Printed and Published by Nova Scotia Hansard Reporting Services
Mr. Graham Steele (Chairman)
Mr. James DeWolfe (Vice-Chairman)
Mr. Mark Parent
Mr. Gary Hines
Ms. Maureen MacDonald
Mr. David Wilson (Sackville-Cobequid)
Mr. Daniel Graham
Mr. David Wilson (Glace Bay)
Ms. Diana Whalen
[Mr. David Wilson (Sackville-Cobequid) was replaced by Mr. Howard Epstein.]
Ms. Mora Stevens
Legislative Committee Coordinator
Mr. Roy Salmon
Department of Finance
Ms. Vicki Harnish
Mr. Byron Rafuse
Ms. Suzanne Wile
Director, Government Accounting
HALIFAX, WEDNESDAY, FEBRUARY 9, 2005
STANDING COMMITTEE ON PUBLIC ACCOUNTS
Mr. Graham Steele
Mr. James DeWolfe
MR. CHAIRMAN (Mr. James DeWolfe): Good morning, ladies and gentlemen. I'd like to call this meeting of the Public Accounts Committee to order on this the 9th day of February, 2005. This morning we have with us senior officials from the Department of Finance, as we investigate government financial reporting. We'll commence with the introduction of our committee, beginning with the NDP.
[The committee members introduced themselves.]
MR. CHAIRMAN: And I am Jim DeWolfe, Vice-Chairman of the Public Accounts Committee. With us today, as usual, is our Auditor General, Roy Salmon - good morning, Roy - and also Mora Stevens, clerk for the committee. I would now like to ask Deputy Minister Vicki Harnish for her opening comments and to introduce her staff, please.
MS. VICKI HARNISH: Good morning. We're here today to answer questions on financial reporting within the Government of Nova Scotia. I would like to make a few introductory remarks about that topic. I have with me today Suzanne Wile, who is our Director of Government Accounting, and Byron Rafuse, our Acting Controller. I know both Suzanne and Byron have visited the committee on previous occasions, although in Byron's case it would have been in another life. He was previously with the Health Department. They're pleased to assist me here this morning.
I would like to take this opportunity to recognize the work of our staff at the Department of Finance, and indeed their counterparts across government who have been involved in making some major improvements in not only accounting but other areas of financial reporting. I can tell you from personal experience that they serve the public well in their roles. They keep up to date in their field, they proceed with their annual activities efficiently and professionally, and they are always looking for opportunities to improve our accounting policies and processes.
The committee may be aware that we put a lot of time, consideration and effort into producing documents such as our consolidated financial statements to ensure that the people fo the province get the information they need. Public accounts alone requires some six to seven months of work. This year it was produced earlier than ever before, in September, and received an unqualified audit opinion from the Auditor General noting compliance with GAAP.
We believe Nova Scotia's citizens have a right to know not only where the money has gone, in an historical way, for the last fiscal year, but how the revenues and expenditures are going partway through the year, along with government's intentions for spending in future years. And they should be able to find the information in a format they can use and understand, to tell them how we did last year, how we are doing now, and how we expect to do next year and down the road.
Financial reporting, of course, encompasses a variety of activities and products within government, from the year-end financial statements to the business plans and accountability
reports, forecasts, the budget itself and a variety of other documents and materials.
Nova Scotia has made considerable improvements in financial reporting in the last five years. In addition to overseeing the implementation of Generally Accepted Accounting Principles, the Government of Nova Scotia has introduced a variety of accountability measures. We have a much more robust business planning process than ever before, and it is now more closely linked to financial forecasting and planning. We continually improve the quality and usefulness of the materials that are available to the public, including to the members of the Legislature. We may not be there yet, but we are certainly much further ahead than we have ever been before.
Mr. Chairman, it is my personal view that some of the recent public discussion about accounting processes within government has not accurately represented the progress we have made in this area and the legitimate choices taken for good reason. There may have been an impression that strict accounting rules have been broken, when, in fact, what we are dealing with here is a difference of opinion about the presentation of fully disclosed financial information. It's useful to note that accountants, like lawyers, doctors and scientists, use their background, experience, intuition and technical expertise to develop advice for their clients.
It is a fact that you can have differing accounting approaches that are well within guidelines or standards.
Accounting is often thought to be black and white but, as with anything else, it is open to interpretation. These variations in accounting opinions surface from time to time in our close working relationship with the Auditor General's office. Our officials work closely together on many issues, and there is considerable professional respect among them. However, occasionally there are issues on which our officials agree to disagree. I think it's important here to distinguish between concerns about major issues of accounting practice, such as those in the days before we used Generally Accepted Accounting Principles, and smaller areas of interpretation that we believe can go either way.
The fact is Nova Scotia and several other provinces are now some 99 per cent GAAP compliant. However, this doesn't mean that every financial or reporting document produced by governments across Canada is intended to meet every test of GAAP. It is appropriate that our year-end financial statements are fully GAAP compliant. The Auditor General confirms this every year, and he has given us unqualified audit opinions of the financial statements. However, other government documents are not always meant to be fully GAAP compliant in the same way as financial statements, and there are many good reasons for this.
Nova Scotia's forecast and budget documents are generally consistent with the accounting policies used to prepare the Public Accounts, but full GAAP compliance may be unlikely, simply for practical reasons. The budget is a policy document that is forward-looking. The underlying numbers are generated using accrual accounting, however, the format may incorporate additional items to explain government's future plans in a way that we think is helpful to the public. The budget itself would have to be much larger and require more resources to produce, to cover the detail on consolidated entities that would be required under GAAP.
Nova Scotia is like all other provinces in that it tailors its budget presentation and forecast documents to our province's needs. Governments must report to the public in a variety of formats, and we continue to work to ensure the best and most useful presentation to the public. With that, I'd like to conclude my remarks. Byron, Suzanne and I would be pleased to take questions on government financial reporting.
MR. CHAIRMAN: We will begin with 20-minute rounds, beginning with Maureen.
MS. MAUREEN MACDONALD: Good morning. I want to preface my questions by saying that I'm a relatively new member to this committee, and I've been reading the background documentation provided by the clerk and attempting to become more familiar with many of the issues that we need to deal with, as representatives of the public. I find your opening comments interesting in that regard.
My reading of the materials we have gives me the impression that there is, in fact, a great deal of recognition for how far the government has come, with respect to adopting the standardized GAAP procedures but that there's always room for improvement. Certainly, when anomalies or difficulties in this process make themselves apparent, then it is the responsibility of the elected officials and indeed, the Auditor General's office, to point these issues out. I think it's really important that government not become defensive because we're part of the process of trying to improve the process, which I think is an objective that we all share in common.
I want to refer to the 2004 report from Deloitte &Touche. Some of the findings in that report, I think, did speak to concerns around insignificant risk management policies and procedures within the division for debt management functions of the province. I want to take some time to ask you about Finance's response to the concerns that have been raised.
I will start by asking you if you could outline for the committee how exactly a middle office functions and what it will be doing differently than the other levels of the front office and the back office if you will?
MS. HARNISH: Maybe we can just briefly describe a front office, a back office and then a middle office.
The front office basically would consist of the people doing the transactions, our traders, for example, on the investment side, it would be the folks who deal with the external managers or do the direct investment themselves. In our debt management side it would be the folks who actually conduct the borrowing program, who look after short-term investments, that kind of thing. So they're the folks who actually do what's done with the transactions.
Our back office are the people who keep check on the transactions, they reconcile our bank accounts on a daily basis, for example. They keep the records, they do the calculations of our debt service costs, that kind of thing.
The middle office is a new function, it's new, in fact, to government. Its main role is to address oversight of the front office and the back office, and ensure compliance against policies and procedures.
Byron has been working with the Royal Bank of Canada, who is assisting us to set up a middle office in this province and maybe would like to just fill in anything that I've left out with regard to the middle office.
MR. BYRON RAFUSE: Certainly. One of the key functions of the middle office is to ensure that a risk policy is developed and approved by senior management. Once that risk policy is developed, they use a series of matrix and calculations, as well as other compliance activity monitoring systems, to ensure that the traders in the front office are compliant with the risk policy approved by the senior management or, in fact, by the deputy minister and the minister of the day. So that's what their primary focus is.
They also can ensure that the practices or policies that are used, both within the front office and the back office, adhere to best practices. They also not only do a policy review but a procedural review on the activities of those offices, to ensure that best practices are being met, and that the back office is ensuring that accounting standards are being met. They do this by not only having risk profile management capabilities, but they must have the capabilities to understand the front office activities, they must be converse in the marketplace and the like. They sort of have a functionality of both the back and front office, but they are more the - I'm going to call it - real-time auditing, as opposed to the people who actually do any transactions.
MS. MAUREEN MACDONALD: Will this require the recruitment of new personnel? I noticed that there was discussion about training and inadequate training for people who are currently in the positions of responsibility, around risk management.
MS. HARNISH: We will be recruiting for the lead person for the middle office, in fact, the ad is ready to be posted. We had the assistance of the bank in doing the job spec and we've now had it rated. We will hire one initially and we believe we will possibly need a second person once we see the extent and scope of the responsibilities and the amount of work that is required. We have budgeted appropriately for three people, max, at this point.
MS. MAUREEN MACDONALD: Will the ordinary Nova Scotian see any difference in terms of the financial reporting and the information that is available either when the budget and all of the statements come into the Legislature, or quarterly reports?
MS. HARNISH: The information and reporting that will occur will be to management within the department primarily, as well as the Debt Management Committee, to assist them in fulfilling their obligations for effective oversight. We will be reviewing the reporting on debt, as well as other issues for our upcoming budget, as well as there will be some differential in reporting required, I expect, next year in the financial statements, but it wouldn't be as a result of the middle office.
MS. MAUREEN MACDONALD: Understandably, I know that you probably want to focus on the positives and I have no difficult with focusing on positives but I think we have to deal with the information we have in front of us.
This report noticed that there were significant deficiencies in the government's operating procedures around financial management. Yet, I think it's fair to say that your department responded as if there was something less than a pretty strong indication of existing practices being adequate in some ways, or being quite well developed. I'm wondering if you could characterize for the committee how you view the report, in terms of the scale of its significance, what it is that they're saying?
MS. HARNISH: First of all, I should point out that senior management in the department who worked with the agreement of the minister commissioned this report because we did believe it was time to compare our practices to best practices used elsewhere, and we had expected that there would be findings as a result of this. Deloitte, in fact, prepared this audit and compared us to best practices in the private sector, so it was a very high standard to which we were being held.
I think we now have an identification of a number of areas that we need to address. We have been addressing these ever since we received the report. We appointed a full time project manager just to oversee and ride herd on this, so that it doesn't fall through the cracks in any way. Within a large department it's very easy to get waylaid but in this case, we have made full commitment to addressing these recommendations. I think it's fair to say we're making good progress on it.
MS. MAUREEN MACDONALD: As a layperson, somebody who isn't an accountant, when I read these words about insufficient risk management and then I see the dollar figures that are attached, when I see that we're talking anywhere from $7 billion to possibly $25 billion, I go, oh my God, what does that mean, what are the implications of this?
I'm wondering if you can help me out by putting into layperson's terms what kind of things can happen as a result of insufficient risk management procedures. I don't find that spelled out anywhere, in any detail, in the reports. What kinds of risks are we exposed to, and what are the implications, and how will we protect ourselves, and what are your plans to address that, beyond having a project manager to sort of build this middle capacity?
MS. HARNISH: That, of course, is kind of oversight of compliance. Right now we're in the process of identifying and documenting the major risks that could occur on both sides, both in the investment and the debt management. I am not an accountant myself, so I share with you this issue on terminology, for sure. In the debt management portfolio, of course, as in any operation that manages a large amount of money, there are many areas where risk could occur, from investing or from borrowing too heavily through one bank in particular and in that event a bank could collapse, to the risk of not being able to get money in a market, when in fact you need that money. Maybe you would be unable at certain times to have the liquidity that you need. The scale of the risk goes right down to something as simple as a transaction may in fact occur, some of our policies and procedures actually talked about
insufficient segregation of duties, the implication being that an individual could profit without being caught. So the range of risk varies according to the area.
You could never safeguard against all these risks 100 per cent. No one could. One of the keys to this is - well, there are a couple - the first one is just ensuring that the culture within the department is one that values integrity, that folks are themselves ethical, of high standards, totally aware of conflict of interest policies and adhering to those, that they are knowledgeable in the job that they do, right down to having in place the appropriate mechanisms in the way of checks through such an entity as the middle office to ensure that the policies and procedures that are developed are being adhered to on a daily basis. It's a very large and complex organization and task, as you can imagine.
MS. MAUREEN MACDONALD: Well, it has a lot of responsibility, the ultimate. Nothing else can happen if this department doesn't function well. So, we have the project office. Can you give us a sense of the timelines, how long you anticipate it will take to get the middle office up and running, and then what your plans might be with respect to an evaluation or some kind of ongoing or systematic review to ensure you're getting the kinds of outcomes that are required?
MS. HARNISH: This isn't a quick process, as you can appreciate. We're moving on the higher in importance areas most quickly. The middle office, for example, we're developing the policies and procedures and the templates for the reporting, even as we speak, through the Royal Bank. We would hope to have the first individual on the director of compliance, the end of March is our target date for that. Then they will be continuing to assess what's needed and staffing up from there.
In the area of governance and oversight, we have prepared, for example, new terms of reference are just about completed for a Debt Management Committee, which we believe will appropriately address the kinds of issues that are raised. We will be looking for an external person to join the debt management committee to provide an extra element of independence in the oversight area in advising the minister. We hope to post an ad for that person within the next couple of weeks. We've developed new conflict of interest policies, even now, that are ready for approval.
We have been doing transaction process flow analysis for the last month or two at the individual transaction level, so that we can identify who is doing what and address some of the issues regarding segregation of duties. We expect that probably by the end of March we'll be in a position to redefine some of the roles and responsibilities of independent staff members in the front and back office, and more appropriately assign duties to them. We've been progressing quite according to the time frame that we believed would be possible, but it's a long-term process as well, and we'll be working at this over time.
MS. MAUREEN MACDONALD: I want to turn away from this topic, because my time is short, and while I have you here I thought it would be a good opportunity to ask a few questions about the Nova Scotia taxpayer rebate.
MS. HARNISH: I hope I can answer them, because my binder is in another office. I wasn't anticipating this subject matter.
MS. MAUREEN MACDONALD: I know that the committee had an opportunity to discuss the tax rebate program last year, but in the summary of eligibility rates sent by Bruce Henneberry, formerly from your department, to the Canada Revenue Agency in April 2003, there's a section titled, Cheques versus Direct Deposits. It says that only cheques will be issued. I'm wondering if you can tell the committee who made the decision that only cheques would be issued and not direct deposit, and how much the province might have saved if direct deposit had been used, because I noticed there was a fair amount of postage and various other costs per cheque, 70 cents a cheque or something like that?
MS. HARNISH: In fact we were recently asked that question, so I do have the answer with me. I anticipated that one. CRA told us that we could not do direct deposit for this program. So, as a condition imposed on us by them, it wasn't an option, so we didn't do a cost comparison.
MS. MAUREEN MACDONALD: In the same document, the summary of eligibility rules, it says that the program is not appealable. Can you give us a sense of why a decision would have been made to prohibit appeals around this program, and whether you have any estimation of how many appeals you might have avoided by going this route?
MS. HARNISH: Let me just take a look at this. I understand, and certainly you can't explore this with me because I'm just going to give you an answer that was provided to me, and I just got it as I ran out the door this morning. This structure was recommended to us by the CRA, possibly because Ontario's program was similar to ours and had been non-appealable. However, in one sense it might be not that significant because the program itself was based on whether one was assessed to be taxable by CRA within a defined time period, so you would have been either eligible as being taxable or not. Appeals would be made with respect to that issue under CRA's usual appeal process.
MR. CHAIRMAN: We'll now turn to the Liberal caucus. Ms. Whalen is going to commence. I'll also welcome Daniel Graham, who joined us some time ago, during the proceedings, from Halifax Citadel.
MS. DIANA WHALEN: Welcome, again. I appreciate it that after this report came out, you did give us a briefing in your office with members of your staff to talk about the Deloitte & Touche report - I'm still on the Deloitte & Touche report, just for clarity. That was helpful, but since that time we've had other information become available and had a
chance to go through it in more detail, and I think it's important that the Auditor General himself had flagged that this is a really important area for the Public Accounts Committee to delve into and to pay attention to. I think in our oversight role that is essential.
What struck me more as I got into this was comparing the objectives of the study to their findings, to whether or not they felt they could endorse, sign off on the objectives. What has been explained to me is that, as you say, the rigours were high, you were compared to private sector, but they didn't give you a qualified response, they gave you no response. They said, we can't sign off on this. Which really means they didn't find the systems and processes in place to safeguard and ensure that risk was minimized or controlled. I think that that's very telling. I don't know if you would agree with me, that that is so much worse than not even a qualified opinion.
MS. HARNISH: I think you're referring to the point that they indicated they could not provide assurance. They did indicate they could not provide assurance. Certainly, we were quite interested when we commissioned this work to get specific details on any areas for improvement. There have been a number of those noted and we are working quite diligently to address all of those areas that have been noted, with the view that sometime in the future we will be able to retest ourselves against the standards set, to ensure that we have made the progress that we have set out to make.
MS. WHALEN: Can you let me know what your plans are for an audit again, to go back, or what kind of time frame before you'll come back and audit a second time to see how you're doing?
MS. HARNISH: Well, I think we would want to make sufficient progress, that it would be an intelligent audit. We would like to be in a position where we feel that we are just about there, so that this time around, we may, in fact, receive the assurance that we hope to ultimately obtain. It is a longer term process, though. I think when we met we told you 18 months wouldn't be a stretch in terms of actually getting through appropriate address of all of the recommendations in place.
MS. WHALEN: Well, I think that, really, the fact that, as they say there in the Executive Summary, "Accordingly, we are unable to provide assurance with respect to the objectives of the audit.", and comparing back to the actual objectives, saying their objective was to provide assurance that major risks have been identified and controls are in place. It is alarming and I think that is what we wanted to particularly convey to you, is that we feel this is very alarming. Although your words are reassuring that certain steps are being taken, there is a sense that we might have 18 months before we really put into place a process which could be adequately compared and reviewed.
I want to be very clear that the urgency is there beyond, perhaps, what I'm hearing this morning. I feel that there were so many things that were flagged in this report, when you actually go through it, even things in terms of the culture of the department and so on that they asked about. Maybe we could go to that in the final conclusions of the report.
MS. HARNISH: If I could address that, although I'm saying 18 months - and that is not uncommon - to get Manitoba's middle office, for example, fully up and running, it has been an 18-month process. That doesn't mean that we're not addressing on a priority basis and with some urgency the most pressing of those needs immediately. When I say 18 months, I'm talking about getting down through to the detailed, less significant items that you would see. This is a very long report and there are a lot of things that we will be addressing.
MS. WHALEN: Well, that is good to hear you say. As I say, there should be some very immediate steps taken. I think that might increase our assurance. Do you feel that the steps you have talked about today, and maybe others, are - maybe you could elaborate on the immediate ones that you and your staff could take right away, moving in to address these issues.
MS. HARNISH: Certainly, we identified the middle office function as one that needed top priority because it is the area where one would see emphasis placed on not only developing appropriate policies and procedures but, as I think Byron described it, real time oversight and analysis of transactions against those policies and procedures, that one we have placed considerable effort on. The Debt Management Committee and the Investment Advisory Committee, which are governance bodies, we also believe are those higher order, more immediate types of activities that we should be concentrating on initially and we have been doing that.
MS. WHALEN: Has training begun for the members of those committees?
MS. HARNISH: It certainly has. About a month ago, four of us attended a course put on by the Institute of Chartered Accountants, for example, just on the whole Treasury management function. We have had courses, as well, to date by some of our dealers in specific areas like derivatives. We are in the process of developing a comprehensive kind of competency analysis and looking for opportunities to address any deficiencies in the actual level of information that is identified.
MS. WHALEN: You did identify about hiring or finding somebody for, I think it was the Debt Management Committee, but will you not look at reconstituting those committees, identifying, and really changing the people who sit on them, perhaps, bringing in the people with the kinds of skill sets that you really need there to oversee $7.3 billion in investments?
MS. HARNISH: The Investment Advisory Committee is a joint committee of the two unions and the employer, itself. We did raise the issue of membership on those committees at the union level, for example, and certainly, I believe that the unions are of the opinion that the individuals they have on that committee are the appropriate individuals, and have the skills and the background that are required. On the management side, we are reviewing our membership, as well, and once the competency assessments are completed we may well be adding to the membership or replacing individuals as required.
MS. WHALEN: So it's going to be a slow process there, as well? It's going to take time?
MS. HARNISH: No, I don't think it will take that long. We would expect some amendment in the composition of the committees within the next month or so.
MS. WHALEN: Because I think that was one of the key areas that was mentioned, that the Investment Advisory Committee's mandate had seemed to expand or the decisions it was taking were beyond what really had been given to the committee, and that decisions that, perhaps, should have been taken by, I believe, the deputy minister - yourself - had been taken at that committee level. I think that's a very important thing, that there would be any misunderstanding about the role of an advisory committee and how far their decisions could go.
MS. HARNISH: And sometimes committees tend to do what they enjoy doing. Certainly, we are working with them. Even now, we have a new terms of reference for the Investment Advisory Committee which responds more immediately to the issues raised by Deloitte. Those terms of reference were reviewed with the committee at its last monthly meeting and the minister will be assigning those terms of reference to the committee within the next week or so.
MS. WHALEN: I would like to ask if, perhaps, that could be made available to the Public Accounts Committee as well, you know, as soon as it's available. I assume it's not quite finalized.
MS. HARNISH: As soon as the minister signs it off it will be. It's pretty much done.
MS. WHALEN: We would like to have that sooner, rather than later, because that is a tangible step forward which we would like to see. As I said, another aspect of those committees was that you, yourself, as deputy minister, are a member of the committee and that oftentimes, because of your own schedule, it's difficult to be a regular attender. Has that been addressed or looked at, whether there should be somebody else assigned?
MS. HARNISH: I believe it said that as chairman of the committee, sometimes it was difficult for the deputy to be there. We are, right now, looking at the governance structure in both of these and comparing the responsibilities of the deputy minister and the minister to the responsibilities of the committee. I would suggest that we will be changing the chairmen of those committees so that we have someone always available who can, on an ongoing basis, attend and chair the meetings and so on.
MS. WHALEN: So the deputy has been chairman for both of those committees, is that right?
MS. HARNISH: Yes.
MS. WHALEN: There was also a comment made that the deputy ministers have changed frequently in the Department of Finance. Can you comment on that?
MS. HARNISH: I can't address that. (Laughter)
MS. WHALEN: Having only been here myself for less than two years, I'm not sure how frequently that occurs. I think it might be a signal to government that that needs more stability.
MS. HARNISH: The deputy minister has changed in the Department of Finance several times over the last few years but as deputy minister, we get assigned. Certainly, Howard, my predecessor was there a very short time. Bill Hogg had provided more stability, I believe, he had at least three years as deputy in the department.
MS. WHALEN: So it varies. I just wanted to go through - I think some of these questions have been covered quite nicely by my colleagues. I would like to know, again, in terms of the benchmarks that you're setting. Apparently the benchmarks were not in place at this time, internally, for Deloitte & Touche to feel comfortable that you were monitoring and controlling to a level that was acceptable. Have you identified benchmarks now that are in place for measuring how you're doing?
MS. HARNISH: We, in fact, had had in place on the debt management side, for example, draft policies and procedures and tolerance levels, ever since I went to the department. They hadn't been formalized, they hadn't been formally approved as such, although staff were working to those. Part of what we're doing at this point is reviewing our risk areas, our tolerance levels. We will be confirming or amending the actual levels that were set. We had always monitored and had seen reports against the levels in the draft policies and procedures so it wasn't that nothing was in place.
MS. WHALEN: Why were they not formalized if they did exist?
MS. HARNISH: It would have been before my time, certainly, so I can't really address that. Some of them, I think, had been fairly recently produced. Staff had been working on them over the past year before I got there.
On the investment side there are very concrete targets set in terms of the returns expected for every type of portfolio and every external manager, as well as internal managers. Every type of investment is linked to public index - this S & P 500 or something - and returns are monitored every meeting against the benchmarks that have been established.
MS. WHALEN: Could I ask, are we comparing ourselves ever, in terms of other provinces and other jurisdictions, how our asset management, our debt management, our returns on our investments measure against those other jurisdictions?
MS. HARNISH: We do. Every two years we have a study done on the pension side to take a look at our pension returns, as well as our pension administration against those of other public sector pension plans. We do look at ourselves, as well, in terms of things like the rating agencies and how we're rated on the debt management by Standard & Poor's, DBRS, Moody's. We constantly evaluate ourselves in terms of our credit spreads against competitors, against Ontario, for example, to see how that's . . .
MS. WHALEN: Are any of the reports made public? Any reports that would come back to the Public Accounts, go to the Legislature, and be released to the media?
MS. HARNISH: The reporting on debt management, we do have sections in the budget document itself and we have sections in the Public Accounts that would report on the actual debt service cost and other factors over the past year.
MS. WHALEN: They're not comparisons. If we're doing well, that would be an opportunity to say so and to brag, you're welcome to go ahead and brag if our results are wonderful, that's good. I don't see that we've done that, that we've brought any attention to this issue.
MS. HARNISH: We certainly have tried when we received the two recent upgrades over the last number of months, for example, in our credit rating. Those results were released both by the rating agencies and I believe we also had issued some statement at that point in time.
Infrequently, when talking to the media, we would talk about our credit spreads relative to Ontario and the fact that they have narrowed so significantly over the last couple of years. But we haven't made it a regular event.
MS. WHALEN: If I may say, comparing yourself to Ontario, they've had some difficult years in the last, say five, so their credit rating has suffered. Our comparison to them may not look the best right now. It may look favourable for us but I think there's a reason for that. I would like to turn it over, if I could, to my colleague.
MR. CHAIRMAN: The honourable member for Halifax Citadel.
MR. DANIEL GRAHAM: Thank you for coming. First, I would just like to pick up on the questions the member for Halifax Needham finished off with, with respect to the tax rebate program. I noted that you were referring to a specific document at the time that you answered each of the two questions that she put to you. I'm wondering in light of that whether you would be in a position to table those, or if it was a single document, or two documents, before the committee?
MS. HARNISH: Actually, it's an e-mail from staff.
MR. GRAHAM: You were referring to it directly and I'm just wondering if you would be in a position to table that for the committee at some future date?
MS. HARNISH: Yes, there would be no reason why not.
MR. GRAHAM: I'd like to, frankly, commend you for taking on the very direct question that you could reasonably anticipate today to come to you, with respect to the second quarter reporting. I think that what you've clearly set out is an issue with respect to the transparency of documents, the accuracy of documents, when they aren't actual budget or you're not doing your Public Accounts.
You'll recall the history of this, it dates back to the year 2003, when an extraordinary report was provided before it was released publicly by the Auditor General, outlining, I believe, essentially four concerns that existed in the period leading up to that time, related to the accuracy of the budget documents, a June release that ultimately affected pension and debt by about $500 million, and then there was the first quarter adjustments which are really more akin to the question that arose again in this last cycle, the second quarter reports for the 2004-2005 period. We've got now, on two occasions, the Auditor General calling into question the accuracy of the reports that have been tabled in the quarterly reports.
You take it on, in the middle of Page 2, in the remarks that you have provided - I apologize for my tardiness - but I think you were reading word for word where you said, "There has been an impression given that the strict accounting rules have been broken, when in fact what we are dealing with is a difference of opinion about the presentation of fully disclosed financial information." Later on you speak about your relationship with the Auditor
General and ". . . occasionally there are issues on which our officials agree to disagree.", that being the officials from Finance and the officials from the Auditor General's office. Then, in the following paragraph, you speak about the possibility that there are ". . . smaller areas of interpretation . . .".
I would like to pick up with respect to that question because the matter in question on this last occasion, when it appears that you've agreed to disagree with the Auditor General, relates to whether or not there is a surplus for this current year forecast in the second quarter of $72 million, or whether it's properly recorded as $2 million. The Department of Finance recorded it as $2 million, the Auditor General says it's more accurately set at $72 million. That, frankly, from my perspective, doesn't strike me as a small matter, certainly quantitatively, and it has great potential political significance for all of those organizations and all of those interests that need to know whether or not we're doing really well and whether or not opportunities to, for example, support education and special education, are more available than they used to be, or whether or not we're trying to pretend it's not available. Those are significant issues and I'd like you to respond please to this general question about whether or not these quarterly reports - recognizing that there are practicalities around it for these types of very important questions like are we at a $72 million surplus or a $2 million surplus - should accurately be reports according to GAAP?
MS. HARNISH: First of all, the quarterly update very specifically identified the spending that was estimated to occur before year end. It also indicated that we had set aside, for specific purposes, three items. Two of those items were already in the budget document itself, that would have been the debt reduction contingency, as well as the $6 million debt reduction management fund. The third item was a $60 million amount which we said was going to be set aside or committed - not spent but committed - in future years for capital spending. The document also indicated that that $60 million would flow to surplus in the financial statements, because that would be the appropriate accounting treatment of it in our financial statements at year end.
The document indicated that and we were very clear in ensuring that the Opposition understood the accounting when we briefed them. The minister addressed that, when he briefed the media, he addressed that as well, and at the end of the media briefing, I gave an accounting tutorial, which was interesting because I'm not an accountant, to some of the media who also asked how this would actually be illustrated at year end in the financial statements. The $2 million represented what we believe to be an uncommitted amount available for other things, at that point in time.
MR. CHAIRMAN: The time has expired, some time ago, for the Liberal caucus. We will turn now to the PC caucus and the honourable member for Kings North.
MR. MARK PARENT: Thank you for the opportunity and for your participation here. As I've listened, not only today but over the past period of time, it reminds me of Zeno's paradox, that no matter how much you improve, perfection is always elusive. It must feel at times, what more can we do? We've had a balanced budget for several years, and your department has been instrumental in that. The money that came from the federal government on health was spent on health. Equalization monies were spent on education. Money that was supposed to go on the debt, we've made this very clear, particularly this $830 million.
So it seems to me that we've done a very good job as a province, and your department has done a very good job. It's probably in the small details at the end that there's some questions and some concerns. It's one of those things where you're always striving for perfection, but you're never really going to get there.
The questions I have are rather general questions concerning GAAP. My first question is, what effect did GAAP, adopting GAAP, and having balanced budgets have on the province's credit rating? How does this affect us?
MS. HARNISH: We've had credit rating improvements from all three rating agencies over the last year, in fact. We're quite pleased with the recognition that's been provided to the government because of its accounting, as well as many other factors. I think, also, the debt reduction, our commitment to debt reduction has equally served us well with the credit agencies. The balanced budgets tend to show to them that we are able to exercise the discipline required to maintain these commitments.
MR. PARENT: And the effect of the good news of the credit ratings is what?
MS. HARNISH: Well, certainly it leads to a better cost of borrowing for us. Our credit spreads have declined relative to Ontario, but relative to many other borrowers as well.
MR. PARENT: So, by adopting GAAP we've sent a very clear signal that we're committed to open accounting.
MS. HARNISH: We have. In fact we've been recognized by PSAB. Very recently there's been a comparison done of degree of comparison with PSAB across Canada, and I believe we're about 99 per cent PSAB compliant at this point in time.
MR. PARENT: That's where I get back to Zeno's paradox, if you move half the distance, from goal A to B and half the distance from the remaining half the distance, you never get there. How many other provinces in Canada are fully GAAP compliant?
MS. HARNISH: The only one that has been rated as 100 per cent at this point would be Alberta. Other provinces have varying degrees of compliance. For example, Ontario, Quebec, New Brunswick and Nova Scotia all have been rated as being somewhere in the area
of 99 per cent compliant. Manitoba is slightly less or so, Saskatchewan is about on par with us, P.E.I. is somewhat behind us, and Newfoundland is maybe 70 per cent GAAP compliant right now.
MR. PARENT: New Brunswick?
MS. HARNISH: New Brunswick is just about at the same level as we are.
MR. PARENT: Are there limitations to GAAP? I'm not an accountant, and I understand something about GAAP, but are there limitations to GAAP? Does GAAP apply to everything, or are there limitations?
MS. HARNISH: Suzanne is our Director of Government Accounting and has a staff of five professional accountants, lives and breathes GAAP and PSAB, so I think I'll ask her to address that.
MS. SUZANNE WILE: Thank you. That makes me sound like a really interesting person, doesn't it? (Laughter) Well, GAAP, as we know it in Canada for government is the Public Sector Accounting Board recommendations that come out of the CICA Public Sector Accounting Board. To the most degree, we follow that as much as we can, and as you said, we're never going to be perfect, probably, because there's always new handbook recommendations coming out, so we're always in the middle of implementing the next thing and trying to improve on any disclosure issues or anything like that that we might have been lacking in in the past. So it is a continuous quality improvement project. I am pleased to say that we are in very good shape compared to where we were six years ago.
As for GAAP's limitations, it mainly speaks to financial statements. That doesn't mean that it doesn't apply to other documents, but its primary focus is financial statements, and primarily the summary financial statements, which would be our consolidated entity financial statements that you would find in Volume 1 of the Public Accounts. So that's the primary document. It does go to a lot of degree of detail in summary financial statements to disclose very many things that you wouldn't normally put in a budget or a forecast or some other departmental reports, for example. However, we do try, in as many respects as we can, to follow GAAP in all those other documents as well.
Given that they have a different purpose than the audited financial statements, there may be different formats or different presentation issues related to those documents that GAAP doesn't really fit with. So that's why you'll see that our budget summary, for example, doesn't necessarily look exactly like our financial statements would look. I guess I see that as the limitation of GAAP. At this point, there are no sections in the handbook that say the budget should be prepared in a certain manner and must have all these rules met.
MR. PARENT: And other provinces recognize these same limitations with GAAP?
MS. WILE: Other provinces have a variety of different presentations in their budgets and forecasts as well. They have other items listed in their fiscal summaries, in their forecasts and budgets that are not truly GAAP expenses, for example, and do not show up as expenses in their financial statements but for purposes of their budget and their forecasting are policy communication lines in their summaries. They do not necessarily meet the test of true GAAP.
For example, B.C. has a line called Forecast Allowance, which is merely, to quote their quarterly report, an allowance of $300 million included in the forecast surplus as continued protection against revenue volatility. When you look at their actual financial statements, you do not see that as an actual item, it's a budget item, they plan for it to build in protection against various things that may affect their bottom line. But, when it comes to reporting actual financial statements, they have to produce the actuals, and a forecast allowance is not an actual accounting measure that you would report. So you will see on their financial statement a budget of $300 million but an actual of zero because it doesn't exist in GAAP as an item.
MR. PARENT: In terms of the infrastructure deficit that we have in this province, and the one I'm most familiar with is roads, and every rural MLA would agree with me on that, how does one plan for and meet the needs of that infrastructure deficit in the budgeting process, in a way that's open and accountable?
MS. HARNISH: Our road construction, for example, expenditures on roads take place in two areas. We have general operating expenses, which would be the general maintenance and repairs, and that's contained within the Department of Transportation and Public Works operating budget. We also devote money every year, through our Tangible Capital Asset allocation, to construction and betterment of roads.
The government has set a target which indicates that all gas tax money will be dedicated to the operation and construction of roads so that somewhat provides a minimum level of expenditure that one would expect to occur on an annual basis on roads and bridges. We put $110 million to $120 million a year, I believe, in capital on roads each year. I think if we were to truly address the needs as identified, we'd need closer to $0.5 billion every year on roads. So we assign those dollars to the highest priority areas, according to the Department of TPW.
So the allocation occurs each year through the Tangible Capital Asset allocation process, and that would be shown, the amount dedicated to roads, highways and bridges, within the schedule in the budget that identifies TCA allocations for the coming year.
MR. PARENT: In terms of forecasting revenues in the future, how has our performance improved over the past years?
MS. HARNISH: Our revenue forecasts are audited every year. As you know, that is the part of the budget that's audited by the Auditor General. The forecasts are done through a series of quite detailed and complex models that deal with forecasts of economic circumstances, they would look at historical allocations from a national pool of money. We are dependent, greatly, on forecasts that are produced by the federal government as well in a number of areas. Certainly those, we have to take and use within our models.
We believe that our accuracy has been quite good over the last number of years. Of course there are always unanticipated prior years' adjustments that occur in monies, in particular, that are flowing through from the federal government. For example, the equalization calculation is extremely complex. It's based on several tax bases, dependent on what occurs right across Canada, in terms of our allocation. Now that will be, in fact, relatively simple forecasting in the coming year, because the equalization pot has been fixed and our allocation within that pot fixed for 2004-05 and 2005-06. What will occur in that transfer beyond 2005-06 is subject to, in part, recommendations that will be made by a federal panel that is being struck to look at the whole equalization system.
So I'm unable to determine whether in the future our forecasting will be based on fixed allocation or a very complex system, but I would say, based on what I know and I've only been with the Department of Finance for a year, our forecasting over the last number of years has been quite accurate.
MR. PARENT: It's audited by the Auditor General.
MS. HARNISH: Yes. The Auditor General and his staff come in and audit. They work very closely with our staff to audit our revenue estimates each year, in advance of the budget.
MR. PARENT: This is not really a question, it's more a comment, because it's a moot point since the CRA wouldn't allow the rebate cheques to be sent out through direct deposit but just as a philosophical question - and you may or may not want to answer this, I don't know - if you want to use tax cuts to stimulate the economy and to create greater spending, then you have to somehow create the impression within the taxpayer that this is free money. A direct deposit, to me, it just goes into my bank account, but if I get a cheque in my hand then I think, oh gee, and so I go out and spend it. Then it served the purpose that a tax rebate is supposed to do. Now, we had to do it that way anyway, according to the rules, but I would think even if we didn't have to do it that way that if you wanted to serve the purpose of a tax cut, which is to stimulate the economy I understand, that that would be the better way to do it. Is there any logic behind my thinking?
MS. HARNISH: Well, I suppose one could speculate that a cheque in hand would prompt a person to be more likely to spend than a direct deposit would, but certainly it's not an area that we considered when making this decision because we had no choice.
MR. PARENT: Well, it's a moot point, but I'm just curious about that and so I would just make that comment. I'll turn it over to my colleague for the rest of our time.
MR. GARY HINES: Thank you for coming in today. I usually defer back to where I came from, and I apologize for that but I guess if you don't know where you came from, you don't know where you're going. We often refer to the public desire to have the government operate as a business, and perhaps that helps them understand finances because as a businessman that's what I understand of finances.
I agree with that, but I also understand that there's a need to make projections and allocations for future spending, much as we have to do in the private sector. And we did it also with school construction by outlining our program for school construction down the road. Is there an opportunity to recognize infrastructure needs and be not only GAAP compliant but recognize the requirement to pay surpluses on the deficit?
MS. HARNISH: Maybe you could clarify that question for me just a little bit.
MR. HINES: I guess what I want to know is, in the real world, which I refer it to, we have to make projections as we go forward in the future, and it seems to me that that's what our government was doing in suggesting that we set aside $60 million to look at the requirements and necessities for an infrastructure. I don't think there's anybody in the Opposition who would disagree that we don't have an infrastructure deficiency, so we're all satisfied with that point.
But in the real world, I can set that money aside and I don't have to comply with any particular accounting principles. Is there a way to get around that with GAAP, or should we be applying to GAAP to have changes made so that we can in fact do that? I think what the public wants is a projection of where we're going in the future, because presently it seems to be that we're stymied a little bit by GAAP accounting that doesn't allow us to look into the future and to make projections for spending in the future.
MS. HARNISH: I believe in this case we were, and we can be, GAAP compliant with this money, because the clear intention is that this money would be flowed to the surplus in the financial statements. What in fact we were saying, though, is that part of this money, the $60 million in this case, that would be shown in the surplus in the financial statements was already committed for another purpose, that purpose being infrastructure, and in future years, because it had given us some room in the indicator called net direct debt to spend on capital in out-years without further increasing the net direct debt beyond the debt reduction plan, that we would in fact allocate capital, the $60 million, to that purpose in future years, $30 million a year in the next couple of years, for expenditure on roads.
So, certainly we were accounting for it properly. The presentation of this in the update is the issue at hand here, and if the presentation is a problem. I guess what concerns me the most is that there may now be some thought in the public that we were doing something that was not correct accounting, and that does disturb me because I think our integrity is very important in this regard. The public needs to feel quite confident that we are treating things appropriately.
We review our reporting every year, on an ongoing basis, to see how best to report in a manner that is best understood by the public. We had already been looking at reporting within the budget and in updates right across Canada, with a view to see other forms of reporting. So, we'll be reviewing our reporting in the coming year, again, to ensure that we report in a manner which not only indicates what the plans are for the money but also presents, in a manner that the public can understand and in a manner that people have confidence in, the plans for the expenditure of the monies available.
MR. HINES: My question wasn't criticizing the adherence to GAAP, because I think it's wonderful and I think that the Auditor General has done a great job with keeping us there. I think there's just a little problem on the part of the Auditor General, perhaps, that the information isn't there that he might need to completely do his job. I don't think he's disqualifying what we're trying to do, but I can't speak for him and I'm sure that he will speak someday to that. With that, Mr. Chairman, I think my time has elapsed.
MR. CHAIRMAN: We'll go to 13-minute rounds, beginning with Ms. MacDonald.
MS. MAUREEN MACDONALD: I'm always very worried about how fast this time goes, and there is a matter that I'd like to explore. I'm also my Party's Health Critic, and the
Auditor General, in his report, made note of a very significant hospital bill in the Capital District, the QE II Health Sciences Centre, of $642,000 for a person from out of the country. So what I want to ask is, what capacity and what role does the Department of Finance have in first of all pursuing the payment of that debt? Is that your role? Do you have the capacity to do that or is that left to the Department of Health?
That's number one. Number two, the Auditor General made mention that anecdotally his staff have heard of other instances but there is no tracking in place to really give us an opportunity to verify how widespread this is and I have to tell you, when this information became public, it really elicited great public reaction. I had calls from all over the province. People were very upset, very concerned about our health care system, the integrity of our health care system and given that we have many groups - Fabry's disease - unable to get medication or persons in need of various drugs, catastrophic drugs, no program, it seems to me to be an extraordinary situation that we would have such a huge expenditure and no accountability, no ability to collect. So can you tell the committee what Finance is doing or plans to do or who properly is pursuing this situation and whether or not you are looking at it?
MS. HARNISH: That occurred within the Capital District Health Authority. The CDHA is responsible, of course, for adhering to accounting standards and policies as set. In fact, Byron just reminds me in this case, that particular issue was approved past their auditors. CDHA is taking a look at these things. I probably should clarify that the bill wasn't exactly necessarily indicative of the cost of providing that. It was set at a deemed billable rate. My understanding is CDHA is reviewing this at this point. The Department of Health has been discussing it with them and will be working with them. It isn't something the Department of Finance would do other than ensure that the appropriate mechanisms were in place for accounting and reporting.
MS. MAUREEN MACDONALD: So does Finance have a role in monitoring in any way or advising Health, assisting the Department of Health with respect to the more general problem, not just the specific case but the possibility that there are other situations like this occurring? I mean the expenditures seem to be quite significant. (Interruptions)
MS. HARNISH: With his Health experience, having been in the Health Department, I think Byron is well equipped to answer that.
MR. CHAIRMAN: I'm looking forward to that, Byron.
MR. RAFUSE: Certainly the billing practices for out-of-country patients at the district level, that authority has been given to the districts by the Department of Health. They set their own billing rates for the uninsured services. This is deemed an uninsured service because they are not Nova Scotia residents. What the districts do, they charge a rate anywhere from - some do two times, some do three times the standard ward rate for services and that ward rate is determined through a calculation of an average per diem set through CIHI.
The billing practices, as I said, have been given to the districts to monitor and it's up to them to ensure that they follow proper, I'm going to call it collection processes on how they look at their aged receivables and what collection procedures they take when they deem them to be uncollectible and when they set up reserves for that. The Department of Finance relies on the auditors of those organizations to ensure that those policies are being adhered to. They set their own policies. We take reliance on that from their auditors who say whether or not they are following their policies.
The appropriateness of whether or not this is an appropriate rate is one that is really a matter between the Department of Health and CDHA. The Department of Finance would not get involved in that.
MS. MAUREEN MACDONALD: I want to go back to where I had left off, now that I made sure that I got that point around that case then, to talk about the $155 taxpayer rebate program. I have one final question on this. The memorandum of understanding between the province and CRA indicated that the Auditor General for Nova Scotia could review the books and records of that program. I'm wondering, have you or CRA asked the Auditor General to review the books or do you have any plans to do that?
MS. HARNISH: The program itself is just winding down. As you know, we were dispensing still a few cheques as recently as a month or so ago. I'm not aware as to whether or not the Auditor General was asked to review it before I reached Finance. At this point, we hadn't given a lot of thought to whether we would ask them. Often, the Auditor General himself decides that it is appropriate to undertake review as well so it's not been an area that we've discussed at this point with him.
MR. CHAIRMAN: Thank you. Ms. MacDonald.
MS. MAUREEN MACDONALD: Mr. Chairman, could I ask a question to the Auditor General about this?
MR. CHAIRMAN: You can, indeed.
MS. MAUREEN MACDONALD: Mr. Salmon, I would like to know whether or not you have been asked to do an audit or if your office has any plans to do an audit or if you have any desire to do an audit, I guess, of this program. I mean it was quite an important program, so that's my question.
MR. ROY SALMON: I have not been asked to and I would suggest to you that given my resource situation, which is not unlike the other departments of government, it would not be a priority for me and I do have a very formal structured reliance relationship with the Auditor General of Canada and I get an opinion from the Auditor General of Canada on tax revenues pertaining to Nova Scotia, as most of my colleagues across the country do. So we don't want to duplicate the work that the Auditor General of Canada is already doing.
MS. MAUREEN MACDONALD: Thank you very much for that. At the time of this program, there was certainly an argument advanced by the government that it would stimulate the economy. I know that certainly we went into an election campaign quite shortly after the government's decision to do this program. My campaign was certainly stimulated by a lot of $155 donations which I had never seen before in campaigns. So it stimulated something. My question, I guess, is whether or not there will be any kind of an assessment or evaluation to determine whether or not it did have that stimulatory effect on the Nova Scotia economy or not?
MS. HARNISH: We have no plans to produce an assessment of that nature because we don't think it would be possible to isolate the impact of one very small factor on what has gone on in the economy in general.
MS. MAUREEN MACDONALD: Thank you. I'm going to turn over what time I have to my colleague.
MR. CHAIRMAN: Mr. Epstein.
MR. HOWARD EPSTEIN: I'd like to turn back to GAAP and, deputy, I was very interested in it with respect to a portion of your opening statements that dealt with the budget and how that relates to GAAP. As I read it, what you essentially said is that the year-end financial statements, when they are finally put together are GAAP compliant and that is the policy of the province but what you did say is that when the budget comes forward, it is not necessarily GAAP compliant and that this would be problematic in terms of staff resources in order to produce, so I wonder a couple of things. The first thing I wonder is, is it your intention to try to move to the point where the budget will become GAAP compliant, or are you not planning on doing that?
MS. HARNISH: One area where we would be required to make significant adjustment - and the Auditor General does point this out in his report each year - is we would be required to do line-by-line consolidation across each spending unit in the budget itself. We don't do that right now, we properly account for the expenditures, we use accrual-based accounting, for example, but we don't bring into the line item for Health, for example, all of the consolidated statements of the district health authorities. What we do is an adjustment further down in the budget summary called Consolidation Adjustment, where we pick up the major consolidation items that we would be aware of and make an entry to account for that. But perhaps Suzanne could just speak for a minute to what would be required to consolidating every spending unit, in order to present a fully GAAP compliant budget.
MR. EPSTEIN: I'd be happy to hear that but the question was, are you intending to make the shift? I take it the answer is no, is that right?
MS. HARNISH: At this point, we are moving as we can but we've never made a decision yet to go to fully consolidated budgeting, no.
MR. EPSTEIN: What we're about to be told is, what resources would be required in order to accomplish that?
MS. HARNISH: Significant. To consolidate year end takes our staff six months and we have six accountants working on it, and that doesn't include the accountants in every department who are providing the input. We think it would be a very large task to go to full consolidated budgeting.
MR. EPSTEIN: Are any other provincial budgets presented on a GAAP compliant basis, do you know?
MS. WILE: As far as I can tell, there are a few items in most of the budgets similar to our debt retirement plan that are not truly GAAP expenses but are shown for policy information and communication purposes in the budget summaries, to communicate that certain amounts of the surplus are reserved or allocated to certain things. Some places, like Alberta, have a different structure in their departments where the Department of Health and the health authorities produce their own financial statements and those roll up, so it's a whole different scenario than here.
MR. EPSTEIN: Maybe I wasn't making my question clear, I'm not asking you whether there was disclosure, I'm asking you whether it's GAAP compliant.
MR. CHAIRMAN: Order, please. Time has expired for the NDP caucus. We will now turn to the Liberal caucus for the next 13 minutes. Diana Whalen.
MS. WHALEN: I have just one quick question to finish up on the Deloitte & Touche report. What I wanted to ask you - and just a short answer would probably be good - that audit was not designed to actually quantify the current risk to the province, they were never asked to say, so we can't determine from that whether or not there has been any loss of opportunity or risk that has been incurred. What I'm asking is whether or not you would commission another audit that would actually look at that, to quantify the risk that we are actually in that situation. Because there was a limitation, they were just measuring your processes and whether you had the structures in place. I want to know if there is actually risk?
MS. HARNISH: We are in the process of doing a risk identification of both investment and debt management, which areas the greatest degree of risk would be in and setting risk tolerance levels right now.
MS. WHALEN: May I ask, are you doing that internally, though, right now?
MS. HARNISH: With the assistance of the middle office, RBC right now, and it will be with the compliance individual when they come in.
MS. WHALEN: Is it part of a program or a contract with Royal Bank then to do that risk assessment?
MS. HARNISH: It is. We have a risk management workshop scheduled for later in the month where they'll be working with the management in the department to fully identify all of the elements of risk and some risk tolerance levels around that.
MS. WHALEN: So do you think at the end of the day we would be able to quantify the current risk to the province?
MS. HARNISH: We could establish a risk profile, whether or not one could put a number on it, I don't think.
MS. WHALEN: I guess I'd just like to signal that it is important that we do that and perhaps that is the natural next step after having had the report that's before us now. So thank you very much. I'll pass it to my colleague.
MR. CHAIRMAN: Mr. Graham.
MR. GRAHAM: I'd like to pick up where I left off. The Deputy Minister of Finance has signalled that there was no problem with respect to the forecast reports in December of this year. I would like to turn to the Auditor General, given that this is a matter that there appears to be some disagreement on.
We also have the Assistant Deputy Minister of Finance, in a newspaper report on January 12th, saying that the December financial update was a communication tool meant to explain government policy. Now, Mr. Salmon, you have appeared before us most recently on January 12th or 13th of this year and you reiterated what you said to us on so many occasions, the importance of having complete and consistent financial planning, even with respect to forecasting. The reason for that that you have set out is that if you don't do it you can't compare original budget forecasts with mid-year performances.
After the questions that came out in that January 12th meeting at the Public Accounts Committee, you filed a letter to the chairman of this committee signalling, in fact, there are guidelines with respect to these interim forecasts. I'd like to table these for the committee and invite you to comment on what you've provided to us and perhaps respond to what has been said by the deputy minister, and perhaps by the assistant deputy minister, and our concerns about the comparability of these updates with the forecasts that are set at the start of the year?
MR. ROY SALMON: Thank you very much for the opportunity. Yes, I provided the committee with the guidance that comes from CICA with regard to future-oriented financial information. Those recommendations are very clear that budgets, forecasts, fiscal updates should be prepared on the same basis as the financial statements, in terms of accounting policies. That has been my position - as you've indicated - from day one.
With regard to the $70 million, that is not an expenditure of the year 2004-05, it's an allocation of funds to be spent in the future. On that basis, it should not be a deduction in determining the surplus, even the forecasted surplus, and that was my issue. That could have
been an allocation out of the $72 million surplus explained in the note in the fiscal update, as opposed to showing it as a reduction in determining the surplus, that was my issue.
MR. GRAHAM: So we could have had the same information in terms of what the purpose of the use of that money might have been but we would still, in your opinion, have to have reported a $72 million forecasted surplus for this year?
MR. SALMON: Exactly right.
MR. GRAHAM: What are the consequences of reporting differently partway through the year, than how you forecast at the beginning of the year.
MR. SALMON: I come back to your phrase complete and consistent information, so people can make the appropriate comparisons. For someone to read that fiscal update and interpret it as a $2 million surplus and then see financial statements at the end of the year, prepared in accordance with GAAP and see a $72 million surplus, how do you explain that? That is my point.
MR. GRAHAM: I want to make sure that there is a full opportunity for the Deputy Minister of Finance to respond to that.
MS. HARNISH: I don't think it would be particularly useful to have a debate with the Auditor General in the middle of the Public Accounts Committee meeting. We have had these discussions in the past. I think the only thing that I would like to indicate is our surprise when this occurred, and I'd like to take you back to the budget document itself.
At the time of the budget we had included two line items for debt contingency and debt reduction before we presented the surplus. When the controller had worked with us on that presentation at the time, we had asked whether or not that would be an appropriate presentation or what presentation mechanisms would be suitable. When the Auditor General's staff - it wasn't Roy, himself, it would have been Claude - reviewed that with our controller during the budget, they had discussions on that.
At the conclusion of the discussions, we added additional disclosure in the form of notes to the actual budget, the fiscal plan, itself, as well as paragraphs in the introductory sections of the Estimates document, to more fully disclose the accounting treatment of those amounts when the financial statements were produced. The update, itself, was produced in the same format of the budget for comparability purposes because it was an update against the budget in our budget plan. So, quite frankly, I was taken off guard and somewhat surprised when I had the message from the Auditor General's Office that they were taking issue with that presentation in the update.
As I have said, I believe at this point it has been unfortunate in that it has, I think, confused the public, in terms of whether or not the government is doing its books in a perfectly honest manner. Because of this aspersion or this bit of a shadow that has been cast, we will be relooking our presentation because I certainly think it's important that our public have every confidence in the type of information materials that are presented to them.
MR. GRAHAM: When was your department aware of the CICA recommended approach prior to the second quarter filing? That's the first question. A related question to that, and this may touch on the question of the $830 million that we are expecting to get from Ottawa, and whether or not there is an intention for that to be booked for this current fiscal year, or whether that is intended to be - or a portion of that - or whether that is going to be booked in some way for other years, and whether that has been sorted out with respect to the Auditor General? I would like the Auditor General, perhaps, to comment on that as well, after you've had a chance.
MS. HARNISH: So your first question was?
MR. GRAHAM: CICA, when did you find out about the recommendation, the recommended approach that the Auditor General favours; and secondly, the $830 million, is it going to be booked in this year? Perhaps there would be an opportunity for the Auditor General to respond.
MS. HARNISH: The CICA guidelines that Mr. Salmon referred to, certainly our staff are aware of all pronouncements by CICA, PSAB and so on, and it has always been our interpretation, and I am speaking for our accounting staff and the former controller, that these applied to businesses. Firstly, they are not PSAB guidelines; and secondly, that updates were not the types of documents to which these were referring. As I said, we did have this discussion with one of Mr. Salmon's staff during the preparation of the budget document, itself, and as a result of that discussion, certainly, added several more items to ensure full disclosure.
On the $830 million, the revenue recognition will be dependent on the form of the legislation, itself, and how that is worded, in terms of whether or not we are to bring that into 2004-05, or we bring it in over time. We will be looking at the legislation. We have looked at some drafts of that already. We have had some informal discussions with some of Mr. Salmon's staff. We will certainly be recognizing that revenue in a totally appropriate manner so that when the audit comes in the fall, as it will, we will be fully GAAP compliant.
MR. GRAHAM: The Auditor General, Mr. Salmon.
MR. SALMON: First of all, with regard to the $10 million in the budget, in my June report I commented on that issue and indicated, at that time, that we had a concern with the presentation, that it was not in accordance with GAAP.
With regard to the $830 million, we have had some preliminary discussions. I have also had discussions with my counterpart in Newfoundland over what we might consider to be the appropriate accounting, but the devil is in the detail, and as the deputy minister has indicated, we haven't seen the formal agreement with the federal government or whatever legislation might be put in place, so the accounting is up in the air, I would say, at the moment.
MR. GRAHAM: Ms. Harnish, you said that we might bring it in over time, the understanding that Nova Scotians have is that this is a lump sum, upfront payment. If we're bringing it in over time, it doesn't sound much like an upfront payment.
MS. HARNISH: There's a difference between cash and accounting, and the devil's in the detail, as Mr. Salmon says. Our understanding is we will have the cash in hand once the legislation is passed in the House of Commons. We are able to use that cash for debt purposes. We will be able to relieve ourselves of some other borrowing, so immediately we'll be in a position to benefit from reduced debt services charges. The revenue recognition policy under accounting is somewhat different than when you have the money in hand.
MR. CHAIRMAN: The time has been used for the Liberal caucus. We'll now turn to the PC caucus. Mr. Hines.
MR. HINES: Mr. Chairman, I think we as government representatives on this committee today would be remiss if we didn't comment on the achievements of the Premier and our government in the Campaign for Fairness, in delivering the offshore oil agreement, which is perhaps the most exciting thing that's happened in a positive light since the last World War in terms of the reflection on this province. That leads me to comment that recent statements by the Leader of the Liberal Party, that $640 million was $830 million and the suggestion that investment and debt payment may or may not be, depending on which day it is, the correct way to spend the new money, and subsequent attempts by the same Opposition members to legitimize the Leader's statement prompts me to ask for, from you, an overview of the achievements of the offshore agreement. In doing that, I would like you to perhaps comment on the payout schedule, the long-term benefit and the effect on equalization, on short term and long term, by this new agreement.
MS. HARNISH: Certainly, as is well known, it does provide to us an $830 million cash payment immediately upon passing of the legislation. That will enable us to build it into our debt management. We can relieve some of our borrowing and receive, immediately, relief in our debt service cost, because we'll no longer be borrowing as much money. We'll integrate that into our program as our outstanding debt rolls over, and we'll be able to accommodate that very nicely, believe me.
The agreement is structured to be totally outside of the equalization program itself, so it will have no impact on equalization being paid to either ourselves or to other provinces. The total pot of equalization has been fixed over time at a fixed amount. The allocation of equalization and the basis on which it will be allocated is only fixed until the end of the next fiscal year. How the formula for allocation will work beyond that is very much up in the air, however, it is the intention and the clearly stated intention, that these offset payments will in no way impact on the equalization of other provinces or ourselves other than if we were to achieve the fortunate position of getting off equalization sometime in the future. According to when that happens, we would stop receiving offset payments, with a bit of a transition to ease that.
Our understanding, based on the Premier's statement, is that the monies themselves that flow in in the way of as we recognize them will be put on the debt. The recognition policy itself, as we talked earlier and Mr. Salmon also addressed, will be totally dependent on the detail within the legislation, because revenue recognition is one of those very technical areas that Suzanne would be happy to expound upon if anyone really wanted her to, but maybe another day.
MR. HINES: Mr. Chairman, certainly the silence from the Official Opposition regarding this same subject is somewhat deafening. The credit lending ratings, obviously, have changed as a result of this new agreement. Do we, as a government, or do you, as bureaucrats of the government, go to Standard & Poor's and the other institutions asking for that rating or do they issue that on quarterly basis? How does that appear?
MS. HARNISH: We actually contract with the rating agencies, as do all investors, for these ratings on an annual basis. We have had positive signals in the way of statements by two of the agencies to the effect that this places a kind of positive assessment on the province, overall. We wouldn't have officially received changes in our credit rating at this point in time, but it's very significant to us in capital markets because, often, capital markets are well ahead of the actual rating agencies, themselves, in terms of the market adjusting to the outlook of the province through lower interest rates, even in advance of a formal upgrading in the rating.
MR. HINES: Thank you, Mr. Chairman. I will pass back to my colleague.
MR. CHAIRMAN: The honourable Mark Parent.
MR. PARENT: Thank you very much. You mentioned on a question from one of my colleagues that a fully consolidated budget would be an expensive proposition but you didn't give us a cost of what that would cost. Can you give us any sort of ball park? We already know that to do the statements from last year's, what, six, seven months work, so are we suggesting another seven months, double the cost, really, to do that?
MS. HARNISH: It would be a very time-consuming effort in addition to the cost and it would really impact our ability to get a budget together and produce, that's for darn sure. What it would involve is, we would have to bring in, to consolidation, the budgets on a kind of line by line basis from every one of the government business enterprises or government service organizations that we have. And we have - how many of these, Suzanne - pages in the schedule?
MS. WILE: Almost 100.
MS. HARNISH: Almost 100 of these entities that we would have to actually do a line by line evaluation, and bring it into netting out, where appropriate, in preparation of the budget, itself. So we haven't costed it, but let's say. . .
MR. PARENT: It must be awfully expensive and. . .
MS. HARNISH: It would be very onerous.
MR. PARENT: Yes. I just want to respond. You sound a touch concerned that Nova Scotians may be worried that we are not being totally forthcoming. I don't think that is the case. I think Nova Scotians think that the government has been very forthcoming and very open, that it is a question of accounting philosophies and differences. I just want to commend you. Clearly, those are important things that need to be discussed.
You did state that you went to the Auditor General's office, and you took their suggestions and incorporated them into your statements in terms of the disclosure of this money and you added some additional disclosure in terms of the $60 million.
MS. HARNISH: No. When we produced the budget document, itself, in the Spring, the discussion was around the appropriate treatment of the $40 million debt contingency and the $6 million debt management amount.
MR. PARENT: Right.
MS. HARNISH: The $60 million wasn't even anticipated at that point in time because, of course, one could never count on the federal government providing money, from which we could make other decisions. The $60 million amount that we will be flowing to the surplus in order to spend it on capital in out years - and we will appropriately account for those capital expenditures in those out years by bringing in the amortization amounts associated with that spending, of course - was recorded as a third line item in the update when that money became available within the same section, so that the presentation would be comparable to the presentation used in the budget.
MR. PARENT: The money was recorded. It was there for everyone to see.
MS. HARNISH: Oh yes, definitely.
MR. PARENT: This problem in the future probably won't be - because you mentioned in the past, that there are changes and the equalization formula is going to be a little clearer, and so you don't anticipate this in the future then?
MS. HARNISH: Well, whether or not we will have unanticipated money from the federal government, we can only. . .
MR. PARENT: But we'll take it, won't we? (Laughter)
MS. HARNISH: We could only hope so. But the sources of that funding are getting fewer and fewer. We have equalization pretty much nailed down for the upcoming year. We have had new health monies allocated for the upcoming year through the additional Canadian Health Transfer that came out of the First Ministers Meeting in October.
Certainly, one area that could be addressed, still, in our opinion, is the level of transfer coming in through the Canadian Social Transfer, the CST monies are those monies that are dedicated towards education and social services spending in particular. We find that, over time, that amount of money has been going less and less far, and providing an ever-decreasing proportion of our total spending in those areas. So we, like other provinces, are discussing those kinds of things with the federal government. Certainly, our prior years' adjustments, as well, will be much less in the future since so many of these other areas are now nailed down.
MR. PARENT: Okay, well, thank you. Again, I just want to commend you on what you're doing as a department and, certainly, I do think you have the confidence of Nova Scotians, and wish you all the best. It's a nice position we're in with this extra money that we have which I'm sure will benefit all of us, as Nova Scotians.
MR. CHAIRMAN: Thank you. Again, thank you to our presenters for providing some clarity to this most complex subject.
I will now ask, Deputy, if you would like to provide our committee with some closing remarks.
MS. HARNISH: We would like to thank you for the opportunity to address our financial reporting. Certainly, out of all of this, I do think we need to stress that the staff within the Department of Finance and the staff within the Auditor General work very closely on an ongoing basis on many issues, and have give and takes like any groups of professionals do. I would think it fair to say, our staff are very professional within the Department of
Finance, are very good at what they do, as are Mr. Salmon's staff, and when professional differences arise, it doesn't mean that anyone is necessarily right or wrong. It is generally in those areas that we consider somewhat grey and it's the shades of grey, often, that present the issues.
MR. CHAIRMAN: Well, thank you for that.
The meeting will adjourn very shortly. Next week, the Department of Health and Doctors Nova Scotia will be with us as we investigate doctors' billing. Oh, yes, Mora has brought to my attention that it is not next week, it is February 23rd for our next meeting.
So having said that, the meeting is now adjourned. Thank you very much.
[The committee adjourned at 10:48 a.m.]