HALIFAX, WEDNESDAY, NOVEMBER 26, 2003
STANDING COMMITTEE ON PUBLIC ACCOUNTS
8:00 A.M.
CHAIRMAN
Mr. Graham Steele
VICE-CHAIRMAN
Mr. James DeWolfe
MR. CHAIRMAN: Good morning, ladies and gentlemen. I would like to call this meeting of the Standing Committee on Public Accounts for the Province of Nova Scotia to order. This morning we have with us the Auditor General and his staff who will be discussing the financial statements and the report on the consolidated statements for the Public Accounts of the province. We will commence the meeting with introduction of our committee members and I will start with Mr. Steele.
[The committee members introduced themselves.]
MR. CHAIRMAN: I'm Jim DeWolfe, Vice-Chairman of the Public Accounts Committee. With me at this table is our clerk, Mora Stevens. I will now ask the Auditor General to introduce his staff.
MR. ROY SALMON: Thank you very much, Mr. Chairman. Roy Salmon, the Auditor General. First I would like to thank you for the invitation to appear here this morning and address this very important issue. Also, I would like to thank you for this seating arrangement to accommodate Angela. With me this morning, to my immediate right, known to most of you, I think, is Claude Carter, the Deputy Auditor General, responsible for any work we do in the Department of Finance. To his right is Angela Cook, a manager in our office who works with Claude on that same subject. Also, we have the newest recruit to our office, Brent Mullins, who has come along to do the important job of looking after the slides. Brent is a graduate of Mt. Allison and is joining us and is starting on the CA program.
1
What we want to do is - and we've given you a handout - I'm going to simply take you through what we have called the key messages which are approximately six or seven slides. We also have a package of additional slides that if, during the course of questioning you wish to focus on any one of those, we can quickly put it up and all be dealing with the same subject matter.
I want to start by saying that in issuing this special report on November 14th, additional report, we felt it important to bring forward some key issues around financial reporting practices. We believe that Members of the Legislative Assembly, in total, and particularly members of the Public Accounts Committee, require financial information that is complete, accurate, understandable and they should receive this on a timely basis. We wanted to bring issues to your attention, both positive and negative.
The consolidated financial statements for the year ended March 31, 2003 do present, fairly, the financial position and results of this province on a basis that is in accordance with Generally Accepted Accounting Principles. There is nothing wrong with those financial statements. That's why I was able to issue an unqualified opinion on them. They are okay. The journey towards reporting financial position and results of operations in accordance with GAAP has been a long one. We've been in the process for 10 years, but it really accelerated with a decision that was taken by the government in 1999. It should be obvious to everyone that once you implement GAAP and have full disclosure, that puts additional pressure on a government's ability to achieve fiscal targets.
One of the key positives in all of this, and what has helped to accelerate the process, is that we've had the same controller and director of government accounting for the last four years. Prior to that, it had been a revolving door. I want to give credit to those two people. They work hard, they're professional, we have an excellent working relationship with them, but they are considerably overworked and understaffed within the organization.
It's important to note that all the significant requirements of the Public Sector Accounting Board pronouncements - the Public Sector Accounting Board being an element of the Canadian Institute of Chartered Accountants - have been addressed, all the significant ones. There are some pending actions to be taken, that is facilitating budget-to-actual comparisons, dealing with supplies inventory, prepaid expenses and the liability for compensated absences. But those are far less material than what's already been done.
All financial reporting needs to be consistent with Generally Accepted Accounting Principles. GAAP is not an option. The use of U.S. and international financial markets dictates adherence to GAAP. If you're going out in markets to borrow money, you have to put forward credible financial information. The controller and his staff in Government Accounting need to have the lead in doing that.
GAAP is not just for the benefit of external parties, it is also intended to support internal decision making. When making budget decisions, we don't know whether Cabinet had full and adequate information on the accounting changes. We don't know whether they were involved in the decision with regard to required changes versus discretionary changes. We don't know whether they were aware of the relevant risks or contingencies in making those decisions.
It's also important to recognize that GAAP will continue to evolve. The Public Sector Accounting Board, CICA, U.S. accounting bodies, international accounting bodies are continually doing research and evolving improved standards. There have been significant new security exchange regulations and other regulatory considerations, many of those evolving from Enron and other situations. In addition, Generally Accepted Auditing Standards continue to evolve.
We believe that there are three things the government should do to really take leadership. First, get the budget and other financial reporting activities on a basis consistent with GAAP. Consider putting the use of GAAP into legislation, the way B.C. has, and make it a requirement to get the financial statements out earlier. You might want to pursue that with the deputy minister next week. He and I have already had some discussions along those lines. It's also important to note that making the changes to fully implement GAAP in 2003 resulted in the ability of the government to report a surplus.
It's important to note that we do not know, based on our audit activity, what the Minister of Finance or the rest of the Executive Council knew, what they were told and what they were not told in terms of these accounting issues. But we believe that MLAs and the public deserve the truth and nothing but the truth about the financial position of the Province of Nova Scotia. We ask the question, would past decisions regarding allocation of resources, would those decisions have been different if there had been better financial reporting, and I raised that issue in terms of decisions that have been made for every year prior to the current year.
It's important to note that in June of this year, we were given draft financial statements that did not include the liability for retirement health benefits, the $500 million, but included the other new requirements under Section 3250 of the CICA Handbook, plus reflected the discretionary move to smooth market values on investment. It's also important to note that just because the government accounts for some things in a way that we in my office do not like, that doesn't mean that it's wrong; it's not my way or the highway. There
is room within GAAP for differences of opinion.
[8:15 a.m.]
It is also important to note that the decision to adopt full market value versus smooth evaluations is a discretionary one-way street. Once you make the decision to go one way or the other, you can't go back.
The final message is that we are well aware that good financial reporting may not put food on tables, shorten waiting lines in hospitals or lower class sizes in schools, but it is also important to note that poor financial reporting in the past has been a large weight around our necks, because it has influenced decision making and has resulted in money going to things other than to good programs.
So those are my comments to start off with and we are wide open to questions on these topics.
MR. CHAIRMAN: Thank you, Mr. Salmon. As usual, we will commence with 20 minute sessions, beginning with the NDP caucus.
Mr. Steele, you have the floor.
MR. GRAHAM STEELE: Thank you, Mr. Chairman, and thank you to the Auditor General for coming here today, for issuing your report and, of course, for your audit of the Public Accounts. Really, the reason why we need good financial reporting is that that is the foundation for public policy debate. The debate held in this committee, held in the Legislature and held in the broader public can only be carried forward on a sound basis if everybody knows that the financial information we have is accurate; poor financial reporting just detracts from any kind of debate that might be held.
I wanted to start today by letting the committee know that at the conclusion of next week's session, I intend to move a motion, maybe not with these exact words but something very similar to this: be it resolved that the committee endorses the four recommendations contained in the Auditor General's special report dated November 14, 2003, and request the Minister of Finance to advise the committee on what steps he will take, and when, to comply with the Auditor General's recommendations.
Mr. Salmon, have you had any official response from the government to your report of November 14th?
MR. SALMON: No official response, no.
MR. STEELE: I want to begin my time today by talking about the unofficial response, what the Minister of Finance and the Premier were quoted as saying the day that your report was released, because if the media reports are accurate, their position seemed to be that they
did not agree with what you were recommending. It wasn't that they said, thank you, we acknowledge there were some issues and we pledge to correct them, what they actually did was argue with what you said.
Now, let me go through those, and I wanted to make sure, in fairness to the Minister of Finance and the Premier that I didn't misquote them, so I brought the media reports that I'm talking about and I want to go down them and ask for your response to what the minister said and what the Premier said.
The first one, is an article from the Daily News for the day following your report, and you'll see, Mr. Salmon, this is one where your picture is bigger than the article itself. In this report, which is headlined "Tories played coy with finances", there is a quote from the Minister of Finance, and this is talking about the retirement health benefits issue. The retirement health benefits issue, which added almost $0.5 billion to the province's debt. What the minister said - this is a quote from the newspaper article - "He . . . " meaning the Minister of Finance, said, ". . . retirement health benefits calculations were not included in earlier financial projections because figures were not firm when the province unveiled its budget or its debt-management plan. 'They were available in June and when they were available, we brought them forward,' Christie said."
So in that excerpt, the Minister of Finance seems to say that there was nothing wrong with what the province did vis-à-vis retirement health benefits. Do you have a comment on that?
MR. SALMON: If you look at Page 18, Slide 36, you will see my comments on the right-hand side opposite that quotation.
MR. STEELE: For people who don't have the benefit of the slides in front of them, I wonder if you could just explain the gist of what it says there.
MR. SALMON: Actuarial information on the retirement health benefits was available in the Spring of 2002, they were in the draft information that we audited in June 2002. The government decided to remove the liability from the March 31, 2002, financial statements in September 2002.
MR. STEELE: So if the minister says that the information wasn't available at the time of the Spring budget, what would be your . . .
MR. SALMON: That would be inaccurate.
MR. STEELE: That is inaccurate. I want to move into another article, this one is from The Halifax Chronicle-Herald, the same day, Saturday, November 15th, a much more modest-sized picture of yourself and the headline is, "Auditor takes issue with Tory
accounting", and in this article the Finance Minister is talking about this issue of the census adjustments. This is, again - and I don't want to misquote the minister, so here's exactly what the article says, "Finance Minister Peter Christie said the province waited until it had accurate census numbers before talking about what kind of impact they might have on money from Ottawa. 'We had nothing substantial to work with until we got to September,' he said. 'In the April 3 budget, we simply didn't know the census data.'"
So, again, the Finance Minister seems to be saying there was nothing wrong with what his government did. They didn't have census data at the time of the budget and therefore couldn't reasonably be expected to deal with it. What's your comment on that, Mr. Salmon?
MR. SALMON: Accounting is an art and not a science. If you have even preliminary information and you know you have a potential liability, you can at least make an estimate and record it. We believe they had at least sufficient information to make an estimate and record it.
MR. STEELE: At the time of the April budget, in your opinion, did the government have information sufficient to alert the public to that contingency?
MR. SALMON: Yes.
MR. STEELE: I want to move on then to a comment taken from the CBC. Again, I don't want anybody to say I was misquoting, so I'm going to read from the article which is, I think, as most people know, the CBC will contain a prose version of many of its stories on its Web site. So here's what it says. "Salmon says someone in the Department of Finance would have known about the equalization shortfall before Premier John Hamm sent Nova Scotians to the polls last summer . . . Hamm is downplaying Salmon's criticism. 'If everybody in the province wants to go out and take an accounting degree and go into it in finite detail, that's fine,' Hamm says. Really what Nova Scotians have to know is that we're $31 million better off than we were a year ago and that's the first time in 40 years that any government could make that statement."
So the Premier and this phrase that he used was widely reported, it was reported in all the media outlets, to the effect that if you want to go out and take an advanced accounting degree, so be it, but that's not really what the people need to know. What's your comment on that?
MR. SALMON: Well, I don't believe everybody needs to go out and take an accounting degree either, I don't need all that competition, but the fact that it was a surplus is accurate. People do need to know that. Our point is that any information they get should be complete and should be on a comparable basis. If you are a truck driver and you're receiving financial information and you want to be able to compare what you were told was
going to happen to what did happen, you should be able to do that if it is prepared and presented on a complete and comparable basis.
MR. STEELE: The Premier's suggestion seems to be that the only people who could be interested in what you are saying are people with accounting degrees. I was wondering if you would like to attempt, in your own words, to explain to people who don't have accounting degrees, who are just trying to get by, trying to get on with their lives, why is the information contained in your November 14th report, why does that matter to the ordinary Nova Scotian who is just trying to get by with their daily life, with their family, their job and their home? Why does it matter to them?
MR. SALMON: I certainly would argue that if people are interested in the state of this province's finances - and they should be, because they're contributing their tax dollars to it - that if they read the newspapers, or read reports, or go to Web sites to get information, they should have confidence that it's prepared and presented on an appropriate basis. Now I grant you, a lot of it is hard to understand, there are complex issues in accounting but at least if you have a budget, or an estimate, or a financial forecast, that you can read and then get a financial statement later on that says, this is actually what happened, they should be comparable; that's all we're saying.
MR. STEELE: I would like to turn now to some detail of your November 14th report and what I would like to do today is draw out more information about what you meant by certain statements in that report, with the intent that these matters be put next week to the Deputy Minister of Finance. I would like to start out with the last two paragraphs on Page 8 of Appendix 2 of your report. Just for the sake of Hansard and anybody who doesn't have that report in front of them, I'm just going to read it, it's very brief. This is what you said and the question I have for you is what do you mean by this, can you give this committee more detail?
What you say is,"There were no limitations placed on the scope of the audit work carried out. While information is received on a timely basis from many departments and other crown entities (and their auditors), again this year, both Finance and my Office experienced significant problems and prolonged delays obtaining requested information from certain entities. Serious delays were encountered again this year by Finance government accounting and my Office in the performance of our respective responsibilities as a result of delays in the receipt of requested information or responses from various entities or their auditors." Mr. Salmon, who are you talking about in this paragraph?
MR. SALMON: I would ask Mr. Carter to respond to that in terms of the detail.
MR. CLAUDE CARTER: In terms of the delays, what we're referring to there is the June 30th - the Provincial Finance Act has a requirement that Crown entities have their financial statements to the Minister of Finance by June 30th. In addition to that, Finance
requests additional information to support them in their year-end consolidation process, and that's all supposed to be available by June 30th. Again this year, there were some entities that
didn't have their audited information available by June 30th, some of that wasn't received in final form as late as September or October. It's a problem for government accounting in the sense that they need to do a fair amount of analysis and work in July to do the consolidated financial statements.
[8:30 a.m.]
So in terms of who the entities are, I don't have a list with me today, there will be a list of sorts, the top five or six will be identified in the Auditor General's Report for this year, when it comes out in December, but this has been a problem for us and Finance for a number of years. What it really comes down to is that that legislated target of June 30th doesn't appear to be much of a priority for certain entities. There may be some logistical reasons why financial statements can't be finalized or finally approved by June 30th but they shouldn't last well past July 31st.
MR. STEELE: Mr. Carter, it causes me a great deal of concern as a member of this committee, as I'm sure it causes concern for all members of the committee, to hear that there are certain government entities that show prolonged delay or what is described as significant problems and prolonged delays that both the Department of Finance and your office have encountered. I know you don't have a complete list of the entities but I think this committee needs to know, as part of the planning of its work, who are we talking about? Who are the offenders here - and I know you don't have the complete list, but - I'm sure you know who most or some of them are - who are they?
MR. CARTER: Some of the financial statements that we had to wait for included the Housing Development Corporation, again, the financial statements for the pension funds were not available in final form on June 30th. Now we do those audits, so we're involved in the challenge of getting those through and so forth. Some of the other ones, maybe I could just ask Angela if she's got any more specifics.
MS. ANGELA COOK: I don't have more specifics.
MR. CARTER: I can provide you with a list, in terms of from our perspective, we have a list back at the office of the ones that were problematic from Finance's point of view. In addition to the entities, there were also departments of government. There are certainly some areas of the province's financial statements where it continues to be a challenge to get the requested information, the required information. That certainly includes the restructuring area, and some of the back-up for some of the accruals there, getting confirmation of information on contract accruals through the restructuring from the Public Service Commission was a problem. The federal-provincial revenue area, in terms of the accruals
made there and some of the adjustments there and reconciling those has been a problem in the past and was a problem again this year. I don't know if that provides you with some specifics.
MR. STEELE: That's helpful. I would like move to the top of the same page in the report. It carries over from the bottom of Page 7. There is a reference to a number of accounting disclosure and audit issues, not all of which were resolved. I was wondering if you could let the committee know which of those issues have not yet been resolved and in your view, are they significant enough to warrant the attention of this committee?
MR. CARTER: The known unresolved matters net out, from an audit opinion point of view to, I think, it's less than $2 million. The possible issues, in other words, the items where we're not sure if there's an issue or it hasn't quite been able to be determined whether or not there's a real problem, are slightly higher than that. Are there some of those matters that should be of concern of the committee? The answer to that, I would suggest is, probably. They would include things like the adequacy of the provisions for the Sysco closure and cleanup. I think they would include some federal-provincial accruals.
MR. STEELE: I would like to note, as I'm sure you are aware, that although there is a cryptic reference to these in the November 14th report, there is no actual list of them. So, of course, if these matters might warrant this committee's attention, we need to really have a list of what specifically is being referred to in that paragraph. The final item, if you don't mind, I know my time is running short, so I just want to put this final item to you, Page 7, fourth paragraph, "While conducting the financial statement audit, areas were identified where internal controls should be strengthened or operating improvements could be achieved. Certain matters identified during the current year have implications which warrant government's attention."
You go on to say that they will be discussed with the government management staff, but what are those issues and, in your view, are they significant enough to warrant this committee's attention?
MR. CARTER: To answer the second part of that, I believe that they are significant enough that they might be of interest to this committee, again, not knowing what all the rest of your priorities are. In terms of what they are, they deal with controls over information technology, they deal with other observations about processes and procedures within departments. I think, in the resolution, one of the reasons why this is so summarized is time. It would have been our preference to have a detailed management letter attached to this. Unfortunately, we too are only able to do so many things in a working day.
The management letter that's referred to there will inventory and discuss the control issues, it will discuss the items that were identified and adjusted during the audit, the items that were identified and not adjusted during the audit. That management letter will be available to Finance for their response some time in December. I would hope that they can
turn around their response, because in fairness to them they should be allowed to have their response in that management letter. The challenge we have is once we get their response and issue the final management letter, how does it get in front of the Public Accounts Committee. I don't have an answer to that, it's not our intention to issue another special report that would include the detailed management letter. The only thing we could do is notify the committee when it's in final form, and the committee can request it from Finance.
MR. CHAIRMAN: Thank you. We've exceeded the time for the NDP. Mr. Salmon.
MR. SALMON: If I can have an additional comment. Some of those matters will be dealt with in the annual report that will be out in the next month.
MR. CHAIRMAN: We will now turn to the Liberal caucus. Ms. Whalen.
MS. DIANA WHALEN: Again, we really appreciate your coming in today. Of all the comments you've made, I like the point best that the public finances should be understandable to all. I think that's a key point that certainly has been lost in the last little while. To begin with, I just wanted to go specifically to your special report that came out on November 14th. Just to clarify, would a report like this come out every year?
MR. SALMON: No.
MS. WHALEN: So it's fair to say that this would be very uncommon?
MR. SALMON: Yes, that is fair. I have not issued a special report related to the financial statements at any time in the past. (Interruptions) Oh, sorry, in 1997 we did.
MS. WHALEN: That was the last time. So it's quite uncommon, definitely. We certainly take your point that the financial statements from 2002-03, which have just closed, met all of the requirements of GAAP and that you had no reservations in giving an unqualified opinion. We understand that that's not at issue today. But clearly, from your special report, there are some serious concerns in the way that information has been disclosed to MLAs and to the media, in fact to Nova Scotians. Given our limited time here, I wanted to focus on those special concerns, if we could.
What I gathered from that was the very general nature of your concerns were that the three reports that we've received since the close of the year, which would be, specifically, the budget that came out in the Spring, the debt reduction plan in June, and the September 19th quarterly update this year, were not prepared in the same way as the audited financial statements were, that there was information that was either omitted or was misleading. Would you agree with that? Have I summed that up right?
MR. SALMON: They were not complete.
MS. WHALEN: Not complete. Information was definitely missing in them. If I could go, first, to the budget document, I would like to look at Page A2 of the budget document. That's where you signed the report actually, on April 2, 2003, stating that the revenue estimates for 2003-04 were reasonable. In that report, you base your statement on the assumption that you've been provided with all of the relevant and material information and that you knew about any contingencies concerning revenue that's known to Finance. Without going into the question of whether or not the information might deliberately have been withheld, my question would be, would you agree with me that you were not provided with all the relevant information at that time?
MR. SALMON: That's correct.
MS. WHALEN: Specifically, was it the census data information that was lacking at that time, the knowledge that revenue related to the census information would differ?
MR. SALMON: That's correct.
MS. WHALEN: Apart from not advising you about this contingency in the Spring, this was neither valued in the budget calculations nor noted as a contingency in the appendix to the budget or anywhere else in the document. Should this have been done? Should it have been noted somewhere in the document?
MR. SALMON: We believe that there should have been at least some reference to the liability for the retirement health benefits, yes, and there should have been some reference that there could be an implication of the census change.
MS. WHALEN: The census change would have changed the revenue forecast or at least suggested that a change was coming and might have changed your comments, your letter approving of the evaluation of the revenues?
MR. SALMON: Yes.
MS. WHALEN: Would you say it compromised your comments in this budget?
MR. SALMON: Compromised? Yes, to some extent.
MS. WHALEN: We already know now from the books having been closed for 2002-03 that the census adjustment there has been valued at $126 million, in terms of the impact on revenue, that's $126 million less than we might have expected. Would you agree that for this current year, 2003-04, the amount will be significant and large?
MR. CARTER: I don't think we can comment on that. We haven't pursued that, obviously because it's related to the current year.
MS. WHALEN: Fair enough. I understand. We already have an admission this Fall in the House from the Minister of Finance that the census adjustment will be in the range of $40 million to $60 million this year. So on Page B2 of the budget, we have columns on Page B2 that show the - how is it exactly, do you have it in front of you? On this one, the census adjustment is not shown in there. On the final column, the estimate for 2003-04, if we take even the lower end of that $40 million to $60 million, it means rather than having a $2.8 million surplus, we would in fact have approximately a $37 million deficit, if that had been shown, if there was any estimate shown in that? (Interruptions)
Assuming that the census data will lead to a $40 million to $60 million decrease in revenue, from the federal transfer payments, if that's the case and this were reflected in the 2003-04 estimate column on Page B2, then rather than having a surplus of $2.8 million, we would in fact be showing a deficit of $37 million.
MR. SALMON: That is true unless other changes were made to compensate, by reducing expenditures or raising revenues in another area.
MS. WHALEN: Yes, understanding that there's a balance of different factors but taken by itself, the census information would, in fact, and will, in fact, make a significant difference to that bottom line.
MR. SALMON: That's correct.
MS. WHALEN: Would you agree with me that the failure of the Minister of Finance to advise you of the census adjustment problem and not recording this at least as a contingent liability really represents a serious breach of the requirement to be open and transparent?
MR. SALMON: I can't comment on whether or not the Minister of Finance knew, I can't comment on whether senior people within the Department of Finance knew but we do know that the information was available at some level within the Department of Finance.
[8:45 a.m.]
MS. WHALEN: Okay, that's very helpful, thank you. I would like to look at the impact of asset smoothing, if I could, as the next part of my questions. As I understand it, the choice to introduce asset smoothing this year was discretionary, is that true?
MR. SALMON: That's correct.
MS. WHALEN: So although it is worthwhile, you gave it an endorsement in terms of a good thing to do, it didn't have to be done this year?
MR. SALMON: Well, a decision had to be made as to whether to implement asset smoothing or not. Once the decision is made, as I said earlier, you're committed to it. You can't go back and forth.
MS. WHALEN: Right. So, going forward, our statements will continue to reflect that because the choice has been made.
MR. SALMON: That's correct.
MS. WHALEN: That's good, they will be comparable in the future then, which will be good?
MR. SALMON: That's correct.
MS. WHALEN: On Page 37 of the 2002-03 statements, we actually have a description or a chart that shows the accounting changes and the impact of those accounting changes. In this one, what it does show is clearly the impact of having adopted asset smoothing. On the top line it's called Pension Plan Assets. That, in fact, represents the change to asset smoothing as it has also been called. The net effect of asset smoothing, by adopting this policy change, appears to be a $56.7 million increase to the bottom line; in other words, it improves the operating budget, either surplus or deficit for the year, adding $56.7 million on that side and also increasing the net direct debt by $153.8 million. The two columns are side by side for 2002-03. So is it fair to say that it had a significant impact on improving the bottom line and contributed towards the government's ability to show a surplus this year?
MR. SALMON: Yes.
MS. WHALEN: That is clear? Okay. Going back again to B2 - I only have a couple of pages, mostly B2 and 37 - if I go back to B2, there are five columns in this chart again. I would like to look at the third, fourth and fifth columns. When I read your report, it suggested to me that these three columns are not all calculated using the same information or under the same assumptions. So what I would like to do is just clarify whether that is the case. At first blush, certainly when you look at an estimate and a forecast for the same year and the same period, 2002-03, that would be the third and fourth columns on this page, my understanding is that the estimate for 2002-03 doesn't show an impact for asset smoothing or hasn't been adjusted for that, whereas the forecast figure does include a $56.7 million boost from asset smoothing. If that's the case, the $14.5 million surplus that was expected in that column would, in fact, be quite a different figure, is that true?
MR. SALMON: Could I ask Mr. Carter to deal with that?
MR. CARTER: I guess the benefit of moving to smoothing is included in the forecast 2002-03 calculation on B2.
MS. WHALEN: The benefit is there.
MR. CARTER: That's right. At the time that they prepared their forecast, did they have a precise number, was it $56 million or $55 million, whatever it is, it is in there. The estimate for 2002-03 was prepared on the basis of accounting that was in place at the time that they prepared the estimate for 2002-03, so the $1.3 million and $14.4 million at the bottom of the third and fourth columns are not comparable to the tune of about $56 million.
MS. WHALEN: Should that have been recorded as a special note or in some way acknowledged in this report?
MR. CARTER: Certainly, that's the essence of our concern.
MS. WHALEN: So, I read that correctly, that there was none?
MR. CARTER: Yes.
MS. WHALEN: Also, if we look at the estimate for 2003-04, which would be the fifth column, it's not comparable to the estimate for 2002-03, which you should be able to hold beside each other and say you're comparing like figures?
MR. CARTER: The answer to me is, yes, with a qualification. We're not dealing with financial statements here, we're dealing with a budget document. Do you restate prior year's estimates that have been approved by the House for accounting policy changes? That's something that is really not definitive. Our point is, if it wasn't restated, there should have been a footnote so the people could have done the calculations themselves and have been able to: (1) consider either in their own mind adjusting the 2002-03 estimate total to be on a comparable basis; or (2) take the accounting policy impact out of the forecast or the estimate for 2003-04, so that they can look at it and say, well, how did we do against the estimate and how does the prior year's estimate adjust it compared to what we're going forward with.
MS. WHALEN: Thank you, Mr. Carter. In the special report from the Auditor General, it, again, stresses the idea of being understandable, that the accounts should be understandable. We have a statement that was quoted in the press, just read recently by the member for Halifax Fairview saying that maybe if everybody wants to be an accountant, we could all understand it. But I think what you're telling me is that even an accountant, properly trained and a person active in the field, would not have picked this up without some indication, it's not apparent even to an accountant about the figures not being comparable?
MR. SALMON: No, it's not, that's correct.
MR. CARTER: When the budget came out, we knew that the retirement health benefits were not included in that. That's about a $30 million interest cost that's not reflected
in either the forecast or the 2003-04 estimate. What we didn't know was that smoothing was in only two of the columns. We didn't know that it was in both the estimate and the forecast. It took us until about September to fully appreciate what was in and what was out.
MS. WHALEN: I think that answers the question that even very competent and qualified accountants may not know this without a lot of digging. So it certainly has failed the test of being understandable and transparent, in my opinion, and I hope in yours. Would you say that this misrepresents the true nature of the provincial finances?
MR. SALMON: That information did, yes.
MS. WHALEN: Thank you very much. I will turn it over.
MR. CHAIRMAN: Mr. Graham.
MR. DANIEL GRAHAM: Thank you, Mr. Chairman, and thank you, guests, for coming. I would like to stay with the budget document and ways in which the budget document may have misled Nova Scotians and the House of Assembly. I would like to go back to the retirement health benefits plan calculations that were referred to by the member for Halifax Fairview. Did the Department of Finance say they preferred deferring that policy change to a later year and if so, to what year did they commit that they would introduce this new policy change?
MR. SALMON: In 2004-05.
MR. GRAHAM: I would like to take you to Page 37 of the Public Accounts, which were tabled just recently, the page that we referred to before, the effect of the retirement health benefits change in 2002-03 was to reduce revenue by - and this is contained in item (c) in the chart that we have there - $34.3 million and to increase the net direct debt by $493 million. Is that correct?
MR. SALMON: That's correct.
MR. GRAHAM: Again, if I could take you back to the budget document, to Page B2. Assuming nothing else changes, if this change were in place in March - this accounting change at budgeting time - instead of June, after the budget was tabled, the $14 million surplus that is forecast in the bottom of the fourth column in the budget document would, indeed, have been about a $20 million deficit. Would you agree?
MR. SALMON: Yes.
MR. GRAHAM: Similarly on Page 38 of the budget document, if you could turn to that, please - I believe it's the last page of the budget document, but you may have it in front
of you - it speaks of the projected consolidated statement of net direct debt. It stretches from the actual in 2001-02 to estimates in 2006-07. I would like to refer you to Columns 2, 3, 4, 5, and 6. Is it fair to say that given the commitment that you've received that even if they weren't going to do it in the timely fashion that you would expect it, with respect to retirement health benefits, they had given you a commitment to make changes in 2004-05, which would have increased the net direct debt by about $500 million that would have caused each of those bottom-line indications in the budget to be substantially greater than $12 billion in each of the lines for 2002, 2003, 2004 and so on, all the way up to 2007.
MR. SALMON: Correct, or it should have at least been disclosed by way of note.
MR. GRAHAM: They had given you a verbal commitment that they would at least put this in place by 2004-05, that was their target.
MR. SALMON: Yes, and it had been disclosed by way of note in the 2002 financial statements.
MR. GRAHAM: If I could take you to Page 17 of the material that you provided us with today, under the second slide, "Did government intentionally lie?" and I would like to take you to the second two bullets that you have there. The first is that you say, "Despite government's June 30 news release, Finance continued to exclude RHBs from totals for presentations to bond-rating agencies and new MLAs in Summer 2003." Do I understand correctly then that what you're effectively saying there is that bond-rating agencies were not given the full information that they were required to have in order to provide us with a bond rating?
MR. SALMON: Based on the material that we have seen that was used to make presentations to the bond-rating agencies, the liability of $500 million was not disclosed to them.
MR. GRAHAM: I would next like to turn to the second document, where there may have been misrepresentations to the people of Nova Scotia, and that is the debt reduction plan. I'm not sure if you have a copy - we have extra copies - of what's contained on the Web site of the Department of Finance. After much fanfare, Mr. Salmon, by the Premier about a debt reduction plan being unveiled before the election, in the Red Room down the hall, on June 11th, the Premier and the Minister of Finance set out a debt reduction plan that set more aggressive targets than the ones that we just referred to on Page B38. In that regard, I would like to refer you to the statements that are contained in the government documents, and I have given all of my debt reduction plans away.
Two charts. The first one relates to the . . .
MR. CHAIRMAN: There are about 20 seconds left in the Liberal caucus' time.
MR. GRAHAM: Page 4 of 9 - if I could ask you this - sets out a figure for the debt being at $11.7 billion in 2003-04, and then two pages over, it also sets out charts that indicate that the debt would be reduced by certain amounts, but at no point in these documents is there an indication, in June of this year, just three weeks . . .
MR. CHAIRMAN: Order. The time has expired . . .
MR. GRAHAM: I'll finish the question.
MR. CHAIRMAN: Okay.
MR. GRAHAM: Would you agree with me that the debt reduction plan and those charts clearly mislead Nova Scotians and the House with respect to what the debt situation is going to be going forward.
MR. SALMON: Correct. Now, a qualification. I don't know whether the Minister of Finance or the Premier were aware of the $500 million.
MR. CHAIRMAN: We will now turn to the PC caucus for a 20-minute round, beginning with Mr. Hines.
MR. GARY HINES: Thank you, ladies and gentlemen, for coming in and being with us today. In starting out, I would like to indicate that Finance Minister Peter Christie released, in 2002-03, financial statements; in your opinion, was there a surplus for the fiscal year ending March 31st in that 2003 statement?
MR. SALMON: There was a surplus of $31 million in those financial statements. I gave an unqualified opinion on those financial statements. They were prepared in accordance with Generally Accepted Accounting Principles.
MR. HINES: In the Province of Nova Scotia, are we the only province in Canada that has an unqualified opinion from the Auditor General regarding revenue statements?
MR. SALMON: Regarding revenue estimates?
MR. HINES: Yes.
MR. SALMON: I am the only Auditor General in Canada who has a mandate to give an opinion on the assumptions underlying the revenue in the budget.
MR. HINES: That's the answer I was looking for, thank you. Mr. Salmon, in essence then, you're satisfied that the government presented an open and accurate picture of the public accounts for 2002-03, given the fact that you gave an unqualified audited opinion?
[9:00 a.m.]
MR. SALMON: That's correct.
MR. HINES: Also, my information indicates that many provinces across Canada and over 40 states in the United States are operating in deficit positions. Some Opposition members seem occasionally reluctant to embrace a balanced budget. There might be a lot of hypothetical suggestion made by Opposition members and a lot of "what if" statements, but at the end of the day your audit has shown us that last year's budget is now balanced. I know this is a question you've answered before, but what if we didn't balance the budget? What would happen if we didn't balance the budget? Why is it important for the province to balance its budget?
MR. SALMON: Well, the objective of balancing a budget is to generate surpluses so that you can start to reduce the debt, or use the surplus funds for capital purposes, et cetera.
MR. HINES: In relation to this and in relation to balanced budgets, you've described the Nova Scotia Government as a leader. When it comes to public accountability and financial reporting, where does Nova Scotia rank in relation to other provinces presently, and how far have we come in the last four years in relation to this?
MR. SALMON: We've come from the bottom of the pack to the top of the pack over a 10-year period, gradually and with a lot of hard work. I'm not in any position to say we're number one, but we're up there.
MR. HINES: Can you elaborate for me on how Nova Scotia has moved, in your words, from the bottom of the pack as it relates to Canadian provincial financial reporting to that of being a leader? How has that process taken place? What has caused some of that?
MR. SALMON: The Department of Finance has taken the lead in implementing accounting policy changes to improve the quality and completeness of the financial statements, first moving to consolidated financial statements, then gradually implementing other policy changes, culminating in the decisions in the last year to go completely to GAAP. It's been a struggle.
MR. HINES: Thank you.
MR. SALMON: Both for the Department of Finance and for my office.
MR. HINES: Mr. Salmon, I guess I would be one of those individuals referred to earlier who just wants to get by in terms of knowing enough about the accounting business, because, as you stated, it's an art and certainly in that respect I'm not an artist. However, I think it's very important that you have that ability and are required to give that unqualified
audited opinion in terms of people like myself understanding the accounting principles and understanding where we're going with these things.
Now there were some increases in expenditures as compared to initial estimates. In terms of the overall budget - I believe that it's $5.5 million - what percentage does this increase represent?
MR. SALMON: Off the top of my head, I couldn't tell you.
MR. HINES: You would suggest that it would be a very small percentage?
MR. SALMON: It would appear to be, yes.
MR. HINES: Then the government is pretty much on target in terms of their budgeting?
MR. SALMON: On the expenditure side, yes.
MR. HINES: Based on the ups and downs of the economy over the run of the year, is it possible that the province's financial circumstances could change, much the same as a homeowner is often hit with unexpected bills? We've had some of those things occur, and those things can happen.
MR. SALMON: Yes. It happens in health care, and the most potentially volatile area would be on the debt-servicing costs. Depending on swings in the value of the dollar, swings in interest rates, you could be faced with cost increases. Take Hurricane Juan, for example, money has to be found to pay for some of those damages.
MR. HINES: In previous Public Accounts Committee meetings, and I believe it was last February, discussing your office and its budget, you suggested that we've come along way over the last number of years starting from '93 onwards and its been a gradual improvement year by year. How specifically has the quality and the completeness of the information improved over the past few years, from previous accounting practices?
MR. SALMON: As I just mentioned, moving to fully consolidated financial statements so that what you see before you is the totality of government operations. We have all the Crown agencies in, we have the school boards in, we have the hospitals in. Previously, none of that information was included, so the financial statements were only a partial picture of what was going on. Then with the adoption of proper pension accounting and these other issues and smoothing in intangible capital assets, and there's a whole range of decisions that have been taken, that have made the financial statements more reflective of the financial position of this province.
MR. HINES: So in terms of those Nova Scotians who just want to get by in terms of understanding the accounting, then certainly the principles of GAAP and the implementation of GAAP as an accounting principle has helped ordinary Nova Scotians, in terms of understanding what is going on with financing in the province. Would you suggest it has been a step in the right direction in regard to that?
MR. SALMON: Judging whether or not they really understand them is probably debatable but at least they are complete. Nova Scotians can be confident that what they are reading is complete and reliable, but that's as far as I can go. The important thing is that everything that is laid before them be prepared and presented on a complete comparable basis.
MR. HINES: Moving on to another area, just so that I can be clear on some statements that you've made on the issuance of the supplementary report that you brought forward this year. How much time do you and your office people spend with the financial staff in the run of a year? How much time would you suggest that you spend there?
MR. CARTER: In terms of the audit of the financial statements, or everything with respect to . . .
MR. HINES: In terms of the work that you do with them.
MR. CARTER: We're working with the Department of Finance throughout the year on a number of things, including the revenue estimates, getting ready for the financial statement audit, doing the financial statement audit, dealing with other areas of financial management and control. The province's finances and the systems of processes are complex and worthy of our ongoing consideration, it's a full-time job, and Angela can certainly attest to that.
MR. HINES: So you're with them almost daily and it's almost a part of a cohesion that takes place between the two bodies, in terms of that's your job and you're there constantly?
MR. CARTER: If I could, they would say, and I would appreciate them saying this and understand, we are with them more than they want us. It is not straightforward all of the time, there have been some complex accounting and other issues. We're all working on other things at the same time. Our goal is to get to the point where - myself and Angela, we're spending about 30 per cent or 40 per cent of our time on financial reporting matters of government, as opposed to what is now closer to probably 70 per cent or 80 per cent of our time.
MR. HINES: That being said, and in terms of coming forward with the supplementary report this year, I know that the census has obviously caused a problem because of the fact there was a statement issued, I believe it was on May 29, 2003, an e-mail from Statistics
Canada advised the preliminary adjustment data contains errors and do not use it. You wouldn't have had that available in June when you issued that report, but the other two areas of concern, was that information not there for you so that the concerns developed after your issuance of your statement in June? Was the information on the other two areas, retirement health benefits being one, was that information not there in June?
MR. SALMON: It was.
MR. HINES: So the census issue was the one that probably would cause the most concern for you, that that information being there and that being one of the main reasons you issued the supplementary report?
MR. CARTER: The census issue from our point of view is the least significant of the considerations. Our concerns relate to the way the retirement benefit accounting changes were presented and the sequence of what was included and what wasn't included, and the decision-making process. As we indicated, we were given draft statements in June 2003, that excluded the retirement health benefits obligations of $500 million and the related costs of $30 million. We met with Finance and urged them very aggressively, that to exclude them from the 2002-03 financial statements was not acceptable under Generally Accepted Accounting Principles. They subsequently decided to include them.
MR. HINES: If I can move onto another area. An example of the confusion that seemed to exist due to our complicated accounting procedures, came from comments reported in a CBC article, regarding the recent audit of the province's Public Accounts. I'm going to read, very briefly, "Liberal MLA, Diana Whalen says the premier's personal credibility has to be questioned in light of Salmon's comments. 'We were told that we had enough money to send out the $155 cheques to all Nova Scotians when in fact the government was aware that it would have severe shortfalls as a result of this,' Whalen says."
Opposition members and perhaps the public can easily confuse discussions of your audit of the 2002-03 Public Accounts of the province, and the discussions surrounding this year's budget and its contents. Is it correct to say that your comments approximately a week ago referred to last year's budget, 2002-03? Would the honourable Liberal MLA's comments perhaps have been better addressed in the 2003-04, as announced last March? Would you suggest that the Opposition member was a little confused when she tried to connect the issues of personal income tax reduction from this year's budget to comments you made recently in last year's budget?
MR. SALMON: My only comment would be that we felt that the budget and debt reduction plan should have at least had a reference to the $500 million liability. I'm not in the position, nor would I comment, on whether there's a relationship between that and the income tax refund.
MR. HINES: Thank you. Mr. Chairman, I will pass over now to Mr. Chataway, if I can.
MR. CHAIRMAN: Mr. Chataway.
MR. JOHN CHATAWAY: Mr. Chairman, I very much appreciate this opportunity. Certainly, of all the committees of the House, I think this is one of the most important, especially with you people because basically, you are watching how the government is spending the money. I think you referred to, Mr. Salmon, that indeed it's the people's money and how well and effectively they are spending it. I think many members of the government really feel that it is clear that our government's implication of Generally Accepted Accounting Principles have been good for our province and for our finances.
Our implementation of GAAP has been endorsed by Opposition members and I would think we are all aware that the chairman of this committee has approved and you have said the GAAP processes are far more good than bad. Certainly GAAP and its accounting principles can be very complicated and confusing. For example, GAAP allows for spreading debt out over several years as amortization, which can lead to the confusing situation of a balanced budget and an increase in debt in the same year.
Basically, I think all Nova Scotians very much like to know that the long-term liability has to be acknowledged on a consistent basis. So we have started that, a consistent basis, where, okay, we have a debt and we are just going to - and so, yes, our public debt may increase, but that we have a balanced budget.
[9:15 a.m.]
I think it doesn't matter if you are a CA. My father was a CA, I am not. But, basically, we have to make it understandable. Basically, I would like, maybe, if you could pass out here - I will just give you this - this is the consolidated statement of operations last year. Just tell me if you think it is accurate. I think this presentation was put on by the Department of Finance and, basically, it categorically says, okay, consolidated statement of operations, $31 million surplus.
Then they got more refined on this. Basically, all the various things - when we spend over - last year it started off $11.5 billion public debt, and now it is over $12 billion. The surplus from operations is $31.6 million. I think that is what, basically, everybody wants to be accurate in that regard.
Talking more of GAAP requirements and things like this, certainly, what effect did GAAP for balanced budgets and related initiatives, have on the province's credit rating? Inevitably, all provinces borrow money at various times. How did us adopting and initiating
the GAAP requirements, et cetera, and having balanced budgets relate on our province's credit rating?
MR. SALMON: That is a difficult question for me to answer. I think it is important that the province, in dealing with bond rating agencies, provide complete credible information. I think that it is likely that bond rating agencies would be far more skeptical of the province and that might impact on the decisions they make with regard to the bond rating. So being open and transparent at least allows you to have an honest working relationship with them.
MR. CHATAWAY: Very recently, I think our credit rating has become more favourable for the province, is that correct?
MR. SALMON: Slightly, I believe, yes, but we are still, in terms of per capita debt, near the top of the list in the country.
MR. CHATAWAY: Yes, that is assuming we have a long-term debt.
MR. SALMON: Right.
MR. CHATAWAY: I think the first thing is, when any province owes some money, they have to say, okay, here is how much we owe.
MR. SALMON: Yes.
MR. CHATAWAY: You have to include all the liabilities in that estimate.
MR. SALMON: That is correct.
MR. CHATAWAY: Otherwise, you are just fooling everybody.
MR. SALMON: That's correct.
MR. CHATAWAY: That's why I think it is very important, and I think it is your recommendation too, to adopt the GAAP requirements. I think you have said, too, that we have gone from being the last in the pack to near the lead of the pack as to getting good accounting principles that would take forward that.
MR. CHAIRMAN: The time has expired. Do you have a response for that, Mr. Salmon?
MR. SALMON: No, that is what I said. We have come a long way in terms of good financial reporting.
MR. CHAIRMAN: Okay. Thank you. We will now move forward with 11 minute rounds, beginning with Mr. Epstein.
MR. HOWARD EPSTEIN: Mr. Salmon, thank you very much for the presentation. I am trying my best not to get too lost in the details here, however important the details are. I certainly agree with that. I wonder if you could follow through with me as I try to summarize what I think you have said to us in your interim report and what you have said to us today.
As I understand it, you have directed our attention to about four different items that you are regarding as problematic. Two of them seem to relate directly to the budget that we had in the spring. One of them has to do with the evaluation of retirees' health benefits. This turns out to be a significant amount. The other has to do with certain evaluation methods for pension assets. These both seem to have to do with the budget figures that we saw in the spring.
The other two, the census data and various other things having to do with the updates, are all information that are post-budget in the spring. That is, they seem to have to do with the information that came forward later. Is that the basic picture, that you have suggested to us, we ought to contemplate?
MR. SALMON: The major issue we had with the budget and the debt reduction plan was the $500 million post-retirement benefits. Although, subsequently, some information came to our attention that indicated that some information on the census was available within the department and an estimate could have been made. At what level that was known is unclear to us.
MR. EPSTEIN: Perhaps I will get to the census information in just a moment. But that didn't really become an issue until later when you made your report and then the Minister of Finance made his comments back, and that is when that really became a focus. Is that right?
MR. SALMON: Yes.
MR. EPSTEIN: Good. Well, let's start with the basic picture, which I took your answer to mean that I did have it correct in my head. Let's think about who this matters to. I think you have told us that this matters to a number of different entities.
You have suggested, I think, that unless the Cabinet and the Legislature have a clear picture in their head of what the province's true financial state is, they might overspend. I took that from your comments on Page 14 of your overheads here today. I took it, when I read your statement that said, the province is $12 billion in the hole due, to some significant extent, to the incomplete and inadequate reporting of its obligations in annual reports prior to 1999. I took that statement to mean that if decision-makers, the Cabinet primarily, and then all of the Legislature, had always had a true picture in their head of the finances of the province, then they might have moderated their spending and we might not be so deeply in debt. Is that what you were trying to tell us?
MR. SALMON: Yes.
MR. EPSTEIN: So the first starting point is why it is important to have a true picture in your head so that we don't run up our debt and spend improperly.
MR. SALMON: Well, even if you have a complete picture, at least when you make decisions to over-expend, you are making them consciously based on complete information.
MR. EPSTEIN: Right.
MR. SALMON: That is a policy decision that I cannot comment on.
MR. EPSTEIN: Absolutely. But it is important that you not stumble into debt, but if you are going to go there, you do it deliberately and squarely, and let everyone know that you are doing that.
MR. SALMON: Yes.
MR. EPSTEIN: All right, so that is what that meant. Okay. So the first audience is then, in that case, the Cabinet. The second part of the audience, I suppose, is the Legislature as a whole because it is important for the Legislature as a whole, all MLAs on both sides of the House, to have a true picture of the finances of the province, so that they can scrutinize what the government is doing. Is that also fair?
MR. SALMON: Yes, and have a complete picture when they are debating the estimates, debating the budget and, consciously, approve or disapprove.
MR. EPSTEIN: Yes. The third audience would be the specialized one of the bond rating agencies and entities that would be thinking of buying the province's debt, is that right?
MR. SALMON: That's correct.
MR. EPSTEIN: The consequence there, of course, is that the bond rating agencies, if they don't have accurate information, may not rate the province appropriately and that is not fair to anyone who is thinking of buying the debt of the province, is that right?
MR. SALMON: That would be my view, yes.
MR. EPSTEIN: Okay. Indeed, you mentioned Enron earlier, which is a notorious example of misleading accounting, and the people who ended up in trouble there, of course, were the shareholders of that company. But bondholders could potentially be in a similar position, is that correct?
MR. SALMON: That's correct.
MR. EPSTEIN: Okay. I suppose the fourth audience, of course, is the public at large who have to decide whether the government is taxing and spending appropriately, and indeed, the question then becomes very relevant at election time when they get the opportunity to express, in very concrete forms, whether they approve or disapprove. Is that right?
MR. SALMON: That's one element of it. I believe that having complete information and understanding the financial position could affect unions in terms of negotiations, it could affect lobby groups for better health care, lobby groups for more schools, and knowing the financial position of the province is important in those discussions.
MR. EPSTEIN: Then I think we're very much at idem as to what it is that is important about what you've told us here. What is then crucial, I think, for all parties who are involved in this is to know whether those in whom we repose, of necessity, trust to run the government have done the job properly. I want to look at the language that you've used to describe this. On Page 18, you talk about "Setting the Record Straight." Now, I want to suggest to you that when you talk about setting the record straight, what you're implying is that the record was not straight, that is to say the speakers on behalf of the government have not been straight with the public. Is that the logical implication of that?
MR. SALMON: I don't believe that the budget was complete with regard to the post-retirement benefits, the information was incomplete, there was not full disclosure.
MR. EPSTEIN: At another point you used the word misled. In your overheads, which are reproduced at Page 17, you asked the question, "Did government intentionally lie?" What I want to know is, which points, exactly, we ought to focus on when we're considering that question? I'm wondering if we are looking at two different situations or at least two different situations, one is the time of the budget in the Spring, then the other is the discussion after you came forward with your special report.
As I see it, when you respond to the question of setting the record straight, you've made it clear that the comments of the Minister of Finance were simply wrong with respect to census data. If that's the case, then surely the focus has to be on the budget, earlier on, because you've nailed down, in no uncertain terms, what it is that ought to be our characterization of the comments of the Minister of Finance in response to your report. So what I'm asking is whether your discussion of, did the government intentionally lie, and to what extent that should focus on the budget in the Spring?
MR. SALMON: I raised the question because, again I repeat, I do not know the extent of communication that took place within the Department of Finance and with the Executive Council.
MR. EPSTEIN: Mr. Salmon, is that what that depends on?
MR. CHAIRMAN: Excuse me, you have to let the Auditor General finish his answer because the time has expired.
MR. SALMON: So I raised the question. In my opinion, if there had been full communication up the line to Executive Council, the government did not disclose what they knew. If they had been told. I do not know the answer to that question.
MR. CARTER: There are two aspects. Your focus is on the census information. There are two aspects. One is the retirement health benefits and the other pension-related accounting changes necessary or discretionary, and the other is the census one. Our view on the census one is that it's really a grey area, they did have information before the budget. They will argue that it was raw data, preliminary data, subject to change. Well, a lot of things are subject to change and review. Where we're coming at it from is of disclosure. We haven't said definitely that in our view there should have been a provision set up in the budget for 2003-04, we've said there should have been disclosure of the fact that this significant event, in other words going from the 1996 census to the 2001 census, is pending and is not reflected in these numbers.
[9:30 a.m.]
MR. CHAIRMAN: We will have to move to the Liberal caucus. Mr. Graham.
MR. GRAHAM: I want to just do a brief recap. We spoke about the budget and the ways in which the budget misrepresented the true state of the financial picture in the province. Just to touch on a point that you contained on a slide, on Page 14 of the presentation that you brought to us today, you indicate that with respect to retirement health benefits, you actually attached a value to that, back in 2002, of $453 million?
MR. SALMON: Is that correct?
MR. CARTER: We didn't attach it, the Department of Finance, Controller's Office had the actuaries do the work in February/March 2002. They had it in the statements, they were going to account for it.
MR. GRAHAM: So it was known to them what the effect of this would be.
MR. CARTER: Absolutely. We've included in last year's Chapter 2 an exhibit that analyzes that $453 million.
MR. GRAHAM: Moving forward to document two, with respect to the debt reduction plan, I believe you have before you some charts that I referred to when we closed off, and I referred specifically to Page 4 of 9, where it indicated that the total, net direct debt would be $11.7 billion in 2003-04. Knowing the amount that was going to change, you would agree with me that that amount is more accurately in the range of $12.2 billion?
MR. SALMON: That is correct, although I would suggest that you could show the chart this way and then footnote the fact that there's an additional $500 million.
MR. GRAHAM: But if this is the way that the Web site appears today, it's clearly inaccurate. If this is from the Web site of the Department of Finance today, it clearly misrepresents the debt.
MR. SALMON: Well, it's not consistent with the audited financial statements released on November 13th.
MR. GRAHAM: Just going back to the timing of this, this debt reduction plan was unveiled on June 11th but after all the cajoling that you spoke of, the retirement health benefit policy change was made less than three weeks after the debt reduction plan. Is that correct?
MR. CARTER: That's correct.
MR. GRAHAM: Then surely if this was an intentional manipulation of timing, then it would be a sham that they would have gone into the Red Chamber and unveiled this debt reduction plan, knowing that in less than three weeks they're going to reveal to Nova Scotians that the debt was going to be, in fact, $500 million more than they're telling us in the Red Chamber.
MR. CARTER: They had no intention of implementing retirement health benefits in the 2002-03 financial statements until we saw the debt reduction plan, met with them and urged them, very aggressively, that if they didn't implement it, it was a significant audit issue.
MR. GRAHAM: The change happened within three weeks of being in the Red Chamber.
MR. SALMON: That's correct.
MR. GRAHAM: Moving to the quarterly report, you would agree with me, Auditor General, that this was also misleading for a number of reasons. First, it still didn't value the census adjustment problem, is that correct?
MR. SALMON: That's correct.
MR. GRAHAM: That's in the range somewhere of, according to the Minister of Finance, $40 million to $60 million less in revenues this year. Second, it failed to disclose the new use of a third accounting policy change that hasn't been discussed yet today, and that's the valuation allowance change.
MR. SALMON: Correct.
MR. CARTER: Right, but we're dealing with disclosure. There shouldn't be any impact from a valuation allowance point of view on 2003-04.
MR. GRAHAM: They didn't note it in the quarterly report and they should have?
MR. CARTER: Well, it would have been helpful to the readers to know that the estimate that's in the quarterly report was on one basis and the forecast is on another, and what the accounting changes are that are picked up in the forecast, and what dollar impact, if any, is on them.
MR. GRAHAM: Okay. Again returning to Public Accounts, Page 37, item b under the 2002-03, entitled Valuation Allowance had a very significant impact on the state of the books. It added $130 million to the revenue line for 2002-03. I would suggest it single-handedly saved the surplus that is recorded at $31 million.
MR. CARTER: But it is Generally Accepted Accounting Principles.
MR. GRAHAM: It is, but if it weren't for that, is it fair to say - and assuming that no other adjustments or changes would have been made, without this accounting change we would have run a $100 million deficit in 2002-03?
MR. CARTER: As indicated earlier by Mr. Salmon, the implementation of the required changes, as well as the discretionary change, which is the pension plan assets, was beneficial to government meeting its desire to report a positive fiscal target.
MR. GRAHAM: It sure was beneficial. It was $130 million beneficial to the bottom line that allowed them to capture a $31 million surplus.
I guess it goes to another question and observation that, in fact, in 2002-03, revenue was lower than expected, expenses were higher than expected, but as perplexing as it might be because of accounting changes, the surplus was greater than expected. Is that a fair statement?
MR. SALMON: Yes.
MR. GRAHAM: I want to go to the three financial documents that we have. I want to make sure that we are fairly representing this. Since the end of March we have had three financial documents put before the people of Nova Scotia and they have seriously misled Nova Scotians with respect to the information that we were to receive: the budget, the debt reduction plan and the quarterly report.
MR. SALMON: They were not complete and they were not prepared on a consistent basis.
MR. GRAHAM: And they were misleading to the reader as a consequence?
MR. SALMON: I think that is a fair conclusion.
MR. GRAHAM: First, with respect to the budget, there was the non-disclosure of material revenue problems that affected your opinion from April 2nd? That is the census adjustment numbers.
MR. CARTER: We would categorize that as a contingency, yes.
MR. GRAHAM: But it wasn't disclosed to you?
MR. CARTER: No. I mean, we were certainly aware of the fact that there was a census in 2001 and that there would be new numbers coming. We had no information provided to us that there was a change of the magnitude of the adjustments that they were looking at.
MR. GRAHAM: This should have been both told to you before your opinion of April 2nd and it should have been either noted or valued in the budget, correct?
MR. SALMON: I think that is a fair statement.
MR. GRAHAM: When forecasting a surplus for the 2002-03 budget - you remember that $14 million figure - the documents failed to show that this was the result of an accounting change, the assets moving?
MR. CARTER: It failed to show, yes. They will suggest that the budget bulletin that talked about the move to smoothing was disclosure. You have to have it on the face of the document where the numbers are, that there is a change.
MR. GRAHAM: Okay. The projections about net direct debt growth in the budget were misleading?
MR. SALMON: Yes.
MR. GRAHAM: The debt reduction plan outlined in the Red Room on June 11th was misleading?
MR. SALMON: Yes.
MR. GRAHAM: The quarterly report failed to disclose the census adjustments to revenue and net direct debt?
MR. SALMON: Correct.
MR. GRAHAM: And you would agree with me that somebody should be accountable for these errors?
MR. SALMON: I guess the bottom line is, yes.
MR. GRAHAM: If you were, for example, a bond rating agency, this would cause you serious concerns to see these repeated errors?
MR. SALMON: I can't speak for how bond rating agencies operate, but what happened has caused me concern and that's why I issued the report.
MR. GRAHAM: Surely this, Mr. Salmon, becomes an issue of trust.
MR. SALMON: At some level, yes.
MR. GRAHAM: Whether or not the people of Nova Scotia can trust that the financial information that they're given by the Government of Nova Scotia accurately reflects the current state of the books?
MR. SALMON: The financial statements do. I gave an unqualified opinion on that.
MR. GRAHAM: Sorry, not the financial statements but the unaudited reports that are received from time to time?
MR. SALMON: That's correct.
MR. GRAHAM: Just back to the quarterly report and the debt, I am not sure if you have a copy of the quarterly report before you.
MR. SALMON: The forecast update.
MR. GRAHAM: Page 4, there is comment about the debt there and I know it is not common for these to have comments about the debt, but would you not have expected that since the debt had risen, according to a policy change, by approximately $500 million that that should have been referenced in that quarterly report when they were talking about debt?
MR. SALMON: If they're talking about debt, yes, it should be reflected.
MR. GRAHAM: A final question, the additional $500 million worth of debt that we've accumulated as a result of these accounting policy changes, will that create operating budget pressures on an annual basis?
MR. SALMON: There's an interest element to it.
MR. GRAHAM: What would the total value of that new pressure be as we go forward?
MR. CHAIRMAN: Time has expired. So, we will wait for an answer.
MR. CARTER: Go to the same page of the forecast update and they indicate that the forecast includes a $31.9 million increase in interest on post-employment benefits. So it's there.
MR. CHAIRMAN: Thank you, and we will turn to the PC caucus. Mr. Chataway, I believe you're going to lead off.
MR. CHATAWAY: Thank you very much for that opportunity. Basically, Mr. Auditor General, this is just a statement for a naive person, possibly, on the surplus in Nova Scotia. This was issued by the Department of Finance and if there is anything wrong there that you can't agree with, please, basically, say it.
I think one of the most important things that you have said in your auditor's report, "In my opinion, these financial statements present fairly, in all material respects, the financial position of the Province of Nova Scotia at March 31, 2003 and the results of its operations, changes in net direct debt and cash flows for the year then ended in accordance with Canadian generally accepted accounting principles for the public sector." I think that is very emphasized. Obviously, you do not report it in just a few pages, but that's a very, very
important statement that you've made in there and, basically, I think most Nova Scotians recognize that.
Just one last question before my friend asks some more questions. I will change the subject somewhat. Some government critics still tell us that now is not the time to balance the province's budget, decrying our recent budget readjustments and telling us, oh, we can balance the budget at a later time. In your opinion, should the government abandon the goal of balanced budgets?
MR. SALMON: That's not for me to say. That's a policy decision and I won't comment.
MR. CHATAWAY: Okay, you just report.
MR. CHAIRMAN: Mr. Hines.
MR. HINES: Mr. Salmon, there was some discussion in your report about disclosure with regard to retirement benefits accounting changes. Is it not true that these changes were made public twice? Once in a note in 2001-02, in the financial statements of December 2002, and again in a press release on June 30, 2003, when the accounting change became departmental policy? Were those two notifications not made?
MR. CARTER: The disclosure in the 2002 financial statements is there. The amount is included there at our insistence. We insisted that it be included there as well as in the Security Exchange Commission filing. The June 30th press release was the culmination of some difficult discussions in exchange of information between our office and the Department of Finance. So the answer to your question is, yes.
[9:45 a.m.]
MR. HINES: Is it correct to say that changes with regard to pension asset smoothing were disclosed as part of the public release of the 2003-04 budget through a budget bulletin detailing the accounting change?
MR. CARTER: No. It's there, it's called Pension Plan Assets. It doesn't talk about the impact on the budget. The fact that there is a Budget Bulletin called Pension Plan Assets or whatever the title is, in and of itself is noteworthy. The content or lack of content in that Budget Bulletin is very problematic.
MR. HINES: You made comments which perhaps to some not familiar with the complexity of government accountancy might make things sound worse than they are. The public and others might think that the budget isn't balanced, but it is. The public might think that GAAP isn't in place but the changes made, which you referenced, are needed to make
Nova Scotia the first province to be fully compliant with GAAP. The debt was well known to the creditors and we made our accounting changes public at that time. So, that would lead me to ask you just a series of quick questions here.
You write in your recent report on the province's Public Accounts that it is common for financial statements of a large government to have small misstatements after an audit. You claim that you had identified some of those but that they don't affect the province's bottom line. Is that true, that it doesn't affect the province's bottom line?
MR. SALMON: Not materially, no.
MR. HINES: In your report, I read that you didn't encounter any major difficulties in performing your audit, that you discovered no illegal acts, saw no fraud and found no unusual actions which would increase risk of loss for government. Would that be a relatively accurate summary of your findings in regard to working with the province?
MR. SALMON: Yes, we have an excellent working relationship with officials in the Department of Finance and we didn't find any serious problems from that point of view.
MR. HINES: Just to recap. You claim that Nova Scotia recorded a balanced budget last year. I think it's important for the public out there to realize that the major statement that's made by your reports, both your initial report and your supplementary report, is that the budget is balanced in the Province of Nova Scotia.
MR. SALMON: The financial statements reflect a surplus of $31 million. The financial statements were prepared in accordance with Generally Accepted Accounting Principles and I gave an unqualified opinion that that is a fair presentation of the financial situation.
MR. HINES: You have written recently and also encouraged the implementation of GAAP. I am sure that you consider it a good thing and as they go forward with full implementation of GAAP, it is something that you will continue to recommend, as we go along. Would that be a fair statement?
MR. SALMON: Absolutely.
MR. HINES: When you made these statements, you go to great pains to demonstrate your independence as an auditor. That's important also, I believe, and I am sure that you believe that. Is that not true?
MR. SALMON: Well, an auditor can't add any credibility to financial statements if he is not independent.
MR. HINES: That's right and that's why I went there, it was to point out to the public who may be viewing the importance of your position as well in the realization that the province does have a balanced budget.
How many provinces use the GAAP principles?
MR. SALMON: They're all moving in that direction although there are some that because of legislation are required to follow accounting principles that are at variance with GAAP, Canada being one.
MR. HINES: So, we use the full GAAP principle now in our budget and our Public Accounts documents. Do you suggest that we and other governments, that should take place in the future, that other governments use financial updates and use the GAAP principles as well?
MR. SALMON: There is a general view among all legislative auditors that the appropriate basis of accounting for governments is GAAP.
MR. HINES: The reasons that I ask these questions, Mr. Chairman, is because some Opposition members have, in recent weeks, made what I would consider wildly inaccurate
and somewhat irresponsible and over-the-top statements about this government. They have questioned the integrity of the government and the Premier's personal credibility and suggested the books are not in good shape. They called the government's actions more than misleading and insulting to Nova Scotians, et cetera. I'm trying to reconcile those attacks with the Auditor General's statements today, which confirm that the 2002-03 budget is balanced, in accordance with GAAP principles, marking the first time in 40 years that the budget is truly balanced.
The Auditor General confirms that he found no major mistakes or errors within the Public Accounts document, as well, and no resistance from government, and no major problems or difficulties whatsoever. So the open, transparent government the Auditor General describes doesn't sound dishonest to me and the 2002-03 budget that he describes doesn't sound in bad shape, as is implied by some Opposition members in the media.
Mr. Chairman, in closing - and knowing there may still be some time left - I would suggest that what the public take from what they see and hear here today, should be that the major impact statement made by the Auditor General was the fact that this province, yes, it does have a balanced budget but there is one area that I would like perhaps some explanation on and that would be amortization under GAAP and the fact that in the accounting principles and in the Public Accounts Committee you noted that, the complexity of the Budget Address, accompanied by the estimates, makes it hard for a layperson to understand them. Many people get confused about amortization. I wonder, could you explain the principle of amortization that was used?
MR. SALMON: Do you mean the assets moving?
MR. HINES: Yes.
MR. CARTER: This is one we have struggled with to understand.
MR. CHAIRMAN: You have one minute to explain.
MR. CARTER: All I can say really, in simple terms, is that it alleviates the risk of volatile swings year to year by spreading the way gains and losses on pension assets are recognized over a period of time in, I guess I would say, a longer period of time. Certainly, if they hadn't implemented smoothing this year, they would have had a $56 million issue, they would have had a deficit to report of $25 million, which would have been fine with us, it would have still been generous to the accounting principles. But in the world of balanced budget and government services, do you want to be closing hospital beds and schools, just because you're aggressively accounting for gains and losses on pensions? This is a way to smooth that out so that the impact on program service planning is not as volatile.
MR. HINES: So, as you suggested, it certainly is an acceptable accounting principle?
MR. CARTER: Yes, absolutely.
MR. CHAIRMAN: Time has expired.
MR. SALMON: Absolutely.
MR. CHAIRMAN: I will allow a few moments for closing comments, as normal. Mr. Salmon, I know you are quite familiar with the process here, so please go ahead, you have up to five minutes.
MR. SALMON: I really don't need that much time. I appreciate the opportunity, I appreciate the questioning. I hope that in dealing with these very complex issues we have been able to explain our views in what has gone on and hope that we have put you in a position to further pursue these matters with the Department of Finance next week. Thank you very much.
MR. CHAIRMAN: Mr. Carter, would you like to say something?
MR. CARTER: If I could, I just wanted to comment on one thing and it's a goal of our office and a goal of the Controller's Office and the Controller's staff to put forward honest, credible, complete, comparable information. The financial statements are onside and we have every reason to be proud of those. Our recommendations relate to these other
documents that form part of external information that bondholders or bond rating agencies use, and the public use, in terms of looking at government's finances. We don't think that
financial statements of government should be a front-page story, we don't think that all of the public of Nova Scotia need to be accountants or understand the province's financial statements.
We think the issue is what are the key numbers and it's the annual results, the net direct debt, those should be upfront and credible. That's what our office and Finance are working towards. Mr. Salmon referred to Enron, not suggesting that what we're dealing with is Enron, but as a result of that the world of accounting and financial reporting had a wake-up call. There are Security Exchange Commission requirements that all of your financial reports are to be credible, are to be on the same basis and consistent. I see this as a watershed in terms of really taking the province's financial reporting, including its financial statements, to a position where it should be just factual information, so that people in this House are not debating about the reporting of the finances of the province but debating things that are relevant to the people of Nova Scotia.
MR. CHAIRMAN: Thank you, deputy. Ms. Cook, we've let you off fairly easy today, perhaps we will have you back another time and have you in the hot seat. Thank you very much, ladies and gentlemen, for attending today. Next week, December 3rd, we will have our witnesses, the Department of Finance, the Deputy Minister and his staff, as we further examine the Public Accounts of the Province of Nova Scotia for 2002-03. The meeting will take place in this Chamber, commencing at the hour of 9:00 a.m. until 12:00 noon. So, until next week.
I will entertain a motion to adjourn.
MR. GRAHAM: So moved.
MR. CHAIRMAN: The meeting is adjourned.
[The committee adjourned at 9:57 a.m.]
