2000 Legislative Session: 4th Session, 36th Parliament
SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS
MINUTES AND HANSARD

MINUTES SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS Tuesday, May 30, 2000 8:30 a.m. � 10:00 a.m. Douglas Fir Committee Room Parliament Buildings, Victoria

Present: R. Thorpe, MLA (Chair); E. Gillespie, MLA (Deputy Chair); P. Calendino, MLA; D. Streifel, MLA; E. Walsh, MLA; D. Zirnhelt, MLA; M. Coell, MLA; J. Weisbeck, MLA; J. Weisgerber, MLA

Unavoidably Absent: R. Kasper, MLA; G. Farrell-Collins, MLA

Officials: W. Strelioff, Auditor General; A. van Iersel, Comptroller General

1. The Chair called the Committee to order at 8:38 a.m.

2. The Committee heard testimony on Report on Government Financial Accountability for the 1998/99 Fiscal Year�, Part I � Report on the 1998/99 Public Accounts. The following witnesses appeared before the Committee:

Office of the Auditor General:
o    Keyvan Ahmadi, Senior Principal, Financial Audit Unit
o    Ada Chiang, Audit Manager, Financial Audit Unit

Office of the Comptroller General:
o    Arn van Iersel, Comptroller General
o    Kit Chapman, Director, Corporate Financial Accounting

3. The Committee adjourned to the call of the Chair at 10:01 a.m.

Rick Thorpe, MLA Chair

Craig James Clerk of Committees and Clerk Assistant

The following electronic version is for informational purposes only.
The printed version remains the official version.

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE 
ON PUBLIC ACCOUNTS

TUESDAY, MAY 30, 2000

* denotes member present

 

Other MLAs present:	Doug Symons (Richmond Centre L)
Clerk:	Craig James

[ Page 1513 ]

The committee met at 8:38 a.m.

R. Thorpe (Chair): Okay, we could get started. We seem to have misplaced Mr. Mitchell from the public documents area. While they're looking for him, we'll move along here.

I just want to make sure that all members note that they received a copy of a letter on a question I had asked with respect to the product distribution centre. It's with respect to its location -- earthquake preparedness. We received a letter from Bill Douglas, the director of the emergency preparedness branch, Ministry of Health. I'm going to ask the Clerk's office to forward a copy of this letter to the provincial emergency program. I'm personally quite concerned when I read the second paragraph of the letter, and it states that: "The product distribution centre. . .the site is on a known floodplain. . . ."

S. Orcherton: Have we got the letter?

R. Thorpe (Chair): I believe it was circulated to all members. . . .

S. Orcherton: Because I've got the whole package here.

R. Thorpe (Chair): . . .on your desks in the House yesterday.

". . .the facility is constructed from tilt-up concrete panels, a mode of construction sometimes noted for less-than-optimum seismic resistance." So I'm a little concerned about that, and I'll be asking the Clerk's office to forward that to the provincial emergency program. If we could, when we forward it, maybe we could ask them for some comments and some feedback with respect to this concern.

Are we ready to. . . ? Yes, Steve.

S. Orcherton: I've got the letter here. I think you referred to the writer as someone other than Bill Douglas, unless I heard that correctly.

R. Thorpe (Chair): I thought I said Bill Douglas. Did I say something else?

S. Orcherton: I think so. That's why I had difficulty finding it.

[0840]

We do not have the people from records? Then we'll move along, and we'll go right to the No. 2 item on our agenda: the "Report on Government Financial Accountability for the 1998-1999 Fiscal Year." Perhaps if we find the people that are looking after file retention, we can deal with that in the last few minutes of the meeting today.

I guess we would ask the auditor general and his staff to make their presentation.

W. Strelioff: Thank you very much, Chair, and members and colleagues. I think most of you have this report, and a copy of the presentation that we're going to lead you through.

With me today are Keyvan Ahmadi and Ada Chiang, and they're going to give you an overview of the contents of our report. So take it away.

K. Ahmadi: Thank you, and good morning.

R. Thorpe (Chair): Excuse me, Keyvan. Have we got someone who could raise the presentation up here so. . . ?

A Voice: I have to get some more stacks of paper to do that.

R. Thorpe (Chair): We do not have a shortage of paper -- I guarantee you.

D. Zirnhelt: We would have if we'd completed section 1 of the agenda.

K. Ahmadi: Good morning. This is the ninth report of the auditor general solely dedicated to the public accounts and their related matters. It's the report on 1998-99 Public Accounts, which were published in September of '99.

This report has two parts. Part 2 of the report, which the committee wishes to address at a future date, deals with the auditor general's comments on provincial debt and its reporting. Today we are looking only at part 1 of the report, which in summary deals with the financial statements of the province and audits of those.

As well as comments on those statements, part 1 also provides commentary on the financial highlights related to the revenue, expenses, deficit and debt over the last five years and presents, on pages 70 to 80, information on the extent of our direct involvement in auditing of organizations that together make up the reporting entity.

In terms of dollars of the total assets, liabilities, revenues and expenses of these organizations, we annually directly audit almost one-third. For the balancing two-thirds, we rely on our review of the work done by other auditors.

Though we are not directly involved in auditing all organizations included in the government reporting entity, the auditor general may find it necessary to comment, from time to time, on the appropriateness of accounting and financial reporting standards used by any organization or sector that he believes is a part of the reporting entity.

So in that line, in our report on the 1997-98, which was the report prior to the one that we're looking at today on the public accounts, we commented on the need for better accounting standards for school districts. This year we are pleased to report progress in that area. The Ministry of Education now plans to implement new accounting and financial reporting standards for school districts in July 2000.

Now, if I may, I would like to return to the province's financial statements and the public accounts and today's first presentation. Here with me is my colleague Ada Chiang, who manages the audit of the summary and consolidated revenue fund financial statements. She is going to make a presentation first on the portion of the report that starts on page 17 and ends on page 54.

[0845]

[ Page 1514 ]

The auditor general's report on the summary financial statements for the fiscal year ended March 31, 1999 was once again qualified. The reservation was with respect to the completeness of the government's reporting entity. The government continued to exclude from its financial statements all regional hospital districts, public health care organizations, universities, colleges and institutes and school districts. These organizations are often referred to as the SUCH sectors.

The government's general accounting policies defined what should be included in the summary financial statements of the province. These statements are intended to include all organizations that are accountable for the administration of their financial affairs and resources, either to a minister of the government or directly to the Legislature, and are owned or controlled by the government. However, for purposes of the reporting entity, entities that have initial accountability to a local board are excluded from consideration as being accountable to a minister of the government or directly to the Legislature.

We believe these organizations are nevertheless accountable to the government. Local accountability for providing essential services cannot satisfy the overall need for accountability for these services to all British Columbians, and therefore they should be included in the financial reporting entity. The impact of this qualification is described in detail in the auditor's report and is also discussed on pages 32 to 33 of the report.

In summary, had the SUCH organizations been included in the province's financial statements for the fiscal year 1998-99, total assets and total liabilities would increase by $4.2 billion and $1.9 billion respectively, resulting in a decrease in the net deficiency of $2.3 billion. Similarly, revenue and expenses would each increase by about $1.7 billion, resulting in a decrease in annual deficit of $45 million for the year.

In our report on the 1998-1999 public accounts, we commented on the changes in the presentation of the province's financial statements, changes in accounting policies and also the application of certain government accounting policies. These matters are discussed in detail on pages 34 to 52 of the report. Here we will outline the highlights of those comments relating to capitalization of tangible capital assets, prepaid capital advances for health facilities, liability for post-retirement benefits, contingent liability for environmental cleanup costs, insurance risk management accounts and contributions to government organizations.

Capitalization of tangible capital assets. The capitalization of tangible capital assets started in the 1995-96 fiscal year. The government plans to complete its capitalization process by the year 2002. This plan is summarized in exhibit 2.2 on page 39 of the report.

[0850]

Highways. According to the capitalization plan, the government was to capitalize highway infrastructure in the 1999-2000 fiscal year. During 1998-99 the government decided to transfer almost all the provincial highways held under its responsibility -- valued at $4.1 billion -- to the B.C. Transportation Financing Authority. We were satisfied that the government made a reasonable effort to determine the accuracy of the value of the highways transferred. In examining the costs of computer software development, we noted that the cost of employee salaries directly attributable to the construction or development of the asset is not included in capitalization, while the cost of contractors' fees performing similar development tasks would be included. This exception is inconsistent with standard accounting practices. We recommend that the government review its accounting policy for constructed assets in this regard.

Prepaid capital advances. In the 1998-99 fiscal year, the government adopted a new accounting policy on prepaid capital advances. Under this policy, funds advanced by the government to specified government organizations for the purchase of tangible capital assets are recorded as an asset of the province. Prepaid capital advances are accounted for as an asset in the province's financial statements, because the province has an ongoing claim to the use of tangible capital assets that are acquired by government organizations from the capital funds provided by the province. The advances representing the underlying tangible capital assets are considered a future benefit to the general public, in that the assets are dedicated to the delivery of government programs such as transportation, health care and education.

This new accounting policy resolves a longstanding issue on which the auditor general has commented extensively in the past, questioning the appropriateness of recording as loans moneys advanced to schools for post-secondary education institutions and health organizations. Repayment of these loaned moneys depended on future government funding.

Related to the prepaid capital advances issue, we commented in the report on our concern over the accounting of prepaid capital advances for the health facilities. In the fall of 1997 the province and the greater Vancouver regional district, GVRD, reached an agreement to embark on a major transportation initiative in the greater Vancouver region. Key in the agreement was the creation of a new corporation, the Greater Vancouver Transportation Authority, or GVTA, responsible for providing an integrated transportation system in the greater Vancouver region.

The delegation of transportation responsibilities to GVTA also included certain funding arrangements and responsibility for future expansion of the transportation system in the greater Vancouver area. Some specifics of the funding provisions include: transferring ownership of certain assets and debt obligations associated with the transit operation in greater Vancouver from the province to GVTA, transferring the motor fuel and parking sales taxes that the province collects in greater Vancouver to GVTA, and granting GVTA the power to raise revenues through use of fees, tolls, vehicle charges and taxes.

[ Page 1515 ]

On January 1, 1999, the government dissolved the GVRHD and assumed all of its debt obligations, including the portion expected to be paid off by taxpayers within GVRHD. The government has released GVRHD's debt and accounted for it as a prepaid capital advance. This accounting decision was made on the basis that the funds originally advanced by the government to the GVRHD were used for the construction of health facilities in the district -- facilities on which the province is now holding a  claim -- which will be used for delivery of health care services in the future.

[0855]

Furthermore, it appears that in order to lessen the burden of the operating costs of the GVTA's new responsibilities, the province allowed the GVTA to introduce a transportation levy. In turn, the province agreed to drop the existing hospital levy that was used to finance the operating costs of the GVRHD's health facilities.

Accounting should reflect clearly the underlying intentions and the economic effect of the transactions. Because of the way that the arrangement is documented, we were unable to conclusively determine the government's underlying intentions in entering into this complex transaction. In other words, it is not clear whether the release of the GVRHD's debt by the government has been a funding activity related to health care or to the transfer of transportation responsibilities to GVTA. Under the circumstances, we believe, both of these suppositions are plausible.

The public accounts have been prepared on the basis of the former supposition. However, the latter supposition is equally plausible because even though no change has occurred in health care or transportation services provided to the public, the health care cost to the province has substantially increased and the transportation cost decreased. Had the latter supposition been the case, then the amount currently recognized as a prepaid capital advance would have been accounted for as a contribution and expensed by the government. Had the government's release of the debt obligations of the GVRHD been expensed, the province's annual deficit for the year ended March 31, 1999, would have increased by about $260 million.

Because government accounted for this transaction based on plausible explanations, the auditor general's report on the province's financial statements was not qualified on this matter. However, to avoid uncertainty in similar cases in the future, we recommend that in all cases, but particularly when negotiating significant multilateral business transactions, the government clearly articulate its underlying intentions and the economic effects that it is expecting to realize, so that proper accounting of those transactions can be determined.

[0900]

Contingent liability for environmental cleanup costs. Many sites around the province are contaminated and require restoration. The cost of cleaning up contaminated sites could be significant. For a number of years the government has included an accrual in the province's books to provide for the cost of cleaning up certain sites known to be contaminated, for which the province is responsible. As at March 31, 1999, a provision in the amount of $44 million was provided for in the financial statements. We believe that the government's year-end procedures to determine whether the $44 million provision is a reasonable estimate to cover all cleanup costs is inadequate.

We recommend that the government establish formal procedures for reviewing annually the reasonableness of the environmental cleanup liability recorded in the public accounts. The government should ensure that all provincial sites for which the province is responsible are included in computing the total liability for restoring contaminated sites.

Insurance risk management account. The province insures risks of various classes of persons working in the public sector, including many in the health and education sectors. In the past the government recorded a liability only when claims had been registered and accepted by the government's risk management office. No liability would be recorded for incidents that may have occurred as of March 31 of a given year before which no claim had been filed or, if filed, had not yet been accepted by the government. This matter was satisfactorily resolved in the fiscal year 1998-99.

Contributions to government organizations. For government contributions to be recorded as an investment, there must be a reasonable expectation of financial return. Last year in our report on the 1997-98 public accounts, we commented about the appropriateness of recording as an investment the $45 million contribution the province made to Columbia Basin Trust on April 1, 1996. The contribution is to be spent by the trust for the ongoing economic, environmental and social benefit of the region. There does not appear to be any expectation of a financial return to the consolidated revenue fund. Furthermore, the recipient corporation is not a business enterprise that could sustain its operations without ongoing subsidies from the government. We recommend that the initial contribution to the Columbia Basin Trust currently recorded as an investment in the consolidated revenue fund be written off and expensed as a grant in the province's accounts.

Our last comment on this section of the report is about the accounting for government enterprises. A number of commercial enterprises are included in the summary financial statements using the modified equity method rather than the line-by-line consolidation. This means that instead of aggregating all assets, liabilities, revenues and expenses of these enterprises line by line in the summary financial statements, the government records only the original costs of its investment in these entities, adjusted annually for the net

[ Page 1516 ]

[0905]

The significance of the information currently excluded from disclosure in the summary financial statements is shown in exhibit 2.3 on page 54 of our report. This concludes our presentation on this section of the report.

R. Thorpe (Chair): Did we want to do any questions, or did the comptroller general want to make a presentation here?

A. van Iersel: It's up to you, Chair, and the members. We do have a presentation, which we'd like to give, but if you want to take. . . .

R. Thorpe (Chair): That complements what has been presented here?

A. van Iersel: Yes. I was making notes as the office of the auditor general was speaking, and I think all the issues will be covered in my response, with two exceptions.

R. Thorpe (Chair): Okay. Go ahead, then, Arn.

A. van Iersel: Maybe the best thing I could do now is just deal with those.

In terms of tangible capital assets and the preparation of guidelines for what is to be capitalized when we're dealing with parkland, I believe we have made a change to the policy in chapter 10. I will share that with the office of the auditor general and make sure that they're in agreement with it.

The other question was on the inclusion of salaries in terms of capital costs. I just want to make a clarification here. We purposely do not include salaries of civil servants in capitalization. It's done for a management budget control reason, in the sense that the provincial budget, by ministry, provides the salaries of those people where those people contribute to the development of a system or another capitalizable item. I've always given the advice that they cannot capitalize it. I realize it is inconsistent, but I do it for the purpose of making sure that the moneys that are voted in the estimates are not used for purposes other than what they are intended, so we don't have a fuzzy line between what is in the estimates book and what gets capitalized.

So in the early years of capitalization, I'm trying to enforce discipline, in the sense that salaries provided in the estimates are used separately from what is a capitalizable item. I realize that's treating contractors and salaried staff differently. But as I say, I'm doing that for control purposes at this time. I think I would say that we would revisit that once capitalization is fully implemented, people are comfortable and we have the right control systems in place.

Those are the only two items that I hadn't anticipated addressing in my remarks. If it's now the committee's pleasure, I'd like to call forward Kit Chapman, the director of corporate financial accounting, who's going to assist me -- first and foremost, in running through the slides and also in helping me answer any questions that you might have at the end.

Like the auditor general's office, we have a presentation. Copies of it should be before you. We're trying to do what was asked of the committee, in the sense that we issued these presentations, as the office of the auditor general did, a number of weeks ago. We're trying to instil that discipline in all people that appear before the committee, such that you have time to review them, and to prepare and note any questions that you might wish to ask.

I'd first like to say we have, in my view, a very good relationship with the office of the auditor general. I realize that it's still to be tested in terms of. . . . We have a new auditor general, and I hope -- I expect, really -- that our relationship will continue to be as positive as what it has been in the past. Our offices work closely together because in many respects, we're after the same thing, which is proper disclosure, proper accountability and trying to move ahead in terms of the information that is distributed by our office in terms of the financial statements.

Kit Chapman is here today as the director of corporate financial accounting. It is her branch, within the office of the comptroller general, that has primary responsibility for preparation of the public accounts. Kit has been here in past years, and Kit worked very closely with Ada, who just finished her presentation.

The first thing I should say is that these are the '98-99 public accounts, and I find it a little odd myself because we're very much focused on the accounts for '99-2000. These are a bit of history, but this is our first opportunity to go through it. In many respects, on some of the things that have been noted, we've already made improvements to.

[0910]

I'll deal with some of the things where we agree and they're positive. We continue to work together on the content and the timeliness. On September 16 these public accounts were released. That was one month earlier than the previous public accounts, and as everyone knows, we've now made a commitment through the budget transparency and account-

[ Page 1517 ]

This has meant a great deal of work in both our respective offices. We had to come up with a new timetable for the preparation of those public accounts, find deficiencies, make better use of technology and so forth. So we're tied together for some period of time. I'm not saying that August 15 is the best we can do. As long as I'm comptroller we'll continue to look for ways in which the statements can be accelerated even earlier. I know that I've been reminded here in the past that Alberta releases its statements by June 30. But I do argue a little bit, in the sense that they follow a quite different financial regime than we do in the way that their estimates and their public accounts are put together. Timeliness has improved since I've been comptroller. That's no disrespect to my predecessor; I sort of made that a focus for myself.

We have had better reporting of business enterprises in terms of their disclosure. We also now include government partnerships, which is something that we previously did not do. An example of that would be the Canadian Blood Agency. Some of these are not voluntary, in the sense that our correspondence with the Blood Agency is that they'd rather not be included. We've worked with our office of the auditor general and indicated our reasons. I think, in this regard, B.C. may be a little bit ahead of the rest. We're going to keep an eye on that.

We also changed our recognition for government transfers to make sure that they reflect the substance of what the moneys are being used for. This was an old issue regarding the year-end. We want to make sure that when dollars are given out towards the end of the fiscal year and are intended for future purposes, we have an appropriate policy that documents in what fiscal year those expenses should fall. This year we've clarified that. So we've changed our recognition criteria. It says that cash can be paid in advance of the provision of the related services and provides for a deferral of the expense or revenue recognition until that occurs; that's a small adjustment.

Other improvements. There previously was a reservation on the CRF financial statements. For the last two years we've been working on the elimination of fiscal agency loans that were funded by future appropriations. These are loans made to bodies such as schools, universities, colleges and hospitals, where in effect we were providing for the repayment of those loans from provincial budgets -- future budgets. We agreed with the auditor that those were not legitimate receivables, in the sense that we showed a receivables on our book. As a result we converted these, as Ada has mentioned, to prepaid capital advances, which is a more appropriate mechanism for reflecting our continuing interest in the assets and also allowing us to continue the good practice of borrowing on these organizations' behalf and then lending it through.

We're also nearing completion, as has been mentioned, of the capitalization of all our various asset classes. We have a little bit more work to do, but again we've made significant progress. I'm going to come back to that.

The reporting -- this is a difficult question. This is one of those issues where the office of the auditor general and my office and others in government have slightly different views. I guess I would say it's consistent with what the minister has said in response to Enns. We're monitoring developments in other provinces to determine what the best course of action will be. We'll come to that in a minute.

We're also wanting to talk to those that are affected at the school board and hospital board level in terms of what their views are and in terms of whether or not moving to an expanded entity impacts local accountability in such a way that makes their task and the task of the Legislature more difficult. So the principal contention remains whether or not they should be included. As you know, in the public accounts, to ensure that there is complete disclosure, we do have a separate set of statements, which we prepare in collaboration with the office of the auditor general that shows the expanded entity; it has been alluded to by Ada. It's an issue of principle. It's not an issue of money, in the sense that the expanded statements actually improve our reported operating results. Also, it has some positive effects, in some regards, on our balance sheet. This is an issue we hope to resolve, and perhaps with the new auditor general we can make some progress in the coming years.

[0915]

Some Voices: It's the back.

A. van Iersel: Is it in the back in yours? Okay. This is a summary, and it's based on the most recent sets of public accounts that we have, plus updates related to inquiries that we have made in terms of what the practices are elsewhere in Canada. As you can see, there are varying practices. In some cases, like ourselves, we don't include any, and in other cases there's partial inclusion depending on it. We tried to, less than a year ago, review the respective legislation of all these jurisdictions to determine if, in substance, there is a difference between their legislation and our legislation which would lead to the difference in accounting treatment.

Our conclusion, based on that work, was that our legislation and theirs is very similar, and we would expect that we'd come to similar conclusions whether they're in or out. I guess the most notable would be the province of Ontario, which is like us but argues, at the same time, that they're following the PSAAB guidelines. As was stated in the presentation by the office of the auditor general, we explicitly exclude these entities, on the basis of local accountability, in our statement of what the reporting entities should be.

We continue to monitor, though. There are changes afoot. Previously only ourselves and the province of Alberta had reservations on the financial statements. We now know that the province of Quebec also has a reservation related to the reporting entity. And we know that in some jurisdictions -- New Brunswick, for example -- hospital corporations are now included. Nova Scotia includes school districts and health authorities. And, we understand, a number of jurisdictions are considering adding health authorities. So there is some change, some movement over time, but we're still waiting to see what the end conclusion will be.

I also understand that the Canadian Institute of Chartered Accountants' plans to review this question in the future. I know I've said that before, but nothing to my knowledge -- perhaps Wayne can say otherwise -- has yet been launched. But it's something that we've asked for direction on. I know

[ Page 1518 ]

As I've said, it's a statement. It's a question of principle, not of trying to put forward a better financial picture. In our view, it actually improves if we go the SUCH sector. It also would -- selfishly, on my part -- streamline things in my office in terms of not having to produce two sets of financial statements.

If I may, then, moving on to debt reporting. . . . A past criticism has been that the debt statistics report did not come out at the same time as the public accounts. We remedied that last year.

We actually have with us today. . . . This is an oversight on my part. I should have mentioned that the assistant deputy minister for the provincial treasury, Bob de Faye, and David Morhart, the director of debt management, are in the audience. Should there be time to address the latter part of the OAG report, they are prepared to do that today. Similarly, if the committee wishes to leave that for later, we're prepared to do that as well.

So the debt statistics report is now more timely. The other thing we're considering. . . . This goes back to a discussion we had here regarding the consolidated revenue fund statements and your acceptance that the CR statements would disappear in focusing on the summary. We're also considering, for future years, incorporating the main aspects of the debt statistics report in the public accounts themselves, because we realize there is a lot of information related to debt statistics that goes along with what we show in terms of our summary financial statements. The province does maintain a high degree of disclosure in the debt statistics report, which I believe is comparable to other provinces, and I think we will continue to do that no matter what form it takes.

[0920]

In our opinion -- as was the opinion for these sets of financial statements, which are now, as I say, a little out of date -- we expect that Skeena will remain commercial, in terms of the way we deal with it. That is based on a projected. . . . They are on a projected income of over $60 million this year. So Skeena looks to be turning around, based obviously on higher pulp prices and also based on some investments that have been made in capital improvements. But we'll come back to that.

A question that's been asked in the past is: what have we invested to date in Skeena? These are figures for March 31, 2000. There's $155.5 million in guaranteed debt; there's also $94.5 million in debt owed to Toronto-Dominion Bank. Then we have what's called a cap ex loan, which represents what the province has put in as a fiscal agencies loan for capital expenditures of $33.5 million. So, if you look at the debt statistics report -- or when you see the debt statistics report -- as at March 31, 2000, we'll have a total debt of $283.5 million.

Post retirement benefits -- another issue that was raised by the office of the auditor general. This is not a new issue; this is an issue that has been looked at for a number of years. I should say it is only this year that guidance has come out from CICA on this liability. We've never disagreed with it in the past; we recognized that the liability existed. But we wanted to avoid the expense of doing an assessment. We've now done that work, but in terms of official requirements to do this, that didn't come out until this year. And there isn't as yet any PSAAB guidance. But our practice has been that where appropriate we first follow PSAAB and then CICA, if that is applicable.

There are some other things going on here, though, that impact this particular liability. There are discussions related to joint trusteeship for various pension plans that may affect how this liability is put onto the books. It is an exception currently, in the sense that these are costs outside of the pension plans. In most pension plans the medical and dental for employees after retirement are included as part of the plan. It is our intention to pick up these costs. We are now working with the office of the auditor general not only on this issue but on the general issue of pension accounting.

The guidance from the Canadian Institute of Chartered Accountants is changing in that regard, partly because the original guidance came out when pension plans were in deficits, and it was important to reflect the liability for future pension payments. But due to some significant growth in investments -- and premium adjustments, to a much lesser degree -- the plans are now moving into surplus, and some are in surplus, even though we are still showing a liability on our statements. So it's in our interest to work with the auditors and to bring ourselves completely current with where the CICA is heading on pension accounting.

Tangible capital assets. I said I would be coming back to this. Ada has mentioned Highways. That was our largest asset class to date, in the sense that that was $5 billion of net book value that we brought on. That value was put on with the B.C. Transportation Financing Authority because of their responsibilities for all new construction; they've been doing new highway construction since they came into being. So we've done that. There's a little more work to do. Again, since these financial statements came out, we've already done ten improvements in 1999-2000 with the office of the auditor general.

[0925]

On the land database, we are -- it was correct -- trying to deal with an observation, I think, of a year or two ago, in the sense that although this is not an OCG primary responsibility, we have worked with the Ministry of Environment, Lands and Parks and others, including utilities and municipalities, trying to develop an integrated land database. It obviously has benefits well beyond the accounting aspects, in the sense

[ Page 1519 ]

Again, just to emphasize, when we deal with land, we're not trying to capitalize all the native land of British Columbia. We're dealing with land that we have in effect paid a price for -- i.e., we bought it, or we exchanged an asset for it. So it's land that has been brought on, in that sense of the word, not trying to quantify a mountaintop at this time.

Environmental costs. For some years we have been trying to track environmental costs. As has been stated, we have a note in the financial statements that reflects what are anticipated costs. Based on the auditor general's comment, this year we have asked for ministries to pay extra attention to this. Separate guidance went out. We're looking for them to identify costs as much as possible. Of course, an issue in this is that environmental costs are not easy to determine and can be very expensive. So we have tried to hold the line in terms of ministries not trying to quantify, at great expense, liabilities. We're relying more on estimation techniques and so forth, and waiting until the property actually is transferred, or something happens in terms of an excavation that makes us determine the full liability.

So we'll see what happens this year in terms of the responses from ministries. There is some activity in Crowns as well. My understanding is that BCBC recently did a study on the environmental costs related to its lands. We'll see what that has to offer, and if there's any further guidance we'll go with that.

Gross bases of accounting. Here in the summary our stated bases of accounting, as has been mentioned, is gross, although in the CRF we have considerable netting that takes place. A lot of it is for management purposes, in the sense that we are trying to incent managers where there is a recovery of a fee for services, as an example, to provide service in the best way and to charge back those costs, where material, to various individuals.

We continue monitor netting and other jurisdictions, and we expect that shortly, in the next year, we will conclude a netting study dealing with what we see as the appropriate principles for netting, where they should be followed, and what that means in terms of changing the estimates for the future. Right now, for the CRF, we have been following very much the estimates format in terms of the recoveries and the revenues that are shown there -- except when we get to the summary. Then we obviously gross up.

GVTA transfer. We've had a little bit of discussion this morning on what was the GVTA. I certainly agree with the auditor general that more disclosure and more paper would have been useful to our offices to determine what the intentions of the various parties negotiating that arrangement were. Notwithstanding, as has been said, there are two valid treatments for this transaction, and we felt that the best transaction, or recording, would have been to recognize that not only did we assume the debt, but we assumed some assets that previously were not ours.

[0930]

Columbia Basin Trust. This is an issue of what an investment is. In the public sector, investments are not as clear as what they would be if you were General Electric or IBM. We believe, since this does go back to 1996, that in this case we are justified in treating this as an investment, in the sense that these are moneys for a particular purpose leading to various assets that were put into the trust for the benefit. . . . What we do, however, is. . . . As those assets depreciate, we've been writing down our investment. So it's never a case where we've shown an investment that isn't supported by some assets, and that's the policy that we've been following for some time.

With that, it brings it to the end of part 1. As I say, Mr. de Faye and Mr. Morhart are here, if you wish to carry on with the rest if the presentation after the auditor general. Or we could stop for questions at this point.

R. Thorpe (Chair): We'll stop for questions now.

D. Zirnhelt: I found both presentations helpful in reminding us what was in there and what's been done. But I have a statement and a question. I agree on the Columbia Basin Trust. I mean, we can't. . . . If money is sitting somewhere in a bank, it's still an asset. I know it's a question of where you draw the line. It's still, in one way or another, potentially part of the entity, I guess, although we may not accept it into the entity. It's still an asset there that's under public control, although maybe not directly under the legislative control -- although it is an act of the Legislative Assembly that established the Columbia Basin Trust. So I actually agree with your opinion on that.

On the silviculture fund, other members may speak to this issue, but I think you're going to create a huge empire if you want to go out and audit and capitalize the forests or even the investments where there's been an expenditure. I have a question: would you ever expect any investment in any silviculture -- mainly planting trees -- to come out as positive on net present value? In other words, standard accounting practices don't allow for long-term investments. So if you use the net present value approach, could you ever expect any single investment in any aspect of silviculture to be positive?

A. van Iersel: We left silviculture to the end for a purpose, and that's because, as I said, we knew this would be a difficult area. We have not made a decision yet whether, from the government's point of view, we will capitalize silviculture. It was one of the items on the original capitalization schedule that was agreed to with the auditor general. As I say, we're still working through the various issues. One of the issues that has been raised by Mr. Zirnhelt obviously is: is this really an asset? That is yet to be proven to me in terms of whether it's

[ Page 1520 ]

I'm also concerned, for example, if there's a fire. If you've capitalized your forests, that then means you immediately have to take a hit in terms of writing off that stand of trees. How do you value those trees?

So if you use the traditional model for valuing silviculture, as we were originally anticipating, I think there are a lot of challenges to overcome. The methodology that is being used elsewhere, as I mentioned in my remarks -- New Zealand and Australia -- is slightly different. They don't capitalize each input; they sort of do an annual appraisal of the timber stands in their domain, and that is how they bring the value of those forests onto the books and maintain the books. I just recently got -- I haven't gone through it yet, because it turned out to be many more pages -- the Australia handbook in terms of capitalization of assets. I may have more to say about this after, but it's not an easy thing. To be quite honest, I'm a little nervous about it.

[0935]

Conversely, if I were simply looking to create an asset on the books for the sake of some balancing of assets and liabilities, I guess our natural resources, our existing forest stands, our subsurface reserves, our mineral deposits, would be the obvious, most valuable asset we have. Is this whole thing simply an accounting exercise to try and minimize the amount of expenditures we have in favour of capitalizing them and pretending that we're not really spending the money?

A. van Iersel: The short answer is no. But let me explain the reasoning behind capitalization. Just to clarify the picture in terms of Canada as a whole, capitalization is being pursued in a number of provinces now, in addition to ourselves: Alberta, although they do some back end adjustments to remove the effects; Manitoba; Nova Scotia; and more recently, Quebec. So it is being looked at.

So capitalization is somewhat new. PSAAB, the Public Sector Accounting and Auditing Board, has partially dealt with this question, and we're expecting more guidance in the future. I think it is accepted in public sector accounting circles, in the sense that it is good program costing.

One of the issues in our move to full accrual accounting -- moving away from cash -- is that we're trying to emphasize what it costs to run a highway program, a hospital program. One of the things that's always been missing is assets. Traditionally, we have bought assets and then have immediately expensed them. So what you do is, in that year that you have high capital expenditures, you create a blip, in the sense that you have high expenses. We lose value in the sense that for program costing purposes, it is more appropriate to take the asset over its useful life and to reflect those costs -- such as the Coquihalla or another asset. What capitalization does is it spreads out the impact of purchasing the assets in accordance with its service life, so you can tell people on an ongoing basis: "The cost of Program A or the cost of Program B is made up of capital costs, operating costs."

It's very much like what the private sector does, although the private sector has the added incentive that they are there for profit. It is very much a cost allocation tool. Care always has to be taken that you don't use capitalization -- I've said this in this forum before -- to ramp up expenditures, because at the end of the day, it is a temporal issue, in the sense that capital decisions today result in amortization down the road. So it's not a free good. Some might have initially thought that, but my office, in working with ministries and Crowns, have made it very clear that capitalization is intended to improve program costing; it's not intended to create a window for extra capital expenditures to result in amortization you can't afford.

J. Weisgerber: Don't you, though, in a period of transition, create kind of a void, where you stop the cash expenditures and move into the accruals for a window of 10 or 20 years? It seems to me you kind of put yourself into a fool's paradise, where you no longer are expensing, and you're putting these things into capitalization and accruing them. I agree that over a 100-year span probably one method would be difficult to differentiate from the other. But in that short transition period, isn't there a real risk, as you note, that you're going to think you're better off than you are, as you quit expensing and the amortization doesn't start to catch up? How do our books adjust for that? How do our books keep a continuity as we change from a cash expenditure to a capitalization-accrual mechanism?

A. van Iersel: Well, we've done a number of things to control that issue. One of them is we didn't do capitalization overnight. We've chosen to do this over a number of years. So in terms of the effect of capitalization, the incentive -- it's not one gigantic event. It's something that's been spread out over seven years now. So there isn't the opportunity.

[0940]

As I say, when our office went out to deal with ministries on capitalization, we said: "Look ahead. Do some projections in terms of the amortization costs to see what your budgetary hit will be, particularly in a downward environment where ministry operating budgets have been on the decline in recent years." So we very much tried to resist the risk in terms of ramping up and finding that we can't afford it or that the budget deficit continues to grow. We're not alone in that; other jurisdictions are doing it. It's for program costing reasons. It's not to create a window.

[ Page 1521 ]

A. van Iersel: As I say, for many years now we've requested that ministries, as part of their year-end instructions, pull together their estimates of the environmental liability that they face -- T & H, Environment, Lands and Parks. Based on the auditors' comments, we've now separately sent a letter asking them to do that and have given the reasons why we want them to. But there's been nothing out of the ordinary, that I'm aware of, in terms of any new environmental liabilities that have come forward. The last that I can think of in my tenure was with the Expo lands and the environmental cleanup costs that were associated with that.

There's a case in point in the sense that I don't think we had very good intelligence on what pollutants were there or what the costs would be. This is the difficulty when you try to estimate environmental cleanup costs. You can be wildly out, either high or low. We rely on the best information we get from the ministries to do that. It's very similar to what we do for legal liabilities. There again, we have to make some judgments as to what the expected outcome is for a court case, so we're following the same methodology. In some instances there's extra work going on, as I mentioned. I believe there's a study by BCBC, looking specifically at their properties to determine what the hazards are. We'll look to that to see if it can help us in the way that we gather the information.

J. Weisgerber: Thank you. My concern is that the next contaminated sites may not have the commercial value that the Expo lands did and that they're going to represent a pure liability, as opposed to a reduction in the asset value.

But finally, can you tell me what the assets are at Columbia River trust that you and the auditor general appear to disagree on -- whether or not they're an asset or in fact should be expensed?

A. van Iersel: I don't know if we disagree over the existence of the assets. I think the point the auditors are suggesting is that this is not an investment that has a traditional financial return in the sense that we make an investment in a company or in a set of shares that has a dividend. I think what we're arguing, from our point of view, is that these are assets and that, yes, they don't have a financial return in the traditional sense of 6 percent or 9 percent. But they have a return in the sense that they provide a service to the community.

If I could just expand on that. . . . This is something I meant to say earlier. That's true of a lot of assets in the public sector. If you look at B.C. Transit and the assets in terms of rapid transit or the busses. . . . Everyone knows that they don't provide financial returns in the traditional sense. They don't make money. These are operations that, in effect, lose money. The fare box cannot cover the cost of the operations, I believe, let alone the capital depreciation. So in the public sector, one of our differences is that we provide assets, in many cases, for the purposes of providing a service, recognizing the using up of those assets in providing that service over time.

As to the specifics of what assets are in the trust, I'm going to have to ask Kit. Do you know, Kit?

[0945]

R. Thorpe (Chair): Go ahead, Keyvan.

K. Ahmadi: The case of CPC is really whether the funds that the government has given to the company are an investment or a grant. That's really the point. The matter of assets is secondary to this. We believe that the funds are a grant, because they are looking after some programs, and they are operating type of programs. The government regards some of the operating types of work as creating jobs and other things, which are kind of assets, in a way. But we do not look at it that way. That's the main difference between the two.

R. Thorpe (Chair): But isn't the real issue here whether there's actually underlying asset value? Isn't that the question that has to be answered? Are you still carrying it at -- what was the number -- $45 million? Is that still being carried at. . . ? Or did I misunderstand, Arn, that if there is an underlying value, you're writing that down or somebody's writing that down on a net annual basis? Am I correct or incorrect?

A. van Iersel: You're correct. I'll have to defer to Kit once again, if we've written down.

K. Chapman: I haven't checked for this year yet, but to my knowledge, the investment has not been written down.

R. Thorpe (Chair): Does it make any sense, as we're going through this process, for someone perhaps to. . . ? Both offices have said that they're working cooperatively together on these issues. Would it make sense for both offices to look at that issue and just report separately back -- because a number of members have asked questions on that issue -- just so we can all be dealing with the facts rather than some speculation here? If there's underlying value, so be it. If there's not, well, then somebody's going to have to deal with it. I know that the member for Kootenay would like to ask some questions on that issue.

E. Walsh: Just a couple of things on the Columbia Basin Trust and further to what my colleague here has said and then the question about some of the investments and investments versus grants, and whether they should be classified as one or the other.

I know that many of the investments from the trust have gone into fish and wildlife. They've gone into heritage projects. They've gone back into the community projects, from which the communities in fact have lost much in the past. So I

[ Page 1522 ]

The other thing is: how do you then classify the investment that goes back into fish and wildlife or that does go back into heritage or that does go back into community economics and community stability?

J. Weisgerber: You've got my votes.

[0950]

In this case, we are feeling that the government is providing grants for some programs, and those programs are very essential and very necessary. Government has a lot of economic development programs. But they do not capitalize the result of those economic programs in all cases, in fact, because they don't have access to those assets. If one philosophically looks at human assets, then one might argue that. But in accounting, we don't do that.

Interjections.

K. Ahmadi: Every cent of. . . .

Interjections.

R. Thorpe (Chair): Maybe we can come to order, and Keyvan could finish his answer here. Time is running short.

K. Ahmadi: In this case we're looking at the funding -- very, very much like the economic development funding in all other cases in development. We believe that these are grants.

R. Thorpe (Chair): If I could just quickly ask a couple of questions here. Arn, you mentioned that you have some guidelines with respect to establishing the costs incurred in creating a park. The auditor general's office. . . . There didn't seem to be a linkage there, so I think you undertook to provide that. Would you also provide that to committee members through the Clerk's office?

With respect to the Ministry of Education and changes that are going to be put in place July 1 of this year, can you just quickly give us the status of that? Is it ready to go for July 1?

A. van Iersel: I believe it is, Chair. Kit, are you more familiar?

K. Chapman: The last discussion I had, I was a little surprised to hear from the auditors that it was ready to go on July 1. It wasn't the impression I had from the Ministry of Education. If that is the case, we will be very pleased, because we have been working with them over the past year to try and make sure this was ready to go. But it hasn't been passed by us at the last run.

R. Thorpe (Chair): Once again then, perhaps we have it in here as July 1. The comptroller general's office doesn't seem to be up to speed or have the same information. Could you both kindly get together and report back to the committee if that's in fact what's actually happening? Dennis, you had a question.

D. Streifel: Just a quick one. Lots of discussion this morning. . . .

R. Thorpe (Chair): Oh, sorry. Arn, did you have a comment?

A. van Iersel: No.

R. Thorpe (Chair): Wayne, did you have a comment?

A Voice: I think Keyvan had.

R. Thorpe (Chair): Keyvan, I'm sorry.

K. Ahmadi: Just a point of clarification, and that's the point that I reported. At the time that we did this report, they planned to implement it.

R. Thorpe (Chair): Well, it's a month away. So maybe we could just ascertain whether in fact it's going to happen.

D. Streifel: There was lots of discussion this morning around what happened and what works and what should be changed to make it work. I have one question as I come to the end of all this. What's the cost of the implementation of these recommendations -- for instance, around the environmental clean-up costs and other circumstances like that? There's no evidence here, or I don't see it in the report, of the actual cost of the creation of the entities to do this work or the expanded facilities that will be required in the offices to carry out these works. Is there an estimate for an increased cost of implementation of the recommendations? Either office, Arn.

R. Thorpe (Chair): Or both.

D. Streifel: Both, actually.

A. van Iersel: Some of these recommendations do not cost very much at all. They're just policy questions that we have to resolve between the two offices; they don't represent too much work. That's even true of the SUCH sector in a sense, as I mentioned. We already have SUCH statements there. In some ways we might save if that were the right way to go.

The one that was mentioned, though, by the member: environmental clean-up costs. . . . We don't know what it would cost to get good information. I think it's one of these issues where it's very open-ended. If you want very precise information, you basically have to go to every property that

[ Page 1523 ]

[0955]

K. Ahmadi: May I?

R. Thorpe (Chair): Yes.

K. Ahmadi: It's very much the same as the work that the comptroller general had done. We have looked at various provinces and where they are in relationship with the SUCH sector being included in the financial statement of their provinces.

I'd like to provide you with some very simple statistics that might help. Out of the ten provinces in Canada, four auditors and the governments are in 100 percent agreement on what should be included and what should not be. As Arn has mentioned, there are some variations and some differences in legislation and the way that things are funded, and they are part and parcel, or not part and parcel, of the government in different provinces.

I'm just looking at the end result. The end result in four provinces, I understand, is that the provincial auditor and the government are 100 percent in agreement on what should be included and what should not be included. In three other provinces, there is significant agreement; that means that except for minor cases, they are in full agreement. So in seven out of ten provinces, their auditors and their governments have come to agreement on what should and should not be included in that. There are only three provinces where the governments and the auditors are not in agreement, and one of them is British Columbia. Another one is Alberta, and the third one is Quebec, where we believe that there are discussions now towards having, perhaps, some changes.

This, in my opinion, says that if we take the standards which are set by the accounting bodies -- in this case the CICA and the PSAAB -- it's the way that the auditors are thinking. The differences have been resolved in seven cases out of ten. Even looking at the schedule which was provided by Arn, most of you can see that if you compare it with a similar schedule a few years ago, there has been a significant trend towards inclusion of these sectors in the financial statements of the government.

A. van Iersel: Keyvan is correct in this, but it's important to note that the three largest provinces are the provinces where the issues are. As I mentioned, B.C., Alberta and Quebec all have reservations. While the province of Ontario reports that they are following PSAAB, and there is understood agreement in the sense that there is no qualification, I do not understand -- having looked at their legislative regime and compared it to ourselves -- how two jurisdictions come up with two different conclusions. I think that's one of the reasons why, as I say, Alberta wrote to CICA and said: "You need to clarify the rules here, because we seem to have some different interpretations from province to province."

[1000]

P. Calendino: I don't know that we really have any time to continue. Maybe we should continue this discussion at the next meeting.

R. Thorpe (Chair): Are there more questions that we're going to want to continue on in part 1 next week?

P. Calendino: Yes, I have some questions on the SUCH.

R. Thorpe (Chair): Noting the time then, Evelyn and I will meet after and just formalize the agendas for the next couple of meetings. I would assume we'll also be asking the records. . . .

A Voice: Would it be possible to have two minutes now to table the. . . ?

R. Thorpe (Chair): No. So if we could have a motion to adjourn. . . .

A Voice: So moved.

R. Thorpe (Chair): By the way, we will be tabling a report in the House today: the "Government Financial Accountability for the 1997-98 Fiscal Year."

The committee adjourned at 10:01 a.m.

[ Return to: Legislative Assembly Home Page ]

Copyright © 2000: Queen's Printer, Victoria, British Columbia, Canada