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

Employment Insurance Account
(Chapter 11 - December 2002 Report of the Auditor General of Canada)

25 February 2003

Sheila Fraser, FCA
Auditor General

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

With me are Peter Simeoni and Marise Bédard, who are responsible for our audit of the Employment Insurance Account's financial statements for 2002.

For the last four years we have drawn attention to this issue in the auditor's reports on the EI Account's financial statements and in the Public Accounts of Canada. The surplus in the EI account grew by $4 billion in the 2001-02 fiscal year to reach $40 billion and was still growing. It was more than $25 billion higher than HRDC's Chief Actuary has said is the maximum amount needed.

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.

The financial statements of the Employment Insurance Account cover its fiscal year, which runs from the beginning of April to the end of March. Under the Employment Insurance Act, the rates for employment insurance premiums are set on a calendar-year basis. As a result, in fiscal year 2001-02 there were two premium rates—one for the last nine months of 2001 and another for the first three months of 2002.

The Canada Employment Insurance Commission set the premium rate for 2001, pursuant to section 66 of the Act. This section required that, as far as possible, the rate ensure that the EI Account would have enough revenue over a business cycle to pay authorized amounts charged to the account while maintaining relatively stable rates.

In our view, this means that employment insurance premiums should equal expenditures over some period of time, including a sufficient reserve to keep rates stable in an economic downturn. In other words, we believe Parliament's intent was that this program would operate on a break-even basis over the course of a business cycle. The legislation also made it necessary for the Commission to make certain key decisions—such as how it would define "business cycle" and "relatively stable rates."

In May 2001, the Act was amended to suspend section 66 for 2002 and 2003 to give the Governor in Council the authority to set the rates for those two years. The Act provides no other criteria to the Governor in Council on how to set the rates.

Nevertheless, given Parliament's apparent intent for the EI Account, we expected that the Commission, for 2001, and the government, for 2002, would have clarified and disclosed the factors considered in setting the rates, the target level for the accumulated surplus, and how long it would take to reach that level. However, we found that neither the Commission nor the government has done so. As a result, I cannot conclude that the setting of premium rates observed the intent of the Act for the year ending March 31, 2002.

In the Budget, the government announced that it will conduct consultations on any new rate-setting process to be implemented for 2005. We note that the new process is now delayed by a year. In the meantime, the government will set the employee premiums for 2004 at $1.98 so that premium revenues would equal the projected costs of the program in that year.

Madame Chair, we have reviewed the Budget Plan and we are pleased that the government agrees that it is Parliament's intent that the EI program would be run on a break-even basis. We also note that the government has endorsed a number of principles for a new rate-setting process, including transparency and seeking expert advice.

Committee members may wish to ask the officials from the Department of Finance to elaborate on the government's plans for public consultations – in particular,

• whether there are terms of reference, including timelines, for the consultations;
• whether the government will report the results of the consultations to Parliament; and
• what opportunity Parliament will have to discuss a new rate-setting process.

Members may also wish to ask the officials from Finance whether the consultations will deal with key program parameters—for example, what would be an adequate reserve, what constitutes a business cycle, and what are considered relatively stable rates.

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