The Chair (Mr Joseph Cordiano): This morning we have before us officials from the Ministry of Finance. Mr Jay Kaufman, deputy minister, is here. I welcome you to the committee and ask you to introduce the staff with you. We have approximately an hour, and then we'll continue with questions this afternoon.
Mr Jay Kaufman: Thank you, Chair. I'll follow your suggestion and introduce my colleagues. With me are Dina Palozzi, who's associate deputy minister of Finance and is responsible for the controllership area of the ministry, which is the area dealing with the changes in our provincial accounting policies; Robert Siddall, who's the assistant controller responsible for the financial information branch in the controllership function; and Gregg Smyth, who's the assistant controller for central accounting. Anne Evans, the director of fiscal planning, is also in the room, and we'll have a couple of other staff joining us shortly, I suspect, who may want to answer some questions as we move along.
What I would propose, if it's acceptable to you, is that each of us make some comments. I think I informed you that I wasn't available this afternoon -- I've got other activities I can't get out of -- but I can be here for the full hour. Dina Palozzi will be leading our team this afternoon and I'm sure will be able to answer any questions. I'll offer a few opening comments and then pass it over to Dina, who will talk about the general implementation plan around moving to the new accounting practices, and then Rob and Gregg will get into more of the detail.
I would like to emphasize at the outset that as the Ministry of Finance, formerly Treasury and Economics, we have certainly always had a strong working relationship with the Provincial Auditor and have tried to be very responsive to the concerns of provincial auditors past and obviously Erik, the new Provincial Auditor. When he and the committee were calling for a change from our current accounting practices, certainly it was something we had to take very, very seriously. As you're all well aware, the Finance minister in October did respond positively and made a commitment to change our approach following on the recommendations of the Provincial Auditor.
I think it is important to say that the past practices, the ones we are currently following, have been around for about 30 years and are well-established practices in terms of our modified cash basis of accounting.
Prior to that, interestingly enough -- I didn't know this until staff mentioned it -- we in Ontario were up until 1968 on an accrual and consolidation basis of accounting. In 1968 there was a decision to change to the current practice of a modified cash basis and non-consolidation of accounting.
It was interesting, when they drew my attention to the reasons for the shift from those past practices and one of the important benefits seen at the time for the current accounting practices. It's important to emphasize these benefits, because they show the continuing validity of this particular approach. It was essentially that the current method has a real strength in the sense of being simple and fairly straightforward, with a degree of precision that is not always achieved in the accrual accounting method. Some of that will come out as we get into the discussion and presentations as we go along.
"The cash accounting system is one of basic simplicity, and it provides a degree of preciseness which is not always achieved in systems based on the accrual method of accounting.... Furthermore, the practice of keeping open the expenditure ledger for a period of 30 days after the fiscal year, in which to pay charges incurred in that same year, negates to a large extent any justification for accruing liabilities of a current nature."
The point of my flagging that is not to get into an argument, which I'm not equipped to do, not being an accountant, about what is the best method, but simply to emphasize that in Ontario we've had a method of accounting which has stood the test of time. Obviously we're prepared to change, but when the request for change came to us it was one we had to take seriously and think about some of the consequences, because it's clear that the public, the Legislature and, not unimportantly in our situation, investors and the credit rating agencies had a clear understanding of what Ontario had been doing. Change of this magnitude is something we had to approach with an appropriate degree of caution.
The arguments for change: Certainly in our judgement there are persuasive arguments for going back, as it were, to an older approach, but emphasize that in shifting to the accrual base of accounting -- as I say, it will become clear as we go along -- we do enter into an approach which involves much more professional judgement on the part of my staff, certainly, and the Provincial Auditor's staff in terms of determining how various accounts are to be recorded.
On balance, I think we have felt that we wanted to approach this issue cautiously in the current context, but none the less respond and meet the commitment that was called for by the Provincial Auditor as quickly as we could. As I think I emphasized at the standing committee a week or so ago, in general our game plan, our commitment, is to present the public accounts on the accrual and consolidation basis for 1993-94 and attempt to meet the target date of September. That plan of action will be gone through by Dina in a moment.
One of the things I want to provide the committee, because it is interesting, is that since PSAAB, the Public Sector Accounting and Auditing Board, has recommended these changes, there has been a gradual process across the country in terms of the adoption of the new accounting basis by provinces. Rob has handed out a couple of tables which show that eight of the 10 provinces are now following in some form or other the PSAAB recommendations on accrual accounting, and both Newfoundland and obviously ourselves have indicated that we're shifting there too. By the end of next year, pretty much the entire country will be on the new accounting basis.
However, having said that, each province has its own unique twist to it. It is not a perfect match between what PSAAB is calling for and what provinces are actually doing. There are a variety of issues that we'll get into that are quite complex, dealing with pensions, assets, revenues and so on, where in fact there aren't clear resolutions on those points, which provinces are still grappling with and we will grapple with here. Also, in terms of consolidation, the second table essentially shows that all the provinces, for purposes of public accounts, have moved or are moving to the PSAAB procedures.
That's basically the general status of where we are and where other provinces are. I should just say one other thing. This whole area of accounting practices is an issue among finance ministers across the country, and there is a genuine concern growing that because of differences among provinces the comparability of provincial finances is becoming increasingly difficult, and some real concerns about issues like the treatment of capital assets and the whole question of capital. There are common concerns across the country. Finance ministers and officials have a project in place to try and look at those issues and come up with some better measure of commonality, but there are a lot of questions to work through there, and we're participating actively in that process.
Mr Gerry Phillips (Scarborough-Agincourt): Mr Chair, just so the comments can be geared to our concerns, which I suspect they are, and just so the committee's aware of what our concerns are, I think the trick is to try and figure out what's going on year to year to year. I look at it like a business: How are we doing year to year? My view is maybe clouded by being in opposition, so you always look for what's really happening here.
Mr Phillips: My own view is that there's a $2-billion to $3-billion number that nothing's changed but the accounting over a three-year period, and I'd like you to dissuade me of that or prove I'm wrong. Just so you know where all the numbers are, I think the sale-leaseback of buildings like this and of GO trains and what not is essentially not revenue; it's a new loan. I don't personally view as revenue what is this year $600 million and next year $700 million.
Mr Kaufman: Just to be clear, so you know where our presentations are coming from, the request we got was to bring the committee up to date on the steps around implementation of the new accounting practices for public accounts. We're certainly open to answering questions -- that's not an issue -- but our presentations today are very much geared to that end, of telling where we are, where we expect to be, what some of the issues are that we're grappling with.
The Chair: Given that the deputy will not be here this afternoon, perhaps it would be appropriate that we permit additional time this morning, running into the lunch-hour period, for some questioning, at least 10 minutes for each caucus. That would give members an opportunity to direct questions to the deputy. Obviously, he won't be here this afternoon.
May I suggest that most of us are familiar with the strength of the table team that's before us, and if we have some specific questions to the deputy, I think that would really go a long way to helping us with our task, and even elements of the presentation could be commenced at 2 o'clock by Ms Palozzi. I'd be comfortable with that. I think that will assist Mr Phillips, and I know Mr Sterling has some questions he'd like to ask of the deputy.
First, on sale-leaseback of things like these buildings, for me it's not a sale; it's essentially just taking a mortgage out on the building, and to me that is just like a loan. I wonder if we aren't kidding ourselves showing that as revenue when in fact it's a loan.
The second thing: You promised you will give us this information in September 1995, but that's quite a way away. I'm aware of at least one thing where -- we're now selling five-year driver's licences and it is I think your intent to show all of that as revenue. If this were a business, you couldn't do that. You'd say, "Listen, we earn that revenue each year that the licence is issued." I'm concerned that we are kidding ourselves on the revenue of the province.
On the expenditure of the province, I really worry about what we're doing with the unfunded liabilities in the teachers' and the OPSEU pensions. I'm aware that the government passed legislation allowing the money to be taken out of the fund and put into revenue, but to me, we the people of Ontario are going to take a three-and-a-half-year holiday from making any payments at all against the unfunded liability and what will happen is that the unfunded liability keeps growing -- check me if I'm wrong -- by maybe $500 million a year, and then when the holiday is over there's a brand-new $800-million-a-year payment: zero, zero, zero, zero, $800 million. I'm wondering why we made that decision, as opposed to saying: "We should continue to make payments against the unfunded liability. it's 15% lower than we thought so we'll reduce payments on that."
Loan-based financing, because the province has 100% of the obligation for repaying the principal and interest, that so clearly to me is government debt. I'm wondering why it doesn't show up as government debt but shows up on school boards' books or hospitals' books but we, the province, have 100% of the obligation to repay it. And I see it's starting to grow: The Ministry of Culture, Tourism and Recreation now is starting on that loan-based financing.
I gather there are going to be about 3,500 public servants transferred into the capital corporations. All the caretaking staff will be put into the Ontario Realty Corp, all the people who work in the sewage treatment plants will go in there. What I think we'll see is a netting of the revenue that used to come in to the province on sewer corporations netted against the expenses. I'd like to know a lot more about that because my suspicion is that, for example, the Ontario Financing Authority will use the provincial debt rating to loan money and charge for that. I want to make sure we are properly accounting for each of those things, because I can see temporarily getting some revenue by loaning organizations money against the provincial guarantee, but that's a short-term saving, in my opinion.
On the capital corporations, I want to understand how, for example, the annual sewer and water grants are going to be allocated. My suspicion is that we may move to what you would call loan-based financing there too which is not, in my opinion, a loan. If the province has 100% of the obligation for paying it, it's a grant by a different name.
Those are my comments. What you're doing is obviously quite legal, but when you look at the numbers for annual comparisons -- and we're not talking small numbers -- in my opinion, we're talking $2 billion to $3 billion that is simply nothing more than reporting things in a different way.
Your last comment just before we got into this was that people who deal with the government, the public, want to know what the true state of the finances is. I'm afraid, with all these things going on -- and these are just the ones that I can see with my limited energy; there may be other things going on as well that we don't know about -- we end up kidding ourselves about the true state of the finances.
Let me start with that one as it's the freshest, which has to do with the crown corporations transfer of staff. There are really only two corporations where there are, at this juncture, significant transfers of staff. The Ontario Clean Water Agency -- I forget the actual number. Probably about a thousand staff are being moved over to that crown corporation, and with it obviously go the operating expenses associated with their operations. But also what goes with it is the revenue related to that. As you're aware, it's not actually 100% provincially funded; the municipalities pay for the operating costs of that particular function, so those revenue streams will be given over to them.
We are changing the structure around the way in which we finance the capital. We've made it clear that we're shifting to a loan-based approach to financing. There's also, accompanying that, a whole new policy on water and sewer which tries to balance conservation goals with economic development goals. Municipalities will be required, obviously, to pay to OCWA the costs of those loans, and that debt will be dealt with by the municipalities in that regard. We are shifting and have shifted on that one, and we've been I think pretty clear on that.
Mr Kaufman: No, we don't. We have mixed responsibility. Traditionally, even in the grant system -- I don't know the numbers offhand; it varies according to municipality -- there was a variable contribution between the province and the municipalities.
The other key principle which we've adopted generally as a direction in terms of water and sewer is to move towards a more full-cost pricing model. That's something we're looking at and will develop a plan around over, obviously, some long period of time. There's no question that there will be a need for certain support to some municipalities which have a very low assessment base and can't afford to provide that level of support.
The basic principle, and I've made this point to you before -- I'm sure the Treasurer has numerous times -- is that we're attempting to structure our capital in a way that begins to recognize that this is an investment, it is a physical asset that has a life to it; and in terms of the current account costs for that, it really is the principal and interest, where we have an obligation, those costs we're supporting. In that sense there's an accurate reflection and relationship between the current account accounting of that, as it were, and the real use of the asset, which I think are pretty sound public finance principles. That basically is being applied as a principle to the hospital sector, the school sector, the USH sector, as you mentioned.
On the loan-based financing, it is important to recognize that our obligations for capital vary very substantially between each sector. We don't have 100% obligations for hospital capital or school capital. They are shared arrangements, either with hospitals or school boards, so that's not an accurate representation of the relationship we have to --
Mr Norman W. Sterling (Carleton): I'd like to pursue a little on the lines Mr Phillips has, but before I do that I have a general question. The Provincial Auditor said in the mid-1980s that our province was at the forefront of moving towards more progressive accounting methods. What's happened over the last 10 years? Why are we now at the tail end? If you look at these charts, it's appalling that only Newfoundland and we have made so few moves in terms of going to this more acceptable method of accounting.
Mr Kaufman: I don't know the history around this issue, but it's my understanding that the Legislature and the Provincial Auditor in the past felt that the current practices were acceptable ones. Various provinces have responded to the PSAAB recommendations gradually over time, and Mr Peters has felt quite strongly, obviously, that Ontario needed to move on this.
Quite frankly, until Mr Peters raised the issue, in our quarters this was not an issue we were really dealing with. Our feeling was that the current accounting practices were acceptable. There was no strong call for change. On a professional basis, both our finance people as well as the Provincial Auditor were looking at improvements along the way within the current framework, but until this last year there's not been a major discussion or pressure to shift our approach.
Mr Sterling: Well, you haven't been listening to this committee, which I've sat on for three years. There was strenuous objection to the whole setup of the capital fund as being nothing more than playing with the books.
Over the past years, for whatever reasons, the governments involved in those times -- and it's not the Legislature that hasn't been interested in it, it's the governments of the day that haven't been interested in it. They've hurt the credibility of our province in terms of our reporting and keeping clean books. That's the bottom line.
Mr Kaufman: Just on the last point, under the current accounting practices the provincial auditors previously have certified the accuracy of the books. Again I make the point that there may have been concerns, but in terms of shifting from the current approach to a new set of rules, at least as far as I know, until this last round of recommendations from Erik, there had not been a specific set of recommendations to make those changes coming from this committee. I may be wrong about that, but I'm not aware of it.
You mentioned that the Ontario water corporation was going to take over 1,000 staff. I know that under a statute that was recently passed by the present government the cabinet can unilaterally declare people no longer Ontario public servants. Has that been done or is that intended to be done?
Mr Kaufman: No. These are what we euphemistically call schedule 4 agencies, and this staff will remain as public service employees and will remain in the official count of the number of public servants of the province. When you get numbers of public servants, they will be included.
Mr Kaufman: In time, the Ontario Realty Corp -- I don't have the numbers; Barb, you may have the information -- will be another one of the corporations which takes some existing line operations, and those will shift over. I think a substantial number of employees will move over. I'm not exactly sure of the timetable.
Ms Barbara Stewart: The realty corporation will have, when it's finally up and running, between 1,350 and 1,400 staff, and those staff will be transferring from the current ministry of the Management Board Secretariat with their functions. They will retain their status as public servants and their bargaining rights etc.
Mr Sterling: To get back to the Ontario clean water corporation and Mr Phillips's line of questioning, you mentioned there were some municipalities that cannot pay for their infrastructure and therefore will be repaying to the Ontario water corporation a certain amount of the cost of putting in the sewer. What happens to the other portion? Which body is giving the grant portion? Will that be the Ontario clean water corporation or will that be the government of Ontario?
Mr Kaufman: It will be the government of Ontario, through Municipal Affairs. To the extent that there's a subsidization of municipalities, it'll be through the Ministry of Municipal Affairs that the subsidy is given, but it'll be in relation to the principal and interest repayment to OCWA that's required.
Mr Kaufman: I don't know enough of the details here. Whatever the formula is that applies to a particular municipality, it'll determine what amount it has to pay out of its own source revenues. To the extent that there is a provincial share, some subsidy required in order for them to be able to make those repayments, we as a province will assist them with that, and Municipal Affairs will be providing that assistance, not OCWA.
Mr Kaufman: First of all, they are the vehicle for reviewing and approving projects, and they will be providing the financing for the projects. In some cases, I presume they will run some, actually build some.
Mr Sterling: Let me go back a bit. The project costs $100, okay? The municipality is deemed under the present rules to be able to pay for 25% of it, so they get $25. They go out and borrow that on the market somewhere else, and they don't deal with OCWA, they don't deal with the Ontario government. Tell me where the $75 comes from. Does it come from OCWA?
Ms Stewart: They'll undertake a loan with the corporations for their 75% share, for the balance of the project, in accordance with the formula that's in the municipal assistance program. The repayments of the principal and interest for that loan, as the deputy mentioned, will come from the Ministry of Municipal Affairs.
Ms Stewart: The loans will be managed by corporations. We're trying to make this as simple on municipalities as possible, so they'll arrange a loan agreement through the financing authority. The repayment of that loan will come --
Ms Stewart: No, for the 75% share. The example you're raising is one where the municipal assistance program would oblige the municipality to pay 25% and the province 75%. That's the example you've raised?
Mr Kimble Sutherland (Oxford): I must say this topic of discussion is starting to get a little repetitive for me. We went through this when we dealt with the capital corporations act in the standing committee on finance and economic affairs.
As to Mr Sterling's comments about where the accounts used to be and the comments the auditor made, I suspect part of the reason things have changed is that PSAAB has also changed its standards over the years in what it's asked and required. Some auditors across the province saw fit to ask that it be done in a quicker fashion than other auditors have in terms of what they were comfortable with in examining the books.
The question I want to ask is related to the presentation. I notice you've attached the article from CA Magazine, the official magazine of chartered accountants. I had read this article when the magazine came out. Also in the same edition, I believe, was a very extensive article on the role of provincial auditors across the country and different things. When I read this article, I was trying to get a sense of their direction. Maybe it was just me, but I was left with some sense that even the accounting establishment is unsure how government should account for capital and how you should do that in the public sector. There isn't consensus on how that should be done. Am I reading this article correctly?
Mr Kaufman: I think so. I'd like Gregg Smyth to speak to this more directly. He's one of the representatives on the committee who's actually looking at this with PSAAB, and I think he can give you a bit more of a flavour about the state of affairs on the treatment of capital assets.
Mr Gregg Smyth: I think you characterized those discussions correctly. There are a lot of pros and cons about what provincial, federal and municipal governments should do about accounting for capital. On the one hand, there's a widespread perception that there should be more information and better reporting of capital spending, but on the other hand, it's balanced off with concerns about what people might do or say with that information, and what should be capital.
There's a given set of rules that talk about appropriate standards for what is an asset in capital spending in the private sector. The motivation there is to come up with a system of accounts that measures profitability. Clearly, when you're in a government environment, your perspective is very different. You need the same kind of information about your capital. You may want to have a split between capital and operating expenses, recognize that you're acquiring property that has value over time. The question is, how do you measure those costs or spread them over different periods to fairly reflect what government's doing?
A lot of the assets are very different too. When a government buys a park, for example, it's outlaid money. The park will have lasting benefits for many years, but in terms of a realizable value or a stream of revenues to justify it, it's maybe not there.
I think that within the accounting profession itself, it's very much an open question. The task force is studying what should be done, what changes should be made to reporting, what are user needs and objectives. It is working through. Our target date for that task force completion is in the fall of 1995, and that in itself I think indicates the complexity and the need to resolve these issues in a very thorough way before PSAAB is ready to issue any new standards with respect to capital.
Mr Erik Peters: Just a very brief statement. The article that appeared in CA Magazine actually reflects PSAAB's status of the capital asset issue right now, which is at the issue analysis stage. What Martha Jones tried to do in that article was simply lay out the issues they're confronting, that they have to deal with. After that comes a statement of principle etc.
They're at the very beginning, and no wonder. We're all looking at these issues. That's why very specifically, in the agreement and the dealings the Ministry of Finance had with us and we with them, we are certainly a far cry from advocating recording off-capital assets holus-bolus in the public accounts of the province. It's not part of the recommendations we're making.
Mr Sutherland: Mr Sterling indicated that because in his perception the books hadn't been kept appropriately, he thought that hurt our credibility in terms of the province being able to borrow effectively on the markets. I was wondering if you had any comment about whether we've had problems borrowing.
Mr Kaufman: Let me deal with two points. The first has to do with the level of information we have been giving in terms of the province's finances. I take the point that people may have different views about the way in which we're approaching crown corporations or capital or whatever. The point is that we have been providing that information in a very, very fulsome way. The budget lays out very clearly what the plan is and what the overall capital spending program of the province is, including the off-budget capital spending that's being taken through the crown corporations.
It leads into the point that you're raising. When we're sitting down with credit rating agencies and investors and discussing what the state of the province's finances is, they get the same kind of full explanation of what the province is doing on all these fronts. We go into very substantial detail with them, and to this point certainly we have not had a problem in addressing their issues and concerns and it hasn't affected overall our capacity to borrow to meet our debt obligations.
Opposition members in the Legislature left me with the impression, by some of the things they said, that there was a reluctance within government to change the model of accounting. I just wanted to put on the record that indeed the Ministry of Finance had established a committee to examine different accounting models, I believe in 1992, with a number of representatives from the private community and the public. Indeed the auditor was a member of that committee, I was a member of that committee, and others. We examined different models, as I said. There certainly was an interest within the government to examine ways of representing most accurately and in as simple a way as possible the accounts of the province for the people of the province.
The other impression that members of the opposition might have left with the public in regard to changing our methods of accounting was that it could be done very quickly. There's an enormous, complex task at hand here. I was wondering if you could detail that in the time we have left so that people can understand that this isn't something that just happens overnight, that it does take a period of time. That could be done this afternoon.
Mr Kaufman: Dina was going to go through that, because there are a lot of steps involved in the changeover. It's probably best if you do leave that issue to this afternoon. She can go through it and satisfy you of what the ministry is doing to implement the changes and try to meet the schedule of next September.
The Chair: We will allow the auditor to make his statement now, which is about five minutes, and it would be appropriate for ministry staff to hear the statement as well. Then we'll recess for lunch and come back at 2 o'clock.
Mr Peters: It's as if Mr Johnson read my mind. The magnitude of the task and the challenge facing the Ministry of Finance, particularly the office of the controller, in implementing the recommendations of the Public Sector Accounting and Auditing Board are daunting. In fact, it was one of the many reasons I expressed my concerns as early as March 1993 to the Deputy Minister of Finance, the Secretary of Management Board and the secretary of cabinet, and in early 1993 I formally advised the Minister of Finance of my concerns.
It was evident that the ministry had also identified the need to review its financial reporting practices as in December 1992, and this is what you were referring to, the newly formed office of the controller established a working group to review recent trends in public sector accounting with a view to recommending ways to improve the value of financial information provided to external users.
In June 1993 this working group issued an advisory report entitled External Reporting: Meeting the Needs of Users. This report recommended a number of constructive changes to improve the usefulness of future public accounts such as: supplement the public accounts with an annual report, similar to that found in the best practices of the public and private sector; provide summary financial statements presenting the revenues and expenditures, and assets and liabilities, of government ministries and agencies; and provide information on the financial position of the province on the basis of accrual accounting.
We endorse these recommendations, as they closely follow the recommendations of the Public Sector Accounting and Auditing Board, and these recommendations contributed to firming up the commitment, I believe, to adopt the more prescriptive accounting rules.
As I stated in my 1993 annual report, the controllership function would be strengthened if a legislative framework mandating the rules and responsibilities of the function were established. To date, this function is in an evolutionary stage, and this may have been a contributing factor to the ministry taking concrete action with the implementation of the new accounting rules only near the end of 1993. While I'm pleased to note that progress is now being made by the ministry in addressing these and other issues, much remains to be done, especially in the short time remaining for us.
I would like to assure both the committee and the ministry officials that my office, while safeguarding our independence and objectivity, continues to be committed to working in a spirit of cooperation and reasonableness to improve the financial reporting in the province of Ontario. To this point, I've dealt with the use of the Public Sector Accounting and Auditing Board recommendations in the financial transactions and in the statements subject to audit by my office.
As you know, we do not audit the budget, and that's how it should be. However, I continue, as I did in my 1993 report, to advocate the use of the same accounting rules in developing the annual budget as I used in determining and reporting the actual results of the public accounts. This is the end of my statement.
I'm going to talk a little about what's involved in implementing PSAAB, a little about the timetable that's ahead of us, and perhaps very briefly, from a layperson's point of view, talk about what accruals are and walk through a few examples. Then Rob Siddall will get into a few more specifics, and Gregg Smyth will talk a little about capital assets and the treatment of those.
As you know, the public accounts are based on the province's books, with millions of transactions worth billions of dollars in payments. They're currently recorded in individual ministry's books and records and also in the central accounts of the province, which are maintained by the office of the controller. The systems that support this were originally designed to support the province's current accounting policy of modified cash for the activities of the consolidated revenue fund.
To make the kind of changes in accounting policies that we're talking about will ultimately require that we introduce new systems in central accounts as well as in ministries and agencies. As you may appreciate, that's not something which can be done overnight and there is a significant cost to that process.
In response to the auditor's recommendations that the public accounts for March 31, 1994, be measured against the new standards of PSAAB's recommendations, we will prepare a snapshot of accrual and consolidation as at the end of the 1993-94 fiscal year in the public accounts of the province. The snapshot will be accomplished by asking the various ministries and agencies to provide, in addition to the information given on the payments and deposits during the year, a listing of their accruals as at March 31, 1994. This information will have to be gathered outside of the existing systems we have in place.
Provisions of in-year accrual information, that is, on a quarterly basis, or the adoption of accrual accounting in the budget and estimates would require major changes of the accounting systems and therefore cannot be achieved this year.
In your handout from this morning there was a set of tables we'd like to refer to. I think the first two were referenced this morning by Jay. Table 3 is an implementation schedule to give you an idea of the time lines taking us to September 1994. As Jay mentioned, we had indicated through the minister to Erik that we are moving towards the adoption of PSAAB recommendations in the public accounts for the current fiscal year, which ends on March 31. Table 3 outlines the timetable related to meeting this objective and gives you a sense of the steps we need to take.
The staff in the office of the controller have been studying and participating in PSAAB discussions, as was pointed out this morning, since the inception of the board in 1981 and have over this period of time adopted many of the recommendations into the annual preparation of the public accounts.
In October 1993, in the office of the controller we began work on implementing for fiscal 1993-94 issues surrounding the outstanding PSAAB recommendations. Both the minister and the auditor have made it quite clear that this will be a massive undertaking -- the auditor, Erik, referenced that this morning -- involving the accounting for millions of transactions and billions of dollars. However, despite the magnitude of the task, we set a target we are prepared to work towards and have at this point in time every confidence we will meet.
Adopting the outstanding PSAAB recommendations will have major impacts in two main areas: accrual and consolidation accounting. We will go into a little bit more detail on the impacts of these recommendations on the province's books later in our presentation.
Adoption of the recommendations takes time at two levels. At the sort of more macro level, accounting staff within the Ministry of Finance must decide on an item-by-item basis how the policies will be applied to the diversity of the government's operations. In this regard we are regularly in touch with the Provincial Auditor's staff in order to keep them informed and to ensure that some orderly progress is made throughout the implementation process.
The Ministry of Finance staff will then inform all of the ministries and agencies affected of the changes to be made in their books and records, and the information and schedules that will be required by the ministry to prepare the public accounts. This information will then be gathered from those ministries and agencies in May and June of this year. The office of the controller will then accumulate and review this information and prepare the public accounts for review by the government and the Provincial Auditor for some time in July and August, at which time the Provincial Auditor provides his opinion.
While the PA's staff conduct their audit work on the underlying records which make up the public accounts continuously during the year, it is in July and August that we will ask the auditor to review the final package and to provide the opinion on the contents. It is our intention to have a final package making up the public accounts to be printed some time in September and tabled by the end of September with the Clerk of the Legislature.
As we mentioned, PSAAB is based on accrual and consolidation, the two major components. To talk a bit about an example of a layperson's understanding of an accrual, you have in your package a small example of what I guess we all commonly share: Visa bills. An example of a household accrual is a Visa bill. If you receive your Visa bill in the mail on December 9, even though you will not pay the bill until the end of the month you've already incurred those expenses and you owe the balance to Visa. You would not wait until the bill is paid to recognize the fact that you've spent your money. If you're in the habit of producing personal financial statements in the middle of the month, let's say, on this year-end date the Visa bill is not yet paid and you would therefore set up an accrual to record your liability.
Another example in terms of the business of the Ministry of Finance is around sales tax receivables. An important example of an asset accrual is the setting up of all taxes receivable. This asset is created on the balance sheet so that revenues reflect the taxes relating to the fiscal year rather than the taxes collected in the year but which may relate to other years.
Consider the specific example of sales taxes receivable. There's an illustration in your package, I believe. Sales tax is collected from licensed vendors on a monthly basis. The amount of tax is calculated on the previous month's sales and is paid in the month following the sales. Under our existing accounting policies, the province records these tax remittances when they are received, that is, on a cash basis. Under the accrual basis, however, the tax collected on March sales, which is remitted in April, would be set up as a receivable at March 31 year-end date. The simplest way to go about recording this accrual is to wait until April and record the receivable for March 31 as the cash is received.
Under the basis of accounting, the 12 months of receipts between April 1 and March 31 are recorded in the province's revenue, whereas under the accrual basis the 12 months of receipts between May 1 and April 30 are recorded as revenues, with the balance sheet at the beginning and the end of the year reflecting the sales tax to be collected in the month of April.
Sales tax, of course, is one of the simplest of all the asset accruals. The subsequent cash receipts tell us exactly what would be set up as a receivable. In other cases, however, the actual receipt is not known at the time of preparing the financial statements. In these cases, an estimate must be made of the future cash that is expected to be received in order to set up the receivable accrual. This will involve estimating the accounts which are owed but which will not be paid.
The ability to accurately estimate the amount of the receivable accrual is further impaired in cases like personal income taxes where the actual receipt may be several years away, as you know, and it's difficult to accurately estimate the amounts.
In addition, we need to determine whether individuals will have the cash to pay their debts to the province. Where this is in doubt, we must estimate and set up an allowance for doubtful accounts as well, as at the balance sheet date, and record changes in the balance of the operations.
I would now like to ask Rob to go through some further examples. Rob, as you know, is one of the assistant controllers in the office of the controller and is in fact the project leader of the implementation of the PSAAB recommendations.
Mr Robert Siddall: Before I get into any more examples, I thought I'd better explain what PSAAB is and a little bit more about PSAAB. PSAAB stands for the Public Sector Accounting and Auditing Board and is a committee of the Canadian Institute of Chartered Accountants. CICA, the Canadian Institute of Chartered Accountants, is the group that sets up accounting recommendations for the private sector in their CICA handbook. PSAAB is really their recommendations in the public sector.
"To consider matters of public sector accounting and auditing theory and practice and to render on its own authority such pronouncements as it considers in the best interests of the community as a whole, and
"In making its recommendations, the committee recognizes that no rule of general application can be phrased to suit all circumstances or combination of circumstances that may arise, nor is there any substitute for the exercise of professional judgement in the determination of what constitutes fair presentation or good practice in a particular case. Recommendations are not intended to apply to immaterial items."
I quoted that to again bring out the fact that what we have in front of us is a set of recommendations which we have to apply to economic transactions of the province. While the recommendations give us guidance, it is the requirement of us and of the Provincial Auditor to look at these recommendations and then to exercise our professional judgement in applying these recommendations to each one of the transactions of the province.
I've handed out as table 4 what I call the accrual continuum. The idea I had was to try and show you that what we're looking at today and what we've done in the past can be viewed as a continuum between cash and full accrual.
At one end, a province or a household would just record its cash transactions without providing any information on future cash transactions in its balance sheet. Under that basis, your balance sheet would look very simply as cash in the bank, if it was a personal household.
At the other end of the continuum is full accrual. When we get to that level, we have to look at exactly what is on our balance sheet in terms of providing future benefits to us. In the research, some of the things that are included at that level are such items as human capital that was referred to in the capital fund paper back in 1990. That's basically recognizing that the province spends money today to support not just physical infrastructures but infrastructures in terms of education and training and health and other areas, and that our money we invest today in education will benefit the province in future years.
Needless to say, at that level, full accrual is not accepted either by PSAAB or by the Canadian Institute of Chartered Accountants as a reasonable accounting methodology to be followed. But I think it's important to realize that along this continuum there are needs of users, and if you can't necessarily meet all the needs of users in numbers, it doesn't mean you don't take the opportunity to provide information to users in other forms. I thing Gregg will get more into the issue of capital assets next.
One of the things the government has been trying to struggle with, that all governments have been trying to struggle with, is how do we recognize that we spend money today that will have benefits to future taxpayers? And how do we maintain our investment in infrastructures that we've spent in the past and that we spend today?
In the area of general payables, the province, back when it moved from accrual accounting to modified cash accounting in 1968, modified it on the basis that it believed that leaving the books open for 30 days would pick up most of the general payable accruals, and in most cases this is the case. When we look at our general payables, which I would call our payables related to office supplies, photocopying, staff costs, most of those payables are picked up within the 30 days after the year-end. By leaving our books open, we pick up the majority of those.
What we will do this year in terms of the public accounts is ask ministries at April 30 to provide us with a listing of any invoices they have not paid within those 30 days but that do relate to the period before March 31. That will be the rest of the pickup of our accounts payable accruals. We're going to take advantage of the fact that the current system does keep the books open for 30 days and that the ministries are used to gathering that information right now: We're going to ask them to continue to gather it that way and then do the accrual as an add-on to the information that's currently collected.
When we get to a liability that is difficult to understand -- and I'm not a pension actuary; I'm an accountant, and it is difficult for even accountants sometimes to understand pension liabilities -- it's the next liability we have to look at. When I joined the government, I became a member of the pension plan. That pension plan very generally gave me the right to a pension, indexed for inflation, when I retire from the government of 2% per year of my last five years of earnings. It was either for my life or, if I so chose, for the life of my spouse, whoever lived longer.
Needless to say, what I've just introduced is a liability the province has in the sense that I make a cash contribution now and the province makes a cash contribution as well. But someone has to go out and estimate whether those cash contributions that both of us are making now are enough to cover the liability the government will owe to me 20 to 25 years out and for an additional 20 to 25 years, hopefully, if I should live that long. In doing that, they're going to have to make a lot of assumptions. The first one is that I will continue to work for the government and that I actually will live to continue to make contributions.
As well, they have to make estimates of that last five years of my salary, which hopefully -- some people might say I'm extremely hopeful -- will grow over the next 25 years and that my last five years of salary will be higher than what I'm earning currently and what I've earned over the last five years. They have to make assumptions about the inflation rates over the next 25 to 50 years and they have to make an assumption about how long I'm going to live and what the value is if my wife lives longer. All those assumptions are not done by accountants, thankfully; they're done by actuaries who are experts in this area, and accountants rely on those calculations to set up a liability.
What the province currently does is disclose the liability, in the notes to the financial statements, that was actuarially calculated for purposes of funding those plans. But what the province is going to do under PSAAB is completely different, in the sense that what was before an actuarial calculation for the purpose of calculating what we should pay into the plan, to either cover our current contributions or to cover any unfunded liability, will change to what is required to determine what was actually earned by the employee in that specific year.
The one point I want to make in all this is that the assumptions can vary and in fact do vary, and the assumptions have a material impact on the financial statements. When we talked about the preciseness of cash versus accrual, it was in this reference: that some people criticize accrual because if I change some of those assumptions, if I change my inflation rate by 1%, I'm talking about a change in the total unfunded liability in the range of billions of dollars. When I look at a number on the balance sheet for cash, I can tell you with some degree of accuracy that that cash is accurate to a dollar, but when I get to the unfunded liability that will move on to the province's balance sheet with the pension liability, I can tell you that number can be out in the range of billions of dollars.
One of the other major areas the profession as a whole is trying to deal with and that governments are trying to deal with is how we handle our investments in capital infrastructures. Gregg has been a member of the PSAAB subcommittee in that area, and I would like Gregg to proceed on that topic.
Mr Smyth: As noted this morning, we are here to talk about methods of accounting and how we change them, and what I want to get into in a little more detail is the work we're currently doing in the area of capital assets, fixed assets, capital property. I am a member of the PSAAB physical assets task force which has been set up by the board to look into questions of how capital property should be reported and accounted for.
By way of introduction to that, the focus for PSAAB and its recommendations has been on a conservative basis of showing a net debt or future revenue requirements as a bottom-line measure that was indicative of financial performance. When you look at our public accounts and the statement of financial position, you note that the only assets shown there are financial assets. It includes cash, near-cash investments, loans receivable and other items. There are only cash items. There are no inventories, there are no fixed assets there at present. The question that arises that we're studying within the Ontario government and also at PSAAB is, is that an appropriate policy to follow in the future?
As things stand now, none of the province's investments in any assets, be they government buildings, hospitals, schools or parks, are recorded on our balance sheet. Everything is recognized as an expense in the year it is incurred.
Clearly, unless people are very careful about how they manage their business, that can lead to some dangers. When those capital assets are expensed, they're invisible and people don't manage their assets as well as they should or keep track of them. It can influence, too, the decisions on the level of capital spending and the way it's handled in whether things are kept up to date and maintained properly, all because a dollar on capital spending is treated in the books exactly the same way as a dollar of spending on salaries or anything else.
We're borrowing some of the material from the article in CA Magazine which was distributed to you all that looked at some ideas and thoughts on reporting objectives and why it might be useful to get more information on capital.
One of the basic items there is that splitting spending between capital and operations would assist in evaluating what a government's current operating position is and what stock of property is then going to be held over the longer term.
One of the other related measures that might be considered to be quite useful is information on the ongoing cost of operating capital. Once the money is spent on a capital project, such as a highway, how much does it actually cost to keep that project ongoing and viable as time goes by? It's useful to have an indication too of the extent of capital property so that you can get an idea of how much borrowing has gone on that reflects investment in such property. Also, it might be desirable to reflect consumption of that capital property and the charge to operations through depreciation.
Other items related to capital that the group is thinking could be useful or productive would be information on the state of repair of capital property, what commitments the government might have for additional capital property, what environmental costs are related. A very important consideration for government is the ability to accurately calculate the cost of programs, and one of the items that is now missing for all governments in Canada is a spreading of the cost of capital across programs, so you don't know whether there's an ongoing portion of capital usage to keep a particular program going.
It's issues like this that are set out as the beginning. Those are all positive or nice things we'd like to see reflected and have more information on, but the tradeoff, one of the dangers people have pointed out, is that if you do decide to go ahead and recognize capital, fixed assets, and show them on your balance sheet, what's that going to mean to your basic measures of reporting and net debt? Is net debt going to disappear because governments across Canada might decide they have a trillion dollars worth of capital? What impact would that have on financial decisions? So it's by no means a simple, basic, one-sided argument.
As you go through this discussion mechanism, there are a lot of more detailed questions. The rules for assets typically set out represent concepts of economic benefit, and as I mentioned this morning, they typically apply in a profit-making situation where you're looking at an asset. Does it generate positive cash flows? What happens there?
If you only use that type of definition, you would capture a relatively narrow portion of government assets, but it's not too hard to look at that in a slightly different sense: that something may be an asset as well if you spend money today and save spending money in the future, ie if you buy a building now as opposed to leasing it over a period of years, and that fact should be represented in your accounts.
The trickiest part of this equation is the fact that you might also want to recognize service potential as a government asset, something that may not generate positive cash flow but something like a highway, which is part of the economic infrastructure of the province and clearly provides benefits to the populace as a whole. That would make that a service-providing asset of value.
As I said, the government at the present time expenses everything. All governments in Canada expense virtually all assets. There's a movement across the country in governments generally to change. This is reflected in the studies now being carried out by PSAAB. It's possible that we might even see some other governments deciding to go ahead and recognize capital assets in their accounts before the PSAAB study is completed.
One of the things we've been considering is really how much more work needs to be done and whether the government is in a position to implement capital assets now. You might appreciate from what I've just said that it's still not evident what exactly the best treatment of capital assets is. There's still not a consensus on a clear definition. From a government perspective, we're going to have to look very carefully at how costly it would be to proceed, to gather the information and to do all the work to change our method of accounting, and weigh that against the value of showing the additional information.
At this point, I'd just conclude that aspect of discussion and say it's something we're working on through the accounting profession, to participate in the framework and standard setting, but as well are doing our own work internally.
In the discussion this morning, there was reference to the study that was carried out in conjunction with people from the private sector and the Provincial Auditor. Part of that work also looked very closely at the idea of reporting for capital and the positive recommendation that you should proceed with that at some point. Still, much more work needs to be done there.
The other area I wanted to spend a little time discussing before I conclude my remarks is on consolidation accounting, which is the other component of the major change we're undertaking to provide in the public accounts this year. We talked about accrual before consolidation. One of the sort of hooks of that on to capital is the fact that many of our agencies, boards and commissions in fact do follow the private sector method of accounting. They're profit-making enterprises, several of them, and they record fixed assets and depreciate.
That's one of the issues that has to be addressed as we move into the other aspect of production of the public accounts for the coming year: How do we do the consolidation? What is included? The general concept there is that summary financial statements for the government of Ontario will be prepared, and they will include the results of the consolidated revenue fund, and agencies, boards and commissions for which the government is financially responsible. Separate financial reports for those agencies, boards and commissions will still be produced and most significant ones will continue to be included in the public accounts in volume 2, as they have been in the past.
The issue that arises is how all these other organizations will be consolidated and included in those summary financial statements. PSAAB basically sets out three types of government agencies and specifies rules on how each will be reflected in the financial statements of the government.
The most basic type of organizations are those agencies, boards and commissions that are essentially government organizations; a good example would be Ontario Housing Corp. The summary financial statements of the province will reflect all the details of these organizations. Essentially, you'll add up every item on a line-by-line basis: You'll add the cash to the cash of the CRF, you'll add their accounts receivable and so on and so forth and all their revenues and expenditures as well.
The second set of agencies, boards and commissions are called "government enterprises." Those are organizations such as the LCBO. In the case of these organizations, they're characterized by the word "enterprise" and consist of commercial enterprises, which means their main business is carrying on selling goods or services to the public. The PSAAB rules reflect that, and the method of consolidation for these types of organizations is different. Rather than adding up everything on a line-by-line basis, the profit or loss for the year is added to the deficit or surplus for the year of the government and the net equity in these organizations, ie, the investment in those, is carried on the balance sheet of the province. So they're two quite different types of methodology, depending on the type of organization.
The third type of agency is a trust. These are under government administration. They're organizations that won't impact on the government's financial statements, because the government is not financially responsible for them, either their assets or liabilities. The prime example of this type of organization is the Workers' Compensation Board.
The last part of the consolidation exercise that has to take place is that which involves eliminating the transactions that take place between these different entities. So where a government enterprise sells to the government or vice versa, you have to eliminate these transactions; you want to represent the net activity that takes place rather than grossing up and overstating sales or expenses.
Mr Phillips: The fundamental thing I'm interested in as we move to this new accounting system is just some basis to compare year to year to year. You've got my own view on the problems we're running into right now as the government adopts quite new ways of looking at things that change the numbers year to year to year. Can the staff be helpful to us in terms of saying, "If we had reported this the way we've always done, here are the numbers"? I'm thinking of all the things on sale of assets, the loan-based financing, all those things where the government has adopted quite a different approach now. Is that a fairly simple exercise, just to show the eight or nine major ones so we can get some idea of year-to-year comparisons?
Ms Palozzi: The point is that in going through this exercise we are looking at each item as we go through and doing an assessment of the change in the treatment of that item from our current method to the PSAAB method or to the accrual method. As we proceed, it takes time to think through. We have examples around looking at the consolidation side and looking at all the various agencies and going through considerations and discussions with the Provincial Auditor's staff around what is in and what is out. I think that process is going to take us a number of weeks to get to and to make those kinds of decisions.
Mr Phillips: This one's not tough for me, at least. You've decided to move to loan-based financing on school capital. You used to give $600 million a year in grants. You'll still spend $600 million, but you've changed the name of it; you called it a loan. Surprise, surprise. In my opinion, it's not a loan, it's a reverse loan: The provincial government owes all the money. I would find it useful personally if someone could tell me, "If we kept reporting it this way, here's what the numbers would have been."
Mr Siddall: We can do that right now on some of the things you've brought up before. For instance, the deferred revenue you referred to in terms of the licences will be handled in the public accounts on an accrual basis.
Mr Siddall: We can tell you that the answer there is that there will be a difference between what is in the budget and what is deferred. We could calculate out what that deferral is. If we take that first one as an example, when people pay for their licences now, they pay those on their birthdates. So what I have to do is go out to the Ministry of Transportation and sit down with them and try to figure out how many people have three and a half years left after the year-end on their five-year licence, three and half being three years and six months, how many have three years and seven months, how many have three years and eight months, and work out to get an exact number of what it is that we're putting in the public accounts. That's the simplest one.
When we get into the USH sector, I think we can give you an answer there too in the sense that those loan-based assets, when we consolidate the two of them together, will not show up as a loan. But when we get into such things as the questions you had on any sale of GO Transit or anything like that, until those transactions actually occur, it's very difficult for an accountant to give an opinion, because we have to go through all the documents supporting that transaction and all the clauses and ensure that all those clauses that have any future impact in terms of requirements or liabilities are in fact taking into their calculation what we're going to set up.
Mr Phillips: Let me be specific. You're going to put a number in on revenue estimates for sale of licence. You'll do it all. It has to be in the budget. I'm asking for it to be reported on an accrual basis and on the way you're going to report it. You've already moved, I gather, some government buildings into the Ontario Realty Corp and you are already, I suspect, charging yourselves some lease costs, and have figured out what you're going to charge yourself for lease costs.
I'm just saying, share that with us so when we see the deficit this year, we have some idea of what it would have been had we reported our finances the way we used to report them. I think the public is asking, "Is the deficit getting better or isn't it?" I've no doubt the government will report a deficit of $7.5 billion and say it's getting better, but I've no idea to what extent it's getting better because so many of the reporting mechanisms have changed. If the staff can't help us, we have to do all the work ourselves to try and figure that out. I go back to the pension thing, which I think is another one where we can at least calculate what payments would have been made in there if you had chosen to do it on a different basis.
Ms Palozzi: As you know, the budget is not a set of books and it is a plan, a laid-out plan. There is full disclosure in that budget. In terms of publishing the public accounts, there will be a reconciliation from public accounts to the budget, and I think that on an item-by-item basis we're able to respond to you the treatment on a cash basis versus a treatment on an accrual basis. I'm not sure where you're heading in terms of the question: Can we know this? The point is that we have to go through this process looking at each item, how it's going to be treated, we'll have a reconciliation in the public accounts, and that's where we are.
Mr Phillips: That's exactly why we've got to get at this stuff. That's why I said on the casinos that we should ensure that the people of Ontario are not responsible for the debt and the deficit of casinos, but you wouldn't buy that. That's why my suspicions are up.
Mr Sterling: He can have some of my time back. On the same issue, the frustration you face, whether you're in government, the opposition, or a member of the public, is that the only key time for a document is the budget document, even though it's a plan. It seems that when the accounts are in, the horse is out of the barn and nobody really cares at that stage of the game. Each year for the last three years the Treasurer has said, "The deficit's going to be this," but the speculation is that it's going to be larger than that. When the final figure comes out, it's news for about 10 minutes and that's the end of it.
The time that is of significance in the public's mind and I think in our mind is before that money is spent. People want to have an accurate picture about what's going to happen in the future because people are making decisions on the basis of the budget.
What I would like to see, and it may be what Mr Phillips is asking for, is that on these major what I call jiggering of the books we'd like to have an accurate picture at that point in time. For instance, the $500 million-plus on the teachers' pension plan was obviously an accrual problem in terms of the budgets. It doesn't really matter whether we get a report of an accrual item of $5 million. That doesn't really affect what the people are looking at when they're confronting that budget. Basically what we would like to see are those major financial impacts properly rejiggered so we can have a clear view of what is going to happen in the next year or what you're planning to have happen in the next year.
As we've seen it go on, we see more and more rejiggering of this with the capital corporations. We're concerned about what they're going to be misrepresenting, really, what is going to happen next year in relation to what happened last year and the previous 10 years. Nobody's going to have a picture when they look at this budget, because essentially the books have been changed. Nobody will be able to compare. People have about two or three hours to look at this and some of them are less skilled than others in looking at those books, so nobody really knows what's happening. As the government continues to change the books from year to year, it gets worse and worse.
Where the major expenditures are, the $500 million we talked about in the pension, these capital corporations, and for me the workers' compensation, although in your consolidation criteria you say the government doesn't have any responsibility for the workers' compensation unfunded liability -- I don't know what government isn't going to have to pick up that tab if nobody else is going to pay for it -- those kinds of things are important to be consistently reported on.
Whenever you change the books, I think there should be an obligation on you to report in the method you've changed the books to, and in how the books were kept last year and how they were kept two years ago. In other words, you've got to give the public some kind of comparative data.
In terms of the transition to PSAAB and the effort and time that takes, we have indicated that the budget and the estimates will not be on an accrual basis this year. There is a lot of work that needs to be done in the changeover of systems to change to one method. We've looked at what other provinces have done. The provision of a reconciliation component within the public accounts is a piece that obviously we have to provide, as other provinces have done.
I understand the point you are making around information and availability of information. Erik referenced this morning a working group that had Provincial Auditor participation and external participation. We have a report on our table making recommendations around improving financial information to users of that financial information, and there are a variety of users and so on. We're looking at that as well.
One of the recommendations was providing an annual report, and we're pursuing some of those. We haven't progressed as much as we would have liked to in the last six months, given a whole host of other pressures on our agenda, but we are looking at that issue; it's not inconsequential. In terms of the budget itself there is disclosure in the budget. The statements in the budget are there in terms of the items that are being addressed.
Ms Stewart: You're looking for some consistency year to year. In general terms, I think the spending plan you're looking for is the budget followed by the printed estimates. The commitment has been made to ensure that all the transactions you've discussed today are fairly and openly disclosed in the budget. They are all articulated, and we'll continue to articulate them openly year to year, from one budget to the next budget, so that comparisons of that nature can be made.
The reality is that the spending plans and the business of government evolve over time. I'm sure if we took a budget from 10 years ago and compared it to a budget last year there would be significant structural changes over a longer period of time, reflecting the kinds of business government is in.
But we have certainly made the commitment that -- indeed, a couple of years ago a capital budget was introduced, and we've tried to display the components of that capital budget consistently year to year. We'll do the same with the capital corporations. The amounts that are being loaned out will be available in the budget, as they were last year, just very clearly marked as loans-based capital financing structuring. The printed estimates will show quite discretely the repayment streams, and those will be showing in the ministries which are actually responsible for those activities, and the businesses reflected by the capital corporations.
There's no attempt to be hiding anything here. We will ensure that there is consistency year to year in terms of how these things are reflected, but what we are looking at is a change in business practice that's going to require some form of change in the spending plan.
Mr Peters: Just to help out. That's a very good question, a question that certainly has been considered by the study group task force that was mentioned before, but it's also something that is very actively being considered by the legislative auditing community.
One of the concerns we have as legislative auditors, and I certainly identify myself with this, is that there is very little accountability for the performance against last year's budget before the current year's budget comes in; in other words, that somebody takes a look and says: "This was last year's budget. This is what really happened vis-à-vis that budget. These are the assumptions we made, this is what actually happened, and this is the impact of the actual change on what is before you as next year's budget." This sort of accountability of past performance and impact on future performance is something that will have to be worked at in the long run, because ultimately -- as I take it was one of the points of your question -- that is really what creates the credibility of this process for the public.
Mr Jackson: My question was following Barb's comment, and then the auditor highlighted it. As the Chair of the estimates committee I have some very strong personal reasons about how effective that committee has or has not been. I'm interested in getting a better sense from you on how we will report in estimates. I don't want to get into the debate of the optics of these changes. I just want to make sure they don't become invisible.
I'm interested in how they appear in estimates and I'm also interested in -- maybe the auditor knows this -- what is the responsibility now on municipalities, as an example, or school boards to report? We have a serious problem with the quality of auditing of school boards in this province, a very serious problem, just in the exact nature of reporting to the ministry as well as reporting to the public generally.
Perhaps someone can help me get a better sense of how they would be reporting in estimates -- pick a ministry -- and how they would treat the changes, whether it's the Transportation aspects of the new capital corporation, or pick Education. Can you just give me a snapshot of that? I think we can get the committee through the year adjustment, but I want to make sure of (a) how it's reported in estimates and (b) what are the responsibilities we're putting on municipalities to report to their communities about the true nature of their debt load? I don't want it to become invisible for them, because it's obviously resurfacing there, different from how it has in the past.
Ms Stewart: The overall approach in terms of estimates in terms of how the loans-based financing transactions will be reported: The expenditure implications that are now being adopted and taken over by the corporations themselves will no longer be reflected in printed estimates, because indeed they'll be on the books of the corporations themselves.
Ms Stewart: We'll make every effort to show that year-over-year change. Less so in Transportation, because it's a very small operational issue, but in Environment and in Management Board Secretariat, those are the larger operating corporations.
Ms Stewart: In Education there's not the same implication for the printed estimates of the ministry in terms of a shift of operating expenditures because indeed all the change will appear in the capital side. Take Education; I think it's the simpler example. What will show up in the Ministry of Education is that there won't be a capital grant, as would have happened in previous years. What will show there is a repayment stream, because indeed the loan is being taken out by school boards and the school board would be under a legal contract with the ministry against that loan.
Ms Stewart: Sorry, the school board. The Ministry of Education would show the repayment stream, reflecting the principal and interest payments on that loan, and it would show that as a budgetary outflow in the estimates of the Ministry of Education. So when you review that in estimates, you'll see that as an explicit budgetary transfer payment line in the estimates of the Ministry of Education.
Mr Jackson: No. I'm sure the Chair won't cut off the auditor if I ask the second part of my question to the auditor. Without getting into the politics of where moneys and true debt is moving to whose books -- it's going to surface in a more dramatic way at municipalities and school boards etc -- what authority do we have to impose stronger accounting rules on those two jurisdictions, for example, to ensure that the public gets a better picture?
Mr Peters: There are really two parts to your question. The first one I'd like to answer in terms of the PSAAB initiatives themselves. PSAAB has just come out with a first set of statements about local government reporting which deals essentially with financial disclosure by municipalities. That is currently being put in and I'm really looking forward to some consistency being brought into that particular picture.
On the school board situation, it's a little more difficult inasmuch as the accounting or the auditing of school boards at the moment rests in the hands of private sector firms hired by individual school boards, who report on the finances of the individual school board. The Ministry of Education is entitled to receive those particular financial statements, as it does, but because there is very often mixed funding going to the school boards, provincial funding as well as local property tax funding, and as you know, there are even school boards which have no provincial funding whatsoever, the input is rather limited; they are only available for very limited financial analysis by the Ministry of Education. They are financial statements that show such things as what salary was paid to the teachers, what benefits they received, how much classroom --
Mr Peters: It's really not very good information to assess the operations of the school board from the point of view of really analyzing the estimates etc. It is another area of public bodies where additional reporting is required. The same is true, incidentally, for universities, hospitals, the whole gamut. There is very much a need to improve the financial reporting so the kind of decisions you're talking about can actually be effectively made by the ministry first and then be put forward as estimates. I hope that answers your question.
Mr Callahan: I've sat and listened to the reasons you've indicated about why it'll take you a while to adopt the suggestions of the auditor. I could accept those in total or just consider them to be delaying the matter, but for the purpose of argument, I'd like to find out, what does Moody's, the rating authority, think of the way you have introduced this new type of accounting since about 1990? Do they have any concerns about it?
In my discussions with Moody's and Standard and Poor's, what they do is they take the books of the province and adjust them for adjustments they feel are appropriate to arrive at their own rating. They'll look at it on a much more private sector basis, and therefore they do make some adjustments.
Mr Madden: When people buy the bonds, they rely on primarily a couple of things: a rating, because they don't look into the results of the province -- they can if they choose, but they generally rely on the rating, for the most part -- and a name.
It seems to me, just on looking at this whole scenario, that if a private enterprise were to do this and sell bonds, it would probably find itself in very serious trouble. It's imaginative accounting, but it's not relating the true picture at that camera shot in time that an investor is relying on. I think you have to agree with me in that regard.
Mr Madden: Where I can agree with you is what it should clearly focus on. An investor will buy a bond based on a rating. If a rating agency says it's AA, which we are, that's what they primarily focus on. They also look at information regarding the budget and our public accounts and they rely on deficit targets that are indicated over medium-term horizons. They don't look at any one particular year. If the rating agency had a concern, they'd have a concern.
Mr Callahan: Some of the concerns I've got have been expressed by Mr Phillips. The latest gambit seems to be that if you want to buy your licence plates for two years, you can buy them now, or if you want to buy your driver's licence for two years, you can get it now. In other words, all the revenue is being drawn in now, and if I understand this correctly, what you've done is you've deferred a payment that should have been made this year to the next fiscal year.
Mr Callahan: What I'm getting at is, if you slide the payment forward and you slide the revenues backward, I'd have to say you're attacking future revenues by collecting them now. Does that not create a difficulty for you? Does that not create a very unhealthy picture -- this may sound partisan -- for whoever comes after you, or if you people have to pick up the chips afterwards? You've got money now, you've deferred payments in your accounting to a period of another fiscal year, and it seems to me you've just created a very difficult situation for anybody to determine what's going on. Is that a rhetorical question nobody gets to answer?
Mr David Ezer: Let me try to answer your question about the teachers' pensions. First, I heard comments before about a $500-million saving. In fact, in the teachers' case it's only around $375 million. The $500-million figure refers to both plans, the teachers' and the public service's. In the case of the public service, we haven't received the evaluations yet and we don't know the size of the gains.
In the case of the teachers' plan, the idea here is that we have about $1.2 billion of gains and the government has three choices in the matter: (1) to reduce the unfunded liability; (2) to reduce the remaining special payments for the next 37 years; or (3), as the government chose, to use it as a line of credit to offset the special payments.
I should point out to you that the gains have been realized because of the current economic situation. Low inflation and low wage growths resulted in gains. The very same economic situation gave rise to the fiscal pressure, and it would make sense, one would argue, that these gains could be used to offset the special payments in the short term.
Mr Peters: To get back to the opening comments of Mr Callahan, one point for clarification on the rating services: They essentially rate the province's ability to repay debt and the interest on the debt. They have a very narrow focus in their assessment, and the rating is given for that purpose and no other purpose. In doing so, they prepare all sorts of reconciliations, taking a lot of this accounting into consideration.
Mr Peters: In that particular case, $584 million was to the teachers, but because the government had essentially been very open about this -- this item had been specifically identified already in the budget for the year ended 1993 -- it was known to the agencies. It had effectively no impact on the rating, because they knew right off the bat, way back when the budget was approved, that that's what the government was going to do.
Mr Sutherland: I don't really have a question. I just want to make a comment about some of the comments from the opposition about the books being consistent from year to year. I think it needs to be reiterated that priorities of governments change year to year and other activities change, so to say there must be complete consistency year to year is not understanding some of the changes that do occur and the differences.
Mr Sutherland: At any rate, my sense of the goal is to move to a more consistent standard with the PSAAB and what it wants and what it's looking for; keeping in mind, though, that even with provinces that have moved to that, not everyone has applied everything exactly based on those recommendations and that sometimes professional judgement has to be used.
Mr Callahan: Well, let me ask you. We understand that $700 million of the social contract savings in 1993-94 will be through a reduction in contribution to the teachers' and public service pension plans. I think Mr Phillips asked for an assurance from the government that this is a sound actuarial decision. Did he ask you that question in finance? Does that sound familiar?
Mr Callahan: Mr Phillips said we've yet to receive the requested assurance from the government that this is a sound actuarial decision. He was writing this, actually, to the auditor, and perhaps the auditor recalls it. He says: "As you point out in your report, the two funds had a combined unfunded liability of $11,780 million as of December 31, 1992. We need some objective assurances that the decision to reduce the planned payment by $700 million is correct. We're afraid that much of the social contract savings may in fact be simply putting off to the future expenditures that should be recorded in the present."
Mr Ezer: As I said earlier, the numbers for the public service pension plan are not available yet. All we know is the teachers' pension plan. The saving in the case of the teachers' plan in 1993-94 is $442 million. Now, whether this is sound or not, I can comment that three independent actuaries looked at the valuation, the actuary of the teachers' pension plan board, the actuary of the Ontario Teachers' Federation and the actuary of the government of Ontario. The three of them concluded that the method is sound, the assumptions are appropriate, the gains revealed in the actuarial valuations are reasonable in amount and the calculations are appropriate.
Mr Callahan: I'd like to go to what I think is really neat -- it sounds like Monopoly almost -- the sale of jails and courthouses. When and if you sell those, I guess it won't be you who will sell them. The realty corporation gets to sell them, does it?
Ms Stewart: There was a comment made in the general government committee when the Capital Investment Plan Act was being debated. It was in response to a question about the kinds of assets that may be sold to the realty corporation, and at that point the plans of exactly which assets would be sold were in the formative stages. I believe the response at that point was an expectation that something in the order of $500 million worth of a variety of property assets would be sold to the corporation and that those would include a wide variety of buildings. I believe jails were mentioned as well as courthouses at that time.
We're further down the road now in terms of exactly which assets will be sold, certainly in the current fiscal year, to the corporation, and there will be sales again in the next fiscal year. In terms of this fiscal year's package of assets, there are no jails in that list; it's concentrated on government office buildings, likely, and there will be some special-purpose buildings, including courthouses that are under construction now, as part of that transaction. At this point in time, there are no plans to sell jails to the corporation.
Mr Callahan: I'm trying to figure out how you get this on your books. When you sell an asset to this crown corporation and lease it back, how do you make a determination of what the lease payment will be, what the terms of the lease will be and all the rest of it? Is that an arm's-length transaction?
Ms Stewart: Those transactions are all being reviewed to ensure consistency with business standards in the competitive market that the realty corporation will be acting in. Certainly one of the main purposes of creating that corporation is to be able to create a value for those assets, because indeed in our current accounting environment and on our current set of books those assets have no value, and there is a concern that we may not be using those assets as cost-efficiently and effectively as we should be, given the lack of value.
In selling them into the corporation, they take on a value. The valuation process is an industry standard process. Valuations are done by external valuators. Once the asset's in and is part of the realty corporation, it will be essentially charging the government rent for the use of those assets. By incorporating that charge-of-a-rent system, which is much more a business practice and a standard that companies would use in the economy generally, we hope to encourage more efficient use of those assets, because indeed it's going to clearly cost a ministry for its best use of space.
Mr Callahan: I don't understand. You say that on the books of the province now it has no value, and then when it's transferred to a crown corporation it suddenly gets it. How does that happen? I'd like to know the secret behind that.
Mr Callahan: Yes, but if it doesn't have a value to the government now -- I mean, you're creating a value between a crown corporation and the province. Just because you set a value on it, why should it have any value when it's transferred there, when it didn't have any value on the government's books?
The Chair: Mr Callahan, you can continue with your questions. I just want to get a sense of the rest of the committee. I believe there are no further questions from government members or the Conservatives. Oh, Mr Jackson, you have indicated?
Mr Peters: There really are two kinds of transactions. One is if the asset is sold to realize a revenue stream, and potentially the capital investment corporations may very well be set up for that purpose, so that they can generate a revenue stream which the province can use to finance matters and to undertake other activities.
Basically, Mr Smyth referred to that this morning in his presentation on the capital. For example, on the Ontario Realty Corporation having land or property that's owned by the province, it's turned over to the realty corporation and, under the current setup, we get into a fairly fancy number of financial transactions. Actually, the land is technically sold by the consolidated revenue fund to the corporation: The corporation actually issues a cheque, borrows money to raise the cheque, and therefore revenue is recognized in the consolidated revenue fund.
Mr Peters: The crown corporation will have a debt to the province, to the consolidated revenue fund, which in turn has now a receivable and revenue from the sale and will recognize that receivable as the debt is being paid off. This is where the two matters come in that we have raised and that I think the ministry has raised with you as well.
One is the matter of consolidation, that these transactions certainly get netted out against one another once the transaction is consolidated with the consolidated revenue fund. The basis for this is that we maintain, and I believe there's agreement, that this was not revenue earned by the government at this particular point. Of course, when the land is sold to a third party outside the government, revenue actually is earned and the combined entity will realize such revenue, but as long as it stays within the family, it just is knocked out.
The other point to raise, and I don't know how the Ministry of Finance feels about doing it, is that in the transactions we have seen this far great care has been taken to establish the value of property, in many cases by getting appraisals and by actually going to third parties and finding a value. It's not a frivolous assignment, and I don't think you were implying that --
Mr Siddall: The only other comment I would make in that regard is that that value is included on that corporation's financial statements, and those financial statements are audited by the Provincial Auditor. The auditor, when he reviews those financial statements, looks at that value to make sure it's a reasonable value.
Mr Peters: Very much so, yes. In virtually all the assets, one of the aspects of the audit is actually to take a look at the value -- are they carried at the proper value? -- and any impairment is recognized. Conservatism dictates also that any gains are not recognized until we actually have a sale to an outsider.
Mr Peters: In the ones we have seen, the process has been that there have been a number of appraisers and a composite value is very often taken or the value is taken. Some rules are applied. If they are within a certain percentage of one another, they accept the average of the two values. If they are too far apart --
I don't want to take up time. I can always call Barb and get a further explanation of it, but certainly it may have implications for charging the tax if it's off to that corporation, depending under certain circumstances. I don't know if there are any revenue implications. Anyway, I'll leave that.
I wanted to ask a final question flowing from Mr Callahan's question with respect to Moody's. It's a question for the auditor. Have you at any time in the process of doing your audit had occasion to talk to those bond rating agencies? Have they ever had occasion to call your office to have matters clarified?
Mr Peters: To answer the last part first, they have not called our office directly. We certainly had discussions with them at the time we were discussing the impact of qualifying the accounts, because there was a concern on our part about whether there would be a disproportionate reaction to what we were doing, essentially an accounting matter we were dealing with at that time.
Mr Peters: More, it was really selfish on our part. It was a pre-emptive move on our part to determine whether a qualification of the opinion would cause reaction in those quarters. The word we had back was that no, any improvement in the accounting rules would be considered as a plus rather than a minus by them.
Mr Jackson: Mr Chair, I'll leave the final question for your consideration, but not response. It may be that this committee or another committee might be interested in talking to one of those agencies. It's not been done in the nine years I've been at Queen's Park, but it may be something we wish to do.
The Chair: Then I would like to take this opportunity to thank the officials from the Ministry of Finance. You've been extremely cooperative, and I would like to thank members of the committee. We are adjourned until tomorrow at 10 o'clock, when we once again have officials from the Ministry of Community and Social Services before us. Thank you very much.