Recommendation
1
That the Employment Insurance fund be used for the intent it was set up for
and not for any other purpose.
Based on the annual audits conducted by the Government and the Office of the
Auditor General, the Employment Insurance Account has only been used for the
purposes that it was set up for: that is, paying eligible program benefits and
costs as set out in the Employment Insurance Act.
However, given that the premiums and eligible program costs are fully
consolidated in the federal government's overall financial statements, differences
in the annual flows between premium revenues and eligible program costs directly
affect the budgetary balance for that year. To ensure that this impact will
be relatively neutral on a going forward basis, Budget 2005 proposed a new annual
rate-setting mechanism, whereby premium rates would be set in such a way that
expected annual premium revenues would match expected annual eligible program
costs.
Recommendation 2
That the Government of Canada complete, without delay, a report outlining
the competing premium-setting methods and mechanisms being contemplated for the
Employment Insurance Program. The government should also indicate which
mechanism it favours. Once completed, a copy of the report should be
immediately submitted to Parliament and, in particular, to the Public Accounts
Committee.
In the 2003 Budget, the Government launched a public consultation process on a
new permanent rate-setting regime and put forward the following five principles as
underpinnings of a new permanent rate-setting process:
-
Premium rates should be set transparently;
-
Premium rates should be set on the basis of independent advice;
-
Expected premium revenues should correspond to expected program costs;
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Premium rate-setting should mitigate the impact on the business cycle; and
-
Premium rates should be relatively stable over time.
Throughout 2003, the consultation process heard from a wide variety of
stakeholders, including business and labour, economists and technical experts,
Employment Insurance Commissioners for Workers and Employers, and individual
members of the public. Summaries of the results were posted on Finance
Canada's website in December 2003.
A new permanent rate-setting mechanism was announced in Budget 2005 that meets
all of the five principles and takes into consideration the views of stakeholders
and the views of the Standing Committee. As proposed in Budget 2005, the
Employment Insurance Chief Actuary would annually determine, on a forward-looking
basis, the estimated break-even premium rate for the coming year, based on the
most current forecast values of those economic variables relevant to the
determination, which will be provided by the Minister of Finance. In matters
related to rate-setting, the Chief Actuary would have a functional reporting
relationship to the Commission, strengthening the independence of this
process. The Chief Actuary would provide a report to the Commission, which
the Commissioners would then make public and use to consult with their respective
constituencies.
Beginning with the 2006 premium rate, the Budget Implementation Act 2005 (Bill
C-43) proposes that the Employment Insurance Commission would have the full
legislative authority to set the Employment Insurance premium rate. In
setting the rate, the Employment Insurance Commission would take into account the
principle of expected premium revenues matching expected program costs, the report
from the Chief Actuary and input from the public, which would increase the
transparency of the rate-setting process. There would no longer be a
requirement for the Government of Canada to approve this rate. However, the
Government would have the authority to override the rate, if it was in the public
interest to do so. The Commission would also be able to obtain, on an as-needed
basis, the services of those with specialized knowledge in rate-setting
matters. This meets the principle of independent expert advice.
The Government is also proposing to introduce limits on changes in the premium
rate from year to year so as to mitigate the impact on the business cycle and
contribute to stability of premium rates. In this regard, the extent to
which the premium rate could change from one year to the next would be limited to
a maximum of 15 cents. This provides protection against sudden large
increases in premium rates in the event of an economic downturn. As a
measure to provide rate stability during the period of transition to the new
rate-setting mechanism, the Government has guaranteed a premium rate ceiling of
$1.95 per $100 earnings for 2006 and 2007.
These new measures increase the independence of the Employment Insurance
Commission in Employment Insurance rate-setting and strengthen the transparency of
the process.
Recommendation 3
That the Government of Canada explain the notional nature of the employment
insurance account in any and all of its future discussions and public
statements.
All money paid to, received or collected by the Government of Canada is
deposited into and paid out of the Consolidated Revenue Fund in accordance with
the Financial Administration Act or other statutes. Similarly,
revenue and program costs under the Employment Insurance Act are credited
or charged to the Employment Insurance Account and deposited or paid out of the
Consolidated Revenue Fund. The Employment Insurance Account is consolidated
within the Accounts of Canada and its nature remains unchanged – it is a
statutory bookkeeping mechanism that adds up annual revenue and expenditures, it
is not an account containing cash. In this sense, the Employment Insurance
Account is a notional account. The practice of the Government of Canada has
been and will continue to be to explain the Employment Insurance Account in this
manner.
Recommendation 4
That, for the purposes of open and transparent discussion, the Government of
Canada refrain from wording that implies that the accumulated notional surplus in
the employment insurance fund can somehow be used to stabilize premium rates.
The new premium rate-setting mechanism proposed by the Government meets all of
the five principles as set out in the public consultation process launched through
Budget 2003. The Employment Insurance Commission will annually set a
forward-looking break-even premium rate, taking into account expected premium
revenues matching expected program costs, the report from the Chief Actuary and
input from the public. Limits on premium rate changes from year to year will
mitigate impacts on the business cycle and provide stability in
rate-setting. This increased transparency and independence in the
rate-setting process will mean that the annual premium rate will be set
independently of the Employment Insurance Account.
Recommendation 5
That the Office of the Auditor General and the Office of the Comptroller
General immediately prepare a report detailing the progress achieved in clarifying
the guidance of the PSAB concerning the accounting treatment for reporting
entities and transfers to these entities, particularly regarding the accounting
treatment of foundations.
The Government will discuss its assessment of the evolving PSAB accounting
standards with the Office of the Auditor General and submit a progress report to
the Committee. It is important to note that while the accounting standard
with respect to the government reporting entity (those organizations controlled by
government that are to be included within the government's financial statements)
has been issued, the revised standard relating to government transfers has
not. Preliminary discussions indicate widely different views amongst both
the auditing and accounting communities. As such, there is a need to proceed
cautiously with respect to any changes to the Government's accounting
policies.
Both through acts of Parliament and their funding arrangements, it was intended
that foundations be independent from, and not controlled by, the Government.
The Government does not control the financial operations and budgets of
foundations. These budgets and operations are currently not included in the
Government's budgetary balance. If foundations are deemed to be controlled by the
Government for accounting purposes, then the foundations' budgets and operations,
which the Government does not control, would be included in the Government's
budgetary balance, placing the budgetary balance of the current and future
Governments at risk.
Recommendation 6
That the federal government, as part of its effort to improve the
accountability of foundations, table the necessary amendments to the appropriate
pieces of legislation in order to allow the Auditor General of Canada to conduct
value-for-money audits at foundations with assets in excess of $100 million.
The Government agrees with the development of a performance (value-for-money)
audit regime to complement the audit and evaluation regimes already in
place. Amendments have already been made to a number of funding agreements
to provide, to both Ministers and the Auditor General, the right to undertake such
audits. The Government undertakes to amend other existing agreements and to
implement this as a standard requirement for future agreements. In this
regard, it will work closely with the Auditor General.
In addition, the Minister of Finance has tabled amendments to the Auditor
General Act, as part of the Budget Implementation Act, 2005, to provide
the Auditor General with the necessary legislative authority to audit the use of
federal funding. However, the Government's proposals go beyond that
recommended by the Public Accounts Committee. The legislative authority
would extend to more organizations than just those identified as foundations by
the Auditor General. It would cover auditing for compliance, performance
(value-for-money) and the environmental impacts of expenditures. In general,
it would apply to most not-for-profit and similar organizations that have received
at least $100 million in any consecutive five-year period. The proposed
legislation was developed in consultation with the Auditor General to ensure it
would satisfy her objectives.
Recommendation 7
That the Government of Canada provide Parliament with a scorecard or some
other measure of its progress in its efforts to fully implement full accrual
accounting. The scorecard should be based on a benchmark full accrual accounting
system or best practices found in other countries that have made the transition to
full-accrual accounting.
Accrual accounting was implemented in all departments for April 1, 2001 as part
of the Financial Information Strategy. In the run-up to this implementation,
scorecards showing each department and agency's progress were posted on the web
site of the Treasury Board Secretariat.
The Government does not believe that the use of a scorecard and benchmarking is
needed since full accrual accounting has been implemented, and the financial
statements of the Government of Canada were prepared and presented on a full
accrual accounting basis in the 2002-2003 Public Accounts of Canada.
As the Auditor General has noted, Canada is a recognized world leader in financial
reporting. This leadership was recently recognized with an award for
excellence in reporting from the Canadian Institute of Chartered
Accountants.
The implementation of full accrual accounting was a major challenge requiring
significant effort. Despite the overall success, there remain a couple of
residual issues in two of the more complex areas of accrual accounting: the
accounting systems and practices for inventory at National Defence and tax
revenues and receivables at the Canada Revenue Agency. The Auditor General
states in her Observations in the 2003-2004 Public Accounts of Canada, the
issues at National Defence and Canada Revenue Agency are not significant enough to
conclude that the government's financial statements are not fairly
presented.
At both National Defence and the Canada Revenue Agency, interdepartmental
working groups, with representatives from the Office of the Comptroller General
and the Office of the Auditor General, meet regularly to discuss the remaining
issues associated with the implementation of accrual accounting and to monitor the
progress in resolving them.
Recommendation 8
That the Government of Canada move quickly to identify, record and quantify
its contingent liabilities including, notably, its environmental liabilities.
Section 64 of the Financial Administration Act requires that contingent
liabilities be included in the Public Accounts. A process is in place and
guidance is available for the identification, quantification and presentation of
contingent liabilities. Management's estimates of these liabilities are
reviewed with the Office of the Auditor General throughout the year.
Contingent liabilities are classified into five categories, including a
category for liabilities for contaminated sites. Information on these
categories was presented in Note 13 to the Financial Statements of the Government
of Canada, with further detail in Section 11, in Volume 1 of the 2003-2004
Public Accounts of Canada.
Recommendation 9
That the government extend full accrual accounting to budgeting and
appropriations and set a firm timeline for its completion. The Committee further
recommends that the government report back to Parliament annually on the progress
being made in this respect.
Since the impacts of adopting accrual budgeting and appropriations are major
and far-reaching, Treasury Board Secretariat continues to believe that a prudent
and thorough approach to introducing changes in budgeting or appropriations is the
most appropriate approach. Although the rate of change is slower than the
Standing Committee on Public Accounts or Auditor General would like, progress is
being made in the area of accrual budgeting.
As announced in Budget 2005, the Government will be implementing a more
rigorous approach to capital planning, beginning with a few pilot departments this
fall. Parliament will be asked to consider multi-year appropriations of
capital funds for these pilot departments. Eligible departments must have a
long-term asset plan conforming to a new Long-term Asset Management Policy, and
must display resources on both an accrual and a cash basis.
Treasury Board Secretariat is also examining the feasibility of conducting the
Annual Reference Level Update exercise on an accrual basis, as well as the cash
basis on which it is presently based. Achievement of this objective would
represent the most significant step yet taken towards across the board
implementation of accrual budgeting. A specific objective would be for the
Treasury Board to approve reference levels for all departments and agencies on an
accrual as well as a cash basis. This should represent substantial movement
to address the Standing Committee of Public Accounts' specific concern that
expenditure authorities provided solely on a cash basis are an impediment to
departments' full incorporation of accrual information into their financial
planning and management.
Treasury Board Secretariat views the issue as a priority and will report back
to Parliament annually, through its Departmental Performance Report, on the
progress made in this area.
Recommendation 10
That the government should, as a priority in its discussions and
publications about debt reduction, clearly tell Canadians how much of its
interest-bearing debt was paid down at the end of every fiscal year. It
should further refrain from saying that the "federal debt" was
"paid down" by the amount of the budgetary surplus. Rather, the
federal government should say that the accumulated deficit was reduced by the
amount of the budgetary surplus.
The Government has noted the concerns raised by the Auditor General regarding
the "paying down of federal debt". Since these concerns were first
raised, the Government has been careful to note that paying down debt refers only
to interest-bearing debt and not the accumulated deficit or federal debt.
The Annual Financial Report contains a breakdown of the accumulated
deficit into its components parts: interest-bearing debt, other liabilities,
financial assets and non-financial assets. In recent volumes, explanations
on the changes in the major components have been provided.
The Economic and Fiscal Update of November 16, 2004 included Table 1.1,
which showed the decline in the major components of the federal debt (accumulated
deficit) since 1993-94. In addition, the Government tables annually in
Parliament two reports containing details on the Government's debt management
operations and strategies (Debt Management Strategy and Debt Management Report).
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