ANNUAL REPORT, PROVINCIAL AUDITOR, 1992 MINISTRY OF HOUSING
CONTENTS
Thursday 21 October 1993
Annual report, Provincial Auditor, 1992: Ministry of Housing
1992-93 Public Accounts
STANDING COMMITTEE ON PUBLIC ACCOUNTS
*Chair / Président: Cordiano, Joseph (Lawrence L)
*Vice-Chair / Vice-Présidente: Poole, Dianne (Eglinton L)
*Bisson, Gilles (Cochrane South/-Sud ND)
Callahan, Robert V. (Brampton South/-Sud L)
Duignan, Noel (Halton North/-Nord ND)
*Frankford, Robert (Scarborough East/-Est ND)
*Marland, Margaret (Mississauga South/-Sud PC)
*Murphy, Tim (St George-St David L)
*O'Connor, Larry (Durham-York ND)
*Owens, Stephen (Scarborough Centre ND)
Perruzza, Anthony (Downsview ND)
Tilson, David (Dufferin-Peel PC)
*In attendance / présents
Substitutions present/ Membres remplaçants présents:
Arnott, Ted (Wellington PC) for Mr Tilson
Harrington, Margaret H. (Niagara Falls ND) for Mr Duignan
Phillips, Gerry (Scarborough-Agincourt L) for Mr Callahan
Wessenger, Paul (Simcoe Centre ND) for Mr Perruzza
Also taking part / Autres participants et participantes:
Office of the Provincial Auditor:
Peters, Erik, Provincial Auditor
Peall, Gary, director, ministry and agency audit branches
Leishman, Kenneth, executive director, reporting and special audits
Stockwell, Chris (Etobicoke West/-Ouest PC)
Clerk / Greffier: Decker, Todd
Staff / Personnel: McLellan, Ray, research officer, Legislative Research Service
The committee met at 1007 in room 151.
ANNUAL REPORT, PROVINCIAL AUDITOR, 1992 MINISTRY OF HOUSING
The Vice-Chair (Ms Dianne Poole): Good morning. I'd like to open this session of the standing committee on public accounts. We have several things on our agenda today. We'll begin with non-profit housing, the Ministry of Housing, section 3.12 of the Provincial Auditor's 1992 annual report. When we have completed deliberations on that particular aspect, we will go on to speak to the Provincial Auditor and hear his comments on the 1992-93 public accounts and the qualified opinion he gave on those public accounts.
Beginning with the Ministry of Housing report, I believe all members have a copy of the response of the Ministry of Housing. At the last meeting we had begun to go through this. What I would recommend, with your approval, is that we have Ray very briefly go through the balance of the report, and if an area is not contentious and we agree with the ministry action, then we don't need to entertain discussion. But there are several areas where I understand there's dissatisfaction with the ministry response.
Mrs Margaret Marland (Mississauga South): I just have one point to clarify from last week, because I don't know if we touch back on this report further along.
Last week we talked about the concern we had because the operating agreements were now not going to be completed until December 1994, and I expressed my concern about that from the standpoint that in the meantime many of these housing co-ops and the other public sector organizations that operate non-profit housing were doing so without these operating agreements in place. That was a major concern identified by the auditor in his report last fall, a year ago already, and then last week we learned that some of them are still not going to be signed until October or November 1994.
The Vice-Chair: Mrs Marland, just one --
Mrs Marland: Let me just finish.
The Vice-Chair: Just one moment. We are going to be discussing the operating agreements in item 14 quite extensively. Would there be any reason your comments can't hold till that particular time?
Mrs Marland: No, but I just want to finish my sentence.
The Vice-Chair: Oh, certainly. Finish your sentence, please.
Mr Stephen Owens (Scarborough Centre): This is called stream of consciousness, however.
Mr Tim Murphy (St George-St David): A run-on sentence.
The Vice-Chair: As long as it's a short sentence.
Mrs Marland: One of the points I made last week was that I thought we had been assured that those agreements would be completed by the end of this year by the Housing ministry officials, and I now see from a copy of the standing committee on estimates of July 20 that in fact I was correct. Mrs Herbert said they were certainly targeting for the non-profit sector operating agreements to be complete by the end of this year. That, I think, is very important, and I will enjoy discussing it again when we get to item 14.
Mr Joseph Cordiano (Lawrence): On a point of order, Madam Chair, more a point of how we proceed, but sort of a point of order: Given the time constraints we have, it's my concern that we may not have much time to deal with the two matters that I think we all agree are substantive. Could we get to those two items rather than going through the whole report? I think we left with some agreement last week that we would deal with those two items. If I understand correctly to this point, we have some consensus around a number of the other issues; on most of them we have that kind of consensus. Can we get to those two items and then come back to any other items we might not be in agreement on?
The Vice-Chair: Mr Cordiano, I think we left off at item 5. I would suggest that I just read out the item number and ask if there is any discussion or comments. If there is none, we will proceed, just in case members do have important questions on other items.
Mr Owens: In terms of Mr Cordiano's question, my question is, are we intending to finish this particular item today? While I'm certainly a new arrival on the committee, it seems that this item has been on the agenda for a number of weeks, and there are other pressing issues the committee needs to look at with respect to the Provincial Auditor's report and the state of the economy etc etc.
The Vice-Chair: That's a good question, Mr Owens. We did have a steering committee meeting last week, at which time we did decide we would try to give final instructions to Ray about the way the report would read. After he had the report completed, I believe we intended to circulate it to all members and hold a steering committee meeting at that time to decide whether we just need a brief meeting to adopt the report or whether we need to take it further.
Mr Owens: Is that a firm resolve to try?
The Vice-Chair: I think it is our resolve to try and complete as much as possible of this report within the next hour.
Mr Owens: Great. Let's do it.
The Vice-Chair: I think all three caucuses indicated their desire to cooperate and do this in a timely fashion, so I don't anticipate a prolonged debate. In fact, I would ask members to keep their comments as brief as possible.
Item 5: I believe that's where we left off. Any discussion on item 5? Seeing none, we'll go to item 6, which is maximum unit price adjustment. Any comments or questions? Then we will proceed to item 7, detailed cost analysis/capital costs, referring to recommendation 11. Item 8, operating costs, budget norms and standards. Item 9, tenant placement consistency, equatability and efficiency, referring to recommendation 13.
This is extremely cooperative.
Mr Cordiano: Well, I just want to be clear and ask Ray about that. This does have a bit of an overlap with the operating agreements with respect to tenant placement, so that would be the only concern I have. Where do we deal with the operating agreements? What number is that?
Mr Ray McLellan: That's 14.
Mr Cordiano: Perhaps you could help me out, Ray. Within the operating agreements, there is some question, certainly discussion, about tenant placement and which local housing authority lists are used to pick up tenants from. There's some question about not having agreements in place and the fact that there are holes in the way tenants are being placed, the procedure used for that.
Mr McLellan: If I could just refer back to page 11, item 9, they discussed the tenant placement program and the fact that the ministry has introduced a new access system and also that they're in the process right now of preparing a background paper on their review and the consultation process. On the bottom of page 11, they run through the various aims coming out of that consultation process, in other words, their agendas to the items they want to address with respect to placement; and then, on page 12, the action plan for tenant placement.
Mr Cordiano: There is a section here that says, "Produce guidelines, processes and/or minimum criteria for tenant selection for Jobs Ontario Homes -- to form part of operating agreement and procedure manual."
I don't think there's enough specificity with regard to that and we have to tie it back to the question around operating agreements. Perhaps we can discuss that in more detail in that section. I just allude to that because we want to make sure that forms part of the discussion on that section.
The Vice-Chair: Mrs Marland has a comment, but just before going there I'd just mention that even though we have proceeded past an item we can reopen it at a later date if we find that it's affected by a later recommendation or response.
Mrs Marland: As I read item 9 -- and I'm not looking at our report because I haven't got it open yet -- it looks like a better way to build a mousetrap, a better way to make existing long lists longer, but what it doesn't seem to address for me -- the title is, "Tenant Placement Consistency, Equitability and Efficiency." Maybe, Ray, you can help me with this: Under efficiency, would that also cover cost-efficiency?
The first paragraph says: "At the present time, non-profit and cooperative housing providers have referral agreements with local housing authorities which commit them to take at least one half of their `deep need' vacancies from the housing authority waiting list."
One of the problems that is arising throughout all the operation of non-profit housing in this province is the fact that there are more people who qualify under "deep need" than there are units available. That's why in Peel we have 10,000 people on a waiting list. Now, there has been discussion by the ministry, formally and informally, about increasing the percentage of units that are deep-need qualified for subsidy and even increasing the percentage of units in a building that are -- I mean, all the units in the building are subsidized. The market rent units are subsidized by the fact that the mortgage is subsidized when the building is built. But going back to the 1970s, when Peel Non-Profit Housing started non-profit housing in Canada, the percentage of subsidy was that 25% of the units were subsidized and 75% were market value. The whole operation of these units from their balancing-their-books perspective is based on their income. When they increase the depth of the subsidy, it skews the financial formula for the operation of that project.
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The fact that the ministry is now sending out videos and publications to the housing authorities to tell them how to promote the vacant units in their existing non-profit housing buildings tells me they're finding that there is competition for their market rent units, so that's why they have market rent units vacant.
Does this answer under item 9 from the ministry, in your opinion, address what the future is from the ministry's perspective as to how it's going to deal with perhaps having to rent more and more of what were designated as market rent units at a subsidy, therefore lowering the whole income for that unit accordingly?
When they talk about tenant placement efficiency, do you think the efficiency looks at addressing the percentage of subsidized units, and -- I don't know, maybe Erik is the one to answer this -- how does that bode down the road for these non-profit programs being able to carry themselves even -- I wouldn't like to say "as well as they do now" because they're not carrying themselves today, but are those changes going to impact the balance sheet on these non-profit projects down the road? Does that come under this section 9?
The Vice-Chair: You've asked a question which probably could be best answered by Ministry of Housing officials. But if either the auditor or Ray McLellan would like to give their interpretation -- they may not have sufficient information to answer that question -- if so, it could be put in our report as part of the section we need more information on. Auditor, would you like to respond?
Mr Erik Peters: I just have only one very quick comment. In the final action plan item which they're showing on page 13 at the top, they leave the issue somewhat open-ended in terms of saying that they're providing input re the access to team negotiating changes to existing housing programs. I find it somewhat difficult to read as to how far-reaching those changes are going to be.
From that point of view, it might be worth requiring more specific information, but it may contain the answer to your question and it may not. I find it difficult to answer.
Mrs Marland: The first sentence of the fourth paragraph on page 11 says, "At these meetings, the design team was given suggestions about what needed to be included in tenant selection practices for social housing." Is that not a little bit of the cart before the horse? If you've got empty units that are designated as market rent units and you can't fill them because people would rather pay a market rent in a non-government-designated building -- I mean, if people are going to pay market rent, they don't want to be in Ontario housing or a government-owned building.
Mr Cordiano: That's a way of putting it.
Mrs Marland: Well, that's what happening.
Mr Cordiano: Let's not leave that impression. I mean, I think --
Mrs Marland: Okay. But the point --
The Vice-Chair: One person at a time. Mrs Marland has the floor.
Mr Cordiano: A point of order, Madam Chair: Look. We can discuss these themes that weave throughout the entire report. I think what Mrs Marland is touching on is a theme that probably speaks to the larger question about need and trying to fill a market need out there and the model that's been developed by the ministry to do that.
I think essentially if there are problems with vacant units, then it speaks to the whole question of the demand-need analysis equation and formula that's been developed. That really ties into the only other question that has a divergence of opinion here, which is the question around the buffer and how we come up with an analysis of need, what true demand is out there, and how many units are designated to be allocated according to a demand analysis versus some allocation method that was hodgepodge and just resembled something the ministry felt was a priority because it felt it was a priority, not based on an economic model. It ties into the question of the buffer, it ties into the question of demand analysis, and that is really the issue on which we have a divergence of opinion, I think, with respect to a fundamental approach that the ministry is taking. I would like to get to that question, and around operating agreements, which deals with tenant placement, but essentially, when you're talking about market analysis etc --
Mrs Marland: This is a point of order, isn't it?
Mr Cordiano: Well, it is, because I'd like to get to the two points that we think are of divergence, which I think we had agreement on last week. If we don't do that, we're going to run out of time, quite frankly.
The Vice-Chair: If I can suggest a resolution to this issue, I spoke to our researcher, Ray McLellan, and he indicated he doesn't have sufficient information to answer Mrs Marland's question but he would be prepared to go through the Hansard afterwards and to put further questions in the report to which we do not have answers. So those areas of concern you have outlined, at least for the draft of the report that Ray is currently working on, he can incorporate that into it.
As Mr Cordiano has pointed out in his non-point of order --
Mr Cordiano: It is a point of order.
The Vice-Chair: We do have an opportunity to expand on this in the two areas we want to concentrate on, items 14 and 16. I would suggest, why don't we proceed, and if it is necessary to open up item 9 for further comments once we're into the body of the other two items, we can certainly do that.
Mrs Marland: We're actually in item 9 now, and in item 9, the second-last paragraph on page 11, it talks about "an implementation plan to achieve this in cost-effective ways." That's the very point I am making. We're talking about tenant placement, and I'm talking about how it becomes cost-effective. I'm quite happy to leave this and get the answers later, but what I don't want to see happening is, this report that we're trying to deal with in this committee, Madam Chair -- and you were an excellent inherent part of the beginning of our questions on this report -- was generated by the fact that the Provincial Auditor identified over a year ago $200 million that wasn't accounted for in the non-profit housing program in this province. We are trying to respond to the auditor's report. That's what this report is all about. I say that with respect to Mr Owens, who wants to get on with this and get this finished.
Mr Owens: On a point of clarification: Would Mrs Marland please clarify what she means by $200 million being unaccounted for in the Ministry of Housing?
Mrs Marland: If Mr Owens wants me to pull out the auditor's report and read those sections to him --
Mr Owens: I just wouldn't think $200 million is unaccounted for.
Mrs Marland: Well, have you read the report from last year on Housing?
Mr Owens: Yes, I have actually, and that's what I'm saying. I don't think $200 million vanished into the ether, as you are alluding to.
The Vice-Chair: Mrs Marland had the floor. She did take note of your comments, Mr Owens. I would ask Mrs Marland to wind up. It's not that there isn't a lot of validity to what you've said; they're very valid comments. The problem is, we don't have that information, and I think we are prepared to put that in the next version of the draft report, that we aren't satisfied that enough details have been provided, that the problem has been resolved and the ministry is reacting.
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Mrs Marland: All right.
The Vice-Chair: But I just don't know how much further we can take it at this point because we just don't know what the ministry is doing.
Mrs Marland: No. Do you remember last week we talked about the fact that there really were going to be questions that probably only the ministry could answer, but it also had been decided not to have the ministry come back? So it's a little difficult to have questions --
Interjections.
Mrs Marland: Excuse me --
Mr Cordiano: On a point of order --
The Vice-Chair: Mr Cordiano, just before the point of order, I would just like to say that what was decided at the steering committee meeting is that this report could go on for ever because there will always be questions that remain unanswered and not sufficient data to complete the report. So I believe we decided that we would in our report itemize areas where we are not satisfied that the ministry has provided us with a complete enough answer or that we feel the ministry's answer itself is not satisfactory. So I realize you have a concern but I'm not sure how we can deal with it right now without calling the Ministry of Housing officials back, and I believe we had decided that would not be appropriate when we're trying to finalize this report.
Mr Cordiano: On a point of order, Madam Chair: I have to come back to this question of timeliness in terms of this report. I thought we had an agreement around what we were doing with this report in terms of time lines. I say this to Mrs Marland because if we're not going to get to the substance of this issue, we can be here talking about this question until next year and the year after that and we'll never file a report. I thought it was important that we file a report; I'm in agreement with that. If there is disagreement, please let me know and maybe we shouldn't deal with this matter today. Maybe we should just allow members to go back, review the documents and come back with further discussion. But we have to have some sense of where we're going.
The Vice-Chair: I think we would like to resolve this, if at all possible. Perhaps I could suggest that Mrs Marland frame this into a recommendation for the public accounts committee, and you could work with Ray on this.
Mrs Marland: I'll frame it into a question.
The Vice-Chair: A question, or in fact you might like a recommendation. Mr O'Connor and then Mr Owens.
Mr Larry O'Connor (Durham-York): I agree with Mr Cordiano here, that we've dealt with this issue at great length. I thought that we had come to a lot of consensus in this committee, in which we do try to be as non-partisan as we can as we review the finances of many wonderful agencies, at arm's length and sometimes even a little closer, how spending happens within the province, and we review this and take a look at the auditor's report. I think the auditor would probably even find some comfort in us trying to deal with this, in that his time in coming to this committee has been well used. Perhaps if we actually sit down, go through the committee's report that I hope will be ready to be tabled in the near future in the Legislature, we'll see some progress. It won't be that long down the road and we'll be dealing with other items that the Provincial Auditor will bring to us as a committee and try to keep this committee non-partisan, as we have been able to on many occasions.
I would agree with my colleague Mr Cordiano, in that aspect, that I thought we were quite close to finalizing this report. I think Ms Marland has offered an opportunity here, that she has a concern and would like maybe to get a response from it. That can happen but I don't think that has to slow down the workings of this committee and not allow us to move forward with the report today. I don't think, and Ms Marland I'm sure will correct me if I'm wrong, that she is about to change her recommendation. I think that she's been involved with this committee's report up to this date as actively as all members of this committee have been and I hope that we can move forward with it.
Mrs Marland: Could I just add one thing?
The Vice-Chair: If you could keep your comment as brief as possible.
Mrs Marland: Yes, this is very brief. You know this summary that we received? If you read the back page, page 15, under the tenant placement, this is what the ministry is saying:
"We are pleased to note that you find our income verification procedures to be satisfactory. Your comments on tenant placement and referral procedures, which we also identified as concerns through the housing policy framework initiative, are also valid. Tenant placement and referral procedures are governed by project operating agreements. After the ministry has finalized these project operating agreements, we will be able to more effectively monitor and enforce tenant placement procedures."
We now know that those operating agreements are not even going to be finalized for a year from now, which is two years from when there was the criticism by the auditor that they weren't in existence.
Mr Cordiano: Correct, but we do have disagreement around -- if I may.
The Vice-Chair: Mr Cordiano.
Mrs Marland: It's very important.
Mr Cordiano: This is why in my comments with respect to this section, I said this ties into the question of operating agreements. If you recall, there are only two areas where I've indicated there's a divergence of opinion, one being operating agreements and the other being the question of the buffer. There is no consensus around those questions. What I simply wanted to do was to get into discussion around those two areas. Now you've opened it up with regard to operating agreements, and I'm glad, because now we can talk about the two matters I think are at issue here.
Quite simply put, we're not going to have agreement, from what I can understand, with regard to these two items, and therefore we may have the filing of dissenting opinions, which is quite normal in a report. We don't need to endlessly discuss this and try to reach a consensus around an issue where there is a fundamental philosophical difference, perhaps. That's where we draw the line.
Let me just say this about those two areas. I don't believe there is agreement with respect to the question of a buffer. Unless I hear differently from someone on the government side, I believe the ministry has a diametrically opposed or a dichotomous situation on its hands. On the one hand they say they've developed a new demand analysis model, and on the other hand they say they're going to build a buffer. Well, which one is it? The two are incompatible. You can't have a new model for determining demand and in the same breath say, "We're going to build this buffer," which does not relate to demand. It's not a compatible position to be in, with those two things happening at the same time. So quite frankly I do not see it, and I cannot see how the explanation would be satisfactory around that.
The Vice-Chair: Okay. What I'm going to do is proceed to item 10. I think we've fully discussed some of the outstanding concerns with item 9 and Ray can work with Mrs Marland on that particular point.
Item 10, tracking construction market construction prices: Any comments or questions?
Mr Owens: What are you reading from?
The Vice-Chair: I'm back to the document from the Ministry of Housing responses that we started with what seems a very long time ago.
Mrs Marland: The construction prices are outside of land prices, correct? Thank you. I think a nod means yes, for the sake of Hansard.
The Vice-Chair: Yes, I think a yes was indicated, in the affirmative.
If there are no other questions, we'll go on to item 11, central management of information systems, referring to recommendation 15.
Item 12, internal audit practices, relating to recommendation 16.
Item 13, budgets and financial statements.
Now item 14, where there has been considerable discussion to date, concerning operating agreements. I know several members have put their concerns and opinions on the table, quite extensively, actually, during the last two meetings. What I'm going to ask now is, do members feel there is any consensus that we could reach as a committee on this particular item?
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Mrs Marland: This committee has asked when these operating agreements will be signed; the standing committee on estimates has been asked when they will be signed. As I was pointing out a few minutes ago, the standing committee on estimates Hansard of July 20 records that the target for them to be signed was going to be, to quote Mrs Herbert, the end of this year. That would be the end of 1993. I feel a great deal of concern for the fact that we have now been told it will be a year from now, which would be the end of 1994.
Was that information given to the auditor, that it would be the end of 1994?
Mr Cordiano: That's in our letter from the ministry.
Mrs Marland: Oh, it was in the letter. That's right. So we have two sources of answers, actually.
Mr Cordiano: Can I say on that, if you're finished, Mrs Marland -- it's just to tie in something.
The Vice-Chair: Just before you give your comments, Mr Cordiano, there were two places where the Ministry of Housing had actually given a time line for when they anticipated the operating agreements would be completed. One was, I believe, in public accounts during our previous set of hearings, but the second was in the standing committee on estimates on July 20, where I had asked if they would achieve their target for the co-op sector of having it completed this summer and Mrs Herbert at that time had said, "Substantially, yes." So details, if members would like them, are in Hansard for July 20 on estimates committee. Not all members of the public accounts may have been present on that committee.
Mrs Marland: That's what I just said.
The Vice-Chair: I know, but there are two different places where it was said. Mrs Marland, this is one area which has arisen time and time again. Do we have any consensus on the committee that committee members are willing to put in the report the dissatisfaction with the public accounts committee that the original time lines were not met and that in fact operating agreements will not be in place for an additional year over when it was committed?
Mr Cordiano: I'd like to put in my comments.
Interjections.
The Vice-Chair: There are several ways we can do this report. We can do it as recommendations; also, in the body of the report, where we have our original report and the ministry's response, the committee can indicate that we require further information or that we are dissatisfied with the ministry's response. There may or may not be a recommendation flowing out of that, but I was just saying, do we have any consensus on what to do about operating agreements?
Mrs Marland: Madam Chair.
Mr Cordiano: Let's discuss it.
The Vice-Chair: Mr Cordiano, then Mr O'Connor and then Mrs Marland.
Mr Cordiano: I think it's pretty clear from the response that was given to us by the ministry that there are not going to be in place operating agreements for at least an additional 14 months. To quote the report directly: "The ministry is currently developing operating agreements for private non-profits and municipal non-profits. The development, dissemination and execution of these documents will require up to 14 months." As far as I'm concerned, that's unacceptable. The ministry has had a considerable amount of time to do just that. The auditor's report is now almost a year old with respect to this. Pardon me; going back over a year that we've been discussing this matter, the report is actually almost two years old.
The whole question around operating agreements certainly has been given ample consideration by this committee. Our concerns have been expressed repeatedly to the ministry and there did not seem to be any recognition of the urgency with which the ministry needed to move on this matter. In my opinion, it is of great importance that the ministry had not moved earlier on this initiative and that to not have operating agreements means that, by and large, there's far less accountability in those individual projects, that we cannot measure the degree to which they're operating efficiently and whether they're following the guidelines and rules that have been set out. In fact, they have no rules or guidelines to follow, because those operating agreements do just that.
Let me ask the auditor, very briefly: If there are no operating agreements, then consideration has to be given with respect to what kind of direction the ministry gives in order for these individual projects to operate. In fact, there are questions around whether budgets were approved, how long it takes to do that, and in most cases -- I think the quote was that half of the budgets were not even approved as of this year. I may be mistaken about that, but I'd like your comment on it.
Mr Peters: Can I ask Gary Peall to answer those points?
Mr Gary Peall: I think it was around 25% of the budgets not approved, yet there is risk as long as the operating agreements are outstanding. It hovers around several issues. The only real control the ministry has is over the budget. You could argue that they could always withhold funding if they found that a project wasn't complying with the rules, but that's very extreme and it's hard on the tenants when it's not necessarily their fault.
That really isn't a viable remedy, so it is important to us that the agreements get in place, and part of the delay does in fact centre around this tenant placement issue. Once the community-based systems are in place, presumably that will govern the clause that goes into the operating agreements on tenant placement.
Mr Cordiano: Just to reiterate my point, I make a very strong point that I could not support the measures that have been set out by the ministry because I think this is of fundamental importance and they've missed the mark. I would not on this issue say that I'm satisfied the ministry did all that it should have and has complied with our concerns regarding this matter; it has not moved quickly enough and therefore there's some question about its ability to operate efficiently.
Mr O'Connor: In taking a look at the draft report that we have before us -- Mr McLellan, as always, has prepared us something that we can work with -- it makes it a little bit easier.
One difficulty that I have is that it's not a recommendation, and I think if we take a look at his report on page 14 at the bottom, he does talk about the operating agreements and he does point out the fact that we didn't come up with a recommendation and there is some difficulty there. I think if we were to remove the very last sentence in that statement, the government members could be comfortable with what's reflected there. I think I have to again, which makes me somewhat nervous, agree with Mr Cordiano that the community-based system that he's had a discussion about with people from the auditor's office here is actually changing. It's evolving. It's improving the system that has been there in the past, and my feeling is that it will better reflect the needs of the communities it is trying to serve in the future.
While we do have some disagreement in this committee around the wording of some parts of this, I would agree that what Mr McLellan has put together here as far as the operating agreements in the back of his report -- if the last sentence was removed, I think it would probably reflect pretty closely something that would be agreeable by government members in this report.
The Vice-Chair: Just on a point of clarification: You're referring to the original report that Ray prepared, the draft report?
Mr O'Connor: Yes, page 14. It's dated September 7.
The Vice-Chair: What you're suggesting is that the committee's recommendation or comment would stand except for the last sentence on page 14?
Mr O'Connor: Which of course we've had much discussion around as far as the time frame that has been mentioned, because that has been a difficulty we've obviously faced and debated to a great degree in this committee.
It doesn't reflect a recommendation that takes away from anything our opposition critics have brought forward. I appreciate their difference of opinion and this committee's approach in a non-partisan way of trying to come up with a report that reflects that as well.
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Mrs Marland: It's great if we all climb into bed together in a non-partisan way and we're all lovey-dovey, but the fact remains that in this province today we have thousands of non-profit units operating without operating agreements with the people who are paying the tab. I'm sorry; on a personal basis, Mr O'Connor, I would enjoy very much being non-partisan and amiable with my colleagues across the room, but we have a very serious situation which was identified by the auditor in his 1992 report. That's why we are discussing this item at this committee level.
When I hear that the auditor says there is a risk to the taxpayers in this province to operate without agreements, and I hear the Ministry of Housing officials promise that those agreements will be in place by the end of 1993 -- they said that in July, which is three months ago -- and now we have a letter from them saying, "Oops, sorry, it's going to be another 14 months," I do not find that acceptable. It's not acceptable that we have a situation where the government of this province does not know what's going on in the operation of its non-profit housing units in some areas.
Mr O'Connor: On the contrary, indeed they do know full well what's happening.
Mrs Marland: I don't have in my head this morning a ballpark figure of the number of non-profit units in the province today. Is it about 140,000? Maybe the auditor's office can answer this question. I can't remember.
Mr Peall: I think by 1994 it'll be about 101,000.
Mrs Marland: Say, for argument's sake, maybe 100,000 units in this province. We're saying that 25% of those do not have operating agreements.
Mr Peall: There are less than 100,000 operating right now. There was 25% at the time we did the audit, and they've given us an update on how they're proceeding. I'm sure it's less than that now; they are making progress. I don't know what the exact proportion is now, though. They haven't given us that.
Mrs Marland: The point is that, however generous we are with the progress that the Ministry of Housing may have made, we're still talking about thousands of units operating today in Ontario without their operating agreements signed. Frankly, I'm not an accountant or an auditor, and I don't pretend to have that responsibility as an elected representative, because we have people employed in the province for whom that is a responsibility. When those people turn around and tell us there is a risk when we have operations without operating agreements, that's good enough for me. I cannot support a report going from this committee that doesn't flag our concern that the ministry can't get its shop in order.
The ministry, within three months, has changed its answer again. When is the Ministry of Housing really going to know what is going on in its housing business? We have been saying, as Progressive Conservatives, that the government shouldn't be in the housing business to start with, but we're in it, and we're in it without any ground rules, in some cases; we're in it without these operating agreements.
Mr Owens: You did so well.
Mrs Marland: If you want to say, Mr Owens, that it's okay for these non-profit organizations to go out and continue to operate without signing operating agreements, which are a requirement --
Mr Owens: You should check your facts.
Mrs Marland: The Ministry of Housing is telling us that there are not operating agreements signed. That's good enough for me.
If operating agreements are a condition of how non-profit units are to be governed in this province, then I am saying we'd better get all the operating agreements signed and we'd better not be building more of these units if we can't keep up with the units that are already built. That's the real scary part: the number in addition to what exists today that this government is going to build in terms of more non-profit units. If we're going to build more non-profit units, and some of the existing ones we have are at risk financially because we don't even have agreements with the ones that are built, we'd better get out of the housing business. That's all I'm saying.
I will be filing a minority report in this committee, on that section in particular, because the concerns are not being recognized. In fairness, we had the ministry in, we asked it how it was doing its business, we asked the ministry what is going on in its housing business, and they said: "Well, we're getting caught up. We're going to have these agreements signed and we plan to have them signed by the end" -- well, her answer to your question was they would be substantially signed by the end of 1993. Now they're saying not even three months later than that; they're saying 14 months later. Madam Chair, I'm not at all satisfied with the situation of the outstanding operating agreements.
The Vice-Chair: I've spoken to Ray about this and about the various reports and what's been said. One suggestion he has is that we would put in the body of the report, as Mr O'Connor suggested, that the committee is dissatisfied with the length of time it is taking to get these important agreements signed.
Secondly, the ministry has given two target dates: one for six months from the time of the report in early October to have all co-op agreements signed, so that would be probably early April; and second, up to 14 months for the private non-profits and municipal non-profits.
Mr Cordiano: On a point of order --
The Vice-Chair: If I could just finish my sentence. It's been suggested that one recommendation of the committee could be that the Ministry of Housing report back on those two. Obviously, you are quite entitled to file a minority report which may go much further than that, but we are running out of time for this particular section and I think Ray would like to have something to work on and to bring back to the committee.
Mr Cordiano: On a point of order, Madam Chair: I do not think I can give Ray any sense of direction without further elaboration on these two matters. I need to put some more things on the record before I'll feel comfortable that we have a sense of direction, so it would be my suggestion that we come back to this. Those two issues that still need to be dealt with require further examination and I think we've run out of time today, so we're going to have to come back to those two matters at some point, perhaps next week.
The Vice-Chair: I believe next week we have scheduled for the Ministry of Health, but we'll have to have a steering committee meeting and decide how to deal with the balance of the report then.
Interjection.
The Vice-Chair: We are now going to proceed with the comments of the auditor on the public accounts, 1992-93 fiscal year.
Mr Owens: On a point of order.
Mrs Marland: In fairness, Dianne, Mr Owens had indicated he wanted to speak before you finished.
The Vice-Chair: The Chair had said he wants to move on.
Mrs Marland: That's not very democratic.
The Chair (Mr Joseph Cordiano): Order, please. Can I just take my seat? We're making the transition. If you will be a little more patient, obviously I have to move from my position as critic to now my position as Chair. Mr Owens, you had a point of order on the last item on the agenda.
Mr Owens: My point of order is simply that my name was on the speakers list. The member for Mississauga South was allowed to make some fairly partisan comments with respect to the report, and I think to deny my right as a member of this committee to respond to those partisan comments is, as the member for Mississauga South also accurately pointed out, not democratic. I want my place on the speakers list.
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The Chair: As a matter of courtesy I can do that. We have certain time lines we've set for ourselves with respect to items we're dealing with on the agenda, and this morning, by agreement of the subcommittee, we did agree to have the matter before us considered at 11 o'clock. Mr Owens, you wanted to make a point. Why don't you just do that.
Mr Owens: I'll be very brief. The one thing I do agree on saying with the member for Mississauga South is that this committee is not non-partisan, in fact; it's not the job of this committee to be non-partisan.
The member and her party on a daily basis slam non-profit and co-op housing. It's quite clear what their position is with respect to this type of housing. The member wants the audience out there in TV land and the audience here to believe that operating agreements not being in place means that co-ops and non-profit housing corporations are simply running amok and misspending the taxpayers' money with great abandon. I want to say that's absolutely and clearly untrue.
What I would like to have an understanding of is that from the auditor's perspective, there was an allusion to that, that in fact there is control being placed on these corporations, notwithstanding the fact that operating agreements are not in place. These housing corporations are simply not, as I say, running amok and misspending taxpayers' money.
The Chair: If I may, time is pressing. You made a couple of comments that I think the auditor has asked if he may respond to, because there was something you alluded to that he had said. Then I have to call it at this point to move on to the next item. I turn to the auditor.
Mr Peters: Mr Owens, the amount spent by the province annually at the time we did the audit was close to $800 million a year, and these $800 million were governed by the operating agreements. If there is a significant proportion of those operating agreements not in place -- and as we heard from the ministry, sections have not even been drafted for some of the municipalities -- we would consider that expenditure not to be under control.
Mr Owens: For the purposes of accounting now, I guess I'm uncomfortable about the nature of that response, in that I don't understand whether that's a political response or a response based on --
Mrs Marland: On a point of order, Mr Chair: I think it's totally inappropriate for any member of this committee to suggest that the auditor is making a political response.
Mr Owens: No, I'm simply asking for clarification, with respect.
Mrs Marland: Well, that's what you're suggesting.
Mr Owens: What that means is --
The Chair: Can I have order, please. I think it's time to move on to the next item. I don't believe the auditor's comments at any time are intended to be biased or political in that respect. I would finish that statement off with that and move on to the next item.
1992-93 PUBLIC ACCOUNTS
The Chair: By agreement of the subcommittee last week, we decided to deal with the matter next on our agenda, which was the qualified opinion of the Provincial Auditor concerning the 1992-93 public accounts. It was deemed to be an urgent and important matter to be discussed by this committee. Of course, we've been dealing with a number of other items that have been before us for some time and attempting to complete those items, but today we will be dealing with this matter.
I turn to the auditor for his opening comments. He has an opening statement he would like to make to members of the committee, and then we'll open it up to questions by members of the committee.
Mr Peters: Just before I get into my notes on this matter, I would like to mention that Todd is preparing copies of my presentation for the members of the committee. Todd, is that going to be available within minutes?
Clerk of the Committee (Mr Todd Decker): It's being copied.
Mr Peters: Okay. The comments I would like to make on the qualified auditor's opinion are starting out with the statement that there are many positive aspects of the government's current financial systems which I have acknowledged. I would like to stress that for 1993, I have only taken exception to the net deferral of $528 million of payments to the pension funds. The many strengths of the current systems include the professional competence and dedication of government officers, good cash management procedures and a number of well-managed ministries and agencies.
Beginning in 1989 and through to 1992, the government preflowed expenditures. This means that expenditures were paid in and allocated to the fiscal year preceding the one in which the expenditure was actually incurred. The effect was that beginning with the fiscal year-end March 31, 1991, the government reported a lower annual deficit than what the deficit would have been had all expenditures been recorded in the accounting periods in which they were incurred. This can be seen from a table which I'm handing out to the members. Just let me go very briefly over the numbers.
In 1991, the government reported a surplus of $3.029 billion -- a deficit, I apologize. Don't we wish we would be in a surplus position to that extent?
Mr Owens: I like those Freudian slips.
Mr Peters: It's lovely. I have to watch these brackets, Steve, but I don't make political statements -- $3.029 billion of deficits, and the adjusted number would have been $3.7 billion. In 1992, it was reported as a deficit of $10.9 billion and should have been slightly over $11 billion. In 1993, it was reported as $11.9 billion and should have been close to $12.5 billion.
The Provincial Auditor commented on this practice as follows in the 1990, 1991 and 1992 annual reports. In 1990, the following statement was in the annual report:
"The effect of the government's recent practice of unbudgeted advance payments has been to shift expenditures forward into years for which they were not planned, thus affecting the comparability of the budgeted plan to actual results, an important accountability measure of the government.
"When such advance payments are not budgeted and are announced in the latter part of the fiscal years, there is a perception that the government is, in reality, managing and adjusting its actual results so they will more closely parallel its budgeted results. This, in turn, raises doubts concerning the integrity of the accounting process.
"Questions concerning the intent of preflows have been raised in the Legislature in both 1989 and 1990. Media comment has also been evident. In order to allay any doubts concerning the integrity of the accounting process, we recommend" -- and this was in 1990 -- "that the government consider excluding any future preflows from expenditures and treating them instead as advances to be reported as financial assets at the fiscal year-end. These assets could then be appropriately converted to expenditures in the succeeding years."
In 1991 --
Mrs Marland: What page are you on now?
Mr Peters: Page 2. In 1991, the Provincial Auditor reported:
"The practice of preflowing expenditures, particularly in the absence of a consistent pattern, can be viewed as an attempt to `manage' operating results. To allay any doubts concerning the integrity of the accounting process, we reiterate the recommendation in last year's report, that the government treat preflows as advances rather than expenditures. These advances could then be reported as financial assets at year-end and appropriately converted to expenditure in the succeeding year."
In 1992, the Provincial Auditor reported:
"As stated in previous reports, the practice of preflowing expenditures can and has been viewed as an attempt to `manage' the deficit, thus raising doubts concerning the integrity of the accounting process. We again recommend that the government treat preflows as advances to be reported as financial assets at the fiscal year-end. These assets could then be appropriately converted to and reported as expenditure in the succeeding year."
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In early 1993, my office began to consider what action to take on the budgeted deferred flow of the pension payments of some $584 million. We had found that this was the first time, to the best of our knowledge, that a material expenditure of the current fiscal year was deferred to the next fiscal period. I would like to remind you that previously we had only been talking about preflows. This was the first time we are talking about deferring a flow. The amount of this deferral also significantly exceeded our materiality limit in auditing the public accounts of the province.
Technically, this shift of expenditure was the result of delaying payment by one day, because the message was: If this amount is paid one day before April 1, it is an expenditure of the year ended March 31, 1993; if it is paid one day after March 31, it is an expenditure of the year ended March 31, 1994. What was overlooked, except for paying an interest penalty of at least $2 million, was that the expenditure had actually been incurred in the year ended March 31, 1993. To be specific on that, it had been incurred in the month of December 1992, in January 1993 and in February 1993.
We concluded that this treatment of the pension payments was an inappropriate shift of expenditures between two fiscal years. As well, it illustrates the permissiveness of the current accounting rules. We also concluded that the accounting rules used were inappropriate because they permit the time when payment is made to determine when the expenditure is recorded.
It is a fundamental principle of accounting and financial stewardship that revenue and expenditures must be recorded in the accounting period during which they were earned or incurred. The deferral of the $528 million of 1993 expenditures led us also to question the future appropriateness of the modified cash basis of accounting used in keeping the books of the consolidated revenue fund. In case some of you are wondering right now why I referred to $584 million and now to $528 million, there was a netting effect. There were also some preflows that account for the difference. So we reported to a net amount of $528 million. But nevertheless, the $528 million of 1993 expenditures led us also to question the future appropriateness of the modified cash basis of accounting used in keeping the books of the consolidated revenue fund. I'm repeating this because of the importance.
The other major reason why we recommended the adoption of more prescriptive rather than permissive accounting rules is the result of the formation of the capital investment corporations as set out in Bill 17. While I raised our concerns about the accountability of the management of these corporations at the standing committee on general government, I would like to focus here on the accounting for their activities as part of the government's financial operations. Our concern here is twofold:
(1) These corporations should be included in determining the financial position of the province because they are carved essentially out of the consolidated revenue fund but are nevertheless under the control and fiscal responsibility of the Legislative Assembly.
(2) Any funding provided to or through these corporations and contemplated to be repaid out of future voted appropriations should be recorded as expenditures of the period in which the funding is originally provided. This would follow rules established in 1986 by the province for such funding. This would properly reflect it as a grant and not, as appears to be contemplated, as a financial asset of the province. It is not an asset, even if flowed through a capital investment corporation. For this and for any other transaction, we must insist that form cannot and should not prevail over substance.
For these reasons, we strongly urge that the government adopt the recommendations of the public sector accounting and auditing board of the Canadian Institute of Chartered Accountants, and we have outlined in the auditor's report the financial stewardship and reporting goals of, and I quote directly from the report here:
"Reflecting revenues and expenditures on an accrual basis of accounting, including the value of pension benefits earned by employees, in order to reflect revenues and expenditures in the determination of the surplus or deficit for the period in which they are considered to have been earned and incurred, respectively, whether or not such transactions have been settled by the receipt or payment of cash or its equivalent."
The second point or the second goal is "the inclusion of all organizations owned or controlled by the government, in order to provide an accounting for the full nature and extent of the financial affairs and resources for which the government is responsible."
There is no doubt that achieving these goals takes effort and time as well as reasonableness and goodwill of all involved in this process, and I am most encouraged by the statement of the Minister of Finance in a letter to me of October 18, 1993:
"I also continue to believe strongly in the need for appropriate accounting approaches to fully reflect the valuable economic contributions of public capital investment.
"I do agree with you that the government of Ontario accounting practices can be revised to reflect the significant advances in accounting practices in the public sector. In particular, I note your support for the recommendations of the public sector accounting and auditing board of the Canadian Institute of Chartered Accountants.
"There is no question" -- this is still the minister speaking -- "that implementation of the public sector accounting and auditing board recommendations represent a major shift from the established practices of the government of Ontario. The changeover will be necessarily time-consuming and challenging.
"To ensure that appropriate measures are undertaken, my ministry officials are analyzing and evaluating the impact of the public sector accounting and auditing board recommendations for the year-end March 31, 1994. They will strive to implement them in that fiscal year. I have asked that they continue to meet with staff from the Office of the Provincial Auditor to determine the most appropriate application and that I be kept closely informed."
I would like to conclude with a further advocacy. We have gone a long way by the minister accepting the recommendations we have made in the auditor's report and I'd like to push the boundaries just a little bit further with a closing comment. This is me speaking again as the Provincial Auditor; I ended the quotation from the minister.
I, as the Provincial Auditor, also advocate that the government adopt the same accounting rules for future budgets as it has for the reporting of the public accounts. This would permit the comparison of actual results with the budget on a consistent accounting basis, because one of the goals that we have is that ultimately we are talking about a number, be it surplus or deficit, that is determined using the same accounting rules.
The Chair: I will now allow for questions and we will rotate as we normally do, starting with the official opposition. There's approximately 40 minutes left, so I will try to divide the time evenly. Perhaps we can start with 10 minutes for each caucus and allow for the last 10 minutes to wrap it up. Mr Phillips, you're first.
Mr Gerry Phillips (Scarborough-Agincourt): I want to take my hat off to the Provincial Auditor, because I think he's done the public an enormous service here. I don't think there's any doubt that the way the finances of the province are reported doesn't reflect currently the state of the finances of the province. My concern is that it is getting worse rather than getting better and that this year, the fiscal year we're in, there are five or six, in my opinion, very questionable areas of reporting. I yesterday took the opportunity to send the Provincial Auditor a letter on it. He may not be able to respond today to each of the points I raised, but I think the budget has, as I say, several areas where I think there are very questionable practices.
The pension delay that you mentioned: The thing that offended me the most about it was that I think it was done purely for optics, to report a deficit lower than the real deficit. In my opinion, it cost the taxpayers almost $5 million, just for the optics of reporting a number $500 million lower than it really was, because the taxpayers were required to pay 11% interest on that money when the money could have been borrowed on the market at around 7% to 7%. That went right down the drain. The taxpayers got nothing for that $5 million. That was a $50,000-a-day penalty, for nothing at all other than the optics of reporting a lower deficit than reality. I was offended by the tactic. As a matter of fact my leader, Lyn McLeod, on May 4, 1992, sent a letter to the Provincial Auditor outlining our concern about that very matter. This was about four days after the budget.
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I also happen to think that in the current budget there are a number of other areas. I think the Provincial Auditor in his presentation today highlighted it, but in my analysis, the province has shifted $600 million of provincial debt on to the school boards' books and the hospitals' books by moving to what it calls loans-based financing. It sounds good in theory, but it's asking the school boards to go and borrow $600 million that the province owes; the province owes 100% of that and it's required to repay that, but the debt will show up on the school boards' books.
The province also is planning to sell about $500 million worth of jails and courthouses and then lease them back instantly. And who are they selling them to? One of the crown corporations the auditor has talked about. That, in my opinion, is smoke and mirrors. I think it's a good idea to sell surplus assets, but to sell jails and courthouses and then instantly lease them back, in my opinion, and I'm looking for the auditor's response, is simply fooling ourselves.
The auditor, I now see from his presentation, is recommending a better accounting of what I call the off-book agencies, but in the last 12 months this government has set up eight new what are called schedule 4 agencies. I call them off-book agencies. They will move 4,000 public sector employees off the government books, off to the side, and move literally billions of dollars of spending off to the side. I'm very supportive of your recommendations on how that's reported.
Also, on the social contract savings, I think there are some real question marks. Of the $2 billion, $700 million of the social contract savings are in reduced contributions to the pension funds. Now, that may or may not be justified, but I can't get a handle on it. We can't get a handle on that, and we'll look to the Provincial Auditor to give us some input.
I guess I want to do two things. One is to very much support the auditor's recommendation that we move to adopting the accounting standards he proposes -- as a matter of fact, we proposed that in our response to the budget this year; that was one of our caucus's recommendations -- and to say you certainly have the full support of our Liberal caucus on that.
The question I would ask the Provincial Auditor, though, is whether he's had an opportunity yet to review the letter I sent yesterday, and whether some of the things I've raised are concerns he shares or whether he can perhaps help me with my concerns that I shouldn't be as worried about. I hope he got the letter yesterday.
Mr Peters: I did.
Mr Phillips: Okay. So that's the question.
The Chair: Maybe I should ask the auditor if he's prepared to delve into that letter, or do you want specific questions?
Mr Phillips: We raised issues some of which I think may be answered in his presentation today by his recommendations. I wonder whether he's had a chance to review these and whether he shares our concerns, and whether if we adopt your recommendation, that will solve these concerns we've raised.
Mr Peters: There are a number of issues I can bring to the table in response to your letter, and I thank you very much for the research that has gone into pointing these out.
The first is that as a matter of practice I give an audit opinion actually on the financial statements; I do not give an audit opinion on the budget of the province. That is why, in the end, I was advocating using the same rules for both. Most of the items at the moment for the current year are the budgeted items, and we will have to take a look at how they are reflected actually in the accounts once the transaction is taken, but in the statement I have very clearly put the province on notice that we will look at the substance of the transaction, not at the form. We will ensure in our auditing that the actual transaction, the economic reality of the transaction, is reflected in the accounts of the province.
This relates to the items you have related; for example, we will very carefully look at the $608-million budget proposal to give money to the schools, hospitals and municipalities. We will also take a look at the other items such as the sale of the jails and the leaseback. Another item we will have to look at very carefully is the actual achievement of the savings resulting from the social contract. So at the moment we are looking at proposals made in the budget on which I am not prepared to comment because that's outside the scope of our audit, but once these entries get into the accounts of the consolidated revenue fund or these corporations we will certainly look at them very closely and see that they are properly accounted for and recorded.
Mr Phillips: On page 1 of your presentation, using your revised methods, using what you and I might regard as good accounting practices, you feel the deficit is more in line with what is down the right-hand column.
Mr Peters: Yes, that is what should have been reflected for those years up to 1993.
Mr Phillips: On a perhaps more detailed question on last year's numbers, my belief is that the delay in the pension payment cost closer to $5 million rather than $2 million. The government could have borrowed on the market -- 90-day treasury bills at that time were around 7.3% -- but it paid 11%. Am I drawing a fair conclusion that the price we paid for that delay was approaching $5 million?
Mr Peters: In my presentation, I refer to it as at least $2 million. We have not done a precise calculation, but the $2 million seems to be the bottom of the expenditure and, as you say, depending on the numbers one uses and the assumptions one uses, the number could be higher.
Mr Phillips: If I could try and get your interpretation of the response from the Minister of Finance, would it be your expectation that there is an acceptance by the government of the public sector accounting and auditing board recommendations and that it is its plan to move to that as expeditiously as possible?
Mr Peters: Yes, to the very last part of your question. They are certainly carrying out the analyses right now that are required. I agree with him; it is quite a shift and requires a lot of analysis and calculation. At this red-hot moment, and my information is as late as yesterday, these analyses are not yet prepared but they are being prepared. We had given quite a bit of notice. I told the ministry on April 8, 1993, that this was the direction we were going in, and of course they had to close the accounts for the province in between; that takes a bit of effort. As soon as that was through, they started on this work.
The Chair: One final, quick question. There's one minute left, Mr Phillips.
Mr Phillips: Regardless of how the government proceeds, it is your intention to comment on the 1993-94 statements on the basis of their having been kept in line with the public accounts recommendations.
Mr Peters: That's correct.
Mr Phillips: Your report on the 1993-94 books will say what the deficit would have been had the government followed the accounting procedures that you as a Provincial Auditor are recommending.
Mr Peters: We very much hope to get to that stage together with them because there's quite a bit of analysis work involved, but that's the target.
Mr Phillips: That will be very useful.
The Chair: Thank you very much. Mrs Marland is next on the list.
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Mrs Marland: First of all, I would like to congratulate the auditor. I think the people of Ontario have to recognize that we are very fortunate to have an auditor in this province who is not willing to sit back and see something happen that is totally contrary to the interests of the taxpayers.
I can use words that I recognize the auditor can't use, and I certainly heard Mr Peters's opening comments in which I think he was being very fair to the government. But I think anyone reading through the rest of this report today will see it for what it is: It is a very damning indictment on the bookkeeping of this government in this province in this year.
I think the people of this province have a great deal to be concerned about if any government has the kind of bookkeeping to the extent that, for the first time in the history of this province, we have an auditor who has concerns to the degree that Mr Erik Peters has. For the first time in this province, the auditor has not been willing to give an unqualified opinion on how the province is doing the business of keeping its books.
The auditor can't use language such as "cooking the books," but as someone who isn't an auditor -- I am a layperson in this field, but reading the auditor's statement before us today confirms essentially that the provincial government has been cooking the books. I hope, as a matter of fact, we will never have to be faced again with such a damning indictment of any provincial government in Ontario.
The concerns, Mr Peters, that you've identified about the offloading of some of the financial management in this province by the formation of new crown corporations, as under Bill 17, are the concerns I'd like to address to you in my questions. You have said, first of all, that the government has agreed to your recommendations of new accounting procedures. I am encouraged that at least they have accepted that much, but my concern is, will those new accounting procedures force the government, with its new crown agencies -- in other words, this money it's going to sidestep and put in another pocket -- to make those agencies report back to this same consolidated revenue fund figures that they had originally? I know they're setting up a new shop here with the new crown agencies, but what happens to the debt load that will be shifted when this bill is proclaimed establishing these agencies?
Also, you have said in your recommendations that it should include all organizations owned or controlled by the government. Mr Peters, would that include all government agencies, boards and commissions that have a financial tie to the government? I'm thinking right away of Ontario Hydro, for example. Is there a way, through your recommendations, of controlling the bookkeeping procedures of Ontario Hydro as an example of all organizations owned or controlled by the government?
Mr Peters: The answer to that question is that we have to analyse every situation very carefully. Ontario Hydro is currently reflected in the consolidated revenue fund through the debt that the province takes on in its name. That is reflected, then, as a recoverable from Ontario Hydro. Also reflected in the accounts are the guaranteed payments that the province makes out of the consolidated revenue fund.
It would be quite a judgement call whether all of Ontario Hydro should go in, on the basis that, although some control is exercised by the government, the revenue source for Hydro is actually out of the fees paid by consumers of electricity in the province and therefore it does have an independent revenue source. The extent to which the province actually can control that revenue source would determine to a great extent the inclusion or exclusion of Ontario Hydro. My instinct is that it is not likely that all the operations of Hydro will find their way into the books of the province.
Mrs Marland: Are there any crown agencies other than the schedule 4 we've referred to that should come into this new bookkeeping procedure?
Mr Peters: We are currently doing a head count of these. I don't know, Mr Leishman, if you would like to comment on that a bit further.
Mr Kenneth Leishman: The head count is being done by the controller's office of the ministry of treasury right now. I know that as of yesterday they hadn't come up with a final total of agencies that would be consolidated with the consolidated revenue fund, but some examples would be TVOntario, Ontario Place, the Ontario Science Centre, agencies like that.
Mrs Marland: So you don't have the answer to that question today.
Mr Peters: No, that is being worked on. That's some of the work that is being done.
Mrs Marland: Even though some of these other agencies are multimillion-dollar operations.
Mr Peters: Very much so.
Mrs Marland: Are they of concern to you?
Mr Peters: Yes, they are, and the way they will be reflected in forming a view of the financial position of the province as a whole. They are of concern and they will be looked at one by one.
Mrs Marland: Do you see any effect of your statement today, which is a confirmation of what's been going on with the bookkeeping in this province, on our credit rating because we now know publicly that the provincial NDP government's been cooking the books? Is there going to be any effect on our credit rating?
Ms Margaret H. Harrington (Niagara Falls): The auditor didn't say that.
The Chair: Order, please.
Mrs Marland: Just read the report.
Interjections.
The Chair: Order. Mrs Marland has the floor.
Mrs Marland: This is the first time in the history of this province that this has happened. What effect, if any, might this have had on our credit rating?
Mr Peters: The answer is probably none, although in future it will be a positive. In other words, any credit rating agency will look forward to better accounting. But it is not a negative now. We have contacted some of the rating agencies on this, because the analyses that we are proposing -- they essentially, in analysing our accounts, have done exercises such as the one Mr Phillips described. They take the budget and they discount and add and deduct, and they come to their own numbers. They carry out very careful analyses, and these analyses were carried out. That's why my answer is that they are not.
The Chair: Mr Stockwell, you have approximately two and a half minutes left.
Mr Chris Stockwell (Etobicoke West): Quickly, I applaud you as well. I certainly think it's about time we had an auditor with a backbone.
Interjection.
Mr Stockwell: Look, I'm saying it. Fine, I have two and a half minutes. He has a backbone; good thing. The previous auditor, in my opinion, was complicit in some of these things. We preflowed for 15 years; that was a mistake. All governments did it. Granted, that was almost Mandrake-like in magician's smoke and mirrors; this government's taken it to Houdini-like levels.
My question has to do with the $600 million to school boards. Why can't you tell us right now that they have to show that in their debt books? Clearly, it's nothing but smoke and mirrors. They're telling the school boards to go out and borrow the money for capital improvements -- "We'll guarantee the loan, we'll pay you back" -- to move the debt off the books so they can fool the taxpayers again. Why can't you tell us right now that it is just unacceptable and no auditor would sign off on that kind of stuff?
The Chair: Let's find out from the auditor what he has to say.
Mr Peters: If it is reflected as it is in the books of the province, then I can comment upon it, but it's not yet reflected in the books. I do not know how the Ministry of Finance wants to deal with this transaction in the books, because the corporations to which it is flowed are currently still being set up. I don't think they will be operational before January. We will look at the transaction.
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Mr Stockwell: Okay, let me ask you this, very hypothetically: If they do set it up the way they suggested they're going to set it up and tell the school boards and the hospitals, "Go out, borrow money on our behalf and we'll pay you back," will you insist that it become part of the deficit, part of the debt, of the province, if it's a guaranteed loan from the provincial government?
Mr Peters: If it is guaranteed. If the current intent, as it is stated now -- I'm putting a little bit more into the question than you asked me -- is that this money is to be repaid out of future appropriations of the province -- and this is what I'm saying in my statement -- and not out of other sources of revenue outside the consolidated revenue fund, yes, I would think it would be an expenditure for the current year.
The Chair: One final question.
Mr Stockwell: The Treasurer has suggested since day one -- and I've been arguing this point with him all along, about the fact that I suggested a couple of years ago that they were cooking the books. I remember sitting here debating that issue. The government may argue the point of view, but I believe it was cooking the books. They've been cooking them for a few years, and the benefit is to convince the people that the debt is less than it truly is. I mean, that's the game plan, and your table shows it. Floyd Laughren was trying to tell everyone in the province of Ontario we owe less money than we really do, and some would suggest that's almost fraudulent.
You're suggesting it won't affect our credit rating. Can I ask you, won't it affect our credit rating? Because the only people the Treasurer certainly couldn't fool, other than maybe some opposition, is the bond rating agencies. They're not kidded by this kind of cooking of the books and they've appropriated our credit rating based on the fact that we have a higher debt than actually reported.
Mr Peters: Two points on that: The credit rating agencies have been aware. They're delighted with what we're doing, because that means that the reconciliation --
Mr Stockwell: Is a lot simpler.
Mr Peters: -- is a lot simpler for them.
Mr Stockwell: But they've been reconciling.
Mr Peters: They have been reconciling. But on the other part I'm under no impression -- and I would have reported on that if the debt were actually higher. The debt is stated as it is. That is a careful analysis that we can confirm with the people who --
Mr Stockwell: The deficit, I meant to say.
Mr Peters: The deficit, yes, that's a different story.
Mr Stockwell: It's been higher and they've been trying to convince people that it's actually less than it truly is.
Mr Peters: Well, that would be --
Mr Stockwell: I hate to put your back to the wall, but I'm going to.
The Chair: At this point we'll move on.
Mr Stockwell: Quickly, then, why would anyone do what they did? The only explanation can be that they're trying to convince people the deficit's less than it was.
The Chair: I'm going to have to interrupt, because we've gone over the time that was allocated.
Mr Stockwell: It's a pretty tough question to leave the auditor hanging on, though.
The Chair: Very briefly. Just to be fair to all three parties, there's limited time, so I want to stick very closely to the time allocation.
Mr Peters: I'll answer the question in this way, and it may not please any one of the parties, but the difficulty -- and this is why I made this advocacy statement at the very end -- is really that we have to come clean on what accounting rules we want to use when we budget. Over the history of the province, budgeting has been a mix of statements of cash flow or expenditures or revenues, and all three have been, in a way, mixed up. There has to be a careful analysis conducted. And it's not just this government; it has been most governments.
Mrs Marland: That's why you're saying use it for future budgets.
Mr Peters: Use it for future budgets; come up with one clean set of rules that say, "This is how we budget and this is how we account for the transactions." What has happened in the past is that we have not had these clean rules.
Ms Harrington: The first thing I want to clarify is that in the first member's comments he mentioned $5 million with regard to the pension payments' interest. In the auditor's report which he presented to us just today, or his comments, he mentions $2 million. There seems to be quite a discrepancy there, and I would believe this one. Mr Auditor, would you like to comment?
Mr Peters: I said at least $2 million. That is the bottom number. It depends on the assumptions. Using Mr Phillips's assumption, it could have been as high as $5 million. I would agree there's a variety. All it means is that we have to apply an interest rate to a very large amount of money, and it really depends on which interest rate you're using, the one at which they're currently borrowing compared to the one they're earning on investments, just exactly which way it goes. But it could have been as high as $5 million. These are not numbers grabbed from the air; they are there.
Ms Harrington: But you do mention $2 billion; you say at least $2 billion.
Mr Peters: At least $2 million, yes.
Ms Harrington: Sorry, $2 million.
The media have suggested that the auditor has not signed the books. Obviously that is wrong because your signature is right here, so I think I'd like to clarify that. In fact, you do say very clearly here:
"In my opinion, except for the failure to record expenditure in the year in which it has been incurred as described in the preceding paragraph" -- referring to the pension payments -- "these financial statements present fairly, in all material respects, the financial position of the province's consolidated revenue fund as at March 30, 1993, and the results of its operation and the changes in its financial position for the year then ended in accordance with the accounting policies stated in note 1 to the financial statements."
I think it's very clear what your position is. I do want to make reference to the word "qualification" in your endorsement of the books. If there is a qualification, it certainly does not mean the auditor does not endorse the books, isn't that correct?
Mr Peters: No, it means just that. Maybe I can just walk you very quickly through the three alternatives that are available to an auditor under these circumstances.
If the amount had been small enough and the procedure insignificant enough, then we could have given a so-called unqualified opinion. As it is, we gave a qualified opinion which says that one part of these financial statements, or one amount, has not been properly reflected.
The third alternative -- and I should confess to you that we had contemplated that, but did not do this in light of all that we saw -- is what is called an adverse opinion, and that is where the auditor comes out with the clear opinion that it does not fairly present. We did not give an adverse opinion. We qualified on the specific expenditure, and I think I'd like to refer you back to the opening paragraph of my statement in which we acknowledged the accounting procedure. We were able to identify --
Ms Harrington: But a qualification does not mean you do not endorse the books?
Mr Peters: I endorse the books except for the failure to do this certain thing.
Ms Harrington: Okay. I'd like to point out that I believe federally over the last 12 years there has always been a qualified endorsement of the budget.
Mr Peters: No, of the books.
Ms Harrington: Yes.
Mr Peters: But one small correction: There was one year where they did give an unqualified opinion. I'm not sure which exactly.
Ms Harrington: Okay, one year out of 12 federally that was unqualified; the rest have been qualified endorsements of the books?
Mr Peters: That's right.
Ms Harrington: Thank you. One further thing I wanted to mention: You talked about meeting with the minister and his officials and working towards an agreement on the best way to do this accounting in the future. I understand you've met with him quite recently. Could you update the committee on any further progress in that regard?
Mr Peters: We didn't discuss progress. What I discussed with the minister is that he had written me a letter. It is standard practice for me, before I include a document of this nature, that I would discuss with the minister that he's in agreement that he is quoted in this fashion. Most of our conversation related to his agreement to permit me to quote him in the fashion that I've done in the report. The second part: A long discussion took place essentially on what I do on budgets versus what I do on the financial statements of the province.
At the same time, in the discussion, there were ministry officials there as well and they assured me that they continue to work on the analyses and the work that is necessary to strive towards this goal for the --
Ms Harrington: In effect, you and the Minister of Finance are working together?
Mr Peters: Definitely, as he expressed in his letter; I would not have put it in if I didn't believe him.
Mr Owens: Mrs Marland quite substantially covered the ground I was intending to cover with you.
Ms Harrington: I'm not Mrs Marland.
Mr Owens: Sorry, Mrs Harrington.
The Chair: That's a Freudian slip.
Mr Owens: Which side am I on here today?
Mrs Marland: I thought it really was a love-in.
Mr Owens: We'll just leave that right where it is, in view of the television cameras here.
Interjection: Take it slowly.
Mr Owens: Yes, this is a sheltered workshop. Terms of being the minister's parliamentary assistant, I want to tell you that we appreciate the tough and clear language with respect to your recommendations. As the minister has indicated, we have accepted your suggestion with respect to the PSAAB accounting process and we are working diligently to get to that goal.
I guess in terms of some of the things that have come from the other side, and I listened quite carefully to the messages that you've sent out, you may have understood that, but in terms of the references to cooking the books and flimflammery and moving things around, in your looking at the accounts of the province, in your opinion, did you see any kind of manipulation or cooking the books or any kind of intentional moving of figures around to reflect perhaps a rosier picture than is actually there?
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Mr Peters: Only to the extent that I've pointed out in my opinion.
Mr Owens: Thank you.
Mrs Marland: Could we have another five minutes?
The Chair: I don't think this is the time for five minutes. How about two and a half to three minutes? The bells in the Legislature will probably ring before we go through that. So we'll start with Mr Phillips for about three minutes.
Mr Phillips: I want to follow up on Mr Owens's comments, because I think when you see words in the auditor's report like "the practice of preflowing expenditures can be and has been viewed as an attempt to manage the deficit, thus raising doubts concerning the integrity of the accounting process," that comes very close -- I've avoided the words "cooking the books" because I have a lot of personal faith in the Minister of Finance. I value his integrity, so I've avoided the words "cooking the books," but this comes as close to cooking the books as you can get without being accused of cooking the books.
I don't think we should in any way underestimate the message we're getting from the Provincial Auditor. He is saying that in his opinion this is an attempt to manage the deficit and that it puts at risk the integrity of the process. I think that for the financial community that's a very strong message that says the books are at least fudged.
In response to the other comments, I asked back in June 1992 on this, on the interest rates, the premium we're paying for this scam almost of moving $500 million of payment due January 1 to April 1. That cost, in my opinion, without any doubt, $5 million. I asked the Treasurer, the Minister of Finance, "What kind of interest premium are we paying?" He said in response, "Yes, the amount we can borrow ourselves is much lower than the interest we're paying the teachers because of the agreement, much lower." He confirms that we are paying 11%. He indicates at that time -- this is in June 1992 -- the cost was at least $2 million. That was the Minister of Finance. That may be where you got your $2-million figure. Six months later, when the transaction actually took place, I looked at 90-day treasury bills and the government could have borrowed that money at 7.3% and saved the taxpayers $5 million. That went right down the drain.
There is a question of credibility for the government in all this, but there's a subissue of, without any doubt, just straight out-and-out waste. As I say, I've avoided saying "cooking the books," but now that you've raised it, I think that the auditor has come as close to saying: "Listen. This has put at risk the integrity of the process." That's why I think there's a sense of urgency of this committee supporting the Provincial Auditor in his quest to get the government to move very quickly to change the books. Again, I can take my hat off to the Provincial Auditor for doing us a service.
The Chair: Thank you. Mrs Marland, we've run out of time.
Mrs Marland: Mr Chairman, you know, it's very interesting to hear an NDP government member ask the auditor if in fact they were cooking the books, using my words. You know why it's interesting? Because you still got a qualified answer from the auditor. You still got the auditor saying, "No, with the exception of those areas that I identified." So in fact the auditor is trying to tell you something and you still don't hear it. You're still defending what has gone on.
Why don't you say, "We don't agree with what's gone on"? Your Treasurer is saying he's willing to change the accounting procedures, so why don't you accept that what's gone on is wrong? It's morally wrong; it's financially wrong. I don't know what it takes to get through to you. This has been a practice described as "inappropriate shift of expenditures between two fiscal years." How much clearer does it have to be, to put in it black and white?
Mr Auditor, the question that I have to you is, based on the establishment of these crown corporations under Bill 17, which again I say is simply moving money out of one pocket into another, do you have any comment to make about how that might affect future privatization of those crown corporations? And what happens with the debt they carry with them? Where is the future of privatizing Ontario Hydro, for example? Who will assume that debt as a crown agency of this government?
Mr Peters: A tough question to answer because there are really three parts to it.
Firstly, the corporations that are currently being established were established with the intent of privatization. One of the encouraging features of their establishment is that they will follow generally accepted accounting principles, which are the accounting principles used in the private sector. This is the only way that the government, with the other accounting principles that it uses, actually could attract private investors or attract private interests. So purely from my perspective on the accounting area, this seems to be a sound step in that particular direction.
On the second part of your question, I do express a concern, which is that if these corporations continue to be outside the books of the province, we really will have difficulty to determine what the actual financial position of the province is. That relates to the third part of your question, and that is that if these corporations have borrowings and do other transactions and we keep this out of the financial position of the province, we may not get the whole picture. That is why I made that encouraging comment of, "Let's bring them in under the umbrella and reflect them in some way."
Mrs Marland: So you share my concerns.
Mr Peters: I do, yes.
The Chair: Mr Bisson for two minutes.
Mr Gilles Bisson (Cochrane South): I think we've been treated to a number of speeches on the part of the opposition parties in regard to what you have presented to this committee. What I have taken out of this in reading your report and in what has been said here today is that you're basically saying that in regard to the cash management, the auditing practices and the way the budget is reported in regard to the books is okay in regard to the cash management and in regard to the way the number of ministries have been managed. Basically, what you're doing here is that you're not condemning an entire process, how the budgeting process is done; what you're saying is that you have a question about one particular practice that has been done for a while and you're asking the government to take a look at it.
Interjection.
Mr Bisson: I see we have another debate. I wonder if you just can comment on that.
Mr Peters: If I may, I hate to disagree with you on this particular point, but my comments are somewhat more far-reaching. We are questioning the relationship between the budget and the actual accounts.
Interjections.
The Chair: Order, please.
Mr Peters: Thank you. We are advocating the accrual accounting, which it's not currently, getting away from the modified cash basis in which recording of expenditures is actually determined by when they're being paid as opposed to when they are actually incurred. So that is very far-reaching and that is actually where most of the analysis work is being conducted.
The other part which we are recommending and which is commented on is that after having carved corporations out of the consolidated revenue fund, there must be some concern now as to how we reflect the financial position of the province, taking all its financial activities into consideration. So those are the two key things that we would like to see in there.
The Chair: I believe, Ms Poole, you had a point of order and you wanted to raise a motion for consideration.
Ms Poole: That's right. The motion was my point of order.
I move that the public accounts committee express our complete confidence in the Provincial Auditor, Mr Erik Peters, and recommend that he continue his diligent efforts to reform the accounting system of the government of Ontario.
Mr Stockwell: That's a fabulous motion.
Ms Poole: The reason I raise this motion is that I was quite distressed at one comment of the Treasurer, where he implied that Mr Peters had some difficulty understanding what was going on because he was new. I think the auditor has shown, since he took office, that he has an excellent understanding of the government books and of the necessity to have the system reformed, and I would like to express our complete confidence in him.
The Chair: Any quick comments on that?
Mrs Marland: I have a point of order.
The Chair: A point of order will be entertained first.
Mrs Marland: The point of order is that I'm quite happy to debate a motion if the committee agrees to extend the sitting time. So what are we going to do? Are we going to have this motion and extend the sitting time? Frankly, the auditor has already done this. We're grateful for the fact that he has already done his job, and he doesn't need a motion to continue to do the job he's already done in an exemplary fashion.
The Chair: Can I just try and help with regard to the time lines here? If there is general agreement that the motion not be debated, then the motion can be put on the floor for a vote. If there is no consensus, then we will have to defer this for further debate. Is there a consensus?
Mr Stockwell: It doesn't matter; he's doing it anyway.
Mrs Marland: He's doing it anyway.
The Chair: Obviously, there's no consensus.
Interjections.
The Chair: Order. To get some sense of order on this, if there is no consensus, then obviously there is further debate required.
Ms Poole: I move that the question be put.
The Chair: There has to be some debate around the matter, and obviously there is no consensus. Before I entertain that motion, there has to be debate on the original motion. Any further debate on this matter? No debate? If not, all in agreement with regard to the motion? All in favour? Passed unanimously.
That concludes our deliberations this morning. Until next week, we are adjourned.
The committee adjourned at 1202.