Opening Statement to the Standing Committee on Human Resources Development and the Status of Persons with Disabilities

Bill C-2, an Act to Amend the Employment Insurance Act, and Chapter 34 of the December 2000 Report: Lack of Clarity on Basis Used in Setting Employment Insurance Premium Rates

Mr. Chairman, thank you for this opportunity to appear before your Committee to discuss Bill C-2 in relation to our audit observation on the lack of clarity of the basis used in setting Employment Insurance (EI) premium rates.

I have with me Nancy Cheng and John Hodgins, two Principals from my Office. Mrs. Cheng worked on the financial statement audit of the EI Account; Mr. Hodgins worked on the audit of the Public Accounts of the Government of Canada.

Bill C-2 contains several proposals. In particular, clause 9 proposes to suspend the existing process for setting EI premium rates. It would give the Governor in Council full authority to set rates for 2002 and 2003, on the recommendation of the ministers of Human Resources Development and of Finance.

The audit observation that I reported to Parliament early last month addresses the setting of premium rates and the balance in the EI Account. With your permission, I would like to briefly discuss three points:

• the nature of the balance in the Account and the related accounting treatment;
• the concern that we raised in our audit observation; and
• the impact of Bill C-2 on our observation.

To start Mr. Chairman, it is important to clarify the nature of the balance in the EI Account. We have used terms like "notional account" and "tracking account" to help explain that the balance of about $35 billion in the EI Account does not represent cash sitting there to be used. There is no separate bank account. The Employment Insurance Act requires that an accounting of EI revenues and expenditures be kept. The balance provides a basis for managing the Account so that, over time, it breaks even.

There is also the question of consolidation. As you know Mr. Chairman, since 1986 the activities of the EI Account have been included in the accounts of the government, or as accountants would say, consolidated with the government's general accounts. In our view, this is the correct method of accounting as it is consistent with the accounting standards of the Canadian Institute of Chartered Accountants. The EI Account is an important component of the government's reporting entity and should be included in the government's accounts. As a result, any surplus in the EI Account would be added to the government's annual surplus. Over time, if the Account were to break even as contemplated by the Act, its inclusion in the government's accounts would have little effect.

In recent years, the growing surplus in the Account has helped reduce the government's net debt and contributed to its annual surplus. During that time, the EI surplus balance has been credited with interest revenue from the government's general accounts.

Mr. Chairman, this brings me to the concern that I reported in the audit observation.

The Act requires that EI premium rates be set to ensure enough revenue to cover program costs while keeping rates relatively stable over a business cycle. Although the Act provides no specific interpretation and definition, the Account should break even over a business cycle. The Account's accumulated balance would be a relevant and important factor in determining the premium rates.

To help achieve those objectives, the Department's Chief Actuary prepares annually an actuarial analysis to support the rate-setting process. The Canada Employment Insurance Commission, with representation from employers, employees and the government, sets the rates. The rates are subject to approval by the Governor in Council, on the recommendation of the ministers of Human Resources Development and of Finance.

However, in recent years the balance of the Account continued to grow, until it greatly surpassed the amount considered enough by the Chief Actuary.

I started drawing attention to this situation in my auditor's report on the financial statements of the EI Account, first in 1999 and again in 2000. In our recently tabled audit observation, I reported that the balance at 31 March 2000 reached $28 billion, far higher than the maximum the Chief Actuary considered sufficient. He estimated that a reserve of $10 billion to $15 billion, attained just before an economic downturn, should be enough. The Chief Actuary estimated that setting the employee premium rate between $1.70 and $2.20 per $100 of insurable earnings would meet long-term costs. Nonetheless, the employee premium rate for 2000 was set at $2.40.

It is possible that other factors or assumptions entered into the setting of premium rates. In my auditor's reports and the audit observation, I urged the government and the Commission to disclose all the factors they considered in setting rates. In my view, transparency is necessary to give Parliament assurance that the intent of the EI legislation has been observed.

In the meantime, the balance of the EI Account has continued to grow and will likely exceed $35 billion by the end of this month. At that level, I would be hard pressed to conclude that the intent of the law has been respected.

Mr. Chairman, let me now turn to Bill C-2. It essentially reintroduced the legislative changes proposed in Bill C-44, tabled in September 2000.

We referred to Bill C-44 in our audit observation. It provided for the Governor in Council to set the employee premium rate for 2001 at $2.25 per $100 of insurable earnings and to set the rates for 2002. The Bill's explanatory notes stated that the government would review the process for setting premium rates and would complete the review by 2003. With the fall election, Bill C-44 died on the order paper and the Canada Employment Insurance Commission set the premium rates for 2001, as required under section 66 of the Employment Insurance Act.

Clause 9 of Bill C-2 proposes to suspend the existing process for setting rates and have the Governor in Council set the rates for 2002 and 2003.

The introduction of Bill C-2 has not alleviated our concern.

There is no requirement for the interim rate-setting process to be more transparent. There is also no reference to any due process that needs to be followed - one that may include receiving advice from the Chief Actuary and consulting the Commission.

Furthermore, unlike the introduction of Bill C-44, there is no information on, or commitment to review, the rate-setting process while section 66 is suspended. In other words, the scope and nature of the review, if any, are unclear.

Even if this does not refer directly to Bill C-2, I would like to mention our observation dealing with abuse and suspected fraud in the EI program (pages 34-10 to 34-17, December 2000 Report). The abuse involves some employers issuing false Record of Employment forms to employees or other individuals so they can obtain EI benefits. Both departments have known for many years of the abuse and suspected fraud relating to false Record of Employment forms in British Columbia. HRDC and the CCRA need to implement an action plan that adequately deals with this problem and that plan could include legislative changes. This outstanding issue may be of interest to your Committee.

That concludes my opening comments. I would be pleased to answer any questions that the members of this Committee may have.