Opening Statement to the Subcommittee on the Employment Insurance Funds of the Standing Committee on Human Resources, Skills Development, Social Development Canada and the Status of Persons with Disabilities

The Employment Insurance Account

4 November, 2004

Sheila Fraser, FCA
Auditor General of Canada

Mr. Chairman, thank you for inviting us to discuss the Employment Insurance Account. With me today are Nancy Cheng and Jean-Pierre Plouffe, the Assistant Auditor General and the Principal responsible for the audit of the Employment Insurance (EI) Account.

The Employment Insurance Act requires that an account be established in the accounts of Canada for recording the employment insurance revenues and expenses. The accumulated surplus is simply the addition of all deficits or surpluses that have occurred year after year since the creation of the account.

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 as it does not represent funds held in a separate bank account.

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. Employment insurance is considered to be a government program: government determines the rate of premiums, eligibility criteria and benefits. The program should therefore be included in the summary financial statements of the Government of Canada. It should be noted that the balance in the EI account is presented separately in the accumulated deficit as disclosed in note 4 of the government’s 2003-2004 summary financial statements.

In my report on the 2003-2004 Public Accounts of Canada, I have identified a concern for Parliament’s attention regarding the continued increase in the accumulated surplus in the EI Account. During the year, it grew by another $2 billion, and stood at $46 billion at March 31, 2004. Mr. Chairman, as an appendix to the opening statement, I have provided members with the details of the increase in this surplus over the last 10 years.

The current surplus exceeds by three times the maximum reserve that the chief actuary of Human Resources Development Canada considered sufficient in 2001.

In my view, Parliament did not intend for the EI Account to accumulate a surplus beyond what could reasonably be spent on the EI program. Thus, I concluded that the government has not observed the intent of the Employment Insurance Act.

In the 2003 Budget, the government indicated its intention to implement a new rate-setting regime through legislation for 2005. In the 2004 Budget legislation, the government gave the Governor-in-Council authority to set the premium rate for 2005, in the event that legislation was not passed in time.

In the 2003 and 2004 budgets, the government described the principles for its new process for setting premium rates. The 2004 rate was set according to principles noted in the budgets, in particular, that the rate would generate premium revenue equal to projected program costs. It should be noted that the notional interest revenue credited to the Account was not taken into account when setting the premium rate.

The principles may help ensure that the surplus does not grow significantly once a new rate-setting process is in place. However, they do not address the $46 billion surplus that has been accumulated.

This long-standing issue needs to be resolved. We are pleased, Mr. Chairman, that the sub-committee has begun to study it.

I am happy to be here today to assist the sub-committee, and I welcome any questions that it may have.

¹For a period of 15 months

²The account adopted Canadian generally accepted accounting principles. The changes resulted in adjusting the opening balances for 2002 by $670 million.