[Recorded by Electronic Apparatus]
Monday, November 27, 1995
.1118 
[English]
The Chair: We have a quorum, so I will call to order this meeting of the Sub-Committee on the Business of Supply.
We have a special request from Treasury Board to consider a proposed change in the votes on the estimates. We have with us Mr. Hopwood and Mr. Miller from Treasury Board, and just to keep an eye on them, from the Office of the Auditor General we have Ron Thompson and John Hodgins. I was sure this committee would not want to deal with anything relating to accountability without hearing from the auditor general.
Mr. David W. Miller (Assistant Secretary, Expenditure Management Sector, Program Branch, Treasury Board): Thank you very much, Madam Chair.
We have a short deck I would like to take the members through, and part of it is context. I know the issue of votes and how Parliament approves them is something this committee will be looking at over the next while, so it's not a question of the exact relevance to this particular issue this morning, which I can characterize as aligning operating budgets with the way Parliament authorizes money, but it's important to get everything in context to make sure members understand that we're not talking about the larger reforms. This is a separate issue.
In the next ten to fifteen minutes I'll try to deal with a discussion on the existing system, the background on our current vote structure - again, just for members to understand - and the concept of operating budgets. I'll talk about some of the anomalies that have occurred since the introduction of operating budgets, about a proposal we have to try to rectify those and about the implications of moving along this way in terms of how information will be presented to Parliament after the changes we're proposing are enacted.
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On page 3, we talk about the current vote structure, which was adopted in the 1970-71 main estimates, where the original rule was one vote per program. A program was defined as ``a collection of activities with the same objective''. The idea here was that this was the first time we were looking at things on a purpose-oriented basis and moving them to results.
I think the interesting thing is that it was ruled at that time, because the types of government expenditure are different enough, that although it's one vote per program, if capital or grants and contributions exceeded $5 million for any program, then they would be placed in a separate vote.
So we have program A with capital of $3 million, with all of its capital included in its operating vote, and program B with capital of $6 million, with a separate parliamentary authority specifically for that $6 million. We have worked within that regime now since 1970.
Moving to page 4, we see that right now we have a little over 100 entities in the main estimates and 94 of those have now one program. Now, a lot of these are the smaller agencies, but there's also a significant number of major departments that only have one program as well. There are nine that have more than one estimates program or one program within the vote structure. That all leads to 195 budgetary votes for this year, for various purposes.
On page 5, then, based on the one vote per program, if we had gone to that, 1995-96 main estimates would have had 122 votes. That's just to give you the context. We still have those input controls, as I mentioned, separate votes for capital or transfer payments exceeding $5 million, and therefore we have 195 budgetary votes for this year.
I'll move on to page 6, where we talk about capital. We have a way of categorizing the kinds of things departments make or buy or do that lines up with the economic activities of Statistics Canada. That's really the fundamental basis. We aggregate those and, at the highest level, call them ``standard objects''.
Standard object 8 is basically the one that relates to construction and deals with land, buildings and works. In addition, standard object 9 is for machinery and equipment that costs more than $1,000. Just to give you a comparison, there's another one, standard object 7, which has the identical category of machinery and equipment, but costing less than $1,000.
So we now have an artificial line in what we call ``capital'' based on value. If it's under $1,000, it falls into one appropriation type. If it's over $1,000, it falls into a different kind.
There are other elements involved with this thing besides actual equipment that get rolled into capital - things like personnel costs. If you're building your own building, then all those costs in construction are included. It not simply the actual price of the construction materials. It's the total cost of building that.
When we look at the votes, then, on page 7, now we've moved to a range of having - and the totals here are important - 23 capital votes representing $4.8 billion of expenditure, and the average size. But in the last column where we talk about the percentage distribution of those expenditures, you'll notice that the four votes of $100 million and over, plus the four votes of greater than $200 million, account for over 90% of the capital expenditures of government. That's an important concept. We're not going to be affecting that with the kind of proposal we're talking about here.
That's the background on the vote structure. That's how we arrived today at where we are, and also the outline of the capital vote structure as it is for 1995-96.
Now to get to the issue for which we're really coming to the committee - and it's related - and that's the idea of operating budgets, which were introduced two years ago in order to really reflect a better management of the resources available within government and to departments. Although it was intended to provide greater flexibility, what it meant was that in the past, if you had a dollar's worth of salary, there were Treasury Board controls - not parliamentary but Treasury Board controls - that basically said that dollar's worth of salary had to be spent on salaries. You could not substitute that to buy printing, postage, equipment, anything else. Even though it was in the same parliamentary appropriation, there were very large barriers between the types of expenditures and what the departments and agencies could do with those funds.
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Operating budgets said that doesn't make any sense, especially with the kind of downsizing we have. Managers should be able to optimize their mix of inputs. They should be able to decide what's going on in terms of delivering their program, which is taking the money that's been approved by Parliament and providing the best inputs that will generate maximum value on the output side, which is the results orientation.
So instead of trying to spend every dollar on salaries, we should ask how we deliver that program and how best can we buy those services. Perhaps it should be from the outside rather than using public servants. Or substitute it for something else and provide managers with the flexibility to do that.
So we then include personnel costs, operating expenditures and minor capital in the concept of operating budgets. That's how it works.
There's one thing that was added. Again, it was to make managers better able to reach decisions in terms of timing. They were allowed to come to Treasury Board to receive authorization to include items in the following year's estimates to represent 5% of the value of their operating budget.
In other words, when you think of the kinds of expenditures that go into this.... I'd like to use a simple example that I've used for various members.
Say I'm a budget manager and I only have two things to do all year. The first one is to pay for my telephone. The second one is to replace a typewriter - it's technically worn out - with another typewriter.
I'm going to make sure I have enough funds to pay for my phone bill throughout the whole year before I go ahead and order that typewriter. Consequently a lot of the minor equipment and other things actually get ordered and purchased during the last quarter of the fiscal year.
The dilemma we used to have was that there was a delivery deadline of March 31. If the manager did not receive those goods or services by that time, he could not be paid out of the appropriations for the old year. You had to pay it out of the new one.
There have been various studies done by the auditor general over the years about whether this is a terrible thing, just a bad thing, or how we can adjust it.
This is one of the things we recognized. Let's give managers the opportunity not to spend the money this year. Instead, they'll come back and, through Parliament's authority, get the funds the following year. That's if, for example, those goods couldn't be delivered by March 31.
It also means that if something occurs - during downsizing, most managers realize that the budgets next year are going to be reduced by more than this year - you can do a bit of planning all within that 5% maximum.
So we still have a limit. We still know, within the context of the government's expenditure framework, exactly what the potential liability is from one year to the next. But it provides a lot more flexibility for individual managers as to how they conduct their own business.
The other thing, of course, involves what's indicated on the last line of page 8: ``Controlled capital established as separate allotment''. So those amounts of capital that did not fall within our definition of minor capital still are segregated by Treasury Board and cannot be used for other purposes.
Controlled capital would be large acquisitions, all construction, and all land purchases. All of those kinds of things are still separate. We call them ``controlled'' because there are limits on this. In a way, it's a misnomer: all capital is controlled. But from a central perspective in Treasury Board, we keep separate track of that.
So that's really how the operating budget worked. Those are the kinds of things that have been going for the last couple of years.
On page 9, we'll just talk for a moment about inconsistencies and anomalies. As I mentioned, departments that have less than $5 million of capital activity have all their capital funds in the operating vote already. They have had this since 1970. For those departments that have more than $5 million, it's a separate vote.
But that provides constraints. I think perhaps the best example is this. Say I'm a manager. Under the operating budget, I say we have to cut back. But someone has found a piece of hardware that costs $900, and I'll be able to replace that clerical function. So I'll be able to replace a body with a $900 machine. That's a good thing to do. Under operating budgets, I have the flexibility to go ahead and buy that $900 machine.
So then someone comes to the manager and says that was a good idea. That worked so well that if we just buy a larger machine of the same type to augment that first one, we'll be able to replace two more people. We'll be able to save an additional $50,000 or $60,000 in salaries.
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As a manager, I would have to say that this larger machine is $1,100 so I may have to go back to Parliament to ask for their authority to do that. That's because $1,100 crosses the line as to how we've defined a machine into ``capital'' as opposed to ``operating'', which is strictly for budgeting purposes. If I don't have the resources in that separate capital vote, then I would have to go back and get it again.
The opportunities for that to come to Parliament are obviously rather limited. So, quite honestly, the way this has been approached is that departments have said they'll manage operating budgets but not worry as managers about how that lines up with how those votes are created. It's only up to the financial centre of each department or agency to make sure sufficient funds are there to allow this to happen.
So we have an anomaly. A manager will say that a machine makes sense at $1,100, so he'll go ahead and buy it. Then he runs around to make sure that a sufficient authority exists, within the way Parliament is voting funds, for that to actually happen.
When we looked at Parliament and the kinds of things we're doing, we did not want to try to address this by raising the limits. These $5 million limits were established in the 1960s, almost. Obviously today they would be worth a lot more than $5 million, but given the work of this subcommittee and the working group that's looking at it, we did not want to touch the actual structure of the estimates.
But we did want to take the opportunity to realign how we defined capital and provide a better managerial framework for how these expenditures are actually incurred in departments and agencies. That would mean moving these minor capital items into the operating vote. The controlled capital would still be separate.
The last item on the page indicates that it's a temporary thing. That's because when we introduce accrual accounting, it will have a completely different regime for how Parliament approves the funding and how departments actually manage it against their budgets.
I think my colleagues from the auditor general's office will be just as pleased as I am to get a solution for how we're going to do that. We're hoping some other country right now will come up with a better way than what they've done so far.
That's something that was announced in last year's budget. We don't have the systems in place to allow us to even introduce accrual accounting until about 2000. So it's not a short-term project, but inevitably, over the next three or four years, there will be discussions on how that will change.
I'll go on to page 10, which is really the proposal. I've talked about most of these elements. It involves redefining the operating expenditures vote to include this minor capital. We have a second element - this was part of the discussion before the meeting started - which is a central vote for carry-forwards.
Perhaps I should explain. The supplementary estimates A this year are just going through the House. Last Thursday I appeared before the Senate finance committee on that. There were about 45 departments and agencies that included amounts that were part of their 5% carry-over from 1994-95 that they're rolling forward into 1995-96.
I had to tell the senators that this does not represent the total amount to which these departments and agencies were entitled. It does not represent all departments and agencies; there'll be another batch appearing in final supplementaries. Or, in fact, they may have deferred this until the following year if they expect the amount they're going to carry forward next year is not required.
One of the principal functions of supplementary estimates is to only ask Parliament for additional funding within the sources and authorities of that vote structure. That means there's an item that's been offset by Treasury Board or through a budget initiative such that, rather than going back to Parliament to ask for additional funds, we'll simply say we'll reduce the amount of money that we say is frozen in your original budget to allow you to go ahead for that purpose.
We do not have - I'm the first one to admit this - a very efficient or useful manner for reporting to Parliament what's going on in departmental budgets during the year. When we were discussing the revisions to the form of the estimates, that was one of the key elements we tried to build into that process. Certainly, the supplementary estimates do not provide us with that.
Say we can improve both information and accountability by lumping all of these expected carry-overs into one vote. So in other words - and we're suggesting it be in Treasury Board's estimates - we say during the year the government expects to have $700 million worth of authority originally provided in the previous year moved into the following year. What we would ask Parliament to do is then approve that maximum, saying you can have up to $700 million to take care of those things that were not accomplished during the previous fiscal year. By taking care of those, then what we would suggest is that the important thing now is to tell Parliament exactly how those funds are being used.
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We have to remember the main estimates come out in February. The final numbers for how much departments have spent are not available until July. The auditor general then has a good look at these kinds of things. Actually, the public accounts came out at the beginning of last week. Until the public accounts came out, we didn't have any numbers to report on last year. So it's very difficult to say that we can close the books early and provide information and estimates about how much is carried over.
We thought that if we had a final amount in, and then we had reports to Parliament either connected with supplementary estimates or other mechanisms, that would then say of the $700 million, here are the amounts that each department and agency are going to use on the basis of the carry-forward. So that was the idea that would allow us to provide better information at the same point, not necessarily having 40 or 50 small departments and agencies in the estimates to simply carry forward what amounts to a few hundred thousand dollars, in some cases, of authority that were unused from last year.
So that's on the table for consideration, and I'm taking every opportunity I can with any parliamentarians to talk about that to avoid surprises. But again, it's not really connected with the items we're dealing with here. It's just a separate approach to dealing with the 5% carry-forward.
I want to get back to the concept of realigning the operating budgets with the minor capital. We're hoping to do that for 1996-97 main estimates. We do not intend to look at re-evaluating the vote structure as part of the reform. Beyond that, and based on what this committee is doing, and also obviously with the introduction of accrual accounting, we'll have to be back to discuss with Parliament what that will mean once we have our own act together on that basis.
In regard to the last two pages, page 11 is simply what would happen after the realignment of minor capital into the operating budgets. We would end up with a total of 19 capital votes instead of the current 23. We would have capital controlled through separate votes as a total of $4.5 billion instead of the about $4.8 billion that was mentioned in the previous table. Again, the largest 7 votes in this case would account for roughly 90% of the government's total expenditures on capital. Those three points I really just highlighted on page 12 as being the major implications of this change.
The Chair: I'm going to start, because I think it would be helpful for you, Mr. Miller, to explain precisely - and maybe by referring to the more detailed briefing note - what you mean by minor capital. I think there are some problems there with how minor capital is defined. It just dawned on me - you're going through all of this for four votes?
Mr. Miller: The intention is not to eliminate votes. The intention is in the detailed briefing - and that's the best place to really look at it. There's an annex on the last page that really says.... My favourite example is the Department of Agriculture, since I used to be their senior financial officer. What this means for the change is that right now in Agriculture, vote 10 has a total authority of $103 million. Of that, $37 million amounts to minor capital, being those machines over $1,000, such as motor cars and all kinds of equipment used on the research stations. All those kinds of things are all included in there. The major capital, which would be what we call controlled, are things like building that new arm on the research station, or doing a computer project that involves a substantial investment of money - $2 million or $3 million. That would still be in controlled capital.
We do have a dilemma for virtually all departments and agencies, which this would correct. The ultimate impact of it would simply be a reduction by four votes in the total letter dedicated to capital.
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The Chair: What I'd ask you to do, David, is go back to page 2 of your briefing note so people understand clearly what the minor capital things are. Particularly under standard object 9, I think there's a great deal of confusion about what should be in major capital and what should be in minor capital.
I'm not sure why a major piece of military equipment that's going to be around for twenty years, and possibly longer if you look at helicopter history, gets in the same spending category as bullets.
Mr. Miller: That's an interesting point. There's a separate process under way, again, which the Office of the Auditor General is aware of and we're working on, called the financial information strategy, which is how the government will do its accounting over the next number of years. Part of that is a study of what we would call financial coding, how these things are defined and how they're categorized.
I'm not aware...I know there's a committee of bureaucrats meeting on that to talk about it, but I'm not exactly sure of the outcome.
The example you have used with Defence is interesting, because Defence considers all of their capital as controlled, so they do not use the concept of operating budgets in the same way as other departments do, mainly because procurement is done on a different basis. Tanks are bought for the sake of having a field of tanks until you need them, not necessarily for each manager to have one that they can roll around their office in.
The Chair: David, I'd appreciate it if you'd go over that page, because what you're asking us to do, regardless of what Defence's practice is, is to allow things like that to be included in the operating budget as minor capital items. If we want to pick a non-military one, for instance, I'm not sure an office desk should be in the same category as motor vehicles, airplanes and road equipment, which are really major investments and should be more heavily controlled in terms of life cycle management and a whole lot of other good things.
Mr. Miller: Perhaps I can start with a general statement; that is, what we're discussing today is the way in which the funds are authorized by Parliament. Is it a separate vote or do we consider it to be part of their operating budget?
Once you make that decision that says, all right, I'm going to buy that piece of major road equipment - suppose it's $50,000 - the asset and the management of that asset in terms of custodial, in terms of replacement, in terms of life cycle costing, all those other things that lead to good management are done regardless of how Parliament approved the money.
Those are all in place, so we do treat those kinds of things differently than an office table. No one goes back and says, well, we're going to simply throw the item out because it was funded under the operating budget, whereas if it had capital approval then we would have sort of expensed it over five years.
All those kinds of things are taken independent of the way in which Parliament actually authorizes the funding. We do have a set of rules and procedures, part of the trick we're doing when we move to accrual accounting, which is exactly how we treat those kinds of items. Accrual accounting assumes that if you have an asset like a major piece of road machinery worth $50,000...is it going to last five years? If it is, each year one-fifth of that - approximately, however we do it - should be charged towards the program, and that's the complicated part for us to then implement, how that kind of thing will be expensed against program costs.
At the same time, Parliament has to have a better mechanism than that to actually authorize the spending of funds in the initial point. So although we're moving the vote differently, we're not changing the way in which assets are controlled, inventoried, expensed, and all those other factors.
The Chair: I'm questioning whether it's a reasonable breakdown in terms of the vote between minor capital and major capital.
Mr. Miller: Right.
The Chair: Mr. Williams, please.
Mr. Williams (St. Albert): Thank you, Madam Chair. Are we going to have a presentation by the Office of the Auditor General?
Mr. Ron Thompson (Assistant Auditor General, Audit Operations, Office of the Auditor General): Ms Catterall and Mr. Williams, no, we hadn't planned on giving a presentation, but we'd certainly be happy to answer questions.
Mr. Williams: Thank you. My first question is not really related to the discussion, but you mentioned at the beginning, Mr. Miller, that grants and contributions are votes. Moneys that do not qualify for being a vote because they're less than $5 million are all lumped in with operating budgets, including grants and contributions. They could end up in an operating budget because the whole thing is less than $5 million. Did I understand that correctly?
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Mr. Miller: The parliamentary control for that is less than $5 million. Treasury Board still puts a separate allotment control on those items, even though it's within the same parliamentary appropriation. So they're still kept separately, but they're not approved by Parliament separately.
Mr. Williams: So when I looked at the estimates and found that we spend $10.9 billion in grants and contributions - that was actually a little short?
Mr. Miller: If you were only using the votes, yes, but if you were using the category at the front of the book that identifies these by type of transaction, it would be okay because that crosses the vote structure.
Mr. Williams: In a more serious vein, I am a little concerned with the proposal because I think we're trying to replace one artificiality with another artificiality. I also recognize that it is a measure of relatively short duration until such time as you move to accrual accounting, so I'm not sure what my position should be on it.
As you know, I have a serious concern about the erosion of the accountability of Parliament. I'm concerned about allowing minor capital expenditures to be lumped in with operating expenditures so that personnel costs, for example, can be replaced with small capital expenditures.
I've been thinking about how one should do this. I thought about the private sector, which has to operate under the guidelines of Revenue Canada and the Income Tax Act. There's no specific definition of a clear line between what is an operating expenditure and what is a capital expenditure in the Income Tax Act, except that if it provides a continuing benefit to the organization, it shall be deemed to be an expenditure of a capital nature.
Knowing that we are moving towards accrual accounting, should we try to align ourselves somewhat along the same lines as business has aligned itself. I think we should have within government the concept that if we make rules for the private sector, by and large they should also be appropriate for ourselves. Perhaps that should also apply to pensions, Madam Chair, but we'll leave that discussion for another day.
The Chair: We've had that discussion.
Mr. Williams: As the chair suggested, I think we should look at the allocation of bullets and tanks. The same vote structure would seem to be inconsistent if one thinks of how the private sector manages their finances - bullets being an expendable item and tanks, hopefully, continuing for a little bit longer. In the private sector, if you buy a single book it's an expenditure, but if you buy a library it's a capital expense. The same anomalies may arise in the private sector, but they have to work around that for taxation purposes.
I'm thinking that the problem lies in the definition of what should be included in particular books. How easily can that definition be changed? Does Parliament have to change these definitions?
Mr. Miller: Our intention with this was to come a little closer to the concepts that you've outlined, to put the consumables in the operating boat, which is not the case right now. I have to reiterate that the control of the assets and what we do with them, the custodial value and those kinds of things, tends to be totally different from and independent of the way Parliament votes on it.
One of the interesting things is the ability of a manager to substitute, whether or not it's capital. To be able to say that in order to achieve the program's objectives, I no longer need input X.... Let's say I'm trying for a certain result and input X - let's say it's personnel costs - no longer does it. I have to invest my money in equipment that can do the same function, rather than having people. I'll get a better result, it'll be cheaper and I'll be able to do all those things, but right now we have this anomaly where that may or may not be possible within a year.
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Mr. Williams: As I said, we don't want to create artificialities, and if there is some kind of similarity or parallelism between the vote structure and the accounting system, that would certainly be more advantageous than to have an entirely different set of books just to facilitate and to produce facts and figures for the books. I see this capital being included with operating as being an erosion of Parliament's authority and accountability, and it's not replaced with anything else, whereas if we were to re-examine the definition of what falls into a particular vote, I think it might be more appropriate.
If you take the situation of the computer that costs $999, which is an operating expense, but if the computer costs $1,001 it's a capital expenditure, and if you buy two computers for $999 it's a capital expenditure, but if two individuals in the same department each buy their own computer for $999 it becomes an operating expenditure....
Mr. Miller: That's correct.
Mr. Williams: That's what I call an artificiality.
To get back to Revenue Canada's perception of the situation, if it provides a continuing benefit to the organization, it is a capital expenditure. A lot of these artificialities disappear when we use that concept, because if it's $999 and provides continuing benefit, it's a capital acquisition. If you buy 10 of them, it is still a capital acquisition. So if we look at the purpose of the spending rather than building in these artificial lines that we have drawn - to say you fall on the left or the right side is not the appropriate thing.
I also think of Treasury Board's standard allocation of...``slush fund'' isn't the term. I'm thinking of something - -
Mr. Miller: Contingency.
Mr. Williams: Thank you. I knew there was a better word.
Mr. Miller: There is an operating reserve, but it's the contingency's vote that's approved.
Mr. Williams: Treasury Board has this contingency fund. It is about $400 million, as I recall.
Mr. Miller: That's correct.
Mr. Williams: It can accommodate a fair amount of small adjustments, within budget items. I'm concerned about accountability and one of the rules I've learned is that if you don't measure it, you can't manage it. Through the work of the auditor general we have heard about lack of accountability, where civil servants have been promoted even if though their project was a complete disaster. I would like to see more accountability in the entire system. Why can't we use Treasury Board's $400 million contingency fund to iron out these small inconsistencies in budget transfers?
Mr. Miller: One of the functions of the Treasury Board contingency vote is to provide interim funding pending approval of Parliament. There are very few items other than paylist that end up being a permanent charge to that contingencies vote. During the period of downsizing, however, the implications for the pay list item are substantial.
Members are well aware that the departure programs, both the early retirement and the early departure initiatives, come at a time when departmental budgets are being reduced. To a certain extent we're trying to assist departments in the costs of actual departure. In many cases a department will try to manage those up to a point, but then realize that because of how many people decided to leave, or because they made a decision at a point in time where something else was expected - we would use the contingencies vote for that, and that will be the predominant use of that money this year.
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We like to be in a position of providing Parliament with as much information as we can on what's occurring in other programs during the year. One of the things we have trouble with is that because all of the capital tends to be the minor stuff that we talked about, and the bulk of it is done in the last three months of the year, for management purposes it's difficult for departments to plan and to understand in time, because the final supplementary estimates have to be out of departments by about mid-January in order to be rolled together, presented to Parliament and approved by the end of March. So we have that kind of anomaly as well - it's difficult to roll in final information.
Mr. Williams: You are asking Parliament to kind of rubber-stamp various things on a pro forma basis, yet we're not seeing real accountability within management, where if things go wrong someone has to pay the piper. I think Parliament needs assurance that adequate controls are being maintained. This is why I come back to who has to be involved in changing the definition of what goes into a particular boat.
Mr. Miller: It's been so long since it was done, but that study I was talking about, the financial information strategy, and the review of the coding structure as part of that, will go into the redefinition of capital. That's exactly the kind of thing that you talked about. It will introduce accrual accounting, which will also help make that determination.
We are working with private sector accounting groups in order to establish government standards. In 1997, in line with your comment that if it's good enough for the private sector and for tax purposes, it should be good enough for government, they will come out with their assessment of how governments should account for assets.
There are obvious differences, but all of that work is being undertaken. It's all being geared towards the introduction of accrual accounting. We must have all those bits and pieces in place before we can ask Parliament to do it.
The Chair: Your time is up. In any case, I understand that you have another obligation in the House.
Mr. Williams: In order to keep the meeting going, Madam Chair, I can switch my speaking appointment in the House. I can stay for a little while longer.
The Chair: We could go ahead with questioning if you just wanted to go speak and come back.
Mr. Williams: They're going to arrange for another speaker.
Mr. Arseneault (Restigouche - Chaleur): The theme seems to be to give the management more flexibility with its operating budget. Is that correct?
Mr. Miller: That is correct.
Mr. Arseneault: And you're going to do that through the use of minor capital and the introduction of a global type of budgeting within the operating budget. In other words, transfers could be made between one line item and another line item.
Mr. Miller: That is correct. That's the regime they've had for the last three years now.
Mr. Arseneault: Would you include the minor capital in that regime?
Mr. Miller: Yes, and managers and departments have been operating that way in spite of the way Parliament has authorized the funds. I'm not saying that is a negative thing, I'm saying we told them that if they have a separate capital vote and they have minor capital, they should treat their minor capital as part of their operating budget.
It's the budget office that must make sure we are prepared to adhere to the primary role, which I emphasize is to stay within the limits authorized by Parliament. So vote structure is at the top of any discussion on this.
Every financial system in government is designed so you cannot make expenditures or commitments in excess of the amounts authorized by Parliament. It means an incredible amount of effort to ensure that those $999 and $1,001 computers end up being charged to the appropriate vote, and the implications of that for structure as it was approved by Parliament.
Mr. Arseneault: Does the system permit the transfer of funds from one line item dealing with personnel to the minor capital item and vice versa?
Mr. Miller: That is correct. Now it does.
Mr. Arseneault: Will it continue to be so?
Mr. Miller: Yes.
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Mr. Arseneault: With regard to the accrual accounting system, once that comes into place, your proposal wouldn't be necessary, I'm led to understand.
Mr. Miller: No, it would not be necessary at that point.
Mr. Arseneault: When would you expect the accrual system to...?
Mr. Miller: At least the year 2000. Well, I say that, but that's three years from now. So it would be at least three years.
Mr. Arseneault: With regard to the 5% carry-forward, has there been any evaluation of how successfully that program has worked? Actually, I was under the impression that the government was instituting it to save some money as well, but you gave me the impression that it's a very good tool for proper management.
Mr. Miller: It was designed not to save money but to instil a different behaviour pattern in managers. It has accomplished that.
Technically, if I have a budget of the same level and I lapse 5% this year, use that 5% at the beginning of next year to complete my intended purchases, and lapse 5% again at the end of next year, I have no impact on the overall spending. From a planning perspective, I used the money I had for the original intended purpose.
With regard to the actual impact on the departments, we did an assessment of how departments and agencies viewed this, and there were quite interesting results.
Unfortunately, when we brought this in, there was the overriding consideration of dealing with the implications of the program review reductions. So most managers were setting aside money for that rainy day the following year when they had to live with a much smaller budget and had to make these kinds of departure costs as well.
Yes, it has provided a different range of incentives for managers, and we're quite encouraged by that. They now think differently. They no longer think life ends on March 31 for a budget. They can make decisions knowing that those funds will essentially be available to them.
Mr. Arseneault: But is there not also less accountability for that 5%? Does it seem that the 5% is almost forgotten? Is there more flexibility rather than less accountability? In other words, of the funding earmarked for this year - year one - you're transferring 5% to year two, and then it gets lost - I shouldn't say lost - in the shuffle. Would the manager really have far-ranging flexibility to do whatever he wanted with that 5%?
Mr. Miller: He would have no more flexibility than he had in the year in which the funds were originally appropriated. So whatever the manager wanted to do with those funds during the year, as long as that authority continued from Parliament, could be done again.
But I think it's important to look at this initiative from the aspect of a single manager who has the responsibility for a budget of, say, $3 million. The mix of inputs there is between salaries, operating, and the minor capital....
Knowing that a portion of those funds.... If plans don't actually happen, if I can get that money back in order to achieve those things in the following year, and if I can get Parliament to authorize it again in order to complete what I wanted to, I'm no longer restricted by how much is done by March 31. You are still, technically, if Parliament doesn't approve any funding again. But for budgeting and planning purposes, you can say those funds are out there somewhere. I can then say to that computer....
I used to get phone calls. One of my great joys from being a senior financial officer was the year I got a phone call from someone who asked whether I was planning to do some computer purchases in January. I said we were planning to. He said he could give us a whole side of computers. He said they were great, they were on standing order with government, and he could guarantee delivery by March 31. I said I didn't care whether he could deliver them by March 31. I wanted to make sure the price was the best I could get and the product was exactly what we wanted in line with our direction and the objectives of the whole department. That person was shocked. It was the first time he had heard that deadline was gone.
So it really does influence and affect the kinds of decisions that are made. In the past there was scrambling to use the money up to relieve pressure on the following year and those kinds of things if you knew that one-year programs weren't going to be completed or one-year purchases weren't actually going to be shipped by March 31.
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Mr. Arseneault: Has there been any work done on redefining capital or specifying in more specific terms where their funding lies, the amounts involved, plus a definition of what falls into capital?
Mr. Miller: What's interesting is that, yes, there are several things going on in conjunction with what Mr. Williams was commenting on with respect to this financial information strategy. I'm not exactly sure where they stand.
Part of it is that we're waiting for the private sector advisory committees from the CICA to set up their standards - and John and Ron may know more about that process - but we're waiting for them to tell us what they think we should do. So we're sort of still in that mode, based on their extensive experience in dealing with accrual accounting.
The dilemma we have for parliamentarians and the difference between the private sector...is that when you expend something over a number of years and say, okay, this is worth $100,000 but we should use it over five years, for tax purposes we only get rid of $20,000 in that first year, but for borrowing purposes it cost us $100,000 up front. And Parliament is still going to be very interested in the borrowings of government and is still going to take that into consideration.
So we have a double whammy. We have costing of the program on the basis of generally accepted accounting practices, and perhaps maybe in line with how National Revenue does it, and we have total borrowings, which will be a totally different number. We'll have to deal with Parliament in trying to facilitate an understanding of what the money is being used for.
Other jurisdictions that have tried to do this have run into this dilemma. On the one hand, you're justifying the cash and the requirements; on the other hand, you're talking about program costs and outputs that relate to the current costing of that program for a particular year.
So that's the major dilemma we have, and hopefully we'll get some recommendations out of these reviews that are going on.
But perhaps one of these gentlemen -
The Chair: Yes, I was about to suggest that perhaps we should.... You can start, in any case. Perhaps we should hear from the people from the Office of the Auditor General.
The question I would ask you to address on behalf of the committee is whether this step improves Parliament's control and its ability to exercise accountability or diminishes it.
Mr. Thompson: Ms Catterall, in terms of whether it would improve or diminish parliamentary control, as I understand it, the focus of the proposed change is more as Mr. Arseneault suggested, at the administrative level. The people are trying to make it easier to manage the departments and agencies within government, as opposed to enhancing parliamentary control over what the departments do.
So I would say it's a bit neutral on parliamentary control, but, mind you, I'm speaking as an auditor, not as a parliamentarian.
As I listened to the discussion, it seems to me the big game really, and the big task, is to somehow switch accountability from trying to control inputs to running government, to getting a focus on outputs and outcomes - in other words, what we are getting for the money we're spending. It's to have the bureaucracy focus more on that, and also provide information so that members of Parliament can better focus on that.
That's the really big change. If that could be brought about, then that would greatly strengthen accountability of the government to Parliament.
Does this affect that? I would suggest no. A consequential change to focusing on outputs and outcomes might be what we spoke of a little bit earlier: getting the accounting more in line with reporting results.
That would mean some move towards some form of accrual accounting from the kind of accounting we have now. Accrual is defined in this sense as trying to account for the use of resources during a period of time as opposed to accounting for the acquisition of resources over that same period of time.
So I would say it's a bit neutral, there's a bigger challenge, and that is somehow getting a focus on results.
Could I just comment a bit on what the CICA is doing on the physical asset issue? That was raised.
I have served for some years on a task force of the public sector accounting and auditing board of the Canadian Institute of Chartered Accountants. That task force is trying to evolve for federal and provincial governments how they should best account for and report their physical assets - in other words, the capital we're talking about today.
We're hoping we will be able to come up with what's called an associates exposure draft in the next couple of months. Probably we'll have final guidance from the CICA through the public sector accounting and auditing board early in 1997. That is our hope. After an associates exposure draft, there would then need to be a formal exposure draft to all Canadians and interested people. The results would be considered and guidance offered.
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So there is some good thinking coming from the Canadian accounting profession, from the CICA. As I see it now, it's quite consistent with what the government is thinking to do in moving to full accrual accounting as a consequential change, an accounting change, in trying to get the focus away strictly from input and more to outputs and outcomes.
The Chair: Okay, I guess my question was why was this issue brought to the procedure and House affairs committee rather than to public accounts, and why is it tight timing? I mean, I can't imagine you just starting working on this last weekend, guys.
Mr. Miller: Perhaps one of the things we were trying to do was to assess the implications of the operating budget I have alluded to. We only really started this based on the 1993-94 fiscal year. So 1994-95 was the first year in fact that the departments had the opportunity to carry over these funds.
That was done through a whole series of submissions and final supplementary estimates last March. We then moved, and had a whole bunch of them in the first set of supplementary estimates for this fiscal year. These are currently before Parliament.
The view is that this thing works so well and it seems to be such a good thing from everyone's perspective that we were left with the one anomaly. Somehow Parliament is still appropriating funds on a different basis from the one established 30 years ago. But we're not changing that fundamental principle; we're just trying to realign the amounts.
So my fear is.... It's not come up very quickly, but in actual fact we're moving to how it operates, to an assessment after the first year of implementation, based on a review of two years' worth of exposure. And now we are coming to parliamentarians to talk about how we can do that best.
Whether or not we go through public accounts or the group of which this is a subcommittee is really based on information.... We're sort of told, if you're going to do something like this, then you should go through this committee. This comes from the Privy Council Office or whatever, and it's a question of who's interested in it or the kind of change involved.
So it wasn't that we set out on a course and said, we're not going to go to public accounts. We take every advantage to talk about these things in front of parliamentarians, but we considered that the procedure and House affairs committee was the most appropriate vehicle for this kind of change.
We certainly wanted to stress the fact that there was no confusion between this particular initiative and the work this subcommittee is actually tasked with, that is, reviewing the supply process and changing that.
So that was our real reason for coming to clarify that. We didn't want any misconceptions about exactly what we were trying to do.
The Chair: This is only a minor point, but my recollection is that a carry-over of 2% was allowed several years ago.
Mr. Miller: That is correct. The carry-over of 2% was started, and then it was raised to 5% for 1993-94.
The Chair: It isn't just in the last year that the carry-over has been allowed. That is what your comments seemed to suggest.
Mr. Miller: No, 1993-94 was the first year at 5%, and I don't believe we actually had a full year at 2%.
The idea was brought in, and before the end of that fiscal year, it was decided to move it to 5%, because 2% just didn't provide enough flexibility to affect people's decision-making.
The Chair: I have a concern. With all respect, buying two or a half-dozen computers is a minor capital expense, but a major information technology program is not a minor capital expense.
As Treasury Board and departments move forward, is there some thought being given - and this probably does impinge on our broader mandate as a subcommittee - to differentiating between capital expenditure and a major capital project, for the information of Parliament?
Mr. Miller: Although there is some other delegation to some of the bigger departments that have much more expertise in this area, any project right now that is basically over $2 million will be in that controlled capital and therefore subject to a separate capital vote.
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Assume the overall amount is $5 million, because that's the original rule. So if you only had a $2 million project, it would be controlled capital, but it would not be in a separate vote.
But, for example - let's be realistic - you could have a major capital acquisition or system development that was $20 million. If a department did not have a separate capital vote because of the change we're talking about today, they would when they implemented that.
In fact in one of the discussions we look at anomalies. A department that in its capital vote structure only has about...most of their minor stuff would move to the operating budget alignment.
I spoke to them about having a $6 million capital vote. That would only be the one project left in their capital that would be in a separate vote.
They had no problem with that. That was run as a distinct project. There was no realignment between that project and what was going on with the capital acquisitions that fall under the operating budget. That was normally the kind of equipment individual managers would have.
That distinction would remain until we moved to accrual accounting, at which point we'd look at the whole definition again.
The Chair: I'm wondering as well about the procedure. What approvals do you need? Is it simply an administrative matter to change the vote procedure?
I'm sure PCO must have informed you -
Mr. Miller: To change the vote procedure?
The Chair: To change what is allocated to the different votes.
Mr. Miller: They were suggesting this would be done through a motion from the procedure and House affairs committee that would go to the House.
The Chair: A motion to the House to do what?
Mr. Miller: To align the operating budgets with that which would move minor capital -
The Chair: A motion is normally to change a piece of legislation, the Standing Orders, or some such thing.
Mr. Miller: In fact, there wouldn't be any of that. Technically to approve this we're not changing any legislation. We are changing a tradition of how Parliament looks at the expenditures, but nothing more than that.
So it is a tricky thing. Since we haven't done it in 30 years, it's not something with which we have a lot of experience, unfortunately. I don't pretend to be an expert in the procedures themselves, but I understood this was the most appropriate mechanism.
The Chair: Parliament doesn't normally just pass motions. The other tradition we do have is not to change the way Parliament does its business unless there's substantial consensus among the different parties in the House.
So to a large extent Mr. Williams' view is going to count largely here, as are everybody else's views. The discussion with the procedure and House affairs committee is also going to count a great deal.
Mr. Thomas C. Hopwood (Director, Expenditure Management Sector, Program Branch, Reform of the Estimates, Treasury Board): On the question of timing, you raised the question of urgency. The only urgency is the fact that Parliament will be sitting for another couple of weeks and then not returning until February.
If we do want to implement these changes for the next fiscal year, we have to let managers know fairly soon that they could start thinking in these terms. Right now the need to try to maintain basically two sets of books is viewed as something of a continuing irritant for them.
Maintaining two sets of books is an irritant in terms of how they actually manage, and then in terms of reconciling this with the parliamentary control system. With downsizing and budget pressures, they've been asking whether we can eliminate as many of these irritants as possible. With the staff reductions it's now starting to come to a head.
We've been asked by departments to try to do whatever we can to resolve some of these administrative irritants. We were advised by Privy Council that we should let Parliament know that we want to do this.
The Chair: The main concern I have heard here in fact is that the definition of minor capital is a little broad, to assure Parliament that it's really ``minor capital'', that it's being moved into the operating budget.
Mr. Hopwood: The definitions explained in the report talk about the fact that any major acquisition, any construction project, would be considered as a part of controlled capital. The focus of the initiative is to move those smaller items, those consumable items, into the operating vote to allow....
The example I was using is that if you're buying $1 million worth of pencils and $1 million worth of paper, and the sum total of all those odds and ends is more than $5 million, you end up with a separate capital vote. It constrains you in your capacity to -
The Chair: But if you're buying $1 million worth of tanks or airplanes, the same thing happens. We would not disagree that there's a substantial difference between those two things, and I think that's where the dilemma is coming from.
Yes, Mr. Williams.
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Mr. Williams: To get back to my question of before, what does it take to change the definition of what goes in particular votes? Are we as hazy on that as we are on the procedure to follow on what we've been discussing so far? I don't think these standard objects are laid down in the Standing Orders, or legislation, or whatever.
So the point, Madam Chair, just made about the fact that.... The government uses a lot of paper, but paper is a consumable item and therefore it's an operating expense. If you buy 3 sheets or 300 million sheets, it's still being consumed and would normally be expensed as an expenditure upon purchase. But to buy a tank or an airplane, of course, that's entirely different because we have, certainly in the private sector, come to recognize the difference between assets that provide benefits on an ongoing basis and acquisitions or purchases that are consumed.
But I do have a real concern about the diminishing accountability by Parliament, because it is not offset, in my opinion, by increased accountability elsewhere.
We are talking here also, on page 10 of your report, about the central vote for carry-forwards. If I understand you correctly, Mr. Miller, what you are proposing is that in the main estimates there would be perhaps a percentage of the total estimates or the total estimates of the previous year of some hundreds of millions of dollars that would be included in the main estimates as part of the Treasury Board's estimates, which would be deemed to represent the carry-forwards from the previous year. But we don't know at that point in time how much they are and which departments are doing the carry-forwards, and if I'm correct, you are also suggesting that Parliament later on would receive a report as to which departments actually had the carry-forward. Am I correct in saying that?
Mr. Miller: That's correct.
Mr. Williams: But we would be approving a pro forma amount or a deemed amount in the Treasury Board's estimates to set up another something, not that dissimilar to a contingency fund. The minister of Finance had $2.5 billion of contingency funds built into his last budget, so now we're up to billions of dollars being into contingency -
Mr. Miller: Excuse me, sir, that would actually replace part of that contingency fund we have in the framework and would then be presented to Parliament as a main estimate. So I agree with you in principle, but you're right in that point, that $600 million or $700 million of the amount in the contingency that the Minister of Finance has set up is actually for the carry-forwards, and now that would be presented to Parliament at the beginning of the fiscal year.
Mr. Williams: Okay, I just feel we're getting contingency funds, additional funds, just-in-case funds, and funds to cover us off in the event of some unanticipated eventuality, that Parliament is getting into just approving a pro forma type of statement that then allows people to go hither and yon spending money as they deem fit, without accountability. I'm not saying it's being spent irresponsibly, but Parliament seems to be losing its control into the basis of allocating global funds without saying this is what the money is to spent for.
I understand we should not be micro-managing government; that's not our role. But it has not been offset by increased accountability of somewhere else. Therefore, I do have, Madam Chair, some serious reservations about what is being proposed.
The Chair: Mr. Williams, we have a couple of options here today - and I realize that you have to leave very shortly and that once we lose you we are not able to make any decision whatsoever.
So as I see it, we have to report back to the procedure and House affairs committee. We can either recommend that this proceed and be reviewed by this committee in terms of its implementation, that it proceed with conditions, or that it not proceed. I'd certainly like first to ask our clerk if she has been able to clarify with respect to the proper procedure here. I can't imagine the House adopting a motion on it. I can imagine that the procedure and House affairs committee could make a report to the House confirming that it has been informed and does not object to this change in process, or vice versa.
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The Clerk of the Committee: Yes, after consultation with staff, I think. A motion would not be in order because it requires a decision from the House and the House is not well enough informed to make a decision. So it would be between you and Mr. Milliken to decide what should be done, perhaps in the form of a letter to the President of the Treasury Board.
The Chair: Okay.
Mr. Williams: I'm sorry, I couldn't hear.
The Chair: We're clarifying the process, and a motion to the House probably would not be appropriate because the House wouldn't have the information on which to make a decision, and there's really no decision it has to make, in any case. So it could be as simple as a letter from Mr. Milliken, as chair of the procedure and House affairs committee, expressing the views of the committee. Alternatively, it could be a report to Parliament informing Parliament that we considered this matter and have come to this conclusion and so advise the President of the Treasury Board.
Mr. Williams: I have a final question for the witnesses.
Mr. Miller, have you examined other potential ways of addressing this situation such as, as I said, changing the definition of the standard objects?
Mr. Miller: Yes, we have, and as Mr. Thompson pointed out, we're waiting for the results of the review by the private sector experts in this matter before proceeding on that basis.
We've had the current structure, give or take, for 30 years, and we felt that if we could do a little minor tinkering at this point then we could spend the time to fully assess what amounts to a complete change in both the way funds are allocated and budgeted and the way the accounts are kept within government for capital assets. We thought this would be the one thing we had to do in this area that would allow us then to move and fully review and implement the recommendations of the various groups looking at the redefinition of capital assets.
The Chair: I would like to ask Mr. Miller a question that may help us to resolve this.
If there was general agreement to proceed with this on a trial basis, how would you propose to inform the House through the Standing Committee on Procedure and House Affairs as to how well this has worked?
Mr. Miller: I think one of the other interesting things that has come up is that on the general review of the estimates there was a lot of concern about how we go about informing parliamentarians who aren't actively involved with the process about what's going on. It was also recommended there be some kind of report from the committee, again not on the results of the review, just the fact that it was going on, just to let people know who haven't had an opportunity.
Tom and I spend a large portion of our time trying to talk to parliamentarians on these things, but inevitably we're not going to get to as many groups as we have to. There's no problem with the committee itself asking for reviews, evaluations, assessments, or anything like that. Obviously, we'd be happy to comply with any request for additional information or subsequent understanding of how this is worked, or what implications -
The Chair: What are your plans within Treasury Board in terms of how to assess what its results have been?
Mr. Miller: What's interesting for us within Treasury Board is the fact that departments have been using this for two years. The anomaly we had is for individual managers. We've almost said: don't worry about which vote the money is in; treat this as an operating budget. It's only what I would call the financial operations of each department that then has to worry about how those line up with the ultimate accountability, which still is parliamentary votes, and this has made this difficult.
So we're not looking at this as a change in anything other than helping those poor individuals who are tasked with ensuring that Parliament's wishes are respected make sense with the way in which fundamentally individual managers are now making their budgetary decisions.
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It's assessed as a success in the first year. The only anomaly that was seriously raised was this problem in terms of having potentially separate votes involved in it, although it's not really equitable because that's a problem for a department with more than $5 million in capital and not a problem for one that has less.
Some departments like DND did not want to roll minor capital into their operation budget, simply because they treat capital totally separately. It's a different function and a different review, and the capital doesn't have the same sort of substitution effect as it has for many other operational managers.
The Chair: Okay, I'm in the committee's hands at this point. It's now 12:30 p.m. - and I know you have a time line, Mr. Williams. I'll take any proposals from committee members.
Mr. Williams: I understand the desire of the witnesses to get an early decision on this situation, but I don't think we're ready to make that decision at this moment, Madam Chair. When is our next meeting?
The Chair: We have our round table on November 30 with the academic representatives. We could meet after that on this specific issue. That's one possibility. We could set another meeting for next Monday in approximately the same timeframe.
Mr. Williams: I'll have to check with my office. I'm not sure if I'll be here next Monday.
I don't want to rush into this, Madam Chair, and as you know, I have some serious concerns.
We've been living with this for two years. We know the situation is going to be changing three years hence, or approximately three years hence. That doesn't mean to say we have to put managers through unnecessary hoops for three more years, but I think for this particular year we should continue in the way we have. I'm concerned about these ad hoc changes without real consideration.
As I said, over the years Parliament has lost control of the public purse and this is one more step along the way. I want to see that arrested, and I'm not in favour of entrenching the status quo. I want to see change, I want to see it work, and I want to see it work well. But if we allow this one to go forward when we're talking about the other changes within the context of all these additional contingency funds being set up and pro forma ideas being voted on in Parliament, and capital expenditures ending up being operating expenditures, and we allow going and buying capital equipment without any offsetting benefits per se on the operating side.... If we're making capital expenditures to buy computers, maybe there should be some downsizing on staff on top of the normal downsizing. Are these types of measurements being made? We don't know.
The Chair: Yes, they are in that particular case.
Mr. Arseneault or Mr. Malhi, have you any comments?
Mr. Arseneault: Well, the indication from Mr. Williams is that he's not prepared to make a yes decision today but he is prepared to make a no decision today. I say to him that maybe in all due fairness, if we're is not prepared to say yes today, we shouldn't be prepared to say no either -
Mr. Williams: I agree with that.
Mr. Arseneault: - and we should take some time to reflect.
I'm of the opinion that if we can see fit to approve the proposal here, not today but in due time, then we should have a look at it in a serious way. There are possibilities there. It's a reasonable proposal.
The Chair: Okay, given the apparent views of the committee and our tradition of making this kind of change with respect to the responsibilities of Parliament only with some consensus, I think we should give Mr. Williams the time he needs to satisfy himself that this is a reasonable change.
I would therefore propose that we defer it to a future meeting, which will be - and I will leave this to the clerk to organize - either at the end of our round table discussion on Thursday when we would allot a certain period of time for this, or we'll set a separate meeting for this time slot, possibly next Monday. She'll confirm with your offices as to your availability.
I would also suggest that I report to the procedure and House affairs committee tomorrow morning on our discussion and how we're proceeding, if that's agreeable.
Mr. Williams: Are you going to get some direction from procedure and House affairs as to how we should actually proceed?
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The Chair: I think we pretty well have that now. We know it's a simple question of the committee, through its chair, informing the President of Treasury Board as to its views.
I think I'll discuss with the chair of the procedure and House affairs committee whether he feels there should also be a brief report to Parliament, just for their information. We'll clarify that before tomorrow morning. My intention would be just to report that we've held this meeting, that there's not complete agreement on the committee, and that we've decided to consider it again at a meeting within the week.
I'll adjourn the meeting. Thank you.