements in terms and conditions, they don't represent a lease. So there is a deviation there that is unclear to us as to whether what is happening is consistent with what the government stated would happen.

Moving on, as of March 1998, that is almost a year ago, the Department of Education had provided construction advances of some $36 million to consortia in advance of having signed agreements and therefore took a risk and at that time had to make a provision for doubtful accounts, in other words whether they would collect that money back of almost half of it, $16 million, related to three schools. However, two schools that at that time were currently in progress of construction, were being financed by the consortia or their lenders, not by the government. The rest of the packages of schools are in various stages of negotiations with regard to both development agreements and leases.

I just wanted to point out here that this is a major program. There is a lot of money involved and there has to be a process of risks to be assumed and the level of those risks. Those things should be considered by both the province and the consortia as we move forward.

MR. CHAIRMAN: Mr. LeBlanc.

MR. LEBLANC: I will just ask a quick question. I am sure Mr. Fage wants to ask about the schools. I want to ask about the provision for doubtful accounts. Can you explain that to me, please? I can't follow why you would be setting up a provision for doubtful accounts.

MR. SALMON: As at March 31, 1998, $36 million had been advanced to these consortia for construction costs. They were at various stages of negotiations of trying to arrange leases. Once a lease is signed, the consortium takes the lease to the bank and borrows the money on the security of that lease and can pay back the government for the money that was advanced. In these cases, consideration was given as to whether or not that goal was going to be achieved, and whether or not the government would be able to recover all of that

[Page 20]

money. There was some question as to whether $16 million of the $36 million would be recovered; therefore, a provision was made and an expenditure was recorded.

MR. LEBLANC: Well, from my accounting experience, a provision for doubtful account is only provided for when there is a very serious consideration that you cannot collect that debt. Obviously, if there was a provision set up, there were some serious questions as to whether or not these entities would be able to complete the projects and finalize the financing.

MR. SALMON: Just to clarify, Mr. LeBlanc, it was one project that was provided for, Sherwood Park Junior High School in Sydney. It was the first one. The school is open, running; it had been funded totally by the province as they had not been able to negotiate a lease. So, in effect, if a lease was not going to be signed, it would become a government-owned school, paid for in the traditional way by the school. So, the provision accomplished that objective.

MR. LEBLANC: That is why I find it strange that you would set up a provision because you would still have the asset that you could have fallen upon to collect it.

MR. SALMON: Well, we have to go back to traditional government accounting. If you build a school that you own, you write off the cost. That is what this provision accomplished.

MR. LEBLANC: Okay, we have gone into the expense; I see what you are saying.


MR. LEBLANC: One quick question, if I could, Mr. Chairman, is about whether or not the P3 should come under the Atlantic Procurement Policy. As it is now, they are outside the parameters of that. These people have basically had carte blanche in how they operate in the private sector, and they do not fall under the Atlantic Procurement Policy. Do you have any comments as to why they are not and whether or not they should be? Obviously, in my opinion, they should, but perhaps you could offer some comments with regard to that.

MR. SALMON: Elaine, can you comment on that?

MS. ELAINE MORASH: It is not an area that we have explored. I really cannot comment on it.

MR. SALMON: In terms of the government's application of the procurement agreement, the RFP process seeking proposals from consortia or developers is not restricted in Nova Scotia. Is that correct?

MS. MORASH: That is correct.

[Page 21]

MR. SALMON: So, it has been applied at that level. What you are suggesting then is that the developer going out and making his contractual arrangements with suppliers is not governed by it. But isn't that consistent with any other arrangement that the government might enter into?

MR. LEBLANC: Well, not really because the government, through the old Department of Supply and Services and its successors, always basically tried to ensure that as much government procurement was done through the Atlantic Provinces and hopefully through Nova Scotia . . .

MR. SALMON: By the supplier.

MR. LEBLANC: By the people who were building the capital projects, by the people who were buying the supplies for the schools, by the hospitals and it goes on and on. Now, we basically have almost a $500 million capital expenditure by the province which lies outside the Atlantic Procurement Policy, which I think is a real loss for the province because there are some opportunities for people to build up expertise and to expand their manufacturing bases whereby they could gain business elsewhere. Anyway, that is a discussion for another day.

MR. SALMON: Yes, and I would say that I am not sure that I am in a position to say that you are right, that it is outside, because I do not believe that we have looked at the agreements in enough detail to know whether conditions are being imposed on the developers to buy in Atlantic Canada. I do not know that.

MR. CHAIRMAN: Mr. Fage and then Mr. Dexter.

MR. FAGE: The $16.1 million represents basically the Sherwood Park Junior High School? Is the Sherwood Park school part of it?

MR. SALMON: Yes, there is part of another school in it, I believe, but it is primarily Sherwood Park in Sydney.

MR. FAGE: It is interesting that two of those schools would have been complete, with Horton nearing completion or fairly well along as of March 31st. The advance is $35.9 million that you have recorded there from the Department of Education. Two days ago, we were told Horton cost $25 million; Sherwood Park, approximately $15 million or $16 million; and O'Connell Drive is $8 million or $9 million. Those totals far exceed $36 million. Is there any explanation for that?

MS. MORASH: What happened was that the consortia were being financed on a progress claim basis so that they were being financed as construction progressed. So, at this point in time, there would not have been the full amount of Horton, for example, in there.

[Page 22]

MR. FAGE: If you run those other numbers up, you are approaching about $47 million. We note the two were complete at that time and would have had their final draws, being O'Connell Drive Elementary School and Sherwood Park Education Centre. If we are talking $47 million and those other two in the range of $23 million to $25 million, $10 million or $11 million on the $25 million seems like an awfully small proportional draw on the Horton school as of March 31st, 1998, because the other two would have been complete and sitting on the books at that time.

MS. MORASH: I do not have the information in front of me, but I do know that Horton was financed by the province and I have looked at the accounts lately. I do not have the breakdowns in terms of how much would have been paid in terms of progress claims before March 31st as opposed to after. But, yes, Horton did go through that account at a certain point in time and the cost will be recovered now that the lease has been signed.

MR. CHAIRMAN: Mr. Dexter.

MR. DEXTER: No, thank you.

MR. CHAIRMAN: Please continue.

MS. SALMON: Here we go again. We can move to Teachers Continuation. This was a special audit, as I mentioned earlier. We had done a previous audit of administration of teachers' benefit plans generally administered by the Teachers Union. We identified some issues with regard to the salary continuation plan and, as a result, the Nova Scotia School Boards Association requested that we undertake a special audit and we agreed to do so.

This related to the financial situation within the plan and started with the fact that at December 1997, there was a significant accumulated deficit in the plan, and that had originated over a period of three years, 1995 to 1997. The trustees of the plan had indicated that Manulife who were administering the plan, running the plan for the teachers, they would not demand that Manulife absorb that deficit. They negotiated, and signed in May 1998, a guaranteed deficit reimbursement agreement, which transferred some of the risks from Manulife to the trustees, if the plan was to be terminated. We feel that it is appropriate that plans like this should be reviewed by actuaries at least every three years to determine that the reserves in them are adequate. This plan had not been reviewed by actuaries since 1991. So, the question of the adequacy of the reserves was somewhat up in the air.

We believe that the school boards need to seek legal advice to determine who has entitlement to prior years' dividends that are currently held by the group insurance trust fund, which is related to the salary continuation plan. We are concerned that claims experience in this plan is significantly higher than in other similar plans; 44 claims per thousand insured teachers is quite high in relation to others. There needs to be discussions between the trustees and the school boards as to how to run this plan because that is somewhat unclear. But we

[Page 23]

do want to emphasize, this is a valuable plan for teachers. It provides them with security and we are not suggesting that that should be eliminated or anything like that, but to continue it, it has to be financially sustainable and it is not at the present time. There are a number of issues that need to be dealt with to address that issue: benefit levels, premiums, how costs should be shared, how to deal with dividends and how to share risks, and the overall structure in terms of governance.

MR. CHAIRMAN: Mr. Salmon, do you happen to know whether the trustees or the school boards have acted upon your recommendations from last year?

MR. SALMON: Elaine, can you comment?

MS. MORASH: There have been ongoing negotiations but there hasn't been a resolution yet with respect to some disagreements between the school boards association and the trustees. The trustees have acted on certain of the recommendations, but the larger ones with respect to ownership of prior dividends and that kind of thing are not resolved yet, to the best of my knowledge.

MR. CHAIRMAN: Have they had an actuarial audit done?

MS. MORASH: I do not believe so, but my information may not be 100 per cent current.

MR. CHAIRMAN: Mr. Fraser.

MR. FRASER: Mr. Chairman, the salary continuation, there is no premium attached to that. That is, if a teacher goes on disability, that pays their salary for a year before they go into the Manulife LTD? No?

MS. MORASH: This is the LTD. After they exhaust their sick leave, this is the plan.

MR. CHAIRMAN: Can we move on?

MR. FRASER: One other point there. The $3.6 million deficit, is that like an unfunded liability, a future reimbursement, or is that a deficit up until a certain period of time?

MS. MORASH: It is a deficit up until a certain period of time, but their accounting policies are fairly strange in that when a claimant is approved for admission into the plan, the entire actuarial cost of paying them until retirement is charged against that year, so they don't spread it out from the year that the claim is approved until the year that they retire. It is a current amount, it is an actual deficit, but it reflects the costs of paying all of the existing claimants until retirement.

[Page 24]

MR. FRASER: Normally if you are dealing with an insurance company, say Manulife - and I don't know the relationship there - are they managing the plan or are they the insurer where it is their responsibility, through their actuarial work, to set a premium that would pay future claims plus administration?

MS. MORASH: They are actually the insurer on the plan. The point we were trying to make is that, yes, Manulife has its actuaries look at it in terms of premium setting and adequacy of reserves and that kind of thing, but because Manulife's interests are different from the Teachers Union's interests, we believe that it would be appropriate for the Teachers Union trustees to also have their own actuaries come in and look at the plan every three years. There is a conflict there in terms of their objectives: Manulife is a profit-making business and the Teachers Union is looking for the best protection for its members and for the lowest premium that it can negotiate.

MR. FRASER: Is there a fear that Manulife may drop the plan?

MS. MORASH: Not to the best of my knowledge.

MR. FRASER: So, they are interested in still carrying on.

MS. MORASH: As long as they can see the light at the end of the tunnel, that there is a way for this deficit to be recouped. But if the plan was terminated, the deficit would rest with Manulife; Manulife is, in fact, the insurer for the plan.

MR. FRASER: Okay, that's fine. So, the province is not on the hook for $3.8 million; if the plan were discontinued tomorrow, Manulife would be on the hook for the deficit.

MS. MORASH: That's right, but in order to continue with the plan, Manulife wants to see that there is light at the end of the tunnel and that, in fact, this deficit would be recouped over the long haul. The other thing is that the province does not directly pay premiums for this plan; the premiums are paid primarily by the teachers themselves and then, for some school boards, they are cost-shared with the boards.

MR. FRASER: That would be standard though, that teachers would pay the premium for their long-term disability coverage and for tax purposes, correct? If they pay the premium, then the benefit is tax-free; rather than if it is a cost-shared arrangement, then it is a taxable benefit.

MS. MORASH: That's right. It is cost-shared at some boards though.

MR. SALMON: I think we can move on to the Department of Finance, Chapter 9, Corporate Financial Management System. This is a somewhat unique situation. This system was implemented on April 1st and we had been monitoring the process of developing the

[Page 25]

system and implementing it. As it was implemented, we had some preliminary concerns about adequacy of controls in the system. The Department of Finance shared those concerns; they had been responsible for putting it in place and they had similar concerns to ours. This is an interesting situation in which it can be demonstrated that the Department of Finance and the Auditor General can work together and still maintain the independence of the Office of the Auditor General and not compromise the officials in the Department of Finance.

We had ongoing discussions with officials in the Department of Finance and we agreed to jointly commission an external audit by a consulting firm through a process of tendering. Such an audit was commissioned, jointly funded by the two offices, the Department of Finance and the Office of the Auditor General, and that was done in March 1998.

In terms of findings, the report confirmed our preliminary assessment of the control issues that existed. The report also identified a number of other situations, made quite a number of recommendations to improve the level of control. It is very clear that the Department of Finance is taking this very seriously and is moving forward to deal with the control issues and improve the level of control in the system and, in fact, has recently assigned a full-time staff member who is managing that process and is developing a strategy and a timetable to ensure that those recommendations are dealt with. That is a very high-level summary of what was a very detailed audit and the report is reproduced in my report.

Maritime Medical. This is essentially focused on the new MSI system that is managed for the government by Maritime Medical. We are concerned about the level of the adequacy of environmental controls in a computer environment within Maritime Medical, their project management practices with respect to the development of the new agreement and, our old friend, Y2K; whether they were ready with this system to deal with it.

In summary, we found that the general overall EDP controls were adequate, quite satisfactory. We felt that it was important that the Department of Health, in terms of exercising their responsibilities, put in place a process of periodic audits or reviews of MMC in this area. We wanted to point out that this was a very complex, significant undertaking; it has been successful and has been operating for over a year. We want to re-emphasize that given that it has such an impact on everybody in this province, essentially, that it be ready to handle the Y2K issue.

We move forward then to the second half of Homes for Special Care, again, recognizing that in this particular situation, we have an evolving transfer of responsibility of something that was shared between the Department of Health and municipalities, to a transfer to just the Department of Health with the municipalities being out of the loop.

One of our focuses here was that given this shared responsibility now between the Department of Community Services and the Department of Health, there has to be appropriate coordination between the two bodies to ensure that individuals are dealt with in

[Page 26]

the most appropriate, cost-effective way in the right facility. One way of doing that is the establishment of what is called a single-entry focus for individuals so that they are then streamed into the appropriate facility and under the care of the appropriate organization. That is all ongoing. I think that is a general assessment of something that is evolving and we feel, for the most part, it is evolving appropriately.

Justice, the Alternative Dispute Resolution Program. Given my mandate with regard to any public spending, my focus here had to be relatively narrow compared to what some constituents and those involved or concerned about this program would have liked. We were focusing on the departmental operation of this program, how they administer it. We could not address complaints or concerns of program stakeholders, such as the past or present employees of the institutions who were being alleged to have been abusers, nor could we address the particular complaints or concerns of those who claimed to have been abused. We could only concern ourselves with the process, primarily with regard to control aspects of the assessment of claims, the reasonableness of evidence brought forward and the process of determining compensation. There was just no way we could assess the performance of the program from an effectiveness point of view.

[10:00 a.m.]

MR. CHAIRMAN: Mr. MacKinnon, you have a point?

MR. MACKINNON: Mr. Chairman, on that issue. Mr. Salmon, in your report you indicated some concern with the methodology, as I understand, upon which the conclusions were drawn; in other words, the methodology, or apparently the process by which decisions were reached to award compensation, was not adequate.


MR. MACKINNON: Could you expand on that?

MR. SALMON: We were concerned that when the program was first launched, it began to evolve and it changed as it moved forward particularly in terms of the original estimates of numbers of claimants that would come forward, because that just mushroomed, and the processes of assessing the validity of claims, some of the fairness aspects and the extent to which documentary evidence would be gathered. That whole program evolved to the extent that we were much more comfortable that in the latter parts of it, there were appropriate controls in place given the nature of the program and how far you could go in obtaining documentary evidence and what would be acceptable, and the process evolved in terms of dispute resolution, differences of opinion and so on. So we are much more comfortable with the way it ended up compared to the way it started. I think that is a fair summary, Alan?

[Page 27]

MR. MACKINNON: Just, again, to put it in layman's terms, what you are saying is, the way it was initially conducted, they took people's word more at face value than doing a proper check and balance approach to ensure quality control.

MR. SALMON: Exactly, yes.

MR. MACKINNON: I don't mean to sound so analytical about it, but that is the basis upon which you prepare your report and is not to diminish the reality of the situation on any particular claim.

MR. SALMON: That is correct, yes.

MR. MACKINNON: The methodology that you referred to is the essence of it.

MR. SALMON: Yes. My mandate is to ensure that to the extent possible in programs that the government, in administering them, gives due regard to economy and efficiency and, if you like, value for money. How you quantify value for money in this situation is almost impossible. So we were concerned that there was due regard for the spending of taxpayers' money and, therefore, there should be sufficient effort put forward to ensure the claims that were being paid were valid. In the earlier days, there was less evidence that that was done appropriately. As the program evolved, they put in more procedures and sought more evidence.


MR. FAGE: In that regard, Mr. Salmon, what about other allegations of abuse or other institutions or situations, does that come into the scope of the audit that all circumstances and other situations are being evaluated, that we are moving toward closure and value for money? Is that in the scope of the audit, other facilities where allegations have been made or other situations?

MR. SALMON: I don't think I could give you an answer related to which allegations should have been put into the process and which should not have been. We examined the program in terms of its objectives and its scope and whether having determined what they were going to deal with, how were they dealing with it.

MR. CHAIRMAN: Mr. MacKinnon, you had a follow-up point.

MR. MACKINNON: Just one final point on that, I don't want to belabour it. I want for clarification purposes, the processes that were put in place by the government as the program progressed. They were put in as - if I am interpreting your comments - designed to ensure better accountability and quality assurance, rather than some would perceive it as

[Page 28]

being, you know, the government trying to be a little more mean-spirited. It is quality control, essentially, is the point you are making.

MR. SALMON: I would agree with you. We saw no evidence of mean-spiritedness.

MR. MACKINNON: Okay, thank you.

MR. HORGAN: I would just like to add one additional piece of information. As Mr. Salmon mentioned, the process became more rigorous as it proceeded. However, one of the things that enabled them to do that was that certain information that was not available at the start of the process became available throughout - perhaps a year or so - into the process. The Department of Justice found a number of boxes of information that applied to some of these youth institutions that contained medical records and stuff like that.

At one point, the process was able to then rely on some documentary evidence that was not available at the beginning. That was one of the reasons why it became a more rigorous process because it was able to become a more rigorous process.

MR. MACKINNON: That embodies another question. Are you saying that there was a breakdown in communication between the two departments?

MR. HORGAN: No, I am not saying there was a breakdown of communications, I am saying that a year or so into the process, the information that no one appeared to know existed - or at least from our discussions with the department - had been found. Somewhere in deep storage in some area of a warehouse, or something, a number of boxes were found that contained documents and information that had originally resided, perhaps, at some of the youth institutions.

When that information was found, the government suspended the program for a little while in order to look at that information, saw that that information could be used in the investigation of claims and then changed some of the process. When they restarted the process again, they had some new rules to follow which required them to assess claims against this newly-found information.

MR. MACKINNON: Thank you.

MR. CHAIRMAN: Thank you. Next section, please.

MR. SALMON: I think we should move to the Alcohol and Gaming Authority. We want to distinguish here, first, just to make it very clear, that there are two organizations that are involved in gaming in Nova Scotia: the Nova Scotia Gaming Corporation which is the operator, and oversees the casino and has responsibility for oversight from an operational point of view of the Atlantic Lottery Corporation; and then this organization which is the

[Page 29]

Nova Scotia Alcohol and Gaming Authority, which is the regulator, establishes the regulations and then ensures that the regulations are followed under the Gaming Control Act.

In general, it has adequate internal reporting and accountability structures. It could be more comprehensive in how it reports on its finances and operations; that is, externally.

A key point here, it has no explicit mandate for monitoring or regulating interprovincial lotteries and certain aspects of video lottery terminals. That is, from our point of view, a deficiency in the regulatory regime for gaming in Nova Scotia.

It does register, licence, and inspect casinos and other forms of gaming in Nova Scotia. It has never formally approved the internal control systems at the casinos which it was required to do. But it is fulfilling its mandate to conduct impact studies, assess and do public interest polling on what is going on in gaming in Nova Scotia.

There is gaming on native reserves, as we know, and that is outside of the authority's responsibility. We have made some observations in this area anyway. The gaming on native lands is controlled by contracts with band councils but government gets very little information on what goes on, on reserves, on native lands with regard to gaming. Those native gaming commissions are not being audited and we feel that it would be appropriate, from a control perspective, to do some monitoring in that area.

MR. CHAIRMAN: Mr. Salmon, do you happen to know whether the authority has moved on your recommendations? I wonder, particularly, about the point about the approval of the internal control systems at the casinos.

MR. SALMON: Have they done anything?

MR. CHAIRMAN: Have they done anything about that?

MR. SALMON: Not to my knowledge, no. We haven't really followed up but to my knowledge, no, nothing has been done.

MR. CHAIRMAN: Okay. Sorry, Mr. LeBlanc. Was that your question, too?

MR. LEBLANC: That was my question. That and a little, short one after. It is in regard to gaming on reserves and so forth. Are those private machines, rather than something through the lottery - it says, you have no information whatsoever.

MR. SALMON: No, they are Atlantic Lottery terminals. They are connected to the Atlantic Lottery main computer.

[Page 30]

MR. LEBLANC: So why would you have little information to the extent of gaming and native lands? Wouldn't that information be available through the computers?

MR. SALMON: Well, Atlantic Lottery would have information but it is not (Interruption) Pardon? Sorry.

MR. CHAIRMAN: Yes, Mr. Horgan.

MR. HORGAN: What our report indicated was that the government did not have complete information. It does have information on VLTs. We know that as of March 31, 1998, there were about 400 VLTs on native reserve land and net wagers during the year ended March 31, 1998, totalled $11.7 million. This is information that is compiled by Atlantic Lottery and reported to the Nova Scotia Gaming Corporation, of which government then has access to.

It is other areas that we are a bit concerned about, with regard to, perhaps, the placing of VLTs, who has access to them, and then other areas of gaming, for example, bingos and charitable lotteries or other forms of lotteries. The government knows very little about any of those issues.

MR. CHAIRMAN: Mr. MacKinnon.

MR. MACKINNON: Mr. Salmon, the second and the last items that you have identified, appear to be extensions of an issue from a previous date, when we raised the issue at Public Accounts with regard to auditing the Atlantic Lottery Corporation. I believe at that time there was difficulty of yourself being, on Nova Scotia's behalf, to be able to do it. Were any of these issues dealt with at that particular point in time when the resolve came forth?

MR. SALMON: No, because that audit was an audit of Atlantic Lottery Corporation's operations and Nova Scotia's interests in that and did not address the issue of the regulatory regime or the monitoring of the regulatory regime by this organization. They are interrelated but also separately focused.

MR. MACKINNON: You looked at Item A instead of Item B.

MR. SALMON: We did not address these issues at that time.



MR. FAGE: I was wondering, listening to the report - and I understand that the arrangements made with the native band councils allow the full regulation or placements, all

[Page 31]

stipulations become the jurisdiction of the band council. As well, I have been told that the negotiations, the provincial government arrangement they concluded with native councils was that Atlantic Loto provide the VLTs. A 5 per cent service fee goes back to the VLT operator which is Atlantic Loto; 95 per cent remaining with the band council, where the arrangement in any other enterprise in Nova Scotia would entail that the regulation placement of the machine and the percentage going to the operator is roughly 30 per cent. Those types of arrangements, does that cause you some concern with that volume of money, and the placement and social issues that could be involved with that, that this government has signed and negotiated?

MR. SALMON: Claude, or Alan, which one would like to tackle that?

MR. CARTER: How do you tackle that? (Laughter) You are correct. It is our understanding that back in 1995-96, when we did the work at the Atlantic Lottery Corporation, the Gaming Authority, under its previous name then, was in discussions with the Atlantic Lottery Corporation and there was a lot of discussion back and forth, in terms of exactly what the authority's mandate is with respect to the Atlantic Lottery Corporation and so forth. So, in terms of putting that in context, there was some interpretation, discussion and legal opinion in terms of how far the authority could, in fact, go in terms of Atlantic Lottery Corporation's activities.

You are correct in your information. As we understand it and, again, this is coming from information that we had in 1995, once government asked Atlantic Lottery Corporation to provide those resources to put VLTs on reserve lands, and the agreement was 5 per cent would return to Atlantic Lottery Corporation and, if my memory serves me, that 5 per cent works through to the Province of Nova Scotia through the mechanism.

MR. HORGAN: The only thing that I would add is with regard to the number and the placement of VLTs on native reserve lands, those two issues are covered by the native gaming agreements. So, there is a contract between the government and the native band councils as to how many VLTs can be on the reserve and how they are to be placed, in what kind of a building and who has access to them.

MR. CHAIRMAN: Mr. LeBlanc.

MR. LEBLANC: In regard to the internal control systems of the casinos, and some of our previous witnesses have indicated that the winning percentages, I believe, have been sort of set by the casino and have not been pre-described in regulations. Do you have any information in regard to that, whether that is the case, whether that has changed? Maybe you could answer that question first of all.

MR. CARTER: I don't recall that the percentage, in terms of the payback, is established for the casinos in regulation. There certainly is a number established with respect

[Page 32]

to video lottery terminals. It is our understanding that the payback was, in the past at the casino, a bit lower than it is for VLTs.

MR. LEBLANC: The reason I asked the question is because, supposedly, the norm or the industry levels have been higher than what they are in Nova Scotia. So, I was just wondering whether or not anything had come up during your review, whether that is being addressed by the Alcohol and Gaming Authority or not. Nothing came across?

MR. HORGAN: No, we did not look at that aspect during the audit.

MR. CHAIRMAN: Are we on to workers' compensation?

MR. SALMON: The last one. We have come to the end. As I mentioned earlier, this audit I guess initially, Mr. MacKinnon, arose from a sit-in. As a result of some informal discussions between the minister's office and my office, we were then formally requested to undertake an audit of the workers' compensation system. We have very carefully chosen the word, system, because this is not an audit of just the Workers' Compensation Board, or of the other individual organizations involved in workers' compensation. It was an audit of the system, which involved the operations of all of them and the interrelationships between them.

We wanted to assess their processes, the effectiveness and efficiency, and accountability of those processes. We wanted to focus specifically on the causes for and recommend solutions to the significant backlog that existed in the benefit decision appeals process. We wanted to assess compliance with the Act. We wanted to specifically focus on the role of medical professionals in the process because, clearly, disputes over medical evidence and medical conditions was a major cause of the appeals situation. We wanted to look at the relationships between the components, recognizing that they have different objectives, different responsibilities and sometimes those can be in conflict and, as well, the relationships with other components, that is external organizations like Canada Pension Plan.

In terms of findings, overall the system has continued to improve. Changes have been made. It is a more cost-effective system than it was previously. The backlog is a significant issue and has to be addressed and it has arisen primarily because of the move from the old appeal board under the old Act, to the new tribunal under the new Act, and quite a number of situations sort of caught in the middle of that transition.

The audit determined that in terms of dealing with the current volume of appeals, the tribunal can deal with that, but a special effort is required to eliminate the backlog. Each of those components appears to be from the work we did in compliance with the Act, and with their various policies and procedures.

It is clear that medical professionals who are outside the direct control of those within the system, particularly those within the Workers' Compensation Board, play a vital role. We

[Page 33]

would suggest that those relationships and understandings of the process need to be improved.

We borrowed here from Manitoba, who have had very good experience with the use of what could be characterized as an independent medical review panel, that could hear evidence from both sides, and independently and objectively make a ruling that would deal with those kinds of disputes and differences of opinion. It works very well, cost-effectively, in Manitoba.

Clearly, the sit-in was caused by a major level of dissatisfaction with what was going on, and clearly the most apparent source of that dissatisfaction was this large volume of appeals that were backlogged, and dealing with that could alleviate the comfort level that exists with the system. WCAT, the appeals tribunal, has developed a plan that would eliminate this backlog by July 2000. We just express a general concern that there is a lack of cohesion within the system in terms of the relationships between the parties and the various organizations, recognizing that they have different objectives and sometimes those are in conflict and those have to be respected. There can be a healthy tension between them that operates with a degree of cooperation that would make the system more effective.

Those are my comments, Mr. Chairman. Questions on that chapter or on any other aspect of the report would be welcome.

MR. CHAIRMAN: Mr. Delefes.

MR. PETER DELEFES: Just one quick question about the large unfunded liability for the workers' compensation system. How do you propose that might be addressed?

MR. SALMON: We did not address that issue in this audit, because we were focused on the processes of claims and not on the unfunded liability. I do not believe we have specific recommendations at this time on how to deal with it. It is certainly an issue, but I believe that the Workers' Compensation Board has a financial plan that is intended to fund it and bring it down over time through their processes, through premium adjustments perhaps, through improved investment policies on their assets, much the same way that the teachers' pension plan, with the same issue, has been successfully addressed.

MR. DELEFES: Do you have an opinion as to the appropriateness of that plan?

MR. SALMON: Not at this point in time. I would say we have not done enough work to render such an opinion.

MR. CHAIRMAN: Mr. MacKinnon who is going to help us on this point.

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MR. MACKINNON: I will try. (Laughter) First of all going back, Mr. Chairman, with regard to the medical review commission, the Auditor General referred to the Manitoba experience. As he probably knows, under our present legislation there is a requirement, by law, to have a medical review commission here in Nova Scotia and, as such, we have taken action to ensure that that medical review commission, as I announced back in May or June, has been appointed through a proper independent process and is now at the point of being operational.

With regard to the caseload, I believe we will find that with a caseload of approximately 33,000 caseloads per year, only 1 per cent of that caseload goes to the reconsideration level within the board, in other words the first line of appeal for a constituent or an injured worker, as you may refer. Only one-half of that 1 per cent will move on to the second line of appeal which will eventually end up to WCAT and be handled through the Workers' Advisers Program. So it is quite clear that the new legislation is working very effectively.

On the third point, with regard to the unfunded liability, as Mr. Salmon knows as well, when the government took control of this issue back in 1993-94, there was an unfunded liability of approximately $465 million which was not a healthy situation. I believe we recall being here before the Public Accounts Committee on this very issue at that time.


MR. MACKINNON: There was a 40 year plan laid out to be able to try to help stabilize rates for the employers of which approximately - well, there was a certain percentage - 20 per cent or 25 per cent of the standard rate goes toward the unfunded liability. The provincial government put in approximately $23 million or $24 million to help stabilize those rates as well. If you look at the reality of the situation, between the business plan, and I give full marks to Mr. Christie and Mr. Stuewe at the board, and their entire board, for putting good financial management processes in place because the unfunded liability is coming down a lot quicker than had been anticipated for a number of reasons. One, because of good management; two because the economy is doing much better than anticipated and at present rates we will have the unfunded liability paid down between 50 per cent and 60 per cent of the anticipated 40 year time limit. So we are doing extremely well. If you review the annual report, I think the evidence is there to deal with that.


MR. FAGE: Mr. Chairman, that was interesting documentary provided by the minister. It seems to me that the Act was passed in 1996 and I commend the minister on finally preparing to appoint the medical review board three years later. I certainly have some grave concerns about any plan that involves 40 years of payment to bring the unfunded liability into line and when we are going to be for those 40 years, if anybody else's projections

[Page 35]

are compared across this country, the highest in this country and I don't think it is acceptable. Finances under those last two years is what has lowered it, not policy. What the government did have control over, which was the guarantee at 4.5 per cent which would have helped lower it certainly a lot faster, is what the government, in my view, removed and made the unfunded liability much larger than it needs to be.

Employers across this province phone very regularly in this process with the select committee on the go and their concern is a just concern and that is in this climate of deregulation on a provincial competitiveness and globalization, they need cost structures in line with other provinces and jurisdictions, specifically in this country and globally as we move down the road. This situation, I think, is going to have to be reviewed again as in repayment terms, what government's responsibility is to that unfunded liability over time. The situation may have to be, and I really feel probably will have to be, addressed again at another time. I guess my question to you is, is 40 years an appropriate repayment scheme to lay out in this situation when there are so many volatile factors out there that influence it?

[10:30 a.m.]

MR. SALMON: I can't give you a yes or no answer to that question. In terms of funding an unfunded liability, you must look at the size of it in relation to the overall program, the nature of it, the risks associated with the plan itself and whether if you don't deal with it in a reasonable time-frame, you are going to be in the position of not being able to pay claims. I have not, and my office has not, done sufficient work in the recent past to comment on whether or not 40 years assumes too great a risk in terms of those aspects. It may be that it is adequate. It may be that it is not. I really can't comment at this point but certainly that whole area is one of importance within this government. We have a long-term plan that establishes criteria as to when and how often we examine, from an audit perspective, various programs and I can assure you that this issue is somewhere in that plan and we will get to it at an appropriate time.

MR. FAGE: I guess certainly for a legislator, as myself, that determination is very crucial, your independent view of those types of terms, because one can have rhetorical discussions among political Parties and partisan views, but the overall good of Nova Scotia and the protection of the workers and a plan that is payable and doable is what is really needed here. When you look at 40 years repayment term, obviously to myself there are other options, too, as to how you can address that.

MR. CHAIRMAN: Mr. Dexter, you had a point?

MR. DEXTER: Yes. It is not on this. I am on another part of the report. I wanted to go back to Economic Development and Tourism just to ask some . . .

MR. CHAIRMAN: Is this on workers' compensation?

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MR. MACKINNON: If I could, just to bring closure on this workers' compensation for all the colleagues who had raised it and then I am going to move out of the picture because it is a point of clarification, if I could, if it is okay. The average rate in Nova Scotia is $2.52, and 47 cents of that goes toward the unfunded liability, so it is important that all members understand the dynamics of the situation and I appreciate my colleague allowing me to make that point.

MR. CHAIRMAN: Thank you. Mr. Dexter.

MR. DEXTER: In your review of the economic diversification agreement and your commentary on the annual reports of the department, you are very careful to say, I note, in 6.40, "Performance information could be reported through the Annual Report . . .", as opposed to should or must be reported. My concern, of course, is that the department can prepare a report which is essentially promotional bumf that doesn't give you any of this and there is no requirement in the Act that does anything more than that.

MR. SALMON: And that is why the could not the should. There is no legislation that requires it. They could do it, we think they should do it but there is no legislation. You people have not said they should do it, I guess is my bottom line.

MR. DEXTER: Sure. Can you give us what you think ought to be in such a report in order to make it meaningful?

MR. SALMON: You are looking for a summary of appropriate performance measures for economic development. Job creation would clearly be one. What was the result of this investment by the government in terms of job creation? We determined through analysis in the beginning that if we invested this amount of money, we could stimulate the economy in a certain region to a certain degree and that should result in an estimate of so many new jobs. So there should be a mechanism in place then to measure whether or not that was achieved. Did we get the jobs we set out to get? Then there should be a mechanism to report to this Legislature that we made this investment with the primary objective of creating this number of jobs and this was the result. So you measure their effectiveness in terms of their decision making and the investment of money and whether it was worthwhile. Now that is just one example, Mr. Dexter, of an outcome measure.

MR. DEXTER: Their loan default rates.

MR. SALMON: Loan default rates is another side of it. Spin-offs from an investment in one industry that leads to the development of other industries and that is more than just job creation. There are a number of those kinds of factors, how do you measure economic growth?

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MR. DEXTER: Is it usual that these kinds of reports would look at successes and failures and compare the . . .

MR. SALMON: Definitely. Clearly, though, we should not look at the reporting of failures just to blame someone for a failure but rather as a means of learning from your mistakes and doing things better the next time.

MR. CHAIRMAN: Can I ask about a different topic if we are finished with this one? Mr. Salmon, I wonder if you could help us understand something that has had some focus of publicity just recently which is the question of the consequences of the most recent federal budget and the announced additional funding for the CHST. I see from an article in The Daily News on Sunday just gone by, February 28th, that you were quoted with respect to the accounting consequences of the supplementary CHST funding. I am wondering if you can help us understand your view of this?

MR. SALMON: I will try. Let me say right off the top that with respect to this issue, it is an accounting issue, not a funding issue. It is very clear that the Province of Nova Scotia is going to get its appropriate share of $3.5 billion and I think that approximates $107 million. So it becomes a question of timing. Which year does that revenue, in that asset, apply to? It is very clear from the federal budget that the federal government's intention is to seek parliamentary authority to provide additional funding and payment authority out of 1998-99 revenues. In other words, the $3.5 billion is going to be an expenditure in the federal government's accounts in 1998-99.

That leads you to the question of what is the appropriate accounting in the provinces and we have been having discussions right across this country on a very preliminary basis, wrestling with that issue as auditors, as have the comptrollers, I understand, in the various jurisdictions. I have only seen some documentation, not all documentation, so anything I say has to be taken in that context; it is a preliminary comment. I expressed this in those terms when I was asked the question by those in the media who were focusing on the issue.

From a pure accounting principle point of view, there are two aspects to it. It is my view that if the federal government records an expenditure and a corresponding accounts payable at March 31st, the provinces have an entitlement; therefore, at that point in time, they have an accounts receivable. That is the first preliminary judgement I have formed. If they have an accounts receivable, it should be on the financial statements of the province as at March 31, 1999, because it is an asset. It is part of the assets that can be used to pay down the debt, if that was the decision.

Then the question becomes, when do you recognize the revenue when it is a transfer payment? Do you take it all up in 1998-99 as revenue or is there some basis for deferring it to future years when you are going to incur additional health care costs? The argument has been put forward that, yes, it is being received and it should be used for additional health care

[Page 38]

costs in the future; therefore, it should be deferred. The problem I have with that at the present time in terms of current accounting guidelines, recommendations and so on, emanating from CICA, the Canadian Institute of Chartered Accountants, is that there is no precedent for deferring transfer payments. You record them as revenue when you receive them. So there is a strong argument to be made that it is all 1998-99 revenue, but I would say that is very preliminary and we are trying to wrestle with the issue as we go down the road.

MR. CHAIRMAN: Mr. Salmon, is there not a complicating factor here? When you set out the accounting considerations, you started out by saying if the federal government records this as an expenditure in 1998-99, then perhaps it becomes an entitlement. Now, the complication I referred to is the view of the federal Auditor General. As I read the federal Auditor General's Reports over the last few years, even though the federal government has chosen to record as expenditures in particular fiscal years various sums, the federal Auditor General has taken issue with that accounting method. When I look, for example, at the latest report of the Auditor General, issued in April of last year, Chapter 9 that he referred, for example, to a several year history of what he regards as improper accounting by the federal government of certain kinds of expenditures that look very much like the kind of accounting that Mr. Martin proposes for this CHST funding. The conclusion the federal Auditor General draws is that this is not proper accounting. So what I wonder is, does that logic that was set out by the federal Auditor General not have some bearing on your first point?

MR. SALMON: It does have some bearing and there is logic there but the circumstances in this case are different. If you make a comparison, the one he took major exception to was the creation of the Millennium Fund, scholarships for students for future years. That is a situation where you don't know the recipients, you have criteria but the criteria have not yet been applied to apply for a scholarship, so I would argue that the Auditor General at the federal level had a very legitimate case with regard to the accounting for the Millennium Fund. In this particular case, we have a situation where the federal government is going to bring forward legislation in the next few weeks to amend the health and social services Act to allow for additional transfers and to provide authority that those transfers be funded out of 1998-99. The Auditor General in Ottawa, as I understand it, is very likely to take the position that if that legislation passes and that payment authority is granted by Parliament out of 1998-99, then it is a legitimate charge to 1998-99 and supporting that is the beneficiaries are identified, 11 jurisdictions; you have to be a province or you don't get the money.

MR. CHAIRMAN: Mr. Salmon, was it not also part of the objections that the federal Auditor General took, that the legislation for things like the Millennium Fund was not passed within that fiscal year and would it, therefore, depend in part on whether the federal government actually passes the amendments before the end of March 1999?

MR. SALMON: I don't think March 31st, for passing of the amendments is critical. I believe that if the legislation is tabled and there is a clear government intention to amend

[Page 39]

existing legislation, then it can be an appropriate charge in the federal accounts to the previous year. There has been a standard practice going back many years in Ottawa, at the federal level, to approve supplementary estimates for overexpenditures following the end of the fiscal year and to have those expenditures recorded in the fiscal year. Nova Scotia is in the situation that they have done it without approving the legislation and there are two factors there.

MR. CHAIRMAN: So at the moment the proper accounting treatment by provinces is under discussion. Is that right?


MR. CHAIRMAN: If it turns out that your immediate reaction as reported in the newspaper article over the weekend is the view that prevails, that is, that the funds should be recorded on the books of the province in 1998-99 as an asset, can you draw out for us the distinction between recording it as an asset and recording it as revenue?

MR. MACKINNON: Mr. Chairman, on a point of order. I believe the Rules of the House are quite clear. I mean with all fairness to the Auditor General, the Rules of the House quite clearly state we don't entertain hypothetical questions. You are zero for 4 now. I would say give up the ghost and allow the Auditor General, if we want closure or clarification, the opportunity to speak directly with the federal Auditor General.

MR. CHAIRMAN: I think he said that he is taking the opportunity to speak with all the Auditors General around the country. Mr. Salmon, can you help us?

MR. SALMON: We are all in the same boat in terms of wrestling with an issue in which we do not yet have complete documentation and we are attempting to do research to determine our position on what appropriate accounting would be. That is probably as far as I can go at this point in time. The issue of revenue recognition is a long-standing one. When does something become revenue? If you have the asset on your books and you have a revenue, either you take into revenue in the current year or you defer a portion of it as a liability to future years. But the jury is out.

MR. CHAIRMAN: Mr. LeBlanc.

MR. LEBLANC: If I can ask a question. In your report you mentioned the basis of accounting, on Page 20, that the comparative information for 1996-97 as well as the results for 1997-98 would have been different if they were consistent. Obviously, you seem to have some concerns with the consistency of the reporting information. I know I am using a very specific example, you may have some time to do it, but it was talking about how the two financial statements for the two years aren't presented on the same basis of accounting. Now that you are going to become auditor next year, I would see you taking a more proactive role

[Page 40]

rather than one basically denoting some of these differences and so forth. I know that you always have the redress of putting in that they are not consistent in your comments after and not giving an unqualified opinion.

Where are your negotiations as they are now? I read these types of comments and when you are going to have, I guess, severe repercussions for not balancing the budget - I will be very blunt with that - so the comparative information is very important that we are consistent so that apples are apples and we are not getting into two different types of statements. Where are you in your discussions with the government, because obviously we are heading into the end of this fiscal year and I would like to know, basically, if you could update the committee as to where you stand?

MR. SALMON: We have ongoing discussions on a very regular basis with officials in the Department of Finance on these issues. I would suggest to you that we and officials in the Department of Finance have the very same goals and that is consistency, comparability and completeness. I would say to you that the Blueprint for Success, I can't emphasize that enough, is a plan to go in the right direction that would create a structure of accounting policy that would make it extremely difficult to have these situations occur, but if they did occur, I would report very strongly. In fact, if the item was material and materiality has to come into it, but I would take a very strong, very vocal position if the accounting policies established were not being followed and if the information that was being provided through the financial statements was not comparable or not complete.

MR. LEBLANC: I think that is one of the biggest reasons that we supported the Auditor General becoming the auditor of record because we felt in the past, sometimes, that maybe that wasn't occurring. Whether that is a fair statement or not, perception sometimes can become the reality.

To follow up on that, what about consolidated statements? I think most Nova Scotians have a very difficult time of trying to assess the information that is being presented. I am a strong advocate of consolidated statements whereby the big picture would be put into one rather than having the financial statements and then the net debt of the province and other calculations. I noticed in your report that there were charges going to the net debt which are not entered into the statements of the province, like subsidizing a lot of our Crown Corporations, so you are getting a true picture of events. My position is that if you had one consolidated statement, it would be much easier to follow. I think people could measure the successes or the failures of the government by what they see rather than trying to have an adding machine and trying to decipher this information.

MR. SALMON: Once again, I refer you back to A Blueprint for Success. Consolidated financial statements are a cornerstone of that plan. The objective of this government is to have the financial statements displaying the province's financial situation on a consolidated basis for the year ending March 31, 2000. That is only one more year away.

[Page 41]

We support that plan. We believe that is an appropriate timetable and recognizing that I am going to be giving an audit opinion on a set of financial statements for March 31, 1999 that will not be on that basis, I will say so, but I must also acknowledge that the plan is to get there in a year so it is balanced.

MR. LEBLANC: So the next budget that will be presented will be on a consolidated basis.

MR. SALMON: No, that is the problem. We are not at the stage that we can prepare a consolidated budget and therefore moving to consolidated financial statements that purport to report against the budget as a measurement, is a problem. Certainly, long term, we need to also look at moving toward a consolidated budget that would take all factors into account, not just the elements within the revenue fund so that things like Sysco and Nova Scotia Resources, regional health boards, hospitals, that their financial plans and cash requirements would be built into the budget as well as into the consolidated financial statements, but we have a ways to go to put the mechanisms in place to do that.

MR. LEBLANC: I will just make a comment. Only being in the lock-up once as the chairman of the committee has been, trying to add up all the numbers and come out with some sort of coherent statement in two or three hours when the lock-up finishes, is a very difficult process, and obviously consolidation would make it a lot easier for everyone to assess the budget.

MR. SALMON: We have a lot more experience trying to do it than you do, Mr. LeBlanc, and we have the same problem.

MR. CHAIRMAN: Mr. MacKinnon.

MR. MACKINNON: One final question, Mr. Chairman, for the Auditor General and his staff. Could your office be kind enough to give all members and the general public some indication as to whether the government is doing a better job today of managing its books than it was in, let's say, 1992-93?

MR. SALMON: I would suggest to you that I have expressed those opinions in this report and in the last several reports in terms of the extent to which improvements have been made, and there are statements in here that say the financial statements are much more complete, they are more understandable than they were in the past.

MR. MACKINNON: Better management.

MR. SALMON: Better information. Management is a very broad term and I am not going to comment on the management decisions of one government versus another. That

[Page 42]

takes me into a realm that I am not prepared to go. I will say that in terms of providing information . . .

MR. MACKINNON: Better accountability?

MR. SALMON: . . . and in being accountable through providing information, significant improvements have been made.

MR. MACKINNON: Thank you.

MR. CHAIRMAN: Mr. Salmon, can you tell me one point about Y2K? It has to do with the way it is shown in the province's books. When something as significant as Y2K was identified as a forthcoming problem a few years ago, should one have expected that the costs associated with that would have begun to show up in some clearly identifiable form in the budgeting and in the accounts of the province and, if so, where would one normally expect to see it? It doesn't seem to be shown.

MR. SALMON: There is a centre that is the Project Office and that is in the Technology and Science Secretariat, and that cost for that centre is shown.

MR. CHAIRMAN: But that is quite a bit different than the expenses of getting people in to do the work.

MR. SALMON: The policy decision was made that each department would be responsible for funding their own initiatives. The other difficulty with this is what is a true Y2K cost and what is just normal upgrading of systems which deal with the Y2K problem. So you have a cost-segregation problem and I am not sure that you could meaningfully say this is the cost of dealing with the Y2K problem that would be relevant or appropriate. It is all integrated.

MR. CHAIRMAN: Now I am very confused. I have the impression from listening to statements from various ministers, particularly in Health for example, that there are huge numbers of dollars going into paying consultants who are coming in and doing specialized targeted work aimed at fixing the Y2K problem and this is going on, as well, in a number of other departments. When something appears to be a project on a large scale like that, I would wonder if it shouldn't be shown as a separate line item for each department. Have you any guidance to offer us on this?

MR. SALMON: Well, clearly if that is an information item that is desired, it could be done. It is just another piece of information.

MR. MACKINNON: Within each department.

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MR. SALMON: Within each department, yes. It could be aggregated for the department so you had one number for the government. It could be done. The system would allow for that to the extent that its expenditures are identified as Y2K costs.

MR. CHAIRMAN: So there are three options. One is there could be an aggregated number government-wide, there could be an identified line item department by department or there could be, as we have now, nothing showing and it is buried in the middle of everything else. Is that right?

MR. SALMON: Presumably, yes.

MR. CHAIRMAN: Okay, thank you. Any other questions? I shouldn't have started this up. Mr. Delefes.

MR. DELEFES: One quick question, Mr. Salmon. I know we will be discussing the Y2K issue at a later time but do you or members of your staff examine the monthly progress reports issued by the Year 2000 office?

MR. SALMON: Examine is a strong word. We monitor and review, yes, and we are prepared to deal with that when we brief next week.

MR. DELEFES: So you have seen the recent progress report posted February 26th, have you?

MR. SALMON: Yes. Claude, do you want to comment?

MR. CARTER: I printed it off last night at 5:00 p.m. because I had the January one and I said, well, I had better check because it is March, and it was there. As Mr. Salmon said, examine is a strong word. You can appreciate that the report went to the printer in early December and we do have some other things that we do on a regular basis, but we have now undertaken to do some continued monitoring, what we are going to do and so on and so forth. So we have looked at them at a very high level and we do intend to get further into that, but we will be talking about that next week.

MR. CHAIRMAN: Mr. Dexter, did you still want to follow up?

MR. DEXTER: That is fine.

MR. CHAIRMAN: Okay, perhaps at this point with just two minutes to go, we can thank our guests and turn our minds briefly to our agenda forthcoming. Members will see that a tentative agenda has been circulated. The suggestion from our staff is that next Wednesday morning we hold a briefing session to discuss Year 2000 problems. The following Wednesday, March 17th, would be part of March Break, but then we would actually turn to

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a public session on Y2K on March 24th, the actual time of that to perhaps be adjusted should the House be called into session by that time. So at this point, that is the tentative and suggested session for the next three weeks. Is this acceptable to members of the committee or is it problematic? (Interruptions) Agreed, thank you.

That said, I would like to thank Ms. Langille for having handled the overhead and Mr. Salmon and your staff for having come and spoken with us this morning so interestingly. Thank you very much.

We stand adjourned.

[The committee adjourned at 11:00 a.m.]