Opening Statement to the Standing Committee on Public Accounts

Human Resources Development Canada and the Canada Employment Insurance Commission— Clarity and improved transparency needed to demonstrate compliance with the Employment Insurance Act in setting premium rates
(Chapter 13 - December 2001 Report of the Auditor General)

Mr. Chairman, thank you for this opportunity to appear before your Committee to discuss our audit observation on the issue of setting Employment Insurance premium rates.

I have with me Nancy Cheng and Yvon Roy, the Principal and the Director responsible for auditing the 2001 financial statements of the Employment Insurance Account.

In December 2001, I reported my concern about the erosion of parliamentary control over the way the government raises and spends money. The examples I used included Employment Insurance premium rates, Downsview Park, the Canada Foundation for Sustainable Development Technology, and the initiative to provide relief for heating expenses.

Today, Mr. Chairman, I will focus on the growing balance of the EI Account and the process of setting premium rates. The premiums amounted to $19 billion for the year ended March 31, 2001, but I was unable to conclude whether the setting of the 2001 premium rates observed the intent of the Employment Insurance Act.

For the last three years we have drawn attention to this issue in the auditor's reports on the EI Account financial statements. We are still concerned about the growing balance in the Account: $36 billion at the end of March 2001. As you know, that balance was far higher than the maximum the Chief Actuary of Human Resources Development Canada considered sufficient. In his last report, the Chief Actuary estimated that a reserve of $10 billion to $15 billion, attained just before an economic downturn, should be enough. Without an adequate rationale for the size and growth of the Account balance, I was not able to say that compliance with the intent of the Act had been demonstrated.

There have been many discussions about what the balance in the EI Account represents. We have used terms like "notional account" and "tracking account" to describe the balance. It does not represent funds set aside for the EI program, and it is not held in any separate bank account. The Act requires that an accounting be kept of EI revenues and expenditures. The balance provides a basis for managing the Account and it should be an important factor in setting premium rates so that, over time, the Account breaks even.

There is also the matter of consolidation. Since 1986 the activities of the EI Account have been included in the accounts of the government — as accountants would say, consolidated with the government's general accounts.

In our view, this is the correct method of accounting and it complies with accounting standards for government as promulgated by 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. This means that any excess of EI revenues over expenditures in the Account would be added to the government's annual surplus. Indeed, in recent years the growing balance in the Account has helped reduce the government's net debt and contributed to its annual surplus. For last year alone, the excess balance in the EI Account increased government's annual surplus by about $8 billion. If the Account breaks even over time, including it in the government's accounts will have little effect. The setting of EI premium rates is an issue of financing, not accounting.

The Employment Insurance Act sets out provisions for setting EI premiums. Those provisions were suspended by a recent amendment to the Act. The Governor in Council has full authority to set the premium rates for 2002 and 2003 without the participation of the Canada Employment Insurance Commission.

In late November 2001, the government set the 2002 premium rate for employees at $2.20 for each $100 of insurable earnings. Traditionally, the Chief Actuary prepares a report and provides forecast information on the EI program to assist the EI Commission in setting premium rates. The report updates historical premium revenues and program costs; it projects program costs and break-even premium rates under different economic scenarios. The actuarial report is later made available to the public on the HRDC Web site. No such report was prepared in advance of the setting of EI premium rates for 2002. The actuarial analysis would have provided valuable supporting information for setting the rates.

Mr. Chairman, the government plans to review the entire rate-setting process during the next two years. In my December Report, we commented on the importance of the objectives and the outcomes of that review.

The review should result in a transparent and objective rate-setting process with appropriate and clear points of reference. The process needs to be transparent, and how criteria are to be interpreted and applied needs to be clear, to give Parliament assurance that the intent of the EI legislation is being followed.

The review needs to clarify whether EI premium revenues are raised to cover only EI program costs. That would include determining the nature of the EI Account balance and deciding on its disposition when the new rate-setting process takes effect.

We also think that the review itself needs to be open and include consultation with key stakeholders. We understand that the Department of Finance is leading the review, in consultation with Human Resources Development Canada. To make the review more open, we suggest that in its consultations the Department of Finance include employer and employee groups along with the EI Commission and the Chief Actuary at HRDC.

Mr. Chairman, this Committee may wish to discuss the status and the progress of the review that is currently under way to determine how EI premium rates ought to be set. The transparency of the rate-setting process is essential to ensuring proper parliamentary control over the raising of EI premium revenues.

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