Public Accounts — Issue No. 26 — Monday, May 2, 2016 (HTML)

Present: Bruce Ralston, MLA (Chair); Sam Sullivan, MLA (Deputy Chair); Kathy Corrigan, MLA; David Eby, MLA; Simon Gibson, MLA; George Heyman, MLA; Marvin Hunt, MLA; Vicki Huntington, MLA; Greg Kyllo, MLA; John Martin, MLA; Lana Popham, MLA; Linda Reimer, MLA; Selina Robinson, MLA; Ralph Sultan, MLA; Laurie Throness, MLA

Others Present: Carol Bellringer, Auditor General; Stuart Newton, Comptroller General

2. The following witnesses appeared before the Committee and answered questions regarding the Office of the Auditor General Report: The 2014/15 Public Accounts and the Auditor General's Findings (March 2016)

• Carl Fischer, Executive Director, Financial Reporting and Advisory Services, Office of the Comptroller General

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


CONTENTS
Page
Auditor General Report: The 2014-15 Public Accounts and the Auditor General’s Findings	881
C. Bellringer
R. Jones
L. Moore
S. Newton
C. Fischer

The agenda today will be consideration of the Auditor General report The 2014-15 Public Accounts and the Auditor General’s Findings.

Let me briefly introduce the officials who are here from the Office of the Auditor General: Carol Bellringer, the Auditor General; Russ Jones, Deputy Auditor General; and Lisa Moore, executive director of financial audit.

From the Ministry of Finance are Stuart Newton, the comptroller general; and Carl Fischer, the executive director, financial reporting and advisory services, office of the comptroller general.

Members will know that the House is also sitting this morning, so I expect that members, on occasion, will have to absent themselves briefly to deal with other duties in the main House. But we will continue during that time.

Auditor General Report:
The 2014-15 Public Accounts and
the Auditor General’s Findings

C. Bellringer: Thank you, Chair, and good morning, everyone. As introduced, I’m joined this morning by Russ Jones, Deputy Auditor General. Russ has had the overall responsibility for all of our financial statement practice. Russ is also a member of the Public Sector Accounting Board, so he’s actively involved in public sector standards setting and current in all such matters. I’m sure you’ll be asking all of us a few questions about the update as we get into the qualification in the audit opinion.

Lisa Moore is also here. Lisa led the public accounts team last year and has had a great deal of experience in our office in this area. Lisa will take us through the report in a couple of minutes.

I just want to also introduce…. There are quite a few people in the back of the room today. They are all here from our office. Peter Bourne is in charge of the current audit of the public accounts. Alex Kortum is with him, another of the key players in the public accounts audit. And Bridget Parrish keeps us all honest. She’s in our professional practice and quality assurance area.

I’ll turn it over to Lisa, but perhaps, Russ, you want to add a few words before she does.

I just wanted to emphasize, before Lisa takes you through the report, that one of the reasons we put this report out is because it allows us to provide information to legislators so that they can better understand what’s in the public accounts, and also to allow the public to better understand what’s in the public accounts. It’s not all that easy to tease information out of those large numbers that you see.

That’s one of the reasons why we wanted to put in that “did you know” section. It helps to explain things. We’re hoping to expand it from what we’ve got there this year to a much larger section going forward next year.

Every year, the Office of the Auditor General of B.C. conducts the largest financial audit in the province. We audit all the ministries, as well as some of the Crown corporations, health authorities, universities, schools and any other organizations that are accountable to the provincial government. There are over 150 organizations.

This takes 65 staff and contractors in our office over 42,000 hours to complete. There are also 25 private sector auditing firms who work above and beyond this. Based on our audit, we report on whether the province’s financial statements are presented fairly, in accordance with Canadian public sector accounting standards.

This report summarizes our audit findings and highlights some of the interesting facts from government’s 2014-15 summary financial statements. Over the next few minutes, we’ll tell you a bit about four general areas from our report, many of which are highlighted on the screen.

First, our audit report on government’s March 31, 2015, summary financial statements; second, the interesting story that government’s financial statements tell; third, the increased costs that must now be disclosed regarding cleanup of contaminated sites; and fourth, upcoming changes to accounting standards for government.

First, we’ll talk about our audit report — or opinion, as it is commonly known — on government’s summary financial statements at the end of last fiscal.

Our only major concern for 2014-15 was around how government recorded certain types of revenue, primarily those from federal transfers. If government had recorded the money the way our office and others believed they should have, the revenue and surplus would have increased by $191 million. This doesn’t mean that government would have additional cash. This money has already been spent on projects such as building hospitals and roads.

Ultimately, we want to ensure that government’s financial statements reflect the true picture of the province’s financial health. This was the third year in a row that we differed from government on how this money should be recorded.
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The Public Sector Accounting Board of Canada provides independent standards for all provincial, federal and municipal governments to follow for their financial statements. However, government interprets the standard differently than others in this area, which reduces some comparability and understanding of the financial statements. That said, we have worked through and resolved many other accounting issues with government over the past few years and look forward to doing the same with this issue.

The next piece we’ll look at is the interesting story the financial statements tell. For many people, financial statements in general are often complex and difficult to understand. But the statements go well beyond the bottom line and provide valuable information about the province’s financial health and performance. For example, page 20 of our report talks about the $157 million government paid to parents as a result of the teachers strike last year. That amount was just a bit less than what government saved in teachers’ wages.

Another example is around the sale of surplus assets. Last year government generated $135 million in revenue by selling off some of its assets. Significant sales include Burke Mountain and Steveston secondary schools.

As an aside, we are in very early days of a separate audit looking at some of government’s real estate sales.

The financial statements also look at government debt. Total debt last fiscal at year-end was $63 billion. Much of it was used to build assets such as hospitals and roads. In the future, though, government will pay its lenders back through taxes and fees.

Did you know that 68 percent of government’s $44.4 billion in annual expenses went to health and education? That left about $14 billion for all of government’s other functions.

Finally, government has signed $102 billion worth of contracts for things like coastal ferry services, SkyTrain construction, electricity purchase and road and bridge maintenance. We note how government’s contractual obligations have increased over the past few years, due in particular to contracts signed by B.C. Hydro with independent power producers. We also explain in the report the distinction between contractual obligations and debt.

These are just a sample of the points we highlight in the report. Further sections talk about how capital assets are accounted for, the fact that dividends received from Crown corporations are not recorded as revenue, the information on pension plans and what credit rating agencies look for.

Let’s look at the third general area in our report, that of a new accounting standard which requires a more complete estimate of the cost to clean up contaminated sites. These are the costs of cleaning up the environment after a site, such as an abandoned mine, is shut down and government accepts responsibility for the cleanup, which could happen if the person or company responsible for the contamination cannot be found.

Previously, government accrued a liability once they assessed the site. Under the new standard, government now completes a more comprehensive estimate of what it will cost taxpayers to clean up the contaminated sites. These costs disclosed grew by $273 million over last year to $397 million this year. These are not new costs, but now government has to estimate and record them.

As this is only for sites that government has accepted responsibility for cleaning up, any liability arising — for example, for Mount Polley — is not the responsibility of government but that of the mine operator.

Finally, over the next few years, eight new accounting standards will come into effect. The first of these — and there are six — come into effect in fiscal 2018. Government needs to consider and address these changes well ahead of time to determine their possible impact on the statements. We will work with them in doing so.

I want to thank the Auditor General for her report. Every year it’s like having your homework corrected. It’s a good process. We do learn a lot by going through the process. There’s a lot of work that gets done prior to the final audit opinion, as well, where we work together on a number of issues, as Lisa alluded to. The relationship is getting better each year.

We do have one qualification. It is a concern for myself. It’s a concern for my colleagues across the country, as well, where they’re dealing with similar issues. We are still working consultatively to be able to address this, both with the Auditor General’s office and also nationally. We do remain committed to maintaining a leadership position in how we account for things. One of the pieces that we need to work through is the qualification.

As I stated, we have a disagreement on the treatment of some of government’s transfers — those with restrictions on the use of funds. The Auditor recommends that we should change the way we’ve been accounting for them — so defer recognition. We would lose consistency year over year.

I don’t think that’s the right time to be able to deal with this change, partially because there is disagreement across the country. Alberta, Ontario, Quebec and the Territories defer restricted revenues under the same programs, similar to what we do. Saskatchewan, Manitoba and the Atlantic provinces prefer to maximize revenue recognition. They’re actually taking revenue in early, similar to what the Auditor General is recommending.
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The related issue of deferred contributions has also been stalled in relation to strong feedback from non-profits across Canada. Both the Public Sector Accounting Board and the audit accounting standards board for public companies are looking at a joint not-for-profit standard. That included not deferring contributions and having them brought forward into revenue. Quite a strong amount of feedback from not-for-profits around actually demonstrating the use of the funds over the life of the asset or the event that was funded by the not-for-profit. There’s still quite a bit of disagreement there.

I think one of the issues that’s a bit of a failing in how this standard was set up is that there’s a piece missing in relation to recognizing non-financial liabilities, like gets done with non-financial assets, and this has resulted in an accounting model that’s slightly distorted. Revenue is brought forward — which is great if you’re a start-up and you want all the money up front — and expenses are pushed off as something is depreciated.

Nobody is standing still as far as being able to go: “Well, we’ve got a disagreement.” There are several groups working on the question. The Auditors General have been discussing and debating this. Audit firms working in the private sector are also debating this issue and how to resolve it. My colleagues — comptrollers general across the country — have regular discussion on this as well, and we are not of one mind either.

The Public Sector Accounting Board continues to look at the issues through the discussion group. From my perspective, there’s no big consensus, so I think the word “standard” is a bit ambitious.

The International Public Sector Accounting Standards Board has introduced a project on accounting for revenue that will be addressing the same issue, along with other conceptual issues that arose from the move to an asset and liability model. So internationally, it’s being looked at.

International financial reporting standards have initiated a project on non-financial liabilities after recognizing that even in the private sector, obligations arise that cannot simply be defined as a requirement to pay cash to another party. We and the other provinces anticipate that the discussion in the broader international environment may help us, in Canada, move away from the entrenched positions that unfortunately arise when we succumb to the ambition of being the first adopters.

I did mention the Public Sector Accounting Board and the Accounting Standards Board having an issue with not-for-profit. So I’m just going to skip that and move on to the next slide.

Other matters. I do like the format that the Auditor General has put forward for this report. I think it covers off the audit piece, but it also provides a broader opportunity to discuss issues in the public accounts.

One of the comments, though, in relation to the report is that the Auditor General has made comments that government is required to follow PSAB standards. That’s incorrect. Legislation requires that government report out as required under the Budget Transparency and Accountability Act, which requires government to follow generally accepted accounting practices of senior governments in Canada, which could be PSAB or could be another standard, should they choose, as well as the regulations. That’s the legal framework that we’re required to follow. We don’t have the choice to just say that we’re going to follow pure PSAB.

The Auditor General has made some recommendations on the financial statement and discussion and analysis section, which is great. It’s not part of the audited financial statements, but we appreciate the comments and the ability to have the discussion.

I did appreciate the discussion on contractual obligations and the clarity that it’s not debt. There is still some ongoing discussion, I think, out in the public as far as what that means. It would be nice if that standard could be tightened up a bit. I always look to Russ when I say things like that, because Russ has stood on the standards board.

The OAG did recommend minor changes to the pension plan note, which we will adopt in this current year. More importantly, I think we had a very good discussion and built a better understanding about how we would accurately disclose our government’s participation in a very sophisticated independent retirement system that we have here in the province of B.C.

Finally, the implementation of contaminated sites disclosure went well. I think we’re getting improvements because we work together, and I think it has put us in the lead in relation to a number of other jurisdictions — on how they dealt with contaminated sites. We really appreciate the good work we were able to do together on that.

B. Ralston (Chair): Okay, great. I’ll open it up for questions from members. We’ll start off with Kathy, then, first.

K. Corrigan: I wanted to ask a couple of questions about the new standard for remediation of contaminated sites.

The information in both the consolidated summary financial statements and the Auditor General’s report is interesting, but I find myself wanting more. I’m wondering. I have a few questions. But just to be clear….

The consolidated summary financial statements on page 75 indicate that there was, in 2015, about $400 million in contaminated sites and then another $368 million that was B.C. Hydro and Power Authority’s responsibility and another almost $100 million accrued by the B.C. Railway Co. It adds up to almost $900 million or thereabouts. There was also a comment that it grew by $127 million this year.
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My question, I guess, is: how is it that we’ve ended up with such a large level of obligation with regard to contaminated sites? What is government trying to do to avoid this happening in the future?

What would happen with a particular site? What is the work that is happening in government to prevent this? When a mine opens, are there good processes that will ensure the financial stability or bonds or whatever? Obviously, there are many of them that government is now responsible for. Just to be clear, my understanding, from the materials…. These are all mines that either are abandoned or there’s been a bankruptcy. Government is, therefore, on the hook for these, right?

I’m surprised at the scope of the problem, and I’m wondering what government is doing to avoid this in the future.

B. Ralston (Chair): Just before you begin your answer, could there also be a definition of “contaminated sites”? It’s not defined in the report. Just so that people who might choose to follow this would get a sense of what a contaminated site means.

S. Newton: We can have Carl could go through the definition of “contaminated sites,” and then I’ll talk a little bit more.

C. Fischer: A contaminated site is normally a site in British Columbia where historical industrial use has occurred, whether it’s a mine or a factory or any other kind of plant. The key characteristics are that there is a high probability of contamination that exceeds a recognized national standard and that the site is no longer in active use. These would be historical sites, no longer in active use, where there’s an expectation or a likelihood of contamination exceeding a national or provincial standard.

S. Newton: Now, as far as what government does, not actually working in the area…. We’re concerned about what gets recorded, but I can give you a high-level overview. For any area where permitting is required in order to be able to do something, there are requirements for standards to be understood and met, as well as letters of credit or some other facility or undertaking to ensure that, should there be, I guess, a breach in the standard while they’re operating, some degree of remediation can be in place.

The other piece. There should also be a provision in the planning to go forward to ensure that when the industrial site has completed its work, it will remediate the site back to what it should be. That’s a standard that’s been in place, I think, for a shorter period of time. There are sites that relate to industrial work that was done quite some time ago, probably a lot longer ago than current environmental standards and awareness. Those still are on the list, and those would be sites that need to be dealt with as well.

As far as the particulars of which site and the details of what particular facility is put in place as far as a requirement to pay based on pollution, that would be individual to the program and the regulatory regime that a ministry would be operating under. I don’t have the detail on that information.

The unique characteristic for this was…. Previously, before the standard, although there was a series of sites, government would go and explore a particular site to determine what level of remediation may need to be required. Then they would document and build a plan and calculate the cost. Most jurisdictions did that based on the availability of staff to go out and do the work.

The new standard required you to not only deal with the ones that you knew about and that you had done some work at but actually make an estimate of all of them that you knew about. The standard required you to actually look more broadly and make some reasonable calculations and assumptions based on what you knew about sites in order to get to a fuller understanding of what that obligation would be, going forward. That obligation, then, is…. We had to set up the liability and the expense, as well, at the time. Over time, as these sites are remediated, they would be drawing down that liability.

C. Bellringer: Just a notice, if you will. We have a report coming out tomorrow on compliance and enforcement in the Ministries of Energy and Mines and of Environment. We do have a section in there on the financial obligations.

K. Corrigan: Just a follow-up. Perhaps it’s going to be in the report tomorrow. I notice that we have this map, a useful map, on page 37 of the Auditor General’s report with stars all over it showing the 18 sites.

What I’m wondering about is either whether it’s in the report or whether we could get the list of what those 18 sites are and what the estimated costs are for each of those sites. And then, in addition…. There are 18 on the map. But the summary financial statements say that at the reporting date 30 sites were identified as potentially contaminated, so I assume that is an additional 30 sites. I’d be interested, if it’s possible, to get that list of what those additional 30 sites were.

S. Newton: One of the things we’ll need to do is reconcile the sites that the Auditor General’s office has said with the ones that we’re talking about, just to make sure
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we’re not double counting, and then we’ll determine what we can get and provide back to the committee. Yes.

R. Jones: I was just going to mention that the Oil and Gas Commission also has orphaned wells that they collect funds from the industry on, to remediate those. Those aren’t part of these 18. They’re separate.

B. Ralston (Chair): Maybe it would be useful, then, just to have an update of that, as well, given that it’s essentially the same issue of the state assuming obligations for abandoned industrial activity.

D. Eby: Two questions. One was…. The comptroller general said, quite bluntly, that the Auditor General’s office was wrong in their interpretation of the standards. I’m not talking about this income recognition issue that you guys bring to us each time. I’m talking about something new, which was the…. Do I need to go into detail? Frankly, I didn’t understand it. But I don’t often hear the comptroller general say: “You’re wrong.” I was wondering if the Auditor General would respond to that and maybe the comptroller general could clarify that a little bit for us.

The question that I wanted to ask was…. It’s mentioned in the summary, this issue of self-supporting Crowns providing dividends and that they’re not revenue. The concern that I have is B.C. Hydro. Our colleague from Kingsway has done quite remarkable work about Hydro’s borrowing turning into what appears to be revenue in the public accounts, balancing the budget for the government.

Now, I don’t necessarily want you to weigh in on that particular issue as much as whether that happens — that you could borrow money from a self-supporting Crown, that it could be reported to government as a dividend and that it could balance the government’s budget and that would be an acceptable accounting practice under the rules as they stand right now.

That seems like a totally unacceptable accounting practice to me, but I don’t understand it well enough to know whether that’s the case or not.

S. Newton: The first piece on the Auditor General’s office being wrong. We disagree with the interpretation on the actual qualification issue, which is the deferral of revenue. The issue that we’ve qualified for, on that same issue for three years — I believe that the standard should be interpreted differently than the Auditor General. That’s where the difference comes from.

D. Eby: Mr. Chair, maybe I can just clarify. It was in relation to, I believe, the Budget Transparency Act.

S. Newton: Oh, sorry. That we follow PSAB? Okay, yes. We’re required to follow the Budget Transparency and Accountability Act, which sets out the accounting standards that government has to follow, which is GAAP for senior governments in Canada — which is currently PSAB plus the two regulations, the one on rate-regulated accounting and the other one on government transfers.

C. Bellringer: Please. A couple of things. We have to audit against PSAB, and we have to follow generally accepted auditing standards. Whether the government has chosen to put regulations in place and alter PSAB, if you will, or interpret it differently, so be it.

But at the end of the day, we will tell you whether or not the financial statements have been prepared in accordance with public sector accounting standards — yes or no. By drawing out those differences, you can use them as you wish.

The item that we’re having a disagreement on, around the government transfers…. Simply put as to what that difference of opinion is, it’s: over how many years do you record the revenues you’re receiving for certain of the capital grants? We’re saying that you record it over the period it takes to build that thing. So if it’s a bridge and it takes whatever, how many years, that’s the period you bring it in over. The comptroller general and the government statements are showing it being brought in over the life of that bridge.

It makes a significant difference in terms of timing. We’re making sure that it’s evident as to what those differences are.

Russ, maybe you could…. There have been some updates, I understand. Some of the jurisdictions have changed their accounting fairly recently, and there is another update going on.

R. Jones: Thank you, Carol. Currently across the country, at least what we’ve been told at PSAB, which I believe to be correct….

B. Ralston (Chair): Perhaps you can just say, for the record, what PSAB is. There’s a tendency to slip into acronyms here, and it’s not always transparent.

R. Jones: Yeah, sorry. PSAB is the Public Sector Accounting Board, where the public sector standards are developed. There are currently only two provinces that are not following the government transfers standard
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at the present time, and that is Ontario and here. Alberta is now following it.

The issue that Quebec has is not the same as the issue here. It’s more around when the Quebec government transfers money, there’s a concern about the standard, but it’s not the same issue.

One of the things that we’ve done at the Public Sector Accounting Board over the last year and a half is a post-implementation review of how the government transfers standard is applied across the country. We canvassed everybody across the country. We got information back in to help us take a look at whether or not there was a feeling that the standard should be changed, because there were issues with it, or not.

There is a report coming out in, I would say, the next four to six months that will, hopefully, finally put an end to the discussion. My hope, as a board member, is that once this is released, all of the jurisdictions in the country — that’s the federal, provincial, municipalities and the First Nations — will agree to adopt what we see as a final standard. I can’t tell you what that is right at the moment, but I really do hope that this puts an end to any discrepancies.

C. Bellringer: I believe it took seven years for the standard to first be issued, and the same disagreements you’re hearing here were discussed throughout that entire period. But the impact of those adjustments is extremely significant.

The numbers that we had in the presentation were the current year impact, but it adds up to $4.2 billion over everything that’s out there so far, so it’s important to know. It’s important to know what the impact of it is, and it’s important, if you’re doing a comparison across the country, to take a look and see which way they’re recording it.

D. Eby: It was in relation to the dividends of self-supporting Crown corporations balancing the budget. Is that possible under the accounting standards?

C. Bellringer: I’ll give the quick answer, and then we’ll, I’m sure, have some technical embellishment.

The dividend itself does not go into the bottom line of the public accounts for the government’s summary financial statements. Everything that’s earned in the Crown corporations is picked up as income for the year, or anything that’s lost is shown as a loss for the year. So the dividend is just a cash flow issue that’s going on, as well, but it has nothing to do with the income or loss that’s recorded in the summary financial statements.

D. Eby: So if there’s a recognition of income by the utility that comes, in part, from borrowing, then it would show up even independent if it was a dividend?

C. Bellringer: The borrowing is also a whole separate discussion. It has nothing to do with what was earned or lost. It was based on what their revenues were from whatever the operation was, what their expenditures were. And then: what’s the difference between those two? That’s all that gets picked up. If they also borrowed money to do other things, that has nothing to do with the income pickup.

Again, it’s trying to separate…. The numbers showing up in the public accounts are a revenue-expenditure bottom line. Then there’s cash flow as to: did the cash that got used in that operation come from the excess of revenue over expenditure? Or, for example, you might decide to build something, a capital item, in which case you might go out and borrow it from a bank. That’s another source. You borrow for that.

There’s been discussion…. We actually have on the list for next year…. I’d like to take a step back and take a look at Hydro and all of the deferral issue. It certainly was a big discussion over time. I’d just like to see where it’s at right now. But in terms of whether money’s being borrowed in order to pay the dividend — those are still just cash flow issues. It has nothing to do with the revenue-expenditure number.

D. Eby: Then the issue is around deferral accounts rather than around dividends, as you understand it.

C. Bellringer: Well, the deferral issue is…. I’m not going to get into the technicalities of why it’s done. At the end of the day…. Let’s assume it’s all capital. There are capital amounts that are paid out for capital today. Under rate-regulated accounting, you’re permitted to not show it in your current year expenses, but rather show it over the period under which you’re going to charge the ratepayer. It’s acceptable accounting standards at the moment. It’s certainly one of the big discussions, but it has not yet changed, and we don’t have a date knowing that it’s going to change. It’s still out there.

It is a matter of: if you were not using rate-regulated accounting, it would be unlikely that you would be able to defer as much as you can. The management issue is that I’d like to know they are at a good point where that number is reasonable when you look at…. There are things that are done in the current audit and everything else. But it’s just that you look at it in a lot of depth to know: is it reasonable to say that given the current capital expansion plans and given what’s already accumulated in those deferral accounts, what’s the impact on the ratepayer over time?
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Regarding the accounting standards disagreement, if the two titans of government finance can’t agree, how would we on this committee know who to side with or what to say? I’m not sure that either general has given a fantastic explanation of the topic. It’s laden with jargon. I would simply appeal, as one of the duller knives in the drawer on the committee, that we have an accounting standards for dummies next time we report on that. I’m sure this will be worked out over time.

B. Ralston (Chair): Accounting standards for dummies really is hardly a fitting term for members of this committee, surely.

L. Throness: A 68 percent figure of health and education spending is really enormous. I find that a bit alarming. I’m wondering if you can just talk for a second about the trajectory of that into the future. Is that figure growing to crowd out everything else in the budget? Are we going to be at 100 percent in 20 years? Can you talk about the trajectory of that for a second?

L. Throness: Okay. My next question is about contractual obligations. I would point out that life itself is a contractual obligation. We pay our lives on a pay-as-you-go basis. A parent doesn’t usually say to his or her child, “I’m contractually obligated to bring you up,” and pay $2½ million over the next 30 years. Government is obliged to govern for the next 50 years, but the Auditor General is not saying that our contractual obligations are $2½ trillion over the next 50 years.

Why do we single out legal contracts that we sign and not disability payments, the costs of hospitals, and so on, as if we are obliged to pay the contracts and not the other? We’re obliged to pay it all. So my question is: why report on contracts at all when they’re simply the running of government?

S. Newton: When the standard for contractual obligations was set up, it was a disclosure requirement in the financial statement, and it was primarily designed to let the financial statement reader know of any large or unusual contracts coming up. So it wasn’t all of them. The actual standard was…. If you were reading the financial statements, you kind of need to know that out into the future, regardless of what you see in the statements, we’ve got a couple of really big oddball contracts that are coming up over an extended period of time.

That’s what it was designed for. The information demand on that note has increased through my entire time in this chair and previously. It appeared that more was wanted as far as what other obligations are there. So it turned into a larger note that’s basically listing all contracts above $50 million or all groups of contracts that create that $50 million number.

It’s creating a bit of a problem in that it is really only focusing on one thing. I agree: we still pay salaries, and we still have other transaction flows that will go on in the future that, for some reason, are not required in the note.

It’s a bit of a disclosure dilemma that I think…. I kind of made the comment back that it might be worth PSAB looking at to be able to clarify what’s really required in that note. It has created some different expectations.

C. Bellringer: Again, it’s one of those difficult things to explain. The one thing I’ll say is, just in terms of all of the accounting discussions, there still continues to be — I’d say it’s probably globally, but certainly across Canada — a discussion at the end of every fiscal year. “What was the deficit? What was the surplus? What was the bottom line?”

Partly, what we’re trying to draw attention to is that it’s far deeper than that. To have a single measurement point is really…. First of all, it has to be comparable. There are so many differences across the country that it really is an unfair comparison. But it’s an important one, and you have to augment it with other understandings, and so on.

Depending on what you want to use different parts of the statements for, it’s important to note the difference between the debt number, which is showing how much you already owe — you’ve already borrowed it — and the contractual obligations, where you’ve entered into a legal agreement, and you’re obliged to pay it, from a legal perspective.

In the third category, you continue to have some discretion. So a change in government, a change in government policy…. You can choose to change those amounts without a legal obligation. You may have a moral obligation, or you may have a traditional obligation, but it is a different kind of obligation than the obligation in a legal agreement, which is what the contractual obligations are picking up.

Again, those three buckets are disclosed in the statements so that you’re aware of what they are, and you can then go and use them for your policy discussions.
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B. Ralston (Chair): Isn’t there a difference, then, just between…? In a contractual obligation, the government is obliged to pay for the service, whereas in general government, the government has an option — could close the hospital or lay off people — which would not be consistent with the same obligation that’s contracted for in a contractual obligation. That is an important distinction, unless I’m wrong.

R. Jones: Just to make life even more interesting, one of the new standards that will be coming out in the next two to three years is around contractual rights, which is contracts that are out there. This will need to be disclosed in the notes to sort of balance the obligations, the rights to collect revenue into the future as well.

Those are going to be seen in the notes, the financial statements, going forward. So trying to balance off the obligations by showing rights.

S. Robinson: I appreciate the discussion and the clarity around recording the revenues and how that sort of plays out, whether it should be over the build of the capital asset or over the lifetime of the asset.

I’m thinking about this notion of consistency, because I think that’s part of why we want to do this: so that we can compare one year after the other and between different jurisdictions.

I’m curious about local government and if you have any idea about what their requirements are, because it’s where I come from. I think a lot of my colleagues in this room come from there. I do remember having lots of discussions with my colleagues around those tables around how we record revenues. I’m thinking about how we compare local government and how they manage their assets, and the provincial government, especially given that local governments in this province are creatures of the province so wanting to — make sure that there’s some consistency there.

R. Jones: Sitting on the Public Sector Accounting Board, there are members from the municipal sector there. They have no problems with the government transfers standard. They actually like it, because the revenue gets recorded as the projects are finished.

That may be a generalization to all municipalities. But any of the ones that we have received feedback from at the Public Sector Accounting Board, as well as any of the discussions I’ve had with municipalities…. They like that transfer.

S. Robinson: Given that local governments, I think, own most of the assets in the country, it would make sense to have some consistency there. With local governments, do they have the option to do the sort of choice or the different interpretation that we see here provincially?

Is there an opening for interpretation at local government? Do we know? I would like to find out, given that local governments can’t run a deficit. We know that. That’s pretty clear.

C. Bellringer: I believe they’re required to follow public sector accounting standards. Unless an auditor were to agree with a different accounting than we are…. We’re not aware of any of those differences there, but I’ll make a note to have a look. I’m quite curious.

L. Popham: My question has to do with the remediation of sites that fall under the responsibility of the Oil and Gas Commission, specifically around the agricultural land reserve areas up north.

From what I understand, when a well has been abandoned or is finished, there is a requirement. It’s an agreement that the commission has within the oil and gas industry that that remediation would take place. I’ve canvassed the Minister of Agriculture on this issue.

The records of those remediation sites, or those industrial sites that need remediation, are records that are kept by the commission. Then they are shared with the Agricultural Land Commission. But we don’t really have that information within this report. The reason why I think that’s concerning is because there are discussions that some of that remediation is not taking place. If it’s not, there is a working relationship that could happen between the Agricultural Land Commission and the Oil and Gas Commission. But we don’t keep track of that.

If the Agricultural Land Commission has a role to play, and the commission is funded by our dollars, as a province, I think that it should be included in this report. There are circumstances where the commission works with the landowner, but those details, of course, would not be shared publicly with us. Does the Auditor General have an opinion on whether or not…?

That’s very important information because, if it’s not addressed properly, it will eventually be our responsibility as a province. If we don’t have a running tally specifically on a map like this, I think it doesn’t really give a clear picture of what’s happening.

B. Ralston (Chair): I appreciate that it’s technically not before us, although I did ask for an update on the oil and gas remediation. I think the point is a valid one, obviously. If you’re not prepared to respond now, would you take that on notice and provide an answer to the committee?

R. Jones: I was just going to say that I think it is a valid point. I think I would encourage the member to talk to
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the Oil and Gas Commission. I’m sure they have that information.

I’m not sure they have it in their annual report, but it wouldn’t surprise me if they did have something in there that shows the abandoned and orphaned wells. But by all means, give them a call.

L. Popham: Could I just have a follow-up? The map that’s provided here…. If we included all sites — possible remediation or ongoing remediation — I believe this map would look completely different and would be more accurate. I know we’re not discussing that specific topic today, but I think the information’s incomplete.

B. Ralston (Chair): May I suggest that, rather than directing the member to the commission, the Auditor General’s office make those inquiries on her behalf. I think sometimes the inquiry by an individual member doesn’t quite have the same weight as the well-known awesome power of the Auditor General’s office when inquiries are made by that office. I’d appreciate that.

C. Bellringer: Sorry, I just want to make sure we’re making the distinction between those that are the province — central province in its entirety…. The province has assumed the responsibility for those. This is not touching on those that are outside of that, where it’s still some…. Okay.

B. Ralston (Chair): I suppose the concern is that, even though technically it may be a responsibility of a private company, given financial failure or default or whatever, then it falls to the province. Ultimately, the province is the backstop in these contaminated sites. One only has to look federally. I think it’s the Giant Mascot mine where the obligation for remediation of the federal government is now in the billions of dollars. That is a federal obligation, not the obligation of the now disappeared company.

C. Bellringer: The discussion in our report on public accounts was only around the first.

G. Heyman: I have three questions. The first one is just following up on David’s question around B.C. Hydro deferral accounts and the Auditor General’s comments about the current acceptability of rate-regulated accounting practices — although, if I understood you correctly, it’s under some review, such that debt obligations don’t have to be recorded until the rates to which they relate begin to be paid. I think I understood you correctly.

Given the significant growth in the deferral accounts and this large bubble, if you will, that will work its way through the system at some point in the future, could the Auditor General comment on…. It seems to me there are only two likely outcomes. In order to deal with the significant amount of deferred debt, there will either have to be a huge addition to the province’s books with respect to Crown debt or a very significant jump in consumer rates to make the debt self-supporting.

C. Bellringer: The member’s question is at the heart of why I’d like to look at it in more depth. There is information available within the Hydro statements. Our office did something a couple of years back, and we did a follow-up after that. But I’d like to look at it fresh and just make sure that I totally understand where it’s at and make sure that there isn’t, if you will, a bubble. I can’t say anything at this point.

My second question has to do with surplus asset sales. The commentary says, “The sale of surplus properties was intended to provide much-needed revenue to the province and also to generate economic activity around British Columbia,” under what was called the release of assets for economic generation program.

Clearly, on the revenue part, it’s obvious. The sale of assets gets recorded as revenue to assist with balancing a budget without making cuts in other areas of government service. But is there any direct linkage from the sale of so-called surplus assets to specific economic generation in British Columbia that you can point to that’s apparent and verifiable in any of government’s accounting records?

S. Newton: As far as spinoff economic benefit in relation to the sale, that wouldn’t be something that we would be capturing in the summary of financial statements. We’re capturing the specific revenue related to the sale. That’s something more along the lines of how the asset was sold and what purposes it was used for, or whether it was leveraged to develop something else.

The ministry responsible for that area would have had that in their discussions, but it certainly wouldn’t have rolled into the development of these financial statements.

G. Heyman: Would it be fair for me to say that the term “release of assets for economic generation” is a descriptor without any verifiable backup that can be pointed to in government activity or financial statements?

S. Newton: I don’t think you can say that, because I can’t answer the question in relation to the link to economic generation. It’s not something that was necessary or integral in determining the year-end financial statements. I can’t make the leap between the two. I can’t confirm it, but I can’t also say it isn’t there either.
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My final question has to do with contaminated sites liability, where the report states that taxpayers “fund cleanup costs only if private parties no longer exist that would accept responsibility for cleanup and the site has defaulted to government.” There are some other descriptors that follow.

My question is twofold. Can the Auditor General point to other jurisdictions that had any practices or policies that would have, in effect, prevented a situation from arising in which such costs would have defaulted to government either by posting of very large bonds or a fund or something that would actually ensure that if a private party ceased operation, the government wasn’t responsible for any cleanup that was left behind?

The second question is: has the Auditor General done any analysis of the relationship between the costs of cleanup for unremediated sites and the royalties that would have been received by the Crown for…? Let’s use, for an example, mines, the mining royalties versus any costs that may have reverted to the Crown for cleanup following a company’s leaving the site in unremediated condition and ceasing operations in the province.

C. Bellringer: The first question as to whether we have examples of the policies being used in other jurisdictions — no, I don’t have that. It wouldn’t be something we’d have looked at in the context of the public accounts, for sure.

The second question on the royalties. We haven’t looked at that either. I don’t know if the comptroller general’s office has something.

L. Moore: I was just going to add to the first question. Although we don’t have the policies of the other jurisdictions, just to point out again that these are historical sites, long before current legislation that’s in place that requires that private companies provide bonds or whatever it is — that a government holds the funds in place in case there is contamination that has to be cleaned up during the process of active operation or when they cease to exist at the end.

A lot of legislation that exists now didn’t exist for these sites that have been defaulted to government. They are quite old.

G. Heyman: Chair, it’s certainly not specifically up to the committee to assign work. But I think it would be informative for the committee, at some point, if either the comptroller general or the Auditor General could look at the quantum that has been set aside as a government liability for future sites and compare that to potential royalty revenue from those sites, where the sites actually depend on provincially owned, Crown-owned, resources and the rents that accrue to them.

S. Sullivan (Deputy Chair): One question is about…. You wrote about contractual obligations, but then you spoke about contractual rights. That was something we were going to have to deal with. Could you give me an example of that?

R. Jones: Thank you, Member. One contractual right I can think of at this point in time is, for instance, forest licences that are given out for a 25-year period. One of the contemplations in the new standard is that it will be up to government to try and ascertain what they expect — the total revenue from those licences, say, over a 25-year period — off of cutblocks that are within that licence area.

So that might be one type of contractual right. But anything where there’s economic generation to the province through revenues, over a longer period of time, much like the contractual obligations, which are obligations over a period of time. This would be: what can government expect in terms of revenue coming in?

S. Sullivan (Deputy Chair): Okay. And just a brief comment on the other issue of deferred revenue is that when I was going to school many, many years ago, government — believe it — operated on a cash accounting system. It was very odd. My professor said: “There’s no way that government is ever going to do what they tell businesses they have to do, so just get over it.” Then when I got here, I found out that there are some pretty good standards adhered to. So I think we should celebrate how far we have come.

The other point is that it does seem to me to be a very genuine difference, because it would be better for the government to be able to take on $200 million more in revenue. It would make the government look better. But in fact, the government is resisting that. It does make me realize this is quite a genuine difference of opinion that is related to, I guess, the forecasting. Is it that you want to be able to forecast…? Can you actually explain to me why you would not want to register $200 million more?

S. Newton: It primarily relates to comparability to budget. We actually budget on a revenue and expense basis. We don’t actually budget on an asset and liability basis. Quite a number of accounting standards are moving to an asset and liability model, where they’re focusing on the value of an asset or a liability over time. The income statement amounts — which we’re used to in dealing with our budget, being revenue and expense — almost become by-products of that.

In relation to why we actually defer, the money that’s received to build the asset is akin to a financing transaction. The asset will be built and used for the purposes for which the funds were provided. It has a useful life. The
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expectation is that we will do that over time. One of the more interesting ways — I’ll call it a cool way — to show it is it actually shows the liability over a period of time of the amount of the obligation you still have in play over the life of the asset.

Interestingly enough, when you build that asset, you will expense it over its useful life. So when you build it, it shows up as a financial statement transaction on the balance sheet. But then you will slowly expense it over its useful life. It creates, I think, a dissimilar treatment or a bit of a conceptual difference, where we’re having the revenue right away, which is great. It’s good for our balance sheet and our income statement, and we’re going to have the expenses occur in another period of time. I think there’s a bit of a disconnect there, and I think that’s one of the fundamental bases that other governments are having a challenge with when they’re dealing with this standard.

But the other piece is that we basically budget based on our revenue and expense model, and that anticipates certain cash flows or accruals and amounts going out over a period of time to match that.

R. Sultan: Shortly after I was elected, the government, under the direction of Finance Minister Gary Collins, announced it was going to adopt GAAP accounting as opposed to the pretty loosey-goosey standards, I guess, which allegedly had prevailed previously.

I went to a meeting at which a group of distinguished accountants from Toronto came out and presented Gary Collins with a plaque recognizing this signal achievement. My chest swelled, and for the next 18 months I went around giving speeches about how we had adopted GAAP accounting. Preachers don’t change very much, I guess. I stuck with that theme too long in the sense that Richard Rees, who heads our local association of accountants, took me aside and said: “Well, I’ve heard your speech several times, Ralph. It actually is not true.” That was a bit of a deflator.

I’ve come to realize that we are pretty much GAAP-oriented, as defined by PSAB, I presume. The standard, as Stuart has explained, is sort of GAAP-plus — plus being our own regulations, which is kind of an out-clause. We can adopt little nuances as we choose. So I think Richard Rees’s point perhaps still applies.

Listening to the nuances of the argument, back and forth, it’s hard for us non-accountants to keep up with the assets, the deferrals and the liabilities over time. At the end of the day, it seems to me that very thoughtful, well-educated and informed people can disagree. It’s just a convention one way or the other. It isn’t as though there’s some absolute truth out there that we’re seeking. It’s strictly a convention that many governments across Canada, I guess, have moved to adopt.

Given that, I’m just wondering. Looking to the future, Stuart, do you see, with this new standard coming out and the various negotiations and discussions that have taken place, that there will ever come a day when we actually adopt that universal standard without the plus — by the way, this is our own little regulation we tack on — when it is so arbitrary anyways?

The irony is that if we did it their way, we would be almost $200 million to the better. I mean, governments around the world are accused of fiddling the books and trying to make awful look terrific. We’re just the opposite. We’ve got a terrific set of books.

If we did it their way, we would look even more terrific. As evidence of that, we have Standard and Poor’s coming with this report last week, lavish in its praise of the transparency and the rigour of the fiscal management of this government. Wow. If we did it their way, we’d look even better, presumably, by that number that they look at.

That’s my question. Do you see us on a merger path here, at some point, where this little technical disagreement disappears?

S. Newton: Yes, I believe it’s possible on this issue. Our issue is that standards are changing quite dramatically over time.

As both Carol and Russ have pointed out, we have eight new standards coming on line in the next five-ish years. We’re working together to make sure that we’re on the same page as we come through. Contractual obligations is one where I think it was implemented, and we’re all on the same page. There are things we can do to improve it. I think we both know. We’re focusing on that.

I think, theoretically, yes. We could get to a place where we could say: “Absolutely. We’re GAAP-compliant.”

If you look at the two regulations that we have currently, the one related to rate-regulated accounting is consistent with the existing standards currently. We don’t even need to draw on it to be able to be GAAP-compliant. So there’s a question of why it still is there, and that’s something that needs to be looked at.

In relation to government transfers…. If everybody did get on the same page and it was exactly as the Auditor describes, we would have a tough time in relation to actually how this government budgets and how their legal responsibility to match budget to actual at the end of the year would work. We’d have a bit of a legislative problem that we would have to work out afterwards, but it is theoretically possible.

I do see, still, a lot of disagreement. There’s enough turmoil out there that it’s going to be around for a little bit longer, but I am heartened by the international public sector standards work and the international financial reporting standards work on some of the issues they’re dealing with, which might help provide guidance to the Canadian experience, as we’ll call it right now.
[ Page 892 ]

C. Bellringer: It is my understanding — I don’t know if this is true for all of them — the credit-rating agencies do remove capital from…. Having a better surplus number at the end of the year wouldn’t change their ratings. They already take that into…. They factor it out. They look at the cold numbers on borrowings and on capital, and they kind of take it out.

I was around when it was pretty close to cash accounting, and then it moved to accrual accounting. Then it moved to full accrual accounting. Now we’re fine-tuning things.

There’s a big difference between Canadian public sector standards and international public sector standards. It started out because…. Canada was way ahead of the international accounting standards setting, going back. Internationals caught up. What’s happened in the private sector is that Canadian standards are based on international.

My personal view is that I’d love to see Canadian public sector move to international — to, again, remove that confusion on a global basis, because right now it is different — based on the fact that ours was stronger to begin with, but now it’s catching up.

Standards do change. They change. They change frequently. They cause changes to underlying systems. If you look across 150 organizations within the public sector, if an accounting standard changes, they have to change the way they’re recording everything; the way, as Stuart described, the budgeting changes. We get that. That’s why it is a pretty intense conversation all the time to come to an agreement on things.

We’re not unaware of the fact that other jurisdictions in Canada…. It is our understanding that it is, at this point, only Ontario that has the same issue on the government transfers.

It has evolved. The next step will be, as Russ described, the post-implementation review, which hopefully will give a little bit more guidance across the country. Because as soon as things start to get a little bit out of kilter, the standards setting does step back and say: “Okay. What’s working, and what’s not?” We’ll see what’s next.

B. Ralston (Chair): I guess people just don’t understand the intellectual liveliness of the world of accounting.

V. Huntington: On pages 32 and 33, you discuss the types of audit reports that are issued. You mention unmodified, modified and compliance reports. I’d like to just ask a couple of questions about the modified reports.

Did you issue any? Did you have any qualifications? Did you have any adverse opinions that ended up, following the opportunity for the organizations to correct any error that you identified? Were there any adverse opinions? What were they?

This is more for the Chair, I think. For a number of years now — given, I feel, the Auditor General is tasked with reporting to the Legislature — I’ve asked this committee if we could look at some of the adverse opinions. There has been a reluctance to do so. I’ll just bring that back up with the Chair.

Could you discuss any qualifications or adverse opinions that you did have as you issued your reports?

C. Bellringer: There aren’t a lot. But there’s one. I’ll ask Russ to explain the difference of opinion on that one.

R. Jones: We had one Crown corporation, the B.C. Transportation Financing Authority, where we issued a qualification, “Does not present fairly,” based on the government transfers standard. They decided not to use the regulation that government had put in place, which would have then meant it was only a compliance opinion last year. They just went straight ahead and said: “We don’t agree with the standard.” They didn’t adapt the government transfers standard, so we had to say: “It does not present fairly.”

It was a qualification — not an adverse opinion, just a qualification, because we were able to identify the total amount of the difference.

B. Ralston (Chair): Could you just remind members of the business of that particular corporation?

R. Jones: B.C. Transportation Financing Authority. Basically, it is the capital arm of…. It’s a Crown corporation that was set up to do all of the capital for highways. It also has within it B.C. Rail, and I think for this year, actually, it’s now going to have all of the assets over the SkyTrain and Millennium Line and whatnot.

Could I ask the comptroller general what his opinion is of the opinion on the B.C. Transportation Financing Authority?

S. Newton: In relation to the B.C. Transportation Financing Authority, it’s the same disagreement that we have in relation to all the other places within government where we have funding that’s come in that we are recognizing the revenue over an extended period of time. The Transportation Financing Authority chose to not use the reg and to be really clear that they felt the standard that exists in the public sector accounting standards allows them to do what they were doing and that the interpretation is consistent with where they see others doing that. That’s the choice they made with the board and their auditors.
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V. Huntington: Could I just ask, then…? Earlier you had said that there was no option. You had to follow the Budget Transparency Act and the regulations, as they were attached to that act. Yet the B.C. Transportation Financing Authority remains outside that requirement?

S. Newton: They chose not to rely on the reg. I don’t why they chose not to rely on the reg, but that resulted in their qualification.

S. Newton: Every board of a Crown has to assess, in relation to the year-end financial statements, where they’re going to land. They work with their auditors on how they’re going to present their financial statements. It’s the board’s responsibility. That’s the choice or decision that they make.

V. Huntington: Do the act and the regulation, then, not extend to government entities or Crown corps?

S. Newton: It does. They chose not to rely on the reg and felt that they didn’t need to use the reg because they felt they were already on side.

V. Huntington: Okay. I guess I’m not understanding. If there’s a law and then a regulation, where is the requirement to follow the law?

S. Newton: They felt the regulation didn’t apply because they didn’t need to use it. They felt the way they were accounting for it was appropriately done. They didn’t need to rely on the regulation to make something work.

On page 25, there is a discussion of contractual obligation and debt. Then the final paragraph talks about government guaranteed debt. So $19 million is for the B.C. Hydro bonds, but there’s $9 million of guaranteed debt for persons or organizations outside of government. Can the Auditor General or the comptroller general discuss that obligation and what those debts might be that are outside of government — presuming legal defences, etc.? I’m not sure.

C. Fischer: In general terms, the guarantees government provides to parties outside of the government reporting entity are to parties that are engaged with government in the delivery of programs or services, whether they’re in health care or education or social services. Government, in some cases, underwrites the required debt of that provider in the form of a guarantee.

V. Huntington: Could you elaborate on that a little bit and give us some examples, for instance, of what type of contract or entity or organization might have that very special guarantee?

B. Ralston (Chair): Wouldn’t it be simpler just to provide a list of the organizations that are the beneficiaries of the $9 million in guarantees? Could that be done? All the organizations that make up the $9 million.

K. Corrigan: I have a question about something else. I just wanted to follow up on something that Lisa Moore said.

The observation was made that the sites that are on that list are historical. I just want to be clear. Present sites like mines and dams and things like that…. Are you saying that government will not be on the hook for any sites that are presently or recently have operated because mechanisms are in place, through bonds, and so on — that government will not end up having to pay the cost of cleanup? Is that what you’re saying?

L. Moore: I cannot say 100 percent, but that is the aim and the goal of what is in place in legislation these days. It’s so that there are funds set aside in the case of a contamination that needs to be cleaned up.

What happens through final dissolution of operations and wrap-up by the private sector…. That’ll be on a case-by-case basis as those operations cease. But that is the plan of government to mitigate that from occurring.

When you say funds have been set aside, is that taxpayer money that’s been set aside?

L. Moore: Private companies. The ministry holds funds in trust accounts and whatnot to have on hand in case there are funds needed to pay for cleanup. It’s like a bank account. It’s a savings account set aside. It’s not the government’s money. It’s private company money that’s set aside.

B. Ralston (Chair): If I might, then. The typical process of the approval of a mine…. They would be given a permit to operate. There’s an estimated life of the mine. Are there, then, letters of credit that are put in place that would mean that regardless of the financial circumstance of the company at the end of the useful life of the mine, there is the financial backing — by letters of credit granted by the company when they get their operating permit — to do a cleanup if it’s necessary? Is that what you’re saying?

L. Moore: I’m not sure if it varies from…. I believe it varies depending on what type of operation it is. But, yes, they should all have something that’s being held.

B. Ralston (Chair): Perhaps, then, just for my benefit and maybe for the benefit of the other members of the committee, because there does seem to be some interest in this, could we be taken through, as part of the enhanced standard of contaminated sites, how that will work in the future?

There are, of course, new mines planned, prospectively. How would that work in the future in order to meet the new standard and to avoid falling back on making it an obligation of the state to clean up after a mine has closed? Is that something that could be done?

K. Corrigan: Maybe I could get Mr. Newton, then, just to confirm what Ms. Moore has said — that now, in place, there is protection for the taxpayers. In contemporary mines — or, in the last few years, ones that have been approved and are operating now or recently — the taxpayers will be held harmless from liability if, for example, a company goes bankrupt.

C. Fischer: Yes, that’s correct. Currently, any active operation, whether it’s a mine or any other type of industrial activity on Crown land, is subject to tenure regulations. Tenuring regulations — they differ between different ministries and different types of tenures — do provide for security. Security is assessed by the ministry responsible. Security is paid in appropriate form, generally GICs or letters of credit, to the ministries. The ministries monitor those securities over the life of the tenure.

One of the big challenges is helping ministries to be consistent in assessing the changing economic environment in relation to an operation — making sure those securities are updated. The oversight is provided by the Ministry of Finance, provincial treasury, risk management branch, and they have, for the past two years, worked with all of those sectors, all of those ministries and the natural resource sector to update and refresh policy with regard to common securities.

K. Corrigan: Just to be clear on this, then, the security would supersede any other claims in bankruptcy? I mean, they are set aside…

How long does this new regime go back? Is it several years now, or is that recent? Just approximately.

C. Fischer: I would say from the last substantial rewrite of the Financial Administration Act. I would say it would be within the 1980s, although there would have been predecessor programs requiring security. We do actually have securities for different types of tenures in the forest sector for small business operators that have been in place for a very, very long time — 50, 60, 70 years.

I have a different question. I wanted to ask a couple of questions about the surplus asset sales. There was $601 million of sales of assets in 2013-14 and then another $135 million in 2014-15. I’m trying to get a sense of the scope of that. Is there somewhere in the financial statements that tell us, by contrast, how much land — because this is land; this is all land, right, when we’re talking in these particular assets — was purchased by the provincial government?

C. Fischer: Yes. On page 98 of last year’s Public Accounts, there is the consolidated statement of tangible capital assets. There are the different categories, including land and land improvements, and buildings. Within the detail of the table, you will see, in the middle line, additions of $180 million for land.

K. Corrigan: So while there was $601 million last year…. Is that 2013-14 or ’14-15?

K. Corrigan: Okay. So that would be other side, then, of the benefit to the government, and so on.

C. Fischer: It would be very hard to make a linkage between land acquisitions for required purposes and the disposal of different pieces of land that are no longer required.
[ Page 895 ]

K. Corrigan: Okay. I have more, but if other people have questions, I can come back later.

L. Reimer: My question relates to page 19 of the Auditor General’s report. It refers to the financial and economic review published in July 2015, which was produced, I guess, by Finance.

It’s saying that basically, there should have been a public announcement, which would have made it more useful as an adjunct to the public accounts process.

My question is: why did we do the financial and economic review, and was it done as a part of the public account process, or was that something completely separate?

S. Newton: That review is separate. That’s an analysis at the end of the year in relation to the economy — how well we did, how well we did in relation to budget. It’s more of an indication of how did we get to this point in the journey and what happened over the course of the year. It is separate from the year-end accounting for dollars and cents.

S. Newton: Annual report. Thanks, Carl. That annual report has both their year-end financial statements in it and something that would be akin to a finance and economic review. In the province of B.C. and other provinces, some do it together; some do it separately. It’s a choice.

I think the Auditor’s comment in relation to making reference to it in future years is something we can easily accommodate in the year-end financial statements. But it is primarily a separate report — two distinct documents.

G. Kyllo: I’m just wondering, with respect to First Nations settlement lands, how Crown assets are actually shown on the books, or are they shown on the books? If there is a settlement with a First Nation where there’s a significant transfer — like the Tsilhqot’in, as an example — how does that affect the government books?

C. Fischer: Crown land is not recorded as assets, tangible capital assets, of the province. They are listed at a nominal value of $1 because they are inherited rights and title, and the accounting standards require that they not be given accounting recognition. Primarily, that’s because it’s very hard to come up with a reliable value for land that hasn’t been surveyed or titled and has never been put into any land title system.

When there is a First Nations partial or final settlement of treaty, land is transferred to the First Nation, as agreed, at net book value. If we are dealing with Crown land, it is transferred at a value of zero. If it is land that the province has to purchase, then it is transferred at the purchase price.

G. Kyllo: A follow-up. So likewise, if there was an allotment of Crown land that may be rezoned or taken into Crown assets for construction of a highway, for example, would there be a value associated with that land? Would that show up as a positive reflection on the capital plan?

C. Fischer: It really depends on whether it’s an exchange or non-exchange transaction. In the case of a non-exchange transaction where there is no compensation provided, generally, it’s considered a grant of land for an allowable purpose, whether it’s the construction of a highway or to further promote community requirements. In those cases, the land is transferred at net book value — either zero, if it was Crown land, or at the purchase price, if it had been previously purchased.

If we’re talking about an exchange transaction where the province, effectively, sells land, then the exchange is recognized just like any other exchange. The amount that’s paid comes in. The amount of the asset that’s transferred out goes out. The difference is gain or loss on disposal.

B. Ralston (Chair): I had myself down for a question about page 26, the information about pension plans. I had understood, just listening to successive Finance Ministers since the late ’90s, that the innovation of having a jointly trusteed series of pension plans meant that there was…. Unlike many American jurisdictions, there are really no unfunded pension liabilities owed by government.

This note confuses me slightly, in talking about an ongoing potential obligation. I’m wondering if that could be clarified or at least my understanding corrected, if it needs to be.

S. Newton: With pension plans, there’s an actuarial valuation every three years. The actuarial valuation helps set the rate that both the employer and employee will be contributing into the plan.

I believe it’s the teachers pension that has the amount that’s in question. When the triannual evaluation was done, there was a recognition that the amount of plan assets in relation to the amount they need to pay up needed to be increased, so there was a requirement that the rate increase.

At the point in time of the actuarial valuation, there’s a difference. We’ve noted our half of the difference. The rate at which the employer and the employee pay out has been increased to make that go away over time. That’s how we
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always, after these evaluations, ensure that we don’t get into a liability position, that we clean up the actuarial difference as it shows up.

B. Ralston (Chair): This is one pension plan of the four, which are the broader public service pension plan, the municipal plan and the college plan as well. The observation is correct that there are…. With this correction, then, in the four plans, there are no unfunded obligations owing by the government to enable the plan to meet its future obligations to people who would take pensions down the road. Is that correct?

V. Huntington: This question just falls out of Greg’s issue with First Nations. As the settlements go on in time, taxation obligations start to click in. How does the government follow those obligations and ensure that they’re being met?

The property tax obligations start clicking in for the members of a treatied community, and they would start paying their property taxes to the Indian government. However, I’m assuming, then, that their income taxes are also starting to click in. Who in government is monitoring how those income taxes are collected and whether they are, indeed, being collected as per the treaty?

S. Newton: The only level of government that has the authority to undertake treaty is the federal government. The province and the First Nation will ratify the agreement, but the actual decision is when it’s ratified federally. It would be a federal jurisdiction to even be able to answer the question that you’re asking.

V. Huntington: Okay. Then let me go back to an issue, say, of school taxation, where a band would pay…. The school would be collecting school taxes. In the case, for instance, of Tsawwassen, they keep those school taxes. But the government makes up the taxation loss to government by paying the local district the amount of taxes that the First Nations government has kept.

It’s been a substantial issue with people, because, basically, it means the taxpayer is being double-taxed on the school. I’m wondering if anybody in government is looking at that issue, how often it occurs throughout the province, what the gaps are and whether it’s worth looking at that issue.

C. Fischer: The federal government provides that transfer directly to school districts. They are monitored by the Ministry of Education as part of their ongoing funding monitoring for the K-to-12 system. The system, in my experience, appears to be pretty robust. The federal government is very timely in terms of providing aboriginal education transfers directly to the school districts.

V. Huntington: I guess I’m just suggesting that there’s something else going on there on a number of the reserves and that you might want to take a look at it.

C. Fischer: I think that might be a federal responsibility rather than a provincial one.

V. Huntington: Not on the treatied settlement lands, I don’t believe. That becomes provincial. When a treaty is signed, then the First Nation is subject to all provincial laws too.

B. Ralston (Chair): But I think that’s an interesting point, and I’m sure that the Office of the Comptroller General will want to follow up on that.

I don’t have any other questioners. I have one further question myself. Is there anyone?

K. Corrigan: I notice on page 25 of the report…. It is under the section of “Contractual obligations and debt.” I do have a few questions about that. But very specifically, on the right column of page 25, it says: “The Columbia Basin power projects debt of $464 million and the UBC Properties Trust debt of $206 million make up the majority of this $720 million…that is not required to be disclosed in the summary financial statements.”

I’m specifically interested in the UBC Properties Trust debt of $206 million. Is that because it’s not part of the government reporting entity? Is that correct?

C. Fischer: No. UBC Properties Trust is a consolidated commercial subsidiary of the University of British Columbia. Because they are a commercial enterprise, just like Columbia Power Corporation, we don’t separately include their debt in the taxpayer-supported debt of the province.

The debt of government business enterprises or commercial Crown corporations is included on a single-line basis, just like the whole organization itself. It is separately disclosed in the debt statistics report, but we don’t separate it out as a debt item, directly, of the province.

I do have a question, generally, about debt and universities. I know that this has come up, but I’m the official opposition spokesperson for Advanced Education. I’ve heard from many institutions, from many student groups, from many faculty organizations at institutions all around the province that there is a real concern about the fact that those institutions aren’t able to borrow money without going through a planning process with the province, because the debt will end up being on the books of the province.

They’re particularly concerned about the building of student residences, because the opinion of the administrators and the students and so on is that student residences are needed, that housing is needed, and that they finance themselves. So it makes sense to build it, but they’re not allowed to do it because of this issue of debt. I’m just wondering if either government or the Auditor General has any comments or recommendations to make on how to get out of this problem, if there’s any kind of accounting solution that would satisfy government as well as the universities.

I’m not asking for a policy decision. I’m just saying: is there an accounting loophole or something that could be used? Maybe I don’t want to use that word, but some way so that this isn’t creating a real problem. And it is.

B. Ralston (Chair): I think there was a promise in the Speech from the Throne a few years ago to actually resolve this issue, but it has not been done.

S. Newton: How you fund capital within government is a policy issue. It’s a policy choice. It’s a policy choice, as well, in this province to distinguish debt between self-supported and taxpayer-supported. There are limits in any organization to the amount that they can borrow and finance over a period of time.

Discussions with rating agencies and others…. The government makes some very serious choices around how capital will be employed within government. So at all times, even in relation to student housing, it would be government’s choice to determine how they’re going to allocate. There isn’t a unique accounting loophole that makes it not become debt. We don’t have that. If we did, I wouldn’t be telling you about it. I would be working in a castle somewhere because I’d be really rich, selling the secret. I don’t have the answer.

B. Ralston (Chair): Did the Auditor General or Deputy Auditor General wish to comment on this topic? And even if you don’t, please do.

C. Bellringer: It wouldn’t be the first time that the finger has been pointed at accounting standards as being the reason why something can’t take place. I just fundamentally disagree with that connection. That becomes a matter of…. Decisions get made by the decision-makers, for whatever reason they choose. I always get a little bit hurt by the accounting being blamed, so I kind of disconnect the two things.

K. Corrigan: I have to go back and look at the Hansard and the history and so on, on this, but I do believe that — and I’m sorry to hurt you — that has happened in the past. At least that’s the putative reason for campuses, universities, institutions not to be able to build student housing which they claim would actually make money. It would generate revenue, and the housing is needed. But it would, would it not…? Even if it is the university that is borrowing on behalf of the students, and the students are involved and put money in, all of that money that’s borrowed would end up on the books of the province as debt. Is that correct? Even if it paid for itself?

S. Newton: Absolutely, unless it’s a separate and distinct corporate entity outside of the government reporting entity. If a university were no longer part of government…. There are a whole bunch of connections across that for a variety or reasons that would make that difficult, and I don’t think anybody’s talking about that. But that is one of those opportunities. Otherwise, if it’s within the government reporting entity, it’s really difficult — I think, impossible — to structure something that says, “No, that’s off-book,” and lives somewhere else and it’ll pay for itself. It would probably be a separate commercial entity not connected to government.

By connection I mean that government wouldn’t have control. Universities at one point in time were not part of government, and then through some of the accounting rules, as well as some of the issues around control and where government and universities interact, it created this scenario where they are in government, and that level of control can’t be eliminated. They would have to be fully excluded from government to make that work.

K. Corrigan: On page 33 of the Auditor’s report, it says, “104 of the 141 entities receiving audit opinions had compliance audit reports because they were required to follow the regular government issue related to the deferral of certain government transfers,” which is the issue that we’ve been talking about. But it said: “As a result, their auditors considered that their financial statements were inconsistent with GAAP.” I would assume that the Auditor General’s office does some of the auditing, but there’s so much to be done that it is also done by private companies.
[ Page 898 ]

It’s interesting that a whole bunch of these compliance reports were done by somebody else. Is that because there was some kind of…? Is there any kind of direction or discussion that happens with those other auditors that says: “This is the way we are approaching it”? Or is that done independently because their interpretation is that using the regulation would require that there therefore be a compliance report?

C. Bellringer: It’s a conversation we’re having right now. It’s a conversation that’s been had over the years to try to get to a single position so that it wasn’t overly confusing.

Having said that, we’ve been rethinking our position. We can’t speak for the other auditors. We’ve shared our position with them. We haven’t yet signed an opinion under this new position, but it’s coming up. It’ll be in this year. We are taking the position that we should be expressing an opinion based on whether or not those financial statements are being prepared in accordance with public sector accounting or not, or GAAP or not, as opposed to whether or not they’ve been prepared in accordance with the regulation.

There’s a lengthy professional practice analysis of exactly why, but at the end of the day, it boils down to: they’re used in a general sense. We think it’s easier for you to understand.

But we are not all in agreement across the various auditors of various organizations. There are those who are comfortable, going forward, continuing with the compliance approach.

B. Ralston (Chair): Before we adjourn, I just wanted…. On page 41, you talk about looking ahead and that the government will need to disclose information about contingent assets — so just as a quick opportunity to explain what that means, and then I think we’ll be in a position to adjourn.

C. Bellringer: I’m not fighting over this one, because I can’t explain it simply.

R. Jones: I guess the simplest way to say it is that we have a standard that talks about contingent liabilities. Most of those usually arise from lawsuits that are sitting out there where there’s no certainty at this point in time whether or not the government will have to pay or whether it’s a possible contingent liability.

The contingent asset is the other side of it, where there may be a lawsuit that’s out there where the government says: “You know, we’ve been wronged” — a bridge was incorrectly built or something — “and the organization that built it for us should be repaying us.” So it’s just the opposite of what a contingent liability is.

B. Ralston (Chair): The note says it’s a new concept. It doesn’t seem that new, actually.

R. Jones: It is not a new concept in international standards. They already record contingent assets. In a Canadian context, it is. Much like contractual rights, we’re really good in Canada about showing the liability side of everything. But we’ve never sort of taken a step back and said, “Because it’s an asset-liability model, you should also be showing the opposite,” which is the assets.

Before we adjourn, I just wanted to tell members that the subcommittee will be meeting to determine future meetings. We may agree to have some meetings in June, but you’ll be consulted through your respective caucuses — and the independent as well.

Access to on-line versions of the report of proceedings (Hansard)
and webcasts of committee proceedings is available on the Internet.

Chair:	Bruce Ralston (Surrey-Whalley NDP)
Deputy Chair:	Sam Sullivan (Vancouver–False Creek BC Liberal)
Members:	Kathy Corrigan (Burnaby–Deer Lake NDP)
	David Eby (Vancouver–Point Grey NDP)
	Simon Gibson (Abbotsford-Mission BC Liberal)
	George Heyman (Vancouver-Fairview NDP)
	Marvin Hunt (Surrey-Panorama BC Liberal)
	Vicki Huntington (Delta South Ind.)
	Greg Kyllo (Shuswap BC Liberal)
	John Martin (Chilliwack BC Liberal)
	Lana Popham (Saanich South NDP)
	Linda Reimer (Port Moody–Coquitlam BC Liberal)
	Selina Robinson (Coquitlam-Maillardville NDP)
	Ralph Sultan (West Vancouver–Capilano BC Liberal)
	Laurie Throness (Chilliwack-Hope BC Liberal)
Clerk:	Kate Ryan-Lloyd

REPORT OF PROCEEDINGS (Hansard)

SELECT STANDING COMMITTEE ON PUBLIC ACCOUNTS

REPORT OF PROCEEDINGS
(Hansard)

SELECT STANDING COMMITTEE ON
PUBLIC ACCOUNTS