The committee met at 10:02 a.m.

[S. Bond in the chair.]

S. Bond (Chair): Good morning, delighted to be able to work together as a Public Accounts Committee again today. As has been our practice over the last number of meetings, we’re going to meet for two days and work through a number of reports the Auditor General and her staff have prepared.

I’m really grateful to the committee members. Everyone has been doing their homework. We’re catching up. I think that’s been fantastic and also a very positive and collaborative approach to the work that lies ahead.

Today we’re going to tackle a couple of reports, very fiscally oriented. I don’t know about you, but you really had to pay attention — doing your homework and reading and understanding and following all the notes. We look forward to having the Auditor General walk through the report and then, of course, the presentation in response.

With that, we’re going to begin with the presentation comments from the Auditor General. Then I know her staff will walk through a PowerPoint, and we’ll make our way through the report. We’re certainly not rushed for time. Get your questions ready, and we’ll start a speakers list.

I also want to thank Kate, the Clerk of Committees, and Hansard for being on the road with us today. I know it takes a lot of effort to organize the event today and tomorrow. We’re very appreciative of that extra effort.

With that, we’ll turn it over to the Auditor General.

Consideration of
Auditor General Reports

The 2015-16 Public Accounts and the
Auditor General’s Findings

C. Bellringer: Thank you very much. Good morning, everybody. It’s our pleasure to be here with you today.

With me this morning is Lisa Moore, who is an executive director within the office’s financial audit portfolio, and Paul Lewkowich, a manager within the financial audit portfolio. We’re here this morning to discuss, in this section, two reports. The first is The 2015-16 Public Accounts and the Auditor General’s Findings — so if you will, last year’s — which was published in February of 2017.

The second report is titled Understanding Our Audit Opinion on B.C.’s 2016-17 Summary Financial Statements, so this year’s — well, this year is now last year, isn’t it — which was published in September of 2017.

[10:05 a.m.]

The common thread between those two reports is the discussion of my opinion on the government’s summary financial statements. There was one qualification in the 2015-16 opinion on summary financial statements, whereas there are three qualifications in the ’16-17 summary financial statement opinion.

I’d like to point out the importance of looking at the audit opinion when reading any set of financial statements you come across. Reading the audit opinion is the fastest way to tell whether the statements were prepared according to independent accounting standards and, therefore, whether they can be relied on.

For example, in preparing our 2015-16 report on the public accounts, we found that only 34 of government’s 142 financial statements were both prepared in accordance with generally accepted accounting principles, or GAAP — you’re going to learn a bunch of acronyms this morning — and received a clean audit opinion. The other financial statements received mostly clean opinions, but the statements were prepared according to accounting policies defined by government. So making that distinction between GAAP and the government regulations that modify the policies.

In our office, we’ve issued a guide. It’s called Understanding Public Sector Financial Statements. It’s a useful resource if you’re looking at government’s financial statements. It’s available on our website.

In addition to discussing the audit opinion, the earlier report, the 2015-16 report, notes that government’s financial statements tell an interesting story beyond the bottom line. It highlights some of the information included within the summary financial statements that we thought would be of interest to you.

The 2015-16 report also includes some background information on special accounts within the consolidated revenue fund and upcoming changes in accounting standards. The more recent report, ’16-17, focuses solely on our audit opinion on the summary financial statements. Lisa will now go through our more detailed presentation.

L. Moore: Thank you, Carol. Good morning, Members. As Carol has noted, we do have two presentations today. Both are included in the same slide deck that you have in your materials, though. The first refers to a report on the 2015-16 public accounts; the second, on the 2016-17 public accounts.

Our fiscal 2015-16 report on the public accounts is made up of five general areas — background information on the financial reporting requirements for government and our audit opinion; a discussion of our audit opinion on the March 31, 2016, summary financial statements; highlights of information that’s included within the summary financial statements; an information piece on special accounts within the consolidated revenue fund; and a description of new accounting standards that will come into effect over the next few years.

Our office audits the province’s summary financial statement each year. This is the largest financial audit in British Columbia, covering over 140 organizations that make up the government reporting entity. This includes ministries, Crown corporations, school districts, universities, colleges, health authorities and other public sector organizations.

Our opinion on the summary financial statements reports whether government has shown its financial position and results for the year fairly, in accordance with Canadian generally accepted accounting principles, otherwise known as GAAP. In Canada, the GAAP that government must adhere to is public sector accounting standards. These standards are set by an independent body in Canada, the Public Sector Accounting Board. A standard opinion, one that doesn’t have a qualification or modification, indicates that the financial statements can be held to a higher level of reliability than one with qualifications.

Unfortunately, the opinions on recent summary financial statements have been qualified. In our opinion on the summary financial statements for the year ended March 31, 2016, there is one qualification related to the inappropriate deferral of revenue. We have qualified on this issue since fiscal 2012. The qualification is due to the inappropriate accounting for revenue received from other levels of government and for restrictive revenue, such as that from endowments.

There is a difference of opinion between government and our office on the application of accounting standards. The accounting disagreement relates to when revenue is recorded and, for the most part, relates to revenue the government received for the purchase or construction of capital assets. The accounting standards require revenue to be recorded by the time the asset is purchased or built, whereas government records the revenue over the useful life of the asset, which could be over several decades. Government is not recording its revenue today. Instead, it will record the revenue in later years, which distorts the financial statements both now and in the future.

[10:10 a.m.]

If government had applied the accounting standards the way our office believes they should have, it would have reduced year-end deferred revenue by $4.2 billion and increased the accumulated surplus of government by a similar amount. Most of the difference relates to amounts that should have been adjusted in prior years, so the impact on revenue surplus for March 31, 2016, was an understatement of $3 million.

Government’s application of public sector accounting standards reduces the comparability, understanding and usefulness of the financial statements. Please note that the increase in surplus does not mean that the government had additional cash. In most cases, the money was either already spent or was earmarked for specific projects.

A lot of people look at government’s financial statements, and indeed, many of them may give up at the title page, but there’s information in them that’s useful to know. Our report highlights some interesting information, including the need for better information to be provided to the readers on planned versus actual results — for example, such as explaining why the actual year-end financial statement amounts are so different than what was budgeted.

It includes estimates and assumptions used in the financial statements, focusing on personal income tax revenue and the resulting measurement uncertainty; the creation of the B.C. prosperity fund and the Forest Enhancement Society of B.C.; the purchase of coal licences by the B.C. Railway Co. during the ’15-16 fiscal year; the central deposit program and advanced rate-setting agreements; information on how the revenue from the B.C. Lottery Corporation is spent; and information about the $101 billion in contractual obligations entered into by government.

The report also provides some information about a lesser-known aspect of the summary financial statements, and that is the use of special accounts within the consolidated revenue fund. Of note is that special accounts are a spending authority separate from the annual supply act that is created through legislation. Once the special accounts have been created through legislation, the ability to accumulate and spend funds from them continues until such time as the legislation is changed.

Between fiscal 2007 and 2016, spending from special accounts ranged between $400 million and $700 million annually. The total spending authority available for all 24 existing special accounts as at March 31, 2016, was $2.3 billion. However, any spending from the accounts must fit within government’s overall fiscal plan.

Over the next few years, there are eight new public sector accounting standards coming into effect, which can impact the financial statements of government organizations. The first six of these come into effect in fiscal 2018. Our report also notes that there are some new international financial reporting standard changes coming into effect over the next while, which can impact the financial statements of government business enterprises. Government needs to consider and address these changes in time to determine the possible impact on the summary financial statements.

That concludes our summary on the 2015-16 report on the public accounts.

Understanding Our Audit Opinion
on B.C.’s 2016-17 Summary
Financial Statements

L. Moore: I will now continue with the slides that highlight our more recent report on the 2016-17 summary financial statements and the Auditor General’s opinion.

This report discusses our audit opinion on the fiscal 2017 summary financial statements. Our opinion is in appendix A to the report, starting on page 14. We include some background information in the report, including a discussion of why it is important to adhere to generally accepted accounting principles when preparing financial statements.

We also discuss the regulations that government implemented that impact government’s accounting policies and why the regulations should be removed and that Auditors issue opinions in order to let financial statement readers know whether they can rely on the financial statements as presented. It should be a rare occurrence for a set of financial statements to have a qualified opinion.

The report discusses the three audit qualifications that were included in our opinion on the summary financial statements: the qualification related to inappropriate deferral revenues, which is the same qualification we’ve included since fiscal 2012; the qualification related to the inappropriate use of modified equity basis of consolidation for the Transportation Investment Corporation; and the qualification related to the inappropriate use of rate-regulated accounting within the summary financial statements.

Our first qualification on the March 31, 2017, summary financial statements relates to the inappropriate deferral of revenue received from other levels of government and restricted revenues such as endowments. This is the sixth consecutive year for this qualification and the same issue that we discussed earlier, in our ’15-16 report on the public accounts. If government had appropriately applied the accounting standards the way our office believes they should have, it would have reduced year-end deferred revenue by $5.1 billion and increased the accumulated surplus of government by a similar amount.

[10:15 a.m.]

The impact on revenue and surplus for the year ended March 31, 2017, is much higher than fiscal 2016. The error in 2017 is an understatement of revenue and an annual surplus of $900 million.

The second qualification for the ’16-17 summary financial statements relates to the inappropriate use of the modified equity basis of consolidation for the Transportation Investment Corporation, also known as TIC.

TIC is responsible for the Port Mann Bridge and the George Massey Tunnel replacement project. In order for a Crown corporation to qualify for consolidation using the modified equity basis, it must meet all of the required criteria to be classified as a self-supported Crown corporation. Based on the conditions that existed on March 31, 2017, it is our opinion that TIC was unable to maintain its operations and meet its liabilities from revenues received from outside of the government reporting entity. As a result, TIC did not meet all the required criteria to be a self-supported Crown corporation.

Whether TIC was a self-supported Crown corporation at March 31, 2017, changes the way the government should have counted for TIC’s financial results in the summary financial statements. Although the differences do not affect the bottom line, they significantly affect a number of account balances, including tangible capital assets, loans recoverable from agencies and the classification of debt between self-supported and taxpayer-supported. We expect that in fiscal 2018 TIC will be accounted for government as a taxpayer-supported organization and that this qualification will be removed.

The third qualification relates to the inappropriate use of rate-regulated accounting within the summary financial statements. The Budget Transparency and Accountability Act, or BTAA, directs B.C. Hydro to follow the United States Financial Accounting Standards Board accounting standards codification 980 known as ASC 980. This accounting standard on the use of rate-regulated accounting is acceptable under Canadian public sector accounting standards. However, the ASC 980 standard requires that an independent third-party regulator or an entities-owned governing board empowered by statute or contract establish the rates used by the entity. For B.C. Hydro, though, the BTAA regulation directing the use of ASC 980 waives this requirement.

Even though B.C. has an independent third-party regulator, government has issued a number of directions that the regulator must follow in the rate-setting process. The fact is that these directions impact government’s own bottom line.

In our view, government’s role is neither that of independent regulator nor is it B.C. Hydro’s governing board. Therefore, it cannot establish rates. Since government’s direction must be taken into account by the regulator, it is our opinion the application of rate-regulated accounting is not in accordance with the independence requirements of ASC 980.

It is, therefore, not acceptable under the Canadian public sector accounting standards. This impacts the accounts at the summary financial statement level. Therefore, it impacts our audit opinion on the summary financial statements. However, because we don’t know what rates the regulator would have allowed B.C. Hydro to charge or what revenues and expenses it would be allowed to defer, we cannot quantify the effect of the lack of independence on the accounts in the summary financial statements. Therefore, we are unable to quantify the impact of government’s directions in our audit opinion.

That concludes our summary of the two reports.

S. Bond (Chair): Thank you very much, Lisa. We appreciate that. That was certainly a good summary and probably helpful to those of us who read all the pages and now to have it summarized in that way.

We are going to ask the office of the comptroller general…. Carl Fischer, the acting comptroller general, will provide a response.

C. Fischer: While we’re getting set up, thank you for the opportunity to come and discuss the Auditor General’s 2015-16 report on public accounts and, of course, the report on the ’16-17 audit opinion. As the Auditor General pointed out, the audit opinion in 2015-16 included one point of qualification related to the deferral of government transfers.

[10:20 a.m.]

This qualification has been in place for a long time and continues to be an area of debate in the public sector and accounting circles, not just in British Columbia but across Canada, as well as internationally. The report also discusses nine other areas of interest which the Auditor General has outlined.

As I mentioned on the previous slide, the deferral of restricted government transfers has been an issue since the introduction of the new standard by the Public Sector Accounting Board in 2011. At the time, we did not agree with the application preferred by some jurisdictions, including the Office of the Auditor General, because it would conflict with the requirements of the legislated financial framework of British Columbia that came about as the result of the Budget Process Review Panel’s work in 1999. We usually refer to it as the Enns report.

One difference I do have with the Auditor General’s presentation is that government is not obligated to adopt any accounting standard, whether it’s Canadian public sector standards or international public sector standards or, which has traditionally been the case, a standard of their own definition. The BTAA does require British Columbia to commit to adopting Canadian public sector GAAP, as supported by regulations of Treasury Board made under the BTAA.

Our approach was to engage with standards-setters and the broader financial community to develop an approach that better reflects the nature of intergovernmental financing, whether it is transfers or grants from the federal government to the provincial government or, on the other side, grants from the provincial government to schools, universities, colleges and hospitals. What we wanted to ensure was that the way we accounted for those transactions reflected the public’s interest in accountability and their interest in a single, consistent bottom line that would be applied the same way year after year and, also, the direct comparability of government’s financial plan, the budget, with the actual results. All of those objectives were codified in the Budget Transparency and Accountability Act.

That approach better reflects the economic substance that money is transferred between government bodies or different levels of government to support service and program delivery. Sometimes, over multiple future periods, that results in a situation where we have a difference of opinion about which period the transfer should be recognized in.

The reason that we think it’s a problem is that if we recognize the revenue up front, when it’s received, and recognize the expense over many future periods, it results in an artificial mismatch between revenues and expenses. In a regime or a political situation like British Columbia, where the public interest is in sustainability and achieving a balanced budget year after year, that makes it virtually impossible to do.

This is the same principle that accounting uses when we deal with capital assets. We pay for capital assets in the year that they’re constructed, but we don’t recognize the expense related with them. Accounting says that you should recognize the related expense systematically over the useful life of the asset. We believe that you should apply that same principle to the liability side, which reflects the financing received for the asset.

At a very high level, the OAG position is that the revenue should be recorded when received or when construction is completed, and the related expense should be recognized over future periods when programs are delivered and assets are amortized. The problem we have is that it skews the operating results and means that in future years, spending capacity would be artificially constrained by the accrual-basis expenses related to contributions that were received in previous years.

Financial statements are prepared on an asset-liability basis, and our requirement to prepare them to budgets is a little bit difficult because budgets are, by definition, revenue-and-expense constructs. They don’t include assets and liabilities. It’s not possible, currently, to find a way to make the budgetary effect line up with the financial statements unless we are very careful about matching the revenues and expenses as they were intended.

[10:25 a.m.]

Currently in Canada, provinces operating under a sustainability framework, like we have in British Columbia, include British Columbia, Alberta, Ontario, Quebec and Nova Scotia. All of those jurisdictions defer restricted government transfers much in the same way that we do.

Alternately, provinces where the debate is more about minimizing annual deficit — that includes Saskatchewan, Manitoba, New Brunswick, Prince Edward Island, and Newfoundland and Labrador — do not defer restricted transfers, preferring to take contributions into revenue when they’re received.

Our message to the Public Sector Accounting Board has been that there are different reporting frameworks in Canada. They were established to respond to different circumstances and different public focus. We have to revisit the standard, find an approach that meets the needs of legislators and the public in all jurisdictions. That should be found in a consistent set of principles rather than a set of rules that result in unintended effects.

The Public Sector Accounting Board reviewed this issue in August 2016 and published an article concluding that they would not reopen the standard because sufficient guidance exists, given the differing circumstances in different provinces that could result in different accounting outcomes. Currently B.C. is the only province that receives a qualification on this issue. So the message is that it is an issue of debate and consideration across Canada, and we’re not the only ones to grapple with the issue.

The good news, if there is good news in all of this, is that the Public Sector Accounting Board has recognized that this is a problem for governments, and they’re being very responsive. They do have a current project underway to redefine the conceptual framework. Our recent discussions with them indicate that they see this as an opportunity to help address the different needs of provinces operating under different frameworks.

I guess the bad news is that it’s in early stages of development, and resolution or direction could be two years away.

The 2015-16 report also includes nine other matters of interest that OAG has identified in their presentation. I won’t go through them all. I will leave that to questions.

Moving on to the explanation of the audit opinion on the 2016-17 public accounts. The Auditor General again qualified on the deferral of restricted government transfers — I won’t go through that again — and introduced two additional qualifications that were not included in her opinion on the ’15-16 public accounts.

The first was a qualification on the self-supported status of Transportation Investment Corporation. This is actually similar to a qualification that was in place from 2009 to 2013 but was removed for the years 2014 to 2016.

There was also a qualification introduced on the application of rate-regulated accounting by B.C. Hydro. We have not had a qualification on this issue before, although it was a point of discussion in 2010 by the previous Auditor General, John Doyle, and covered by some follow-up reports prepared by OAG since then.

Jumping ahead to the Transportation Investment Corporation issue. The Auditor General has revised her opinion on the self-supported status of TI Corp. We don’t agree with the conclusion reached by the Auditor General. We did not make an adjustment at the end of the year.

For the year ending March 31, 2017, the financial performance of TI Corp exceeded revenue forecasts by 10 percent. That means that TI Corp was better able to support its operations than expected and was continuing to demonstrate improved traffic volumes and revenues over that period.

Actual results of past transactions or events — those that occurred before March 31 — are better evidence than assumptions about future transactions or events, and we’ve placed a lot of reliance on the performance of TI Corp for that fiscal year.

The one thing I do need to mention is that in May of 2017, after the end of the fiscal year, there were specific commitments made by political parties to remove or reduce tolls on the Port Mann Bridge. Because these commitments were specific, of significant public interest and would have a material effect on future financial statements, we included a subsequent event note on page 81 of the 2016-17 Public Accounts.

[10:30 a.m.]

A subsequent event is something that occurs after fiscal year-end but that may have a material impact on the financial statements. We do not account for events that occur after fiscal year-end, but where it’s relevant, we do make disclosure.

Ultimately, as pointed out, the tolls were removed from the Port Mann Bridge effective September 1, 2017, in the 2017-18 fiscal year, as the result of a positive action of government — an order to remove the tolls. At that time, the status of TI Corp changed from a self-supported to a taxpayer-supported entity, and the financial impact was recognized in the second quarterly report and will be represented in the 2017-18 financial statements.

Had we made the changes recommended in response to the Auditor General’s recommendation in 2016-17, there would have been no financial impact reported as the result, specifically, of that action of government. We don’t believe that would have been consistent with good accountability practice. We believe that transactions or events should drive accounting, and accountability means that we need to be very careful about tying financial impact to the decisions and actions of governments.

OAG has also introduced a new qualification on rate-regulated accounting, specifically related to B.C. Hydro. As I mentioned before, this has not been a qualification item in the past, although there was some concern raised by the previous Auditor General in 2010. At that time, international financial reporting standards, which B.C. Hydro follows, had not provided guidance for the upcoming 2012 implementation of IFRS. Ultimately, IFRS, international financial reporting standards, did provide guidance on the continued use of ASC 980, which Lisa outlined, for rate-regulated accounting. So the result was as expected. The direction was: continue doing what you are doing, following the same standard.

The OAG corrected the statements that were made in their 2011 report on the matter and then concluded in their 2014 follow-up report that the accounting for rate regulation is appropriate and consistent with standards.

Rate regulation can be a complicated area. There are a lot of people that have a lot of different perspectives. I think it’s important to separate the practice of accounting for rate regulation from the policy decisions related to rate regulation. There are a lot of different opinions. Regardless of what those decisions are, we always account for it the same way.

I would recommend that for additional information, reading the 2014 follow-up report that OAG prepared in relation to rate regulation is a very good, easily digestible primer and is a good resource for our office. We recommend it to most people.

The public accounts itself deals only with accounting for rate regulation. We don’t deal with policy decisions that determine whether you should regulate or how you regulate. The authority for those policy decisions is established in legislation, specifically, in the Utilities Commission Act.

We don’t agree with the Auditor General’s position that government, represented by cabinet, is not the governing board when we talk about the financial statements of the government of the province of British Columbia. We believe that cabinet does represent the governing board as intended by the standards. If cabinet is not considered the governing board, I don’t know who is. We just don’t agree that that’s the appropriate place.

There is only one standard that relates to rate-regulated accounting, and that is ASC 980, as identified by OAG. IFRS 14, which is the standard that tells entities, like B.C. Hydro, following IFRS to use ASC 980, directs B.C. Hydro to use this standard.

[10:35 a.m.]

For government’s financial statements, the public sector accounting standard PS 37 directs government to consolidate the financial results of B.C. Hydro on a modified equity basis, and that means without any adjustment, change or amendment to their accounting.

As outlined in the audit opinion, ASC 980 provides for the regulatory actions of an independent regulator — in our case, BCUC — or the entity’s own governing board if it is empowered by statute to do so. Cabinet is the governing board, as described earlier, and they have been empowered by section 3 of the Utilities Commission Act to make regulatory decisions.

In that regard, I think that the requirements and intent of the accounting standard have been met. If there is a discussion about whether or not government should provide direction, that’s more in the nature of a policy discussion, rather than an accounting discussion.

To summarize, since adopting PSAB GAAP as the basis of accounting, as we’ve said in the BTAA, OAG has introduced 11 items of reservation, including these three. We do keep track, because it’s important to have a sense of how we are doing and what the best way forward is. Of those 11 items, eight have been resolved without any financial adjustment to the financial statements, which is positive, leaving only these three to be resolved.

We found that taking a measured approach to understand the differences and seek the best solution has been an effective strategy to continue to mature public sector accounting here in British Columbia and, we like to think, have an influence on the rest of the country as well. But we know we do not face these issues alone. It is through working with standards setters and our respective colleagues that we are best able to help public sector accounting standards move forward.

That’s our presentation.

S. Bond (Chair): Well, thank you very much, Carl. We find ourselves with a very interesting discussion that will, I’m sure, take place.

John is on the speakers list. If you want to just put your hand up, we’ll add you to the list.

There are certainly two sides to this story. I think we’re going to explore a little bit about the varying opinions that have been presented.

Why don’t we start with you, John?

J. Yap: Thank you to both the Auditor General and the comptroller general for the comments.

I want to start with a general question in regards to the standards. There’s been mention that GAAP, or generally accepted accounting principles, includes the rulings from a body like the Public Sector Accounting Board, PSAB. I’m curious…. What is PSAB? Who has a say as part of that board? Is it a mix of accounting professionals in the public sector — auditors general, comptrollers general? Can you give us a quick overview of how that standards setting is done and by whom?

C. Bellringer: If you like, I’ll start. Carl, if you want to add something to it…. We’re both very familiar with it. Russ Jones, the Deputy Auditor General, has just finished a term sitting on the Public Sector Accounting Board, so we’ve certainly been close to the process.

The board is made of up of…. You know what? Actually, I’m not sure exactly who’s on it right now. There are other legislative auditors on there, but it’s broader than that. We can look up the membership, maybe.

Carl, do you know who’s on there now?

C. Fischer: Not off the top of my head. But it does include preparers, auditors, representatives….

S. Bond (Chair): What? Carl, you don’t know off the top of your head?

C. Fischer: I don’t. I blame Diane.

It also includes representatives from local government, and there’s an interest in reaching out to Indigenous governments to have their representation as well.

C. Bellringer: In terms of process, the Public Sector Accounting Board will have deliberations to discuss a preliminary position on something, and then it’s a broad public process to gain input from the community.

I participate on the auditing side of standards setting, on the oversight council. There’s an equivalent oversight council for both financial accounting, broadly, as well as public sector accounting. It’s called the Accounting Standards Oversight Council, which provides another check to ensure that the public interest has been considered within the setting of those standards.

[10:40 a.m.]

If they feel that the outreach hasn’t been sufficient, they’ll request the board to expand the input and so on. There are always differences of opinion discussed throughout that process, which is why we still fundamentally believe in the application of the standards as they land.

It’s funded through the accounting profession, but there’s a very careful oversight process to ensure that the accounting profession does not drive the creation of the standards. The regulators are involved in the oversight process — the banking, securities regulation, all of the various key regulators, including the group that does inspections of the firms that do the publicly traded securities. That’s the Canadian process, and it runs a parallel internationally.

J. Yap: What I’m hearing is that broadly, the public sector accounting profession and stakeholders — both auditors and those in the public sector, different levels of government — had input into this. I presume that over time, the standards can shift and change, depending on issues as they arise.

What I’m getting at is the reference in regard to the issue of deferral of government transfers revenue. There was a bullet there saying that PSAB reviewed the differences in treatment and concluded that sufficient flexibility exists.

I take it from that that while your office, Carol, had a concern and expressed it as a qualification on that issue, PSAB had enough flexibility in regard to this issue, on the government side on this issue, that it fell within the realm of flexibility.

C. Bellringer: I’ve heard that description of flexibility from a number of sources. I disagree with that. I don’t think it’s a matter of flexibility. It took them seven years to get that standard put in place initially, and a lot of that was a complete disagreement between the audit community and the preparer community. We really did start from very different places. Where the standard landed was an ability to establish a liability — in other words, this deferral practice — in the event that there is a liability in place. It’s at the heart of our disagreement.

We don’t agree that there is a liability. Once whatever it is, the capital thing, has been built, the revenue should have been recognized by then. There’s no requirement to…. Is there an expectation to maintain the asset? Yes. But is it required under the terms of the receipt of the revenue? We say no, it’s not.

An example. There are some different types. Again, this is where we get into a disagreement as to whether or not the liability is there. If you had to repay it…. Let’s say I build a hospital. We’re not using the hospital anymore. I have to repay the grant. That would be a clear-cut liability. The question becomes the wording of agreements.

One of the differences…. I will just speak to one item that we’re in complete disagreement about. We don’t know all of the other jurisdictions’ contractual arrangements, so we don’t know the terms of the other agreements in place in other jurisdictions.

I have had the conversation with my colleagues at the Auditor General table, and there is only one jurisdiction we are aware of where we have a complete disagreement on the position for this. About five years ago, as it was an early standard, we had disagreement all over the place at the Auditor General table. There was every combination and permutation, “Record it this way; don’t qualify” or “Record it a different way,” and so on.

There is one jurisdiction, and it’s a large one. I have to name it, because I think at the end of the day, it’s important to know. It is Ontario. They have the same accounting as British Columbia, and they do not have a qualification in their audit opinion. We have had the conversation. The Auditor General in Ontario and I do not agree on this matter.

[10:45 a.m.]

J. Yap: Okay. If I may, on that issue, the number involved is a difference of $900 million. I think that was the figure. If I read it right, revenues were understated by $900 million. In terms of the accounting principle of being conservative, that’s a more conservative presentation, is it not?

C. Fischer: It can be interpreted that way, but I think that would be a cheap shot. So I won’t take it at this time, while Carol’s watching. I would describe it more as a perspective of getting the timing right. It doesn’t affect the cash. It doesn’t affect the availability of governments to spend money on programs or services. All it does is it affects the way it is represented, in terms of the government’s accountability to the public or comparison to the budget.

Now, the problem is that budgets in the public sector are also authority mechanisms and accountability mechanisms. So following that approach would offer up great results when there are plenty of transfers from the federal government or other sources. But eventually, in possibly the worst time in the future, when economics are constrained and transfers dry up, public spending would be artificially constrained because you would not have the temporal opportunity to access that revenue that was intended for multi-year programs. So accounting would ultimately wind up creating a problem that it really has no business being involved in.

M. Dean (Deputy Chair): This is very interesting and complex and obviously developing nationally and across the provinces. I just had a couple of questions.

As the Auditor General, can you answer that point that has just been made? Is there not a way to receive the money and have the money? You have it on the books. You recognize the money, and you still have the money for that purpose, and then you take the money that you need each year that you need it. Can you do that?

C. Bellringer: There’s a very separate exercise you should go through to determine your cash flow needs. The financial statements will give you information to use to do that, but they’re not the cash flow statement. So yes, you can do that.

I’d say equally that they’re not the full economic policy piece either, which is back to…. The accounting standards and the economic policy decisions and the cash flow decisions are three separate buckets.

We still go back to, in the old days…. I have to go back to the ’70s, when I was doing my accounting. There were two things that we talked about that…. It’s quite bizarre to roll forward to today. One of them is that there was this bizarre idea that you would do any accounting looking at market as opposed to historical costs. We’ve seen accounting today in the private sector is completely now on a market-value basis. So things completely change, and it’s moving that way within the public sector as well.

The other thing is that we used to have a really simple practice back then of matching. Matching was this idea that you always matched your revenue to your expenses. So it was actually easy, as an accountant and as an auditor, to see: is it matching? It’s a different principle today, so there isn’t an automatic “it has to match,” in terms of that same kind of matching.

The revenue number is intended to pick up: what are you actually entitled to as of today? Likewise, if you collect more taxation revenue than you need for the current year, you don’t defer it to next year. You recognize it as a surplus.

There are lots of non-matching things going on in the accounting world.

M. Dean (Deputy Chair): Can I ask about the new standards that are coming out? Will the new standards have something to say about this matter?

C. Bellringer: No. In fact, the decision of the Public Sector Accounting Board was not to revisit that standard. That’s just a fact. They did not believe that it was necessary.

C. Fischer: Although their current work in relation to the conceptual framework, which is an overarching standard where they talk about what are our assets, liabilities, revenues, expenses, and how do they articulate…?

[10:50 a.m.]

That will be the opportunity where they will have to think about the problem that’s unique to the public sector, and that is that we not only deal with exchange transactions that the private sector does but also a large number of non-exchange transactions, including grants, taxes, penalties, fees — things that are unilateral in nature and bear a very different onus of discretion on both the government and the member of the public that is receiving or paying them.

It’s a tough area, because it’s a bit more philosophical than I think accountants are used to dealing with. But it’s an important discussion to have. If we are adopting private sector direction towards market accounting and accounting for unrecognized gains or losses, then we also have to think about not just what the similarities with government accounting are but also the differences.

M. Dean (Deputy Chair): So say we shifted. Say, for whatever reason — I don’t know how it would happen — we actually shifted away from our existing system to the one that the Auditor General recommends. What impact would that have on our financial statements, like the next ones that we would issue? Most importantly, what would be the difference to British Columbians? What would they see would be different in that recommended system, compared to the system that we have at the moment?

C. Bellringer: Do you want to go through the accounting impact?

C. Fischer: Sure.

The accounting impact would be relatively straightforward. As a matter of fact, for Diane and myself, it would be much easier. We could shorten our workweeks considerably. There’s a lot of work in trying to maintain that large volume of information about all of the different programs and streams of transfers.

The impact would appear to be relatively moderate. In good times, when there are plenty of transfers from the federal government, you would expect revenues to increase between $150 million and $900 million each year. But in the future, when the economic cycle turns, we could have a protracted period where revenue was constrained or reduced by a similar amount for a long period.

Where that is important to the public is that in British Columbia, we compare actual results to the budget. The budget provides not only an estimate of how government is going to be doing, but it also provides the authority to spend. The challenge is that we’d never be able to find a way to make those two logic constructs balance. So we would have to move to either two sets of books — which, in the past, British Columbia has not really rallied around — or two bottom lines. We would have to find a different way of reconciling what we budget on the revenue-expense basis to what we report on the asset-liability basis.

C. Bellringer: The way we’ve described it, just in terms of…. We’ve given you the numbers it would have been had the revenue been picked up in the way we believe it should have been. So it was $3 million last year and about $900 million this year. There’s about $5 billion in accumulated numbers.

Now, this one…. I don’t like it, but it is part of the public sector accounting rules. In the event that the change was made next year, because we’ve been qualifying on it, the government would have to put that adjustment through all in the current year. If they did it in 2017-18, then you would see a $5 billion revenue coming in, in 2018. Am I right?

Interjections.

C. Bellringer: I’m getting “I believe so” from my two experts.

There are two sorts of “what are the impacts” questions. One is: what would it have been had you been doing it the way we’re describing it? The other is: because you haven’t been, what would the hit be in the year if you make the adjustment? It’s just dealt with a little bit differently. It gets picked up all in the current year.

The other element of it, and the part that I think is most important for British Columbians is…. And I’ve said this before at the Public Accounts Committee but, of course, not with the current membership. I really think there’s way too much focus on the single bottom line.

[10:55 a.m.]

I think that’s true right across Canada. You often hear the discussion about what the surplus was and what the deficit was, as opposed to a more fulsome discussion about what it means. In every jurisdiction, it means something else.

We do far too simplistic of a comparison to just say: “Well, there was a surplus.” As opposed to…. It then exits the accounting conversation, and it enters into the political conversation. We don’t have a view on it, but I think the fact that it takes place is an important one. There needs to be an understanding of what the statements are telling you.

The qualification is, I hope, helpful in explaining to you what’s going on. In fact, if there was no qualification, I don’t know if anyone would even pay attention to the fact that all of this revenue had been brought in, as it related to the government transfer.

It’s that “what does it mean…?” Take that focus, and make sure you understand what’s going in statements. A surplus can mean you’ve collected too much revenue, or it can mean that you’ve managed your money really well. You have to be very cautious and understanding what the bottom line means.

S. Bond (Chair): Thank you.

Rick, you’re up next.

R. Glumac: Just a question. We’re talking about this subject right now. Is it just going to be any question at all that we want to bring up?

S. Bond (Chair): Did you have some about a specific fund?

R. Glumac: I’m curious if we’re going to…. Are we going to go through the reports and go through each section and ask questions about each section, or should we just ask general questions?

S. Bond (Chair): No, you can just go ahead and ask general questions. I think that’s been the format that we’ve had. I think they are prepared. So go ahead — whatever you want to ask.

R. Glumac: Well, I’ll start with this topic, and then I have some other questions later.

It was stated that there are five provinces that are doing things one way, and five that are doing things another way. It was stated that for provinces that have an interest in sustainability…. Does that mean that the other five provinces don’t have an interest in sustainability?

C. Bellringer: I didn’t say that.

R. Glumac: No, I know you didn’t say that.

C. Fischer: The way we describe it from the accounting perspective just tries to describe those provinces that try to achieve a surplus every year, to balance the budget, versus those provinces which traditionally rely on equalization payments and are not in an economic situation to hope to achieve a balanced budget going forward. Their focus is on demonstrating financial management and accountability by minimizing the annual deficit.

R. Glumac: Of those five that are doing things in this way, you mentioned that only one of them is not meeting…. You mentioned Ontario. What is happening with the other ones? How are they meeting the generally accepted accounting principles, yet still deferring revenue?

C. Bellringer: I’ll just say this is where we are differing on the number. I’m only aware of the one. As I’ve discussed it with my colleagues, we’ve resolved the fact that we’re on the same page, except for that one area of disagreement.

I really don’t like to speak for somebody else, in terms of what the other positions are, but I do believe Ontario’s position is that the standards could be applied either way. Not that what they’re doing is right, but rather, either way they did it would be okay.

That’s where we disagree, where I believe that the standards are very clear. Depending on the circumstances of your arrangement…. And that’s where we can only reach that conclusion and make that assessment on the arrangement in place in British Columbia.

R. Glumac: Okay. In the report, it says that B.C. has created its own regulation. It sort of gives the impression that we’re doing our own thing. But we are kind of doing what Ontario is doing as well.

C. Bellringer: Correct. On the regulation issue, our position is that the BTAA should have stopped after saying that public sector accounting standards should be applied. We don’t see the regulations as interpretations but, rather, as modifications to the standards.

[11:00 a.m.]

The two regulations…. One is on this matter. It is more specific to the underlying entities. Those organizations like universities and colleges — and, maybe another one, hospitals — somebody who is receiving money and then having to record it at that layer below the public accounts…. The regulation directs them as to how to record it.

Those organizations are creating what we call compliance opinion, or the auditors are auditing to a compliance opinion. They’re saying: “Did it or did it not comply with the regulation?” We do the audit: “Did it or did it not comply with the accounting standards?”

We think the regulation should not be used to…. You should know whether or not organizations are doing their accounting in accordance with public sector accounting standards. The regulation changes that.

You’ll see the same thing on the Hydro statements. On the rate-regulated accounting issue, we are not forming an opinion on Hydro itself. We’re talking about how it impacts the public accounts. In Hydro, they, too, have a compliance opinion, and the regulation is modifying the accounting standards by not requiring an independent regulator in order to reach your numbers.

R. Glumac: Okay, thank you.

S. Bond (Chair): Are you good for now? Okay. You’re welcome to come back with the questions about the other, because the Auditor General did talk about a number of funds and a variety of things.

B. Ma: I don’t have a strong accounting background, so I apologize. I’m probably going to ask some maybe very low-level questions here.

It strikes me from the conversation that it sounds like B.C. does their financial statements in a certain way because balancing the budget is important. Is that correct?

C. Fischer: Yup, that’s correct. And it’s not just British Columbia, as the Auditor General pointed out. It’s Ontario as well. B.C. and Ontario have been taking a very similar approach since the adoption of these standards, including those two regulations that Treasury Board issued under the BTAA. They’re exactly the same as similar regulations in Ontario.

The reason is that Ontario and British Columbia both have very similar financial management frameworks: the requirement for a balanced budget, the requirement for direct comparability between budget and actuals, and the requirement to prepare budgets on an accrual basis. We’re still currently the only two jurisdictions in Canada that do so, though Alberta, Quebec, Nova Scotia and the government of Canada are struggling with how they’re going to do that now as well.

There are a lot of similarities between Ontario and British Columbia. They all stem back to a requirement for direct comparability, a single bottom line and the ability of the public to clearly understand what government budgeted to do and what the actual results were.

B. Ma: If B.C. were to follow the public accounting practices that the Auditor General believes they should, does that mean we would not have a balanced budget?

C. Fischer: What it means is that we’d have to take an alternate approach and either compare the budget to some other financial management report that’s prepared on a different basis or prepare two sets of financial statements for comparative purposes — or perhaps two types of budgets, one on a cash basis that provided authority to spend and another one on the accrual basis.

The problem is that credibility really suffers over time if you have multiple bases of comparison. No, not everyone is thoroughly seduced by the magic of accounting, and until we find some way to get people really excited about learning about accounting, the way it works and the mechanics of it, we are subject to providing the information at the appropriate level that they require.

B. Ma: So there’s a certain amount of public relations in the way that we are….

C. Fischer: I would argue that it’s the response of successive governments to calls from the public for accountability. I think the best articulation of that would be in the 1999 report of the Budget Process Review Panel, which was very clear, very succinct and provided the basis for the financial reporting framework that was established in legislation.

[11:05 a.m.]

B. Ma: I have a few more specific questions about aspects of the 2015-2016 report. On page 17, in the last paragraph, the Auditor General said: “We have been encouraging government to improve its FSD and A since fiscal year 2006-2007 because the report often lacks an explanation as to why there was a decrease or increase in certain amounts.” One of the recommendations was that government actually would provide dialogue on that. Will that be in there, moving forward?

C. Fischer: Yes. In 2014-15, we revised the financial statement discussion and analysis to include further explanation about revenue results based on a very similar report we do at the same time called the Financial and Economic Review. There was a plan to work with OAG last year to discuss how we can improve the discussion on the expense side, but during the year the requirements of the audit didn’t allow for any detailed discussion.

This is an area we’re very interested in. We don’t have any disagreement with OAG. It’s finding the right way to describe things while maintaining the focus on the financial statements rather than the budget or the economic situation. It’s trying to get the right message or the right explanation for the right product. We have continuing discussions with OAG. Diane meets with the audit team weekly, and this is one of the things that they talk about.

B. Ma: On page 30 of the same report, it refers to the accumulation of billions of dollars in cash and temporary investments that were accumulated in our Crown corporations and in our school districts or advanced education, and so forth, and the development of the central deposit program to enable government organizations to deposit their extra cash.

I’m wondering: was there a reason that all of this extra cash was being accumulated? Has it always existed through­out? Have these organizations always held so much extra cash, or did something encourage it to suddenly grow? Was there a policy change that actually caused school districts and Crown corporations to start hoarding this extra money? What happened, basically, to create the situation?

C. Fischer: My opinion is the move to accrual account­ing actually created a situation where government funds schools, universities, colleges and hospitals based on their accrual-based bottom line. Even though they don’t need all that cash to pay for goods and services, because things like amortization and future employment benefits don’t have any cost, it can result in a situation where entities on their own can appear to be overfunded. Now, that’s not exactly the case, because we’re all part of the broader government.

The issue really is: how do we apply the appropriate treasury management practices to make sure that cash — regardless of where it is, whether in central government or entities — is well managed, that it is invested and that we minimize the amount of borrowing to optimize the borrowing program of the province?

B. Ma: Why are we funding accruals and amortization, then, and non-cash expenses?

C. Fischer: Because there’s no other mechanism to say: “Okay, school district, your budget says $10 million, but we’re only going to give you $8 million and hope that everything works out.” You do have to go through the process. Now, the important thing is that when you go through the process of saying, “Yes, we’re funding for that $10 million,” you have the appropriate structures and mechanisms in place to meet their requirements to their stakeholders and their accountability interests, as well as the province’s.

In this case, it involves creating the central deposit program where the excess cash really is recycled back through the process so that we don’t wind up with 200 separate little pots of cash all over the province that need to be managed.

[11:10 a.m.]

B. Ma: But school districts still have access to that cash, so governments can’t truly repurpose it for anything else. They can withdraw at any time.

C. Fischer: Absolutely. That’s part of the art of it that provincial treasury deals with. What are the appropriate banking and financial management structures that empower and enable schools to do what they have to do while maintaining good financial control?

B. Ma: I’ve heard the suggestion before that the requirement that school districts deliver balanced budgets and not run deficits contributes to the accumulation of this money, in part because they can’t show a deficit — so all of your amortization costs and whatnot have to be funded — and that it actually encourages them to hoard a bit because they’re worried about running a deficit. Do you find any truth to that suggestion?

C. Fischer: I wouldn’t want to talk about the psychology of financial people out there and whether they’re induced to underspend or overspend.

The balanced budget mechanism does run right through the entire reporting entity. In order for Treasury Board staff to develop a fiscal plan that government can be assured is going to balance, the budgeting mechanisms that they apply to every organization — whether it’s a Crown corporation, school district, university, college or hospital — also have to ensure that there is accountability there. Generally that’s accomplished by a prohibition on running a deficit without prior approval by Treasury Board staff.

B. Ma: Okay. My last question is about later on in the report under page 35 to 37-ish. It’s in regard to gaming, the British Columbia Lottery Corporation. It talks about the revenue that the corporation receives and how the payouts and the expenses are broken out. I’m wondering whether the Auditor General might be able to clarify: how do you define revenue in a gaming situation?

For instance, someone comes in with $20 and they’re playing the slots. They play the slots and, $10 in, they win $50, and then they put that in. It seems like the money…. Do you count the money once, or do you count it every time it goes into the system? I’m just wondering. For instance, at the table games, I suppose that you only count the revenue when it’s exchanged the first time, perhaps? Maybe if you could clarify, because it seems like the….

C. Bellringer: Carl, do you know how the mechanisms…?

C. Fischer: I think I do, but I haven’t done any work in this area. Generally, revenue would be recognized only once. The casino itself would, of course, engage in all of the gambling transactions, for want of a better word. They would have to accumulate the information and report back to the commission, and, of course, the basis of those reports would result in the amount or portion of the money that’s remitted to the province.

From the province’s perspective, it would only ever be accounted for once. The casinos or gaming operations themselves would have to demonstrate through the verification of — can I guess? — an extensive external audit that they have accounted for their earnings revenue independently of that process.

B. Ma: Hypothetically, if a person walks in, and let’s say they purchase $100 million worth of chips, random number here. They play for a few hours. They cash out $80 million. Is the revenue then $20 million, or is it $100 million?

C. Fischer: I don’t know that level of detail. You’d have to go to an expert in the casino area to get that.

A. Olsen: I usually buy $100 million worth of chips. [Laughter.]

B. Ma: Hey, there have been media stories about it recently.

A. Olsen: Thank you again to the Auditor and to the comptroller.

I was explaining to Carl as we were coming over, sitting on the plane next to one another, that it’s been a benefit to be on this committee because this is not my strongest point. I get to focus and learn and….

S. Bond (Chair): We’ll make note of that, Adam, for future reference in the House.

[11:15 a.m.]

A. Olsen: Make note of it. Use it. Refer to it in Hansard. It’s fine. I’m learning.

For me, I guess the challenge that I have here is that I’m seeing this as where accounting becomes political, frankly. Accounting, to me and as it was explained to me, is about evaluating the work that we do. It’s a window into how well we’re doing our job. When that, then, gets twisted and the accountants need to do some gymnastics in order to achieve something political, that becomes problematic for me.

As I’ve tried to understand the language…. I’m not an accountant. As I’ve tried to understand and unpack what’s actually going on here and what’s being said between the two offices…. While the goal of achieving balanced budgets is a noble one and an important one, and it’s one in which we can say to the people of British Columbia that we’re being prudent with their money, when it becomes an end in and of itself is when I think we’ve got a problem. I think that we can be fiscally prudent, yet the books don’t appear to be balanced. In other words, if we bring in revenue to build a hotel….

A hotel? A hospital. Hopefully, we’re not bringing in revenue to build hotels.

S. Bond (Chair): Is that a policy statement, Adam? [Laughter.]

A. Olsen: To build a hospital. If we bring it all in, in 2018, then that’s when the revenue came in. To me, that’s when I see that it could be recorded. That hospital is going to be valuable to us over a long period of time. There’s no question about it. Actually, there are going to be costs to maintain and to manage that asset over the life of it. I think there is a bit of accounting gymnastics done here when we say that we’re actually paying for that hospital over time, because we’re not. We’re not bringing in revenue every year. If the federal government contributes to it once, it’s not contributing $1 million, as I think was said.

I guess for me, part of the challenge we have here is that we have the GAAP, which is saying that we need to account for what’s actually going on. Then we have an amendment, the balanced-budget legislation or the Transparency and Accountability Act. I completely agree that we should be transparent and accountable and be balancing. But for us, for our Finance Minister and for our government to be able to say that we’re balancing it this year, this year and this year, we actually need…. In order for us, I think, to start to view the world as it is over a long period of time, we have to be able to say that actually, we have fiscal prudence over a long period of time rather than just, “Here it is this year,” as a messaging piece.

For me, I really want this to get sorted out. I was going to ask the question: “Is there a way for these two offices to sort it out?” Frankly, I don’t think there is. Frankly, I think that sorting it out happens here at this table with the elected officials, in the way that we are going to move forward, being able to articulate how we are being fiscally prudent with the people’s money and balancing the books. We’re not asking our staff to be creating exceptions when, clearly, it doesn’t sound like GAAP is going to change.

[11:20 a.m.]

I don’t know if you’re comfortable commenting on that, but I was going to say: “What’s the solution?” Then I realized, over the discussion, that maybe the solution is sitting at this end of the table, in how we articulate to our constituents and the people of British Columbia how we are being fiscally prudent. Just saying “balanced budget” and then forcing the accountants to go through it doesn’t necessarily…. I mean, it says it, but….

S. Bond (Chair): I have a feeling that both of you will want to speak to that.

C. Bellringer: I suspect so.

There’s no question that there is the need for, if you will, political intervention in the conversation because of the application of regulations, which are prescribed by Treasury Board — not by the comptroller general’s office, not by a public servant, if you will.

The existence of those regulations — the one that is prescribing how to record the government transfers and the one that I’d say is a larger issue, being the rate-regulated accounting one…. Those two regulations are set as a result of the BTAA, the Budget Transparency and Accountability Act. It permits regulations, and those have been established. But they’re not something that either the comptroller general’s office or….

We can’t resolve the fact that they exist. We’ve made public recommendations in the past, and continue to do so, that the regulations be removed so that you can see what the accounting would be without them. The government direction piece that occurs in the rate-regulated accounting side, for us, is: the same government who has established the act is now prescribing how the results should be accounted for.

It’s not being prescribed as the result of an independent regulatory body. It’s being prescribed by government. The directions are directly from government. So government itself, in determining what its own bottom line is, is very specifically directing the regulator and the utility as to how to record certain things.

That’s what we’ve taken exception to. It isn’t something…. I mean, Carl can say otherwise, but I don’t believe it’s anything that the comptroller general can change.

C. Fischer: I don’t think I can change a whole lot of legislation myself. We are in a situation quite often where we have a difference in application that’s driven not so much by a philosophical difference but because you have to make a choice of whether or not you are going to take the advice of the Auditor General or follow legislated requirements. Quite frankly, being employed by government, legislation wins.

Legislators do have the responsibility, along with government, to determine what the best interests of the public are with regard to public accountability. They have the responsibility to develop and implement legislation, practice and all of those mechanisms that ensure that accountability to the public.

A. Olsen: That’s it. It’s on the government. It’s on to us.

S. Bond (Chair): So the quote of the day is from Carl: “Seduced by the magic of accounting.”

As someone who certainly was seduced by the magic of numbers and economics, I’ve been waiting to hear from you, Ralph. You went to Harvard Business School. Let’s hear your questions to the Auditor.

R. Sultan: Well, it’s really a continuation of Adam’s question. I was going to ask the comptroller general…. We have had, as the Auditor General points out, the, I would say, startlingly anomalous situation where a government has understated its revenues over prior years by, according to her strict standards, $4.2 billion — therefore, you might say, penalizing itself unnecessarily, perhaps, or, judgmentally, to make itself look a bit worse than it really is from a fiscal point of view. This is astounding in politics. I mean, this seldom happens around the world, I would venture to say.

It does beg the question, though — back to the comptroller general — which Adam appropriately raised: how malleable are, in fact, these special rules that governments dream up to justify the accounting that the comptroller general is then asked to apply?

[11:25 a.m.]

Without telling tales too much out of school, since we now have a laboratory test of a changing of the guard — and, I would suspect, a change in philosophy — may we now see the government of the day bringing forward some new theories of how we should account for things like revenues and expenses? I presume the comptroller general, at the end of the day, has to sort of go along, despite what the Auditor General may say.

Am I being overly cynical here?

C. Fischer: It depends on how you define “overly.” What I will say is that all of these issues resulted from a continuation of historical practice. None of them arose from any kind of change that was managed or directed by any politician, government or public servant.

Our approach has been to be very moderate. When there is a potential economic impact that we don’t understand or that we cannot think the ultimate effect through, we hold off and engage with the broader community. A lot of times, if we were to adopt a different approach to government transfers and result in an overnight change worth $4 billion, that’s immediately irrecoverable. We can never move back.

We do have some issues. We do have some accounting issues to think about. It’s great to say that government transfers should be recognized in a different way, but government transfers in this context are financing transactions. I think we have to be very thoughtful about how we consider them, because if we were to change the title on the top of the page from “government transfer” to “forgivable loan,” it would have exactly the same economic effect, but the treatment would be very different. That’s a problem for me.

If we don’t have continuity, even on that basic transactional level, it means that somewhere down the line, there’s going to be a big problem that we won’t be able to recover from. Those are the challenges that make us within government, along with our colleagues in the OAG, think: “No, the prudent course is to stop and engage and discuss.”

I’ve been doing this job for 18 years. My friend Diane Lianga, who is currently acting as the executive director or the lead accountant for the province — and she’s excellent at it — has been here for 15 years. I can say that I have never, ever had any kind of direction or push from any minister, all the way back to Paul Ramsey, or any elected official or any government deputy minister. I have found all of those people to be absolutely aware of the peril of trying to manipulate or undermine the accountability of financial management, whether it’s a budget process, financial statements or the audit process. I have known them all to be extraordinarily challenging, curious and interested in being convinced that the direction that is proposed or recommended is the right direction.

R. Sultan: If I may, Chair, I have several other questions, one perhaps a bit irreverent.

On page 6, the Auditor General points out in a very obvious way, with this kind of block diagram, that the B.C. Lottery Corporation returns 24 cents of every dollar wagered. With tongue in cheek a little bit, I guess, I was going to ask the Auditor General if she was pointing this out as a matter of criticism or praise.

C. Bellringer: That section of the report is neither. It’s information.

R. Sultan: Just the facts.

C. Bellringer: It’s just the facts. Definitely, we certainly get a lot of questions around lotteries. This was explaining where the moneys go to, in what we hoped was an understandable way.

[11:30 a.m.]

R. Sultan: On a more substantive issue, perhaps, on page 21 of the report, the Auditor General gets into the question of uncertainty on personal income tax revenues and suggests that maybe there’s $400 million kind of floating around there — we’re not quite sure — which, by my eyeball, would be about 5 percent of total personal income tax revenues collected in any one year that we’re perhaps not quite sure of.

Again, I’m sure the comptroller general has been reading the newspaper headlines about the surge of money from offshore into British Columbia — in particular, into ridings like my own and the riding of the current Attorney General — and the allegation that a good deal of that money is actually unaccounted for. We have the astounding claim of some of these people living in huge houses and driving Maseratis and that they report an annual income of under $100.

As I understand it, residents of Canada are obligated to report their worldwide income, and if this is as rampant as the media seems to be reporting it is, it occurs to me that the error in the reported personal income tax could be multiples higher than the Auditor General estimates. Is that something you would care to comment on?

C. Bellringer: Just in terms of what’s included in the report. The $400 million isn’t an estimate of what we believe to be unrecorded. It’s a matter of timing, if you will. We are not in disagreement on this matter. In fact, every year we reach an agreement as to what the accrual should be.

It’s pointing out that, at any point in time, you’re not going to have all the information you need to have a perfect…. You wouldn’t need an estimate. You’d know the exact number. It’s demonstrating…. The numbers that are used to calculate how much the revenue was for the current year. You’re not going to know them until…. Is it 18 months later that we get this?

C. Fischer: It’s like three years.

C. Bellringer: Three years — in total, to have the 100 percent…. Well, it would be 97 percent, or something like that.

It’s just a matter of…. In fact, you could release your statements a lot later and have a little bit more current information to get a better estimate. But in getting out timely financial statements, you’re needing to use the best available information from Revenue Canada, because that’s where you get your numbers from. It was just to show that difference.

The question around whether or not all of the revenue is recorded is another one where…. It’s a different discussion than this.

R. Sultan: Well, that only reinforces, I guess, the thrust of my question. Should we not, at least as government — perhaps this is not an Auditor General issue but, nevertheless, as government — be concerned about these reports — which frankly, in my mind, have substance — and be concerned about making sure we’re collecting all the income tax, in particular, that is due to us? And under whose responsibility and domain does that lie? It would seem to me that it begins somewhere in the bowels of the Ministry of Finance.

C. Fischer: I think it’s certainly something to be thoughtful of. As a member of our society, it’s a critical issue. We also have to be aware that it is anecdotal evidence. In particular, as accountants and auditors, we would need to think about: “Well, how do you actually find out what’s going on, if there is an issue, and what the nature of the issue is.”

I would also look not only to our provincial responsibilities but also federal responsibilities. As the primary point of contact for our self-reporting taxation system, they certainly have a role to play in determining, I guess, the appropriateness or the coverage of their personal income tax reporting mechanism.

I think that there’s a lot of opportunity for governments and their respective agencies to think about risks and develop mitigating strategies to address them.

[11:35 a.m.]

R. Sultan: Just so I can indicate my own views, while these are media reports, I think there’s a lot more than anecdotal evidence out there that this is real. It’s a problem. If we’re going to maintain faith in the tax system, government at all levels — all three levels, shall we say — really have to take this quite seriously and, up until now, perhaps haven’t. I mean, it’s been a very casual, too-hot-to-handle hot potato. “Let’s just defer the issue and let somebody else worry about it.” I don’t think that’s going to cut it with the taxpayers that I represent, in the future, at least. Anyways, enough of that rhetoric.

On page 31 of the Auditor General’s report, there is discussion of hedging contracts, getting into the whole subject of derivatives, swaps hedging and other mechanisms for mitigating risk.

Just as an observation, in recent years and, I suppose, starting all the way back to 2008, the great financial collapses around the world of some very respected banks and other financial institutions can very frequently be traced to some trader developing a huge forward position in — I don’t know — sweet potatoes or some other exotic commodity. And lo and behold, unsupervised, it turns out that these largely verbal contracts are expected to be honoured because they’re all on tape, and the roof collapses.

What assurance do we have that our participants in these markets, with all of the temptations for quick wins and so on, are having these risks managed so that the exposure to our balance sheet is not excessive? Do we have comfort on that score?

C. Fischer: The most significant control is the Financial Administration Act prohibition on the use of derivative instruments, or any financial instruments, for speculative purposes. When people use financial instruments and find themselves unhappy at the end, it’s always the result of speculating — using an instrument to leverage or amplify the risk that is inherent in the bet that they take. Eventually, someone’s going to be unhappy.

Governments don’t traditionally do that. Governments engage in the use of financial instruments solely for the purpose of managing the risks that arise in their debt portfolios. Governments, all governments, operate on debt, basically. Portfolios are huge, complicated and require constant management, not of the individual items but of the portfolio as a whole, to make sure that the value of that borrowing program is optimized. That’s very different than the kind of financial situation that, unfortunately, makes the newspaper or movies after a huge disaster. And because the whole nature of the program is to mitigate risk, it is, in itself, a self-supporting, risk mitigation structure.

R. Sultan: That’s always the reason — to mitigate risk. And a lot of these contracts are in the foreign exchange area, for example. I would believe that the province of British Columbia is very heavily engaged in the creating of derivatives. But I would just hope that the comptroller general is watching this very, very closely.

C. Fischer: We do. There are a number of notes that are maybe a little difficult for laypeople to read through, but we do have full disclosure about the hedging and risk mitigation practices of the province. Our provincial treasury is solely dedicated to managing that risk portfolio.

R. Sultan: Do you have any hard-and-fast rules or limits on the degree of exposure on any particular contracts?

[11:40 a.m.]

C. Fischer: They have limits or definitions on what are allowable and what are not allowable practices for every­thing. There’s also a risk committee that reviews the decision.

The thing to remember about using derivatives and the debt portfolio is that you are not taking a one-sided bet on some commodity or some financial event. You are using a derivative, along with the underlying debt obligation, to ensure that any unexpected change in market values — whether it’s interest rate, fixed or floating currency rates — offset each other. You’re cancelling out the risk.

It’s a very complicated specialist area of practice. We do have an organization that is solely focused on managing that, and our experience, certainly over the last few decades, has been very positive, even in the face of extraordinary market changes.

R. Sultan: But because it is complex, it’s dangerous?

C. Fischer: Yes.

R. Sultan: I have a final question. On page 12 of the Auditor General’s report, we come back to one of the favourite subjects of this Public Accounts Committee over the years — the regulatory accounts balances of B.C. Hydro. We have this intriguing chart showing it climbing, climbing, climbing to the vicinity of $6 billion, and then, intriguingly, with a dotted line, it points down, down, down.

The footnote on the chart explains that that dotted line projection is on the basis of some regulatory filings by B.C. Hydro. This surprises me, frankly, because I would assume that we should not be dependent on, shall we say, the secondhand detritus that we pick up from what is, after all, probably our biggest Crown corporation of all with some other agency. I would hope that the comptroller general would have more direct access to what the plans are.

I suppose my question is: does the comptroller general have faith in that projection? I would remind this committee, and I guess some of us have been here quite a few years, that the previous Auditor General made a big deal about this, to the point where the chief financial officer of Hydro came twice to explain what was going on and how we could sleep well at night.

Well, that was many years ago, and the number just keeps going up. So I’m curious as to the basis of these forecasts.

C. Fischer: Once again, I would have to refer to B.C. Hydro in detail. We do talk to our friends at B.C. Hydro at the end of every year. Last year, as we were dealing with the recommendations of the Auditor General, we spent a good deal of time going through their schedules or beliefs in relation to the rate-regulated accounts.

What I can say is that certainly in terms of the mechanics of accounting for those regulatory accounts, they are very good. They’re very solid. They have exceptional understanding and ability to monitor that. What they have less control over are the regulatory decisions that may be made from time to time and how those would impact the overall balance.

Going back to our previous discussion, we really have to separate the accounting for rate-regulated actions from the policy decisions that underline rate regulation. They’re two very different things. I think the Auditor General would agree. It’s very easy to do good accounting for rate regulation, but the decision-making and the policy direction that underlie it are really outside of our domain.

R. Sultan: Could I ask the Auditor General whether you have any further comment?

C. Bellringer: I do, actually. I don’t actually think the accounting is that simple.

In following up the report that was issued by our office with the previous Auditor General, we…. It did go back to 2013, I believe — ’12 or ’13 — when that was issued.

[11:45 a.m.]

It was at a time when the international accounting standards in the area of rate-regulated accounting were expected to change. There was an expectation that no deferral accounts would be permitted anywhere internationally. That accounting policy never did come into play internationally. They still don’t even have it on their project list, to address it in terms of a timeline.

We decided it was time to get an up-to-date report to the Legislature so that you would fully understand what all of the various implications were of rate-regulated accounting, because they are complex. We do have that project underway. It should be finished by this summer. There are 27 different deferral accounts that Hydro has set up, and the government direction of the regulator is playing a part in the application of the policies.

There is a difference between rate-regulated accounting and the regulation itself. So we’re trying to explain those differences as well. When we did the audit of the summary financial statements, we did have enough information from having gone through that exercise and from the project to understand the accounting standard well enough to determine whether or not we thought it applied at the public accounts level. So that’s where we reached the conclusion that we did with the qualification on public accounts.

On the Hydro side, there are a number of factors that do include the work of the regulator. It does include the extent to which they’ve reviewed the ten-year plan that supports the recovery of the deferrals. We’ve done two things. One is the project on rate-regulated accounting. The other is a project that will be out later in the spring around the work of the Utilities Commission itself.

S. Bond (Chair): We’re going to go to Jane, and then after that, we’ll have Rick again.

J. Thornthwaite: I’ve got a brief comment, and then a question that follows up from what Adam and Ralph said, with regards to a comment that was made previously about school districts. Maybe our Chair, who was the Minister of Education, can clarify, but it’s my understanding that school districts are compensated for their expenses based on many things, including enrolment.

Enrolment is fluctuating, so there’s a system called holdback that would prevent school districts from so-called hoarding. They don’t actually get their whole budget until a certain time that their enrolment is confirmed at a certain date. My discussions with school boards is that…. You know, they always want more. They’re not hoarding.

I wanted to clarify there are probably a lot of situations where government has to hold back funds because emergencies come up. The one that comes up the most now are the fires we had to go through, tragically, in the summertime.

I would just be a little bit cautious about the term “hoarding” with regards to school districts and perhaps other entities. I don’t know if you wanted to comment on that first, and then I can go on to my question.

C. Fischer: I think there is a difference between budgetary decision-making based on enrolment from the cash management and the funding of school districts. I don’t think those two situations conflict with each other. I don’t know enough about the Ministry of Education’s budget finalization process to be able to respond to the question with regard to school districts.

S. Bond (Chair): Just a comment. I think the most important message here is that I don’t think I’ve ever heard from a school district that they’ve been overfunded. That’s not an argument we regularly hear.

I think it’s about fiscal prudence. It’s about not penalizing school districts who look at managing their funds. The comptroller general can respond to that. But it’s about allowing them to look at a longer period of time in terms of how those expenses are done and not penalizing them.

[11:50 a.m.]

We base funding on a fiscal and annual basis, so it’s about allowing good, practical management at the school district level. I think that’s probably the basis for the thinking around the decision to allow that cash to be held.

C. Fischer: Oh, absolutely. It is about efficient management, and efficiency often comes through economies of scale. So what we can do to help smaller organizations deal with administrative issues, we do, as long as it’s consistent with the overall goals and objectives of government.

J. Thornthwaite: My question is more on the philosophy end of it. Except for Ralph, I think, everybody here is not an accountant nor has a background in accounting. I was happy to hear what the comptroller general said….

I’m paraphrasing. You probably didn’t say this exactly, but you meant to say it, I think — that you had not had any experience, in your years of dealing with Finance Ministers, of any kind of undue opportunity to influence what was going on in the books. I just kind of wanted to clarify that, to make sure that that was the case, because that’s what I heard.

Then my question is: given that we do have a so-called change in the guard, how is the public going to be able to decipher a change in the guard of a similar system? Or will a system of accounting…? Obviously, there are different accounting systems. I mean, it seems like the battle of the accountants here, and the battle of the accountants nationwide as well. The point is that there are different opinions on how accounting occurs.

How is the public supposed to decipher it, with the battle of the accountants but also the change in government? How are they going to determine that the books are the same or better or worse if the criteria or the accounting mechanisms change over time? How is the public supposed to decipher that, given the fact that we’re in Public Accounts and trying to decipher it ourselves? But the general public are not accountants, and they might lose sight of the politics of it all.

C. Fischer: I would respond that accounting is certainly a continuity business. In order to have any value, the same principles and policies have to be applied over a long period of time. When there is a shift — and over the past decade, there has been a significant shift, as the Auditor General pointed out, in the world of accounting — we need to do a better job of disclosing that.

Our approach is maybe a little fanatical, in that we make decisions based not on individual transactions, events or shifts in policy but from a much longer-term perspective. The way we analyze the application of proposed accounting policies from the Public Sector Accounting Board or the international public sector board is to model out, for as long a period as we can, what the impact will be, in order to determine whether there is, as you said, a shift in economic substance, and then to think about how we define that or describe that for the people who rely on the accounting.

Accounting, in itself, is not a definitive system. It just represents the values and relationships of all of those economic transactions. Really, the only benefit that accounting can provide to legislators or the public is to describe a baseline, over a long period of time, against which you can make decisions about whether something is or is not as you expected or in your economic interest. That’s the same thing, whether you’re a legislator deciding whether a certain policy direction or investment is prudent or not, or you’re a member of the public evaluating whether your jurisdiction is being well managed from a financial perspective.

I’m always a little uncomfortable about dramatic changes. We’ve talked about that with the auditors an awful lot. There are times when things have to change, when you haven’t got them right or you need to respond to circumstances. But significant, material financial changes of billions of dollars overnight, when you can’t really see the change in economic substance — that’s when we become very cautious.

S. Bond (Chair): I think the Auditor General wanted to make a comment, Jane, if you don’t mind, and then we’ll come back to you.

[11:55 a.m.]

C. Bellringer: The comment was on the central deposit program. I just did want to make the distinction between…. The section in our report was looking purely at cash reserves, where we were seeing at the time that work was done that there were organizations that…. It wasn’t a matter of hoarding. It was just that they found themselves in a positive cash flow. They had cash in the bank, and other organizations were borrowing at the same time. So it was a mechanism in order to minimize the amount of external borrowing. By having it from one hand to the other — one pocket to the other, if you will — it keeps the cost down.

That was all that we were getting at in terms of what we had looked at. Clearly, there are some cash flow discussions around the school districts themselves.

On the “battle of the accountants” conversation, I have to tell…. From the auditors’ perspective across Canada, we don’t have extreme different opinions on various things. We do talk about change and how to apply certain new standards. We also talk about any proposed standards to see if we fully understand them, and so on.

At the heart of it is that you hire an independent Auditor General in order to give you advice as to what to watch for. We do have an extensive process. It’s that 40,000 hours that we apply to the audit of the public accounts, and then there are all the various individual statements that flow into the public accounts — 140 of them. It’s a lot of work to put a reliability around the process and give you that information that you can have assurance with the numbers.

There are different components to the system. I don’t see it as a battle of the accountants. I see it that government does have some policy perspectives, the comptroller general does put together the numbers that reflect that, and we provide you with advice as to how to interpret some aspects of it that we think are less than clear.

J. Thornthwaite: Obviously, we all appreciate the work that both of your offices do. My only concern is that because of the change of the guard, for instance, if the goalposts change, then for the public to be able to decipher an Auditor General’s report on this particular year versus an Auditor General’s report on this…. As long as the goalposts are the same and the accounting principles are the same, that’s good. But if things start to shift, unless we’re really clear about that, then the public is going to be very confused and perhaps get not an accurate story — or the story’s to be told, as you say in your reports.

S. Bond (Chair): I think the Auditor General wanted to respond.

C. Bellringer: Well, just in terms of for our own office, our goalpost does not change. We are required to follow generally accepted accounting principles, the public sector accounting standards. We have in the past and we will continue to provide you with opinion on all of the statements that we audit as to whether or not they’ve been prepared in accordance with those standards.

If there are other changes within regulations and other application of them, that would be a government activity that we may comment on, but our standard, and what we’re auditing against, is not changing.

R. Glumac: I’m trying to wrap my head around all this. I’d like to sort of understand this in terms where the public can also wrap their head around this and understand this in simple terms. Where we’ve deviated from the generally accepted accounting principles, what effect has that had on people in B.C., and what effect will it have in the future for people in B.C.? This is, I think, the core of what I’d like to understand. How do we resolve the situation if we need to?

Getting to this first one, the deferral of revenues. It’s been stated: “Oh, this is a great thing.” We’re actually not accounting for as much revenue as we’re getting, so we’re being more conservative about it. But when we do this, don’t we also, then, if we want to have a balanced budget, have to reduce expenses? So we’re deferring revenues….

[12:00 p.m.]

C. Fischer: No. I think the expenses are already reduced, because you don’t recognize them in year 1. You recognize them over a period of time as that asset is used.

R. Glumac: Well, we’re deferring the revenue, right — $5.1 billion.

C. Fischer: Yes. The purpose, as the Auditor General pointed out, is to defer that to match up with the expenses when they will be recognized in the future rather than all at once. What we don’t want is a big lump of revenues in the first year and then no revenue in future years but all of the expenses out there.

What we’re attempting to do is reflect the nature of the contribution from the federal government or regional hospital district or other contributor on the same basis, or under the same principles, that we would apply to the program or service or asset that is being delivered.

R. Glumac: What has happened is that we’ve deferred $5.1 billion of revenue. If you’re looking at the bottom line, in order to have a balanced budget, things will have to be cut. Expenses will have to be cut. Isn’t that the case?

S. Bond (Chair): Okay. I think we need some clarity there, because I don’t think that’s accurate. Would one of you like to respond to that?

C. Bellringer: There’s one element of it that…. It is this difference between, again, the accounting for something and then the economic policy conversation. On the accounting side, with the deferral…. It isn’t the position we take, but with the accounting that is currently in place, as that revenue is spread out over time, you’re seeing, on the expense side, a depreciation charge. Just as you would in any organization that has a big asset, they charge depreciation to the organization. In effect, the accounting policy does match up the revenue. The two are going to eliminate so that there’s no impact on each year’s statements.

Now, we are saying, from an accounting perspective, we don’t agree with that. In order to really analyze balanced-budget legislation…. That’s where I get into the single-bottom-line conversation is a difficult one, because there are different ways to balance your budget. You can do it over one year. You can do it over several years. You can eliminate certain categories. I mean, there are a whole bunch of different ways to determine how you’re going to balance the budget, and that gets into the economic policy and the political decision.

R. Glumac: Okay. Then on the other side of it, there’s kind of the opposite thing happening with B.C. Hydro, where we’re deferring expenses. I listened to what was stated earlier about how, in the past, it was: “This will come down over time or whatever.” And it continues to go up and up.

What does this mean, this term “rate smoothing”? Isn’t it just pushing the debt to the future, that people in the future are going to need to pay this off? It seems kind of like we’re hiding the actual situation by pushing it off to the future, and that’s concerning to me.

C. Bellringer: The fundamental question with deferral accounts in a rate-regulated accounting environment is to determine the extent to which…. Rate-regulated accounting is permitted, by the way, in terms of the accounting policies. But the implication is whether or not future ratepayers — so within the utility — can cover those future costs or whether you can’t absorb them because they’re too big. The future plans have to demonstrate that there’s an ability to recover them in that future period.

It’s the role of the regulator to analyze that significant amount of information to determine whether or not the ratepayer can cover it. In the event they cannot, it would be absorbed in the tax numbers. It would get reflected as, if you will, a deficit that then is going to show up in the public accounts.

That’s at the heart of determining whether or not the number is too big or not, and that’s the role of the regulator.

[12:05 p.m.]

R. Glumac: How do we get out of this situation? I mean, the question was asked earlier. Can we trust that it’s going to go down? What substantially is changing over the next ten years or whatever to bring down this debt? What’s the big change that is making that chart go down on page 12?

C. Bellringer: The answers from our perspective on that will come out in that report I referred to that we’ll be issuing in the summer on rate-regulated accounting. There’s no simple answer to that question, which is why it’s taking us quite a long time to get that report done.

R. Glumac: Okay. I look forward to that.

The other question I have is around contractual obligations. I saw on page 40 of the report that B.C. is highest in Canada in terms of contractual obligations — over $100 billion of contractual obligations. Can you help me understand? These contractual obligations aren’t considered debt. Is that a standard practice?

C. Fischer: Yes, contractual obligations are not considered debts. They are commitments to purchase goods and services in future periods under contracts. The important thing about that chart is that those amounts are in perpetuity. It’s not $102 billion in year 1. It’s $102 billion for all of the future.

The other thing that we found when we worked with OAG on that section, year before last, was that there’s a lot of difference across the country about what is included in contractual obligations. For example, one big difference is that a lot of parts of Canada were not including the contractual obligations of their government business enterprises like, in B.C.’s case, B.C. Hydro. Other organizations or other provinces included only the contractual obligations of core ministries, not all other entities.

What we look at as the important issue is how much of next year’s expenses are committed through a contractual process rather than being available for government to use for whatever they think is appropriate. You don’t really get that number from contractual obligations. It just picks up expected payments under contracts. It doesn’t include the biggest one, which is salaries in the public sector — which, arguably, are a much greater commitment than contractual obligations for photocopier leases.

Contractual obligations are an interesting piece of information, but we don’t really think it was implemented in the best way to give the public information about what they need to know about government’s capacity to make spending decisions or if it was constrained by other arrangements.

C. Bellringer: I hadn’t thought we had any disagreement on this one. In terms of the differential between what should be recorded as debt and what is recognized as a contractual obligation, there is a difference. We’re in agreement on the fact that there is a difference.

We actually had made some adjustments to the numbers to take into account what was going on in other jurisdictions. We think it does give you the relative differences across Canada. Do you owe it today, based on your obligations in place as of today, and that shows up as debt? Or have you entered into a contract which, once those events have taken place, there will be a liability associated with it?

[12:10 p.m.]

As of today, we’re not yet there, but there is a contract around it. That’s the contractual obligations.

The previous Chair of the Public Accounts Committee had a particular interest in this subject. In fact, he did quite an eloquent discussion of it at the Canadian Council of Public Accounts annual conference last year, just as an information piece around ensuring that members understand the difference between the two. It was pretty much a regular, annual discussion as to what were the numbers.

R. Glumac: Can you comment on why it is that B.C. is the highest in Canada?

C. Bellringer: We do know that a significant portion of it comes from the independent power producers and Hydro, so almost $60 billion of the total is related to that. That’s the biggest number.

R. Glumac: Basically, that just comes with a government policy kind of thing. I guess B.C. Hydro could have borrowed money to do energy projects, have it publicly owned, or they entered into contractual obligations. That’s not something that’s an accounting thing, I guess. It’s a decision of government.

C. Bellringer: We just tell you what the facts are. And you’re correct. How it got there is a government decision.

R. Glumac: Okay. I have another question. The B.C. Railway Co. paid $18 million for some coal permits. I’m not sure how I can ask this question in an accounting realm, but is this a common practice for Crown corporations to purchase things that they will then sell to private companies in the future, for some reason?

C. Fischer: It may very well be, as long as it’s consistent with their mandate. Each transaction or event is an individual thing that has to be considered by the corporation itself and in guidance that they have from government.

R. Glumac: The B.C. Rail Co. does coal exploration.

C. Fischer: I don’t have a lot of background on that particular transaction. I know that we did have a discussion at the time, with our colleagues at OAG, but it didn’t result in a significant finding or direction.

R. Glumac: How would you investigate the appropriateness of this? I guess it’s not something that is relevant to what you’re doing in looking at the books on this, is it?

C. Bellringer: Sorry, I missed the question. I was concentrating on trying to figure out as much as I could from the report.

Backing up for two seconds. One of the reasons we had put this into the report to explain it…. It was not to get into how many licences and assets that are sitting out in the various organizations. So I don’t know the answer to that. There is a difference in accounting, whether it’s flowing through a ministry versus flowing through a Crown organization that follows international financial reporting standards.

The way they did it through the government organization…. It ended up being an intangible asset, so they could record it as an asset. Had that same transaction taken place within a ministry, it would have hit expenses. There are differences to note.

Now, if you want to repeat the question — sorry — I can go back and see if we can answer it.

R. Glumac: Well, it’s probably not the right venue to….

S. Bond (Chair): I actually think it’s outside the scope of the Auditor General’s and the comptroller general’s mandate.

R. Glumac: Yes. I’ll look into that separately.

The second to last question. There has been a lot of discussion around ICBC. ICBC had a certain amount of money in reserve, and that money was put into general revenue. That really didn’t come up in any of this. So there’s no comment that you have on that, even though it’s something that’s being discussed?

S. Bond (Chair): Again, I think that question is outside the scope of the report that’s been presented today. I don’t know if the Auditor would like to comment, but I think it’s outside the scope of the reporting that was done.

R. Glumac: I guess my question is: is that a common practice — to pull cash out of a Crown corporation to sort of balance the books in the government?

[12:15 p.m.]

C. Bellringer: From the preparation of the summary financial statements and our opinion on those statements’ perspective, the ICBC is a government business enterprise, which is an organization that’s self-sustaining.

What we would look to…. We do what we call oversight procedures. We attend the audit committee meetings. We have correspondence with their auditors. It’s not our office. They have external auditors. We correspond with them at the planning stage. We attend the meeting when they present final opinion on the financial statements.

Those financial statements are brought into the summary financial statements…. They’re part of the one line — how much income was lost for the year, how much accumulated, the surplus or deficit. They’re part of the summary financial statements.

We have not done a separate project on ICBC in recent years. We do have something on our performance audit coverage plan to just take a look at some things, but there’s nothing underway. There are no issues that have come forward that we felt were necessary to report to the Legislature.

R. Glumac: No issues with ICBC?

C. Bellringer: That does not mean to say there aren’t, again, economic policy decisions, other government decisions that should be made on any organization. We’re just saying, from an accounting perspective, we did not have any concerns around the disclosures that were included in the financial statements. If you look to the statements of ICBC, we were comfortable with the accounting for it reflecting accurately and completely what the situation was.

R. Glumac: Okay. Last question. It was described earlier that it would be simpler to not defer revenue. Can you quantify what the extra cost is in the way that we’re accounting right now?

C. Fischer: No, I don’t think I’d have any way to do that reliably.

R. Glumac: No? Okay.

S. Bond (Chair): Thanks, Rick.

We’re going to move on to a quick follow up from Adam, Ralph, and then I have a couple of questions I’d like to ask before we wrap up for lunch.

A. Olsen: I wanted to point out that if there was an impression left I was suggesting the Minister of Finance of any government at any time had their fingers inappropriately in the books, that was not the point I was making.

The point I was making was to emphasize what I think both the Auditor General and the comptroller general have said. That is that there’s a policy decision here that was made, and that it was made in order to have a particular effect on the numbers and how well the province is doing over a certain period of time and not over another certain period of time — an annual period rather than, perhaps, a three- or a five- or a 20- or a 50-year period.

The point that I was making was not to say the current or the past or any long-past member of the Legislature and Minister of Finance was doing anything untoward, just that the government, as it’s evolved, has made a policy decision. What the effect of that is, is that the comptroller general then has to report a certain way and has to apply the policy that the government has set. I think what we’re hearing is that the Auditor General is saying that makes the Auditor General’s office uncomfortable.

I raise that simply because, to the point that Jane made, the goal posts actually had been changed over time. I don’t know where the current government stands on how it wants to account for or how it wants to portray a balance or fiscal prudence to the people of British Columbia, but the advice that we’ve been given is that there could be a change that’s made — with the caution, of course, from the comptroller general that if you’re going to do anything, do it prudently, do it slowly and ensure that there are specific outcomes that you want to achieve and that you’re very clear on what those are and that you do it over time.

[12:20 p.m.]

From my perspective, I just wanted to point out that I think there is…. I don’t record in my personal budget every time I have an expense, a little bit of income. I get income, and then the expenses go out. That’s just how I do it. I guess I could record every time I have a car payment or an insurance payment I could record that amount in income and then say: “See. Look, we balanced the budget.” I don’t know if that’s a direct analogy, if it’s clear enough.

The point I was making was not to cast aspersions on anybody. I just want to be clear about that. It was simply to suggest that we have an opportunity…. I don’t know what the current government’s position is on this. I don’t know if it’s going to maintain the balanced budget, the BTAA or whatever. But there is an opportunity. There is likely a philosophical change, and we’ll see how they decide to take it.

S. Bond (Chair): Thanks, Adam, for that clarification. I guess we’ll find out in February. There’s probably going to be some strong signals about that, isn’t there?

R. Sultan: I apologize for raising a new subject. We may not have time for a full discussion.

Partly because I think it involves some of the First Nations bands with whom I am in contact and work with regularly on the North Shore, I’m intrigued, on page 29 of the 2015-2016 Auditor General findings, by the interesting story, as she headlines it, of the sale of 38.8 acres of Jericho lands in Vancouver, near the University of British Columbia, for $480 million and some subsequent timing of payment information in the Auditor General’s report.

My question — and perhaps there’s not time to really fully explore it now — is that…. I think it’d be very helpful to me and the committee to understand how this is going to be accounted for. Are we reducing our asset holdings of Crown land and ending up with a bunch of cash in the bank? That would perhaps be a nice outcome, if possible.

Perhaps I’m not allowed to say how the First Nations run their business. But where’s the half-billion coming from?

C. Fischer: I know a little bit about the Jericho lands sale. The sale price was $480 million. It was structured as a vendor-takeback mortgage, so the payment was not all at once; it was over a period of five years. I believe that the purchaser will be kind of raising that money to pay back the mortgage through engaging in preselling leases for parts of the land or other usage.

I think the interest rates are…. I can’t remember what they are, but they were commensurate with commercial rates at the time.

R. Sultan: So the point is that we’re not financing both sides of the transaction.

C. Fischer: No. It’s all discounted to get the province to the right place, in terms of receiving the $480 million.

S. Bond (Chair): If the committee will just indulge me, I have a few questions I want to ask.

I guess I want to begin with a premise. I did appreciate all of the questions, but I think it’s really important for British Columbians, everyone here on the committee and whatever party they represent…. We’re all interested in the same thing. That is accountability and transparency to taxpayers. I think that British Columbians want to be sure that there are appropriate accounting practices in place. I personally think they are far less engaged with which standards we’re following.

I have to admit that I have a bias. I think that when the words “inappropriate use” are articulated in a report from the Auditor General, it elicits a particular response. You’ve heard some of that here today, that potentially something inappropriate is going on. I don’t think that’s the case at all.

[12:25 p.m.]

What we’ve heard here today is that the comptroller general has presented his argument; the Auditor General has presented her argument. British Columbia is following appropriate accounting practices. There is a difference of opinion about how that is reported out.

I think, from my perspective, what’s absolutely essential is…. This isn’t about: is B.C. following or using accounting principles or standards? Of course we are. The issue is which standards, how they’re expressed and how they’re followed. What people really want to understand is that there are appropriate standards in place. It really is about sound, prudent fiscal practice.

I think the questions are important, and I think resolution may or may not occur in the near term. We are not alone, and I think that is an important perspective here. It doesn’t make it right or more appropriate, but British Columbia is not alone in looking at a framework that includes some policy choices made by a government. The new government may well change some of those practices.

From my perspective, a lot of this discussion is about the usefulness and comparability of the information. It’s not about the fundamental, core fiscal practices of a government. I [inaudible recording] think those are important and tough questions. I’m interested, and I’m sure the Auditor would have a view of this.

When the comptroller general, in his comments, makes this statement on page 6 in the second document that “qual­ifications arise from disagreement with the accounting pol­icy choices of government rather than from error or incon­sistency in accounting,” I’m interested. I think it’s an important perspective for people to have in British Columbia.

I’m wondering if either the comptroller or the Auditor would like to comment. The fundamental principle is that it’s policy choices, and a disagreement about those accounting policy choices. It’s not about error or inconsistency in accounting. Is there an agreement that that’s accurate?

C. Bellringer: No. I will clarify that our use of the word “inappropriate” is not inferring that somebody is taking money, if you will, and absconding with taxpayer funds. That’s not what we mean by “inappropriate.”

We do take the position that government’s modification of the generally accepted public sector accounting principle is inappropriate in giving you the result that would have occurred under GAAP, which we’re required to do. We’re required to tell you whether or not the statements are prepared in accordance with GAAP, and we’re saying, “No, they’re not,” because the modification is inappropriate in that context. It’s inappropriate within that context. I just want to clarify. It’s not about somebody taking money, if you will.

We do have some fundamental differences of opinion as to whether or not, at the end of the day, the modifications…. Are they or are they not just a clarification of what did GAAP mean in the first place, as opposed to a change to what GAAP would have resulted in? In our view, it’s a change. In fact, we don’t know what the individual audit firms would have concluded on those individual statements, the ones that we say are prepared in the compliance framework, because they’re not permitted to tell us. What they do is tell you whether or not the regulation has been applied.

I think it is important to know what the result is under GAAP. It is expected right across Canada. Canada has very strong accounting standards. Internationally, we’re recognized as having had them for a long time. In the public sector, governments record debt. They record all their debt. Governments record the results of operations of all of the organizations they control. That’s not the case everywhere internationally.

I think we have much to be proud about in Canada, and B.C. was leading the pack on that. Certainly, the legislation is stronger in B.C. in terms of requiring an adherence to the accounting policies. That’s not the case everywhere in Canada, but you’ll see the practices, indeed, still following that.

[12:30 p.m.]

I think the importance of knowing what the accounting numbers would be is the appropriate starting point. I’m sorry to use the word again, but I mean it, in that sense of: what’s your appropriate base upon which to now make your economic policy decisions? You should know what the results would be under the accounting framework.

The modification of the accounting framework is a…. We do have a fundamental difference of opinion as to whether or not you can do that. You can do it to reflect some of that economic policy, but it’s not going to do it 100 percent anyway. There are still going to be all kinds of other…. The part of the due process, when we have these discussions about accounting principles across Canada, is that no, we don’t all agree on every aspect of it. But you reach something that you say: “Okay, well, we’re going to apply it in a common way.”

I’m sure Carl has a slightly different view on that one, because we do have these discussions every year.

C. Fischer: I certainly agree we have a very, very strong practice of public sector accounting in Canada. It’s this type of debate, though it seems very dramatic, that helps get us there, certainly in British Columbia. As a result of our experience, in many cases, we have helped lead the country.

The important point I felt was critical to outline in my comments was that these differences are not the result of slop­piness or accidental error in adding things up. We normally catch that before our auditor colleagues come. They are the conscious policy choices of government. Ultimately, I do believe government is responsible for making those policy choices, just like the governing board of any organization is.

Where I think we have a little bit of a challenge is the fact that public sector accounting statements have changed so much and so dramatically over the past decade that we really have to wonder: were we doing things extremely wrong in the past, or are we fully prepared to understand what direction we’re moving in, in the future?

It’s not just Canada; it’s internationally as well. Canada’s example and role have played a huge role in helping international public sector accounting standards develop as well, so we really do have a lot of reach. But being out in front also means you run the risk of getting off track from time to time, and you have the responsibility to learn from your experiences.

S. Bond (Chair): Well, I appreciate those comments. I go back to the Auditor General’s comment about the use of the word “inappropriate.” I think she’s clarified here today that it’s in the context of the accounting principles.

I think that it is an unfortunate headline when you suggest inappropriate…. I don’t mean the Auditor General personally. But when we talk about inappropriate deferral of revenue, I don’t think the average British Columbian jumps to the conclusion that it has anything to do with accounting principles. They make the leap to it having some other nefarious behaviour behind it.

I think that’s unfortunate. We’ve heard today, over and over, how strong the accounting principles and the track record of British Columbia are in terms of leadership on the fiscal front in the country.

I just wanted to ask this question. Is government obligated to adopt a particular standard?

C. Bellringer: The quick answer is no. Having said that, in order to comply with the Budget Transparency and Accountability Act, a regulation would have to be put in place to indicate which standard is not being applied.

S. Bond (Chair): My point is that it’s not black and white. It’s not: “It’s this way or no way.” It’s: “There is a practice, and government has the ability to look at policy, like balanced budget measures and those kinds of things.” My point is simply that it isn’t as clear as: “The government must do this.” In fact, this new government will have the opportunity to look at policy implications.

[12:35 p.m.]

In fact, one of my questions relates to things like ministerial accountability — those kinds of things — and whether or not there has been any signal or any view by the Auditor or the comptroller that there are changes planned in terms of the budget transparency process, those kinds of things. And if there are changes made to that, what does that imply in terms of the reporting out that would take place?

C. Fischer: I’m not aware of any indication of changes to the financial reporting framework or regime that we currently operate under. And not being aware of what the potential changes might be, I’d be hard-pressed to determine what the impact could be.

The one thing I will say is that we do have pretty good disclosure about the accounting policy choices. There is a section in note 1, right at the front of the notes to the financial statements, where we outline any change in accounting policy. Internally and administratively, changes in accounting policy have to be made by Treasury Board. And if they are material enough to have an impact of over $25 million, then they do have to be tabled in the House at the earliest possible opportunity.

We are very focused on the implications of changes to the structure. And I have to say that working with OAG over all these many years, they’ve also been focused on thinking about: “Well, what does this mean? Does it need to be a change? How do we implement that change?” That’s a very positive part of our ongoing relationship.

S. Bond (Chair): We don’t expect you to be able to read the minds of the government in terms of what direction they might take.

I have a couple of other specific questions. I know that people are probably getting anxious to be able to go to lunch.

There is comment in the report, on page 22, about the B.C. prosperity fund, which has a framework around it and is legislated. What would the process be? There’s been an indication that that prosperity fund will not remain in place. What are the requirements of the new government in terms of wanting to spend…? Or what are the practices, and how does that change the reporting out? How will that be managed in terms of the B.C. prosperity fund?

C. Fischer: I think the easy answer is that changes to the B.C. prosperity fund would require legislative changes to that section of the Financial Administration Act that established it and defined its operations and what the permissible uses of the fund are. Beyond that, the government of the day has the responsibility to make a determination after the end of the fiscal year — I think by September — of any contributions to the prosperity fund. Of course, they have obligations to make decisions about any spending from that fund within those allowable parameters that are defined in the FAA.

S. Bond (Chair): Obviously, it is legislated, so before that, the framework around spending would require legislation, and the government would need to bring it through the House.

The only other comment I have about the specific other sections that the report covered was on the Forest Enhancement Society. I was a bit surprised. I almost felt like it was a bit of an editorial comment, but I’d be interested in knowing. There was a comment on page 33 about it being a large sum of money to grant to a society that, basically, had no history behind it. I think that, obviously, governments create new entities all the time in terms of how to share and to look at how money is distributed.

I’m interested in that comment and whether or not there has been, at this point, any indication the Forest Enhancement Society…. There was a big debate in the report about whether it was controlled by government or not. Eventually there was an agreement that it wasn’t controlled by government, which obviously has implications. Is there any sense of a change to that practice? I was just surprised. It felt more like an editorial comment — you know, here’s a big sum of money being handed out to an organization that has no history. Could you just elaborate on the thinking around that?

[12:40 p.m.]

C. Fischer: Is that part of our commentary or yours?

C. Bellringer: No, it’s ours.

S. Bond (Chair): This is on page 33.

C. Bellringer: I will say that in terms of our own internal conversation, there wasn’t a great deal of conversation around that particular sentence. It wasn’t meant to be some­thing that was criticizing the establishment of the society. It was in the context of: to what extent did government control the organization? And control…. We were looking at it from an accounting perspective, again, as to whether or not government is controlling the operating and financing policies of an organization. That determines whether or not it comes in and it’s consolidated, or else you reflect the fact there’s a grant been paid.

It does hit the bottom line differently, so we were going through that particular assessment. If it had been a few million dollars, that would have been a different indicator of control than $100 million. So that was the reason for that particular comment.

S. Bond (Chair): I want to thank committee members, first of all, for their questions. This is an opportunity for us to ask tough questions, and often, at times, uncomfortable questions.

The most important message today for British Columbians is…. I actually think this kind of debate is important and healthy. We all have to remember that it’s not like there are no accounting principles being applied or standards in British Columbia. It’s a discussion about which ones more accurately reflect the practices of government and the policy decisions that are made.

Governments do have the ability to actually look at the standards and enact regulations. I appreciate…. I have to admit that it’s one of the first times we’ve actually had…. Usually, the ministries come in and say: “Thank you very much to the Auditor General. We appreciate it, and we’re going to do everything she says.”

I think it’s fantastic that we had this kind of feedback between the two offices, as challenging as that is. I do appreciate the opportunity to hear both from the Auditor and the comptroller general today. It is obviously a work-in-progress. We’ll see how that evolves, specifically with a new government in place.

With that, I do want to recognize that in the gallery today — and I appreciate his patience — we are very pleased to have Dr. Tony Buti with us. He is the chair of Western Australia’s Public Accounts Committee. We are very appreciative of his sitting in on our session today. We look forward to having a conversation about some of their practices. We’re always interested in learning about best practice, so we look forward to having a discussion with him very shortly.

Seeing no further comment and thanking the Auditor and the comptroller general for their comments today, we’ll recess, and we will reconvene at 1:45 p.m.

The committee recessed from 12:43 p.m. to 2:03 p.m.

[S. Bond in the chair.]

S. Bond (Chair): All right. I’m very pleased to bring our session of the Public Accounts Committee back to order. We appreciate the opportunity we had during lunch to meet with Dr. Tony Buti from Western Australia’s Public Accounts Committee. It certainly was an interesting discussion. We are now going to reconvene and move on to the second item on our agenda today.

The next item we’ll be looking at is consideration of the Office of the Auditor General’s report, Budget Process Examination Phase 2: Forecasting for Operating Expense, Capital Spending and Debt. That report was released in April of 2017.

We’re very happy to welcome Carol Bellringer back with us this afternoon, our Auditor General. There’ll be a number of Ministry of Finance representatives speaking to that report as well.

We’ll begin with Carol’s comments, and then we’ll receive a PowerPoint from the Auditor General and her team.

[2:05 p.m.]

Budget Process Examination Phase 2:
Forecasting for Operating Expense,
Capital Spending and Debt

C. Bellringer: Thanks very much. Good afternoon, Members. This is the second report we’ve issued based on our examination of B.C.’s government budgeting process. With me for this report are Sheila Dodds, assistant Auditor General, who led the audit team, and Spencer Goodson from that team.

Our first report was released in June of 2015. It focused on government’s 2014-15 three-year revenue forecasts and the process used to create them. This is the second report. This report discusses government’s approach to forecasting the other side — the operating expense, the capital spending and the debt for the 2015-16 three-year budget and fiscal plan.

I just want to emphasize that our report was about the process of preparing the budget, not the budget itself. The annual budget is, in effect, a policy document that reflects the financial implications of government’s priorities. We are not talking about the merit of those policies, just the process for putting together the budget forecast.

Sheila will take you through the report and the findings from our examination.

S. Dodds: Thank you, Carol. Good afternoon, Members.

In this examination, we focused on the systems, methods and processes the Ministry of Finance used to prepare the forecast for operating expense, capital spending and debt in the budget and fiscal plan.

We did not examine the budgeting processes at individual service delivery agencies — those being school districts, universities, colleges, health organization and taxpayer-supported Crown corporations. However, we did test that the boards of these agencies had approved the agency budget to ensure oversight of the underlying forecast assumptions. This report is the result of phase 2 of our examination of the B.C. government’s budgeting process.

Our first report, from phase 1 of our examination, was released in June of 2015. Phase 1 focused on the revenue forecasts in the budget and the process used to create them in the 2014-15 three-year budget and fiscal plan. We made three recommendations to the Ministry of Finance in that report to improve the clarity and transparency of future budgets. All three of those recommendations have been addressed. This report presents the results of our examination of government’s approach to forecasting operating expense, capital spending and debt for the 2015-16 three-year budget and fiscal plan.

The examination was designed to assess four things. First, whether the assumptions underlying the forecast were well-supported and provided a reasonable basis for the forecast. Second, whether the forecast reflected these assumptions. Third, whether the presentation and disclosure of the budget and fiscal plan met Canadian accounting standards for future-oriented financial information. Finally, whether the budget process met the requirements of relevant provincial legislation. We concluded that government’s forecasting processes to estimate operating expense, capital spending and debt met our four expectations.

Preparing the provincial budget is a complex endeavour that involves consolidating budget information from over 150 government entities. Legislation adds further complexity. It prohibits government from forecasting a deficit and sets consequences if financial results do not meet the legislation’s requirements. This means that government must develop forecasts that are flexible enough to accommodate unexpected expenses or revenue shortfalls.

Between the two phases of this project, we have now exam­ined all of the main components of government’s bud­geting process. While we’ve made recommendations for improvement, government is generally doing a good job preparing and reporting the budget forecasts. Overall, the budget process was sound for the two years we looked at.

With an eye to continuous improvement, we identified two areas where government could further improve the clarity and transparency of budget information for readers.

First, government presented debt balances in the main body of the budget and fiscal plan differently than it did in the summary financial statements. Consistency in reporting between these two documents is important so that readers can compare government’s planned versus actual financial performance. We recommended that the Ministry of Finance include information to inform readers of their reasons for and the effects of using a different presentation for the debt balances in the main chapter of the budget and fiscal plan than for the debt balances in the summary financial statements.

Our second recommendation is that the Ministry of Finance enhance disclosure of the key assumptions supporting significant changes in projected caseload trends for statutory programs. For example, in our examination, we noted an 18 percent drop over three years in the estimated annual caseloads for the Ministry of Social Development and Social Innovation’s temporary assistance program. The program provides temporary income assistance for eligible individuals or families.

[2:10 p.m.]

To be eligible for that assistance, recipients have to meet legislated requirements. Therefore, government has limited control over the number of people eligible. There was no explanation of how or why government forecast this change in caseload. Such an explanation would allow readers to better understand the reasons and risks around the changes.

Budgets are always a best estimate, regardless of the quality of information or the process used to create them. This is just as true for the provincial government as it is for the finances of a business or a household. Actual results will always vary. It’s important in all cases to control one’s finances as much as possible by keeping an eye on how well results compare to the budget, and if they do differ, understanding why.

This concludes our presentation.

S. Bond (Chair): Thank you very much.

We’re just going to change the screen to allow for government’s response, and the PowerPoint will be put up.

I know that the respondent today is David Galbraith, who is secretary to Treasury Board and associate deputy minister in the Ministry of Finance. I know that David has brought some additional staff with him, so maybe we’ll start with introductions of your staff.

D. Galbraith: Sure. With me today I have Jonathan Dubé, who is an executive director in the performance budgeting office within Treasury Board staff, and then I have David Riley, who is responsible for our financial reporting. Dave is effectively what I would call the revenue guru for B.C., and Jonathan works on the expenditures side in the areas of what I’ll call the social side.

S. Bond (Chair): Thank you. I don’t know, David, if you’re going to do the PowerPoint or make some opening comments, but it’s available on the screen now. You can get started, whoever is going to lead.

D. Galbraith: I think before I start, one thing I would like to flag is that I’ve had the luxury of working in government for 25 years now. Over that time, I’ve worked for Treasury Board on four different occasions — in the ’90s, 2000s and now in the teens.

The one thing that I would say that I’ve seen consistently across the decades in the Ministry of Finance is a real focus on doing our best to provide clarity and transparency, follow process and stick to the rules. I think one of the things that we strive for on an ongoing basis is how do we ensure that the public — investors, companies, taxpayers — all have confidence in the documents that we put forward.

I have the responsibility for delivering the budget. I have the responsibility for bringing forward the quarterlies. And I have the responsibility for the financial and economic review. All of those documents are responsible for giving an indication to the Legislature and to the public of B.C. of what’s happening financially in B.C., which is why I think it’s so important to go through a review like we did with the Auditor General. I think it was discussed earlier. The more that you have a strong dialogue between government and the Auditor General makes…. I think everyone is a winner.

I know we, here in the Ministry of Finance — and I’ve seen it in my four tours of duty at Treasury Board — along with Treasury Board members and whoever has been the Minister of Finance have always strived for meeting that. I’m happy to have…. I’m lucky. I’m the one who’s giving the results of this report, but I wasn’t actually here at the time that it was initiated, so I tip my hat to all those people that have gone through that process that I think started in 2013.

Having said that, I’ll move on to my next slide.

As was mentioned, this is the second of two reports from the Office of the Auditor General that examine government’s budgeting process. The first phase is done, and we have moved forward on the recommendations that were put forward. I think it’s important to flag those.

Phase 1 of the report identified that we should “clearly disclose in the budget and fiscal plan the inherent limitations associated with future-oriented financial information in line with the disclosure standards established by CPA Canada.”

Two: “Enhance sensitivity disclosures in appendix table A5 of the budget and fiscal plan, explaining why the selected economic variables are used and disclosing and discussing the likely range of historical data volatility.”

[2:15 p.m.]

Three: “Provide additional information on the risks supporting the annual forecast allowance.”

We have addressed the three issues. Also, there have been two recommendations that have come forward. We accept those, and we’ve moved forward on those too.

What were some of the key findings of the report? Based on the examination of Budget 2015, the Office of the Auditor General concluded the following. The key assumptions used in forecasting the operating expense, capital spending and debt were suitably supported and consistent with government’s plans, and they provided a reasonable basis for the forecast. They found the forecast accurately reflected the key assumptions. They also found the presentation and disclosure were consistent with principles in the Canadian account­ing standards for future-oriented financial information.

However, the Office of the Auditor General did identify two areas where government could improve presentation and disclosure so that readers can better understand the key assumptions and related risks and sensitivities underlying the forecast. The budgeting and estimates requirements of the Budget Transparency and Accountability Act and Balanced Budget and Ministerial Accountability Act were met. The main conclusion: taking into account both reports and having looked at all the main components of government’s budgeting process, the Office of the Auditor General concluded that the overall budget process is sound.

Moving on to recommendation 1, the recommendation reads: “Inform readers of the reasons for, and effects of, using a different presentation for the debt balances in the main chapter of the budget and fiscal plan than for the debt balances in the summary financial statements.” Government accepted this recommendation to enhance disclosure for readers, and we did so in Budget 2017 and Budget 2017 Update.

As one of the main users of our budget document, any comments and suggestions from the Auditor General to improve readability, clarity and understanding are important and considered very seriously. You can find the added disclosure, for example, on page 45 of the Budget 2017 Update. I’ve brought copies. I’ve marked them in case anyone wants to see them.

The presentation of debt projections in the budget document is consistent with the debt summary report that is included in the public accounts and audited by the Auditor General. This presentation is more consistent with other jurisdictions across Canada and with methods used by rating agencies in their annual assessment and rating of the province’s credit worthiness.

I do want to be clear and would reiterate that financial forecasts in the budget document, including provincial debt, are prepared in accordance with generally accepted accounting principles and consistent with the accounting policies used to prepare government summary financial statements. This was confirmed by the Auditor General on page 21 of her report.

Recommendation No. 2. “Enhance disclosure of the key assumptions supporting significant changes in projected caseload trends for statutory programs to allow readers to understand the reasons and risks behind the changes.” Government accepted this recommendation to enhance the disclosure of key assumptions underlying significant changes in projected caseloads for statutory programs like income assistance.

This recommendation is about improving the presentation and disclosure in government’s budget documents, not about the forecast used for budgeting. The Auditor General confirmed that key assumptions used in forecasting operating costs were supported provided a reasonable basis for the forecast and that our forecasting processes met all of her expectations.

This does not make the recommendation any less important. We welcome opportunities that are identified to improve the information provided for readers of the budget document. I think one of the things I latched onto with regards to this recommendation is the focus on changes. One of the things, as we’re going forward, is that as something happens…. Right now we are very clear on a number of the what I’ll call sensitivities. We see the trend. We track the trends to see how they’re going. Unless there is a substantial change to that trend line, we continue with the disclosures we have.

In summary, we’d like to thank the Auditor General and her staff for this report. This is the second report, alongside Budget Process Examination Phase 1: Revenue, released in June 2015, that reviewed all of the main components of government’s budgeting process.

[2:20 p.m.]

These two reports represent many years of work. I believe the Ministry of Finance received the first notice of examination about the Office of the Auditor General’s phased approach looking at government’s budgeting process in early 2013.

We are pleased these reports have concluded that the budget process is sound. This independent and objective assurance of government’s budget process should hopefully provide confidence in the quality and the credibility of the information presented in the annual budget. Often, I refer to the budget as B.C.’s prospectus. I think it’s really important that it is clear and transparent for all those that are interested in the financial affairs of the province.

I’d like to say, lastly, thank you to my staff, who I know work tirelessly. I’d like to thank the staff of the Auditor General for the collaborative approach on moving forward with this.

S. Bond (Chair): All right. Thank you very much to both the Auditor General and to the Ministry of Finance. Are there questions from members of the committee?

R. Sultan: The report refers to the law which bans deficits. Is that an oversimplification? Deficits are illegal in British Columbia.

D. Galbraith: So within the BTAA, correct? Sorry, I don’t have a copy of the act in front of me. Dave?

D. Riley: It’s illegal to budget a deficit. Can’t plan for one.

R. Sultan: In the budget.

D. Riley: That’s correct.

R. Sultan: Well, I mean, your answer implies that there’s the budget, and then there’s the real world.

D. Riley: Well, it’s not illegal to run a deficit, but it’s illegal to post, in the budget, a deficit.

R. Sultan: It’s illegal to budget for a deficit.

D. Riley: That’s correct.

R. Sultan: But if a budget happens….

D. Riley: If a deficit happens…?

R. Sultan: I’m just trying to understand the impact of such a law. I mean, I believe — correct me if I’m wrong — that the law was on the books going into 2008. Our former Premier, Gordon Campbell — I recall vividly, without breaking caucus confidentiality — was very distressed to be told that revenues were plummeting and that we were heading for a big deficit. All sorts of actions were triggered by that environment, which was totally beyond our control.

With hindsight, did we learn any lessons from that event? Did the law or practices change?

D. Galbraith: If I can respond to that, what happened when there was a recession was a 30-year event. The last time was back, I think in 1982, give or take — around that time frame. We are not immune to those types of events. The hit on the revenues that occurred in that year would have taken a draconian response if there was not the ability to run a deficit.

What we’ve learned over time is that here at Finance, we go through what I would call a prudent approach to setting a three-year budget. So we have a surplus that we’re required by law to budget towards. We have a forecast allowance. We have the contingencies. We have prudence in our economic forecast. We have prudence in our natural gas assumptions.

All of those things create what I would call a buffer against unanticipated shocks on the revenue side or unanticipated shocks like what occurred with wildfire, where you have some extraordinary events. That gives us the ability — this is my personal belief — to manage a shock to 3 to 4 percent, give or take, potentially, on revenues.

When we’re faced with a worldwide phenomenon — or at least a North American phenomenon like the recession, which is one in 30 years — in that scenario, we’re going to be hit with a deficit. There’s nothing within our legislation that stops that.

[2:25 p.m.]

There are some implications of running a deficit. My salary is reduced, as are the members of government’s. There are a number of impacts that occur when government runs a deficit.

However, we have created a system of budgeting that is here to see us through what I would call the normal fluctuations you will see in an economy on a normal, everyday basis.

R. Sultan: I take it from your response that you think the present system is a good one.

D. Galbraith: B.C. is doing quite well fiscally. We’re doing quite well economically. As someone who’s worked in Finance back and forth over the last 25 years, I’m quite comfortable with the process we have now.

R. Sultan: Without putting words in your mouth, I take it that you would view any change in that law as a rather unfortunate development.

D. Galbraith: I’m a fundamental believer in democracy, and the key part of democracy is a non-partisan public service. I count myself as that individual.

A. Olsen: Thank you for the report. I’m glad to know our budgeting process has…. I wasn’t here for the first part of it, but congratulations on having a nice report from the Auditor General.

I do want to ask a question with respect to incremental budgeting. The Auditor General doesn’t criticize the approach to incremental budgeting for me to be raising it, but I do want, since we’re all here, to ask the question starting from the last year’s point and then going forward.

I used to work in certain industries which would benefit, I think, from this idea that there’s no ability to roll a budget over from one year to another in a department. We would see huge amounts of spending happening, and the people that were making it were just basically like: “Well, we have to get rid of our budget.” I know that’s uncomfortable to hear, and it’s uncomfortable to say. But it’s something that I think is a result of, perhaps, incremental budgeting and this idea that we can’t roll a number over — that there are little ways for us to contain that, maybe.

Are the two connected? Am I connecting the two inappropriately, or are there other ways in which we could perhaps view this, where (a) we’re not consuming unnecessarily and (b) we can get the best performance out of the money that we’re collecting and spending on behalf of British Columbians?

D. Galbraith: Over my time working at Finance, I’ve seen any number of approaches to budgeting and different approaches across different ministries, depending on the characteristics of the ministries and also depending on what the policy objectives are of government.

It’s not entirely accurate to say we use an incremental approach to budgeting. We may flatline ministries, where they don’t get additional funding. We may have a ministry that’s a demand-driven ministry, like Social Development. You know, we don’t turn people away as more people come on into income assistance. Then in other areas, we may take an incremental approach.

Generally, budgeting is not a short process. It’s a long process that over the decades, starts in July by government identifying what some of its key priorities are; us, at Finance, doing our modelling of what we think revenues look like, based on some policy assumptions; and then going through the fall and working with ministries, working out how much we think we need to provide them so they can deliver on the mandates that government gives them.

Just looking at it and saying: “Everyone gets a 2 percent increase….” I think, if you’re reading it that way, that’s not actually how the budgets get built.

Now, for things like compensation, we’ll have to provide…. If there’s a settlement and it’s 2 percent a year, generally, we’re going to provide that 2 percent. So it’s incremental from that perspective. But depending on the ministry and depending on the policy objectives of the government, there can be any number of budgeting approaches that we use to determine what the amounts will be.

[2:30 p.m.]

A. Olsen: In the Auditor General’s report, they highlight that increment…. I’m not suggesting, in asking the question, that a department gets 2 percent every year and is on an escalator up. Perhaps there is space for a budget to come down as well. There are lots of things we could probably look at in this that you need less money for over time than more money.

As it says here, the common approach to budget preparation starts with the prior year’s base budget. Within the ministries, within each department, within each office, within each team, do we start…? Is this up to a minister or government to determine whether we start and say: “That budget was good, or in this budget, over the last five years, we’ve ended up with more money. We find ourselves in a position. Perhaps there’s an opportunity here.” In the bureaucracy: “We need less money this year than we did last year.” It’s a culture change, but it’s all part of prudent fiscal management, which we’ve been focused on today.

I’m wondering if there’s something built into the process there where we can ask that question and perhaps a system in which we can reward the service that says: “Look, we haven’t needed this budget” — so rather than just spending it or finding a place to spend it.

D. Galbraith: First of all, the decision-making for what’s happening on the budget is under the purview of…. The chair and the Minister of Finance and Treasury Board have that responsibility.

On the approaches, at a staff level…. That’s why the budget process generally takes so long — from basically July till three weeks from today. And the document is not finalized yet. It’s months and months of activity that go on. It’s a very iterative approach, both looking forward at what we can afford versus what we need to provide to help government realize its policy objectives. Then, at a staff level, our job is really to test. We are the cheesecloth that ministries have to go through in determining whether or not they do need more money.

We find there are efficiencies that occur the longer you do a program. There may be less of an uptake than you thought. All of these things. We don’t just say, generally, through the budget process: “Well, you got $100 last year. I’m going to give you $102 next year.” It’s actually quite an iterative process that occurs.

In trying to figure out budgeting, what we can afford on a macro level, we might attach some very simple percentages to make sure that we are…. We have the task of pulling the whole budget together. Well, we determine each of the ministry areas. For example, we might model out that the Ministry of Health needs 4 percent. So what does that look like? Then Social Development we’re seeing is increasing by population, so it needs another….

It’s an amalgam, if that’s the right word, of different approaches we have to employ over an iterative time period to then bring the budget together for those three years.

C. Bellringer: In terms of the way we were describing it in the report, I would only contrast that approach with something like zero-base budgeting, where you just start over from scratch every year. We weren’t suggesting that there needed to be a change to the kinds of mechanisms that were in place. They worked.

I think there was a different question asked, as well, around, in effect, the lapsing of funds and what mechanisms might be…. There are all kinds of different practices around the world in terms of whether you hit the end of the year and if you haven’t spent it, it’s gone. There are some jurisdictions using mechanisms like you can keep 15 percent of it and roll that over, and others where if you didn’t spend it, you lose it. And others where you can….

There are mechanisms in place within B.C. We had some examples in that first report from this morning about special accounts, where there would be a legislative vote to create a fund, which then doesn’t have the same…. Although the balanced-budget legislation does require any spending from that fund…. It doesn’t lapse at the end of the year. You still have it available next year, but you’ve got to build it into your ministerial portfolio total spending.

[2:35 p.m.]

There are different techniques available in the world to deal with that “spend it or lose it” phenomenon. There are also justifications for not changing it and leaving it as an annual budget for those ministries that have to follow that.

D. Galbraith: If I can just build on that, two comments. One of the things that we built in at an administrative level is that we require very tight third-quarter projections from ministries now. So what you will see is the change from the year-end versus where we were projecting the third quarter, which we release with the budget, is very tight now.

In fact, we hold ministries to, I think, approximately 1½ percent. So they can vary by 1½ percent. We don’t want these big gaps or swings from third quarter to the end of the year to avoid things like the March Madness, which I think you’re referring to.

Likewise, one caution, I would say on the statutory…. That is effectively what you’re talking about — the ability statutorily to use the money the next year. That doesn’t create, from an income statement perspective, revenue. It creates an appropriation. So you may have the ability to spend it. We have the ability….

Hopefully, this never happens, but if we had a $5 billion fire cost in the summer, we have statutory appropriation to spend that. All things being equal, we would run into a deficit of $5 billion. When you talk about carrying over funds, it’s fine from an appropriation, if you follow, but it doesn’t create revenue. So you may be, all things being equal, decreasing your surplus or increasing your deficit, if you follow. That’s something that is a caution — whereas, us here in B.C., we focus basically within the year.

A. Olsen: Thank you for explaining that. You carry some things in. You hear some things. You carry some things in, and now I’m here, I can ask the question. I appreciate the opportunity.

Our job here is to not disparage anybody for behaviour or whatever. It’s to try to create the best culture and behaviour around fiscal prudence. I hear that we’re doing a pretty good job of it. All day today we were talking about this and figuring it out, so I appreciate it.

B. Ma: My question is: given the current legislation in B.C. that requires governments to budget surpluses as opposed to deficits, are there other jurisdictions in Canada who also take the same approach to their budgeting?

D. Galbraith: Dave, do you know? Dave is a historian.

D. Riley: I don’t know of any other jurisdiction that has it in legislation.

C. Bellringer: It was in place in Manitoba, and during the recession, they were permitted to not have to meet the requirements of the legislation for a period. I don’t know if it’s come back in. I think there are a few more across Canada as well, where it is….

It became quite popular in the early ’90s to introduce balanced-budget legislation, and one of the really positive effects from it was the management practices changed with the legislation. It was really evident in terms of just putting a little bit more rigour to the process so that there were real implications embedded in legislation. You could see that.

But in terms of how they’re designed, they aren’t all the same. What you’re balancing and over what period can be built differently into the legislation to reflect your economic policy.

B. Ma: I also had a question about exhibit 6 on page 21, which shows debt forecasts for B.C. I’m wondering if you could clarify exactly what’s included in the debt forecast. Is it everything? For instance, does it include B.C. Hydro debt, TI Corp, and so forth — ICBC? All of that’s included under the red bar, I’m guessing. Is that correct?

D. Galbraith: Yes, so self-supported. There’s the taxpayer-supported, and then there’s the self-supported. The self-supported, I think — we have copies of the budget here — would be things like B.C. Hydro, ICBC, etc.

[2:40 p.m.]

B. Ma: Are there other types of public debt that are not considered in these two groups, or are they all captured in those two groups?

D. Galbraith: I believe that’s all captured.

D. Riley: It wouldn’t include municipal debt, for example.

B. Ma: Okay, that’s fair. We prepare budgets so that there are no deficits, but obviously, from a capital perspective, B.C. is not debt-free.

Are there opportunities or challenges in regards to…? I guess what I’m wondering…. We have the operating plan, and then you’ve got your capital plan. Do any of the budget items ever cross over, or are our processes pretty strict about that? Are there opportunities for crossover?

D. Galbraith: I’m not sure if “crossover” is the right word. If you think of an income statement versus a balance sheet, using traditional…. If we own it — we, collectively — under the global reporting entity, government owns it. It’s capital. If we don’t own it, like a municipality, it’s not capital.

I’m trying to find a simple example of something you may think crosses over. We will give operating grants to TransLink, for example, on some of the assets they hold, whereas a hospital would be capital on our balance sheet, soo there’s the balance sheet versus…. TransLink, we give them grants, an operating grant. That’s the income statement. But they’re both capital assets, if that helps you. Where the two tend to join…. I’m treading into accounting, so I’m getting nervous here.

A Voice: There are lots of us here to help you with that.

D. Galbraith: Okay, you guys hop in if I go wrong.

When we run a surplus, that generally gives us a mechanism to, for lack of a better word, pay down debt, all things being equal. That’s when the income statement slides into impacting the balance sheet, if that makes sense.

D. Riley: I’m not sure if I’m interpreting your question correctly, when you’re talking about crossover. You’re talking about maybe using some capital budgeting dollars for operating dollars. Is that what you mean?

B. Ma: Yeah, or vice-versa, whether or not that ever happens.

D. Riley: Well, with the operating statement, especially with ministries, they have an appropriation. They cannot overspend what’s been appropriated, debated and passed within the Legislature. You can’t just, then, take capital dollars and add to the operating budget. That’s what the contingencies vote is for.

D. Galbraith: On that, if I could just say one thing: if anyone does that, Carl catches it, and he cleans it up. If Carl doesn’t clean it up, the Auditor General cleans it up. Accounting is accounting. The rules of accounting and GAAP accounting, we follow — if that helps.

B. Ma: No, that helps.

M. Dean (Deputy Chair): Thanks for the reports and for all of the discussion. I’m interested in caseload projection. I was really privileged to come and observe the economic forecast discussion, where all of those people came and were able to brief the Finance Minister. Is there anything similar in relation to the caseload preparation and forecast?

D. Galbraith: We work with the ministries involved. They have their modelling that they’ll use, for example, on income assistance, where they look at a number of factors.

We work, on an ongoing, through-the-year basis, looking at what’s happening with population, what’s happening with regions of the province, what’s happening with migration, what’s happening with any other policy decisions that government is making. Into the budget, we make a forecast based on that, and we identify in a sensitivity table how much we think that that can be adjusted. Then as the year goes on, we track it very closely, because the past is a pretty good indicator of the future, all things being equal.

M. Dean (Deputy Chair): Okay. So you do take into account other policy decisions as well.

What you were saying in the response was that basically, if it looks like the caseload isn’t going to change, then you just kind of repeat the same….

[2:45 p.m.]

D. Galbraith: If the trend isn’t going to change. Generally, we’ve had trends over…. For example, temporary assistance — the caseload was declining pretty consistently for ten years. Likewise, with disability assistance, it was going in the other direction. That trend continued on. We monitor that to see whether or not that’s changed.

Now, if the trends change, then that’s something, based on the advice of the Auditor General, that we should talk more about in our document on why we think those trends are changing.

M. Dean (Deputy Chair): Is there, at any point, then, a risk that the trend might continue but the cause of the trend might change?

D. Galbraith: Sure. Something as complicated as income assistance. You know, how is the economy doing? What’s happening with refugees, immigration? There’s a whole bunch, a number of things that could be…. Is government changing on disability assistance? When government changed eligibility based on — I’m going back in time here — mental health issues, that was a big shift. So there’s always that ability for something, but it tends to be…. I used to work in the area, and it tends to be a bit of a linear relationship.

J. Yap: In regards to capital spending, in the ten-year capital plan there’s a reference that it’s tied to the framework based on maintaining a triple-A credit rating so that the debt-to-GDP and growth of debt…. How is that managed? I’m interested, because it seems to me that there has to be some….

As much as it’s a science, it’s also an art, right? Because we don’t know how the rating agencies will feel as conditions around the world, the global economy and interest rates, that type of thing, change — kind of a shift in the economy, or politically. How is that managed?

I’m interested in terms of the planning, because we have so much going on — right? — whether it’s highways, bridges, hospitals, university buildings. I’m sure there’s very significant tracking, but at the end, you have to commit to that ten-year plan.

D. Galbraith: There are different components to your question in the answer. The first thing is…. The two things that…. We meet with the credit-rating agencies regularly. We talk with them after budgets. We see them after quarterlies. We have an ongoing relationship all the time with them, so we feel pretty comfortable on the types of things that they look for.

First off, they look for: do you have a plan? Even when things may go bad, as long as you have a plan to improve on the metrics that they care about, they generally give you a little bit of leeway.

The second thing is the actual metrics themselves. They track debt-to-GDP and debt-to-revenue, and generally, they have their thresholds where they’ll say to us, you know: “We think you’re fine, if you stay…. Don’t go above….” On debt-to-revenue, for example, they look at 95 percent as being an area of concern, so we keep an eye on that.

From a debt-to-GDP perspective, we are in the 16 percent, 17 percent, and they’re comfortable with that. They would probably say that we shouldn’t go too much higher than those two amounts, but we’re in the right ballpark. That’s the first piece.

In the second piece is budgeting around the capital plan. At the same time as the operating budget is going through the process through government, through the budget process, we go through a capital process the same way. The only difference is that we budget in ten-year increments for capital, partially because big capital projects could take six, seven years to build out. Capital is one of those areas where it’s a bit fluid on when things occur, so we have to look at a larger time frame.

As we go through the budget process, we are working with the ministries. They give us updates on how they’re doing with their existing capital, because that’s important. We get that almost on a monthly basis, I believe. We know how their spending is, and they tend to be under.

[2:50 p.m.]

It’s just the nature of capital projects. They rarely tend to occur in the time frame. It tends to squish out into the out-years. We factor that in at the same time as the provincial treasury needs to do some borrowing for working capital, so that impacts our debt, and then we factor that.

Remember what I said — debt-to-GDP? So how’s the economy doing? How fast is it growing? I think we’re plus or minus about $300 billion now and continuing to grow. Then since they measure against revenues, we also look at how the province is doing from a revenue perspective.

As we go through that budget process and as we go through each of our quarterlies, we have the aggregators, sitting down by Dave, who create the big financial statements for the province that show how we’re doing on all those metrics.

J. Yap: I’m presuming that the total of all the possible capital needs or asks exceeds what the capacity, based on the goals, right….

Is there a process where Dave or some group will say to the Minister of Finance or Treasury Board: “Okay, we have $2 billion or $3 billion of capital that we can allocate to the ten-year plan.” And then: “What are your priorities?” Is that how it works?

D. Galbraith: Yeah. We do our best to model out, over time, what we think is going to happen with the economy and what’s happening fiscally, and then that generally creates the amount of room we think we’ll have for capital projects, by year, that can be factored in.

We go through the priority setting, through Treasury Board, whether it be health, schools, transportation, etc.

J. Yap: That’s where the choices are made?

D. Galbraith: Yes.

J. Yap: Okay.

S. Bond (Chair): Any other questions or comments?

R. Sultan: On debt management, I think all of us in the MLA world receive urgent messages concerning housing, but in particular, student housing.

It’s frequently the case…. Well, it’s certainly my experience, at least, that housing administrators at places like UBC or Capilano University will say: “You know, if they would just let us cut loose a little bit, we find there are lots of people that will give us mortgage loans, and we can build a lot of student housing. So what’s the problem?” We sort of patiently explain: “Well, that’s not how the system works.”

However, I did see a media story the other day quoting some university housing administrator saying: “I think there’s a new wind blowing through the corridors in Victoria. Maybe there’s some more flexibility appearing.”

Then I also…. I was fumbling to find the spot. From this morning’s discussion of the Auditor General’s report, in terms of what I was not aware of, was a longstanding program to sell assets. I’m not sure if I got the formula correct. To free up money by allowing non-profit societies to essentially leverage…. I’m not sure I’ve got the story straight, but the Auditor General will straighten me out.

S. Bond (Chair): It’s tomorrow.

R. Sultan: It struck me, in the large, as another creative way to get some capital freed up for very essential projects without directly impacting the government balance sheet. I presume that was the thrust of that program that the Auditor General had raised some questions about — if I got the story straight. I’m not sure I did.

I guess my question to you is: how do you view these ideas that maybe we should just be a little bit more flexible? There are all sorts of people out there — at UBC, and so on. There are lots of lenders and offshore investors and goodness knows who willing to put money in their hands — on attractive terms, of course — and they’ll finance this stuff. So what’s the problem here?

D. Galbraith: That, I would argue, is a policy choice of government. It’s not a policy choice of David Galbraith. If government chooses to change that policy, then government can change that policy.

[2:55 p.m.]

The existing policy is that we do not allow…. There have been some minor examples of…. I believe it’s perhaps a college or two in non-urban areas that have been allowed to borrow. I believe it was to build. I’m trying to remember off the top of my head, so don’t quote me on that. But the existing policy is that we don’t allow universities and colleges to borrow on their own for student housing.

R. Sultan: What are the good reasons for that policy?

D. Galbraith: It would be the impact on debt.

R. Sultan: It’s all, at the end of the day, our debt.

D. Galbraith: That’s true.

D. Riley: UBC does have its self-financing projects though.

D. Galbraith: Correct.

R. Sultan: I’m sorry?

D. Riley: UBC does have self-financed projects. It uses its own source of funds for commercial projects.

R. Sultan: I think, particularly given the housing pressure that our society is under, your policy is going to be increasingly challenged, I would guess.

D. Riley: Let’s be clear. It’s not my policy or Dave’s policy.

R. Sultan: Speaking for my own preferences, I hope you can, fast. If we have every Crown-related entity up making debt deals all over the province, who knows what it will add up to at the end of the day? I don’t think it’ll be good fiscal management. That’s my particular prejudice.

S. Bond (Chair): Thank you, Ralph. I’m sure that that will unfold as the government makes its choices about debt and policy and how that’s going to work.

I don’t see any other comments. I think that when you look at the chart on page 5, we don’t often see, after a rigorous process from the Auditor General, a check mark that says the process is sound. I think that’s something that is pretty important, because what it says is that the inputs are working well the way that this process works. There’s always room for improvement, and I think there have been a couple of recommendations made.

I guess I want to ask about the realistic response to the second recommendation, which is related to caseload pressures and better explaining them. When there are drops or when there’s…. I can only imagine. Certainly, as part of government, grappling with caseloads is a very difficult issue — while I’ve not held that particular ministry that’s referenced.

Maybe a realistic comment about what you can do or what can be done. I notice that in your response to the recommendation, it was: “We appreciate it. We’ll give it some thought.” How would you be able to capture the kind of detail that the Auditor General is recommending, an explanation as to projections around caseload? It’s really volatile, and it depends on the economy and a variety of other things. Have you given some thought to that?

D. Galbraith: Sure. I think, using income assistance, understanding more about the people that come onto income assistance and why would be an example, and working with the ministries.

Not to pick on refugees, but after the first year…. The feds pay the first year, and then the province pays after that. Getting an understanding of if the federal government is going to be increasing more refugees entering Canada, we have to be prepared. That would be something that…. If we were going to get 5,000 people who we knew — I’m making the numbers up — 80 percent ended up on income assistance, that should be something that we should flag as where we see the trend. As opposed to saying, “Every 1 percent costs X,” instead saying: “We anticipate there is going to be a number of people coming that way.”

Or if after the fires…. Had the fires not been like they were, which was largely not in communities but just off, but had they hit communities and we knew that was going to lead to people losing their livelihoods, etc., I think that would be another area where we could flag when there’s been something catastrophic.

I think working with the ministry, and as it gets each of the ministries…. For example, Education is a caseload ministry now that enrolment is going up and tracking what’s happening to enrolment. Is that because more people are having children? Or is it because more people are moving here from other areas?

I think where we see a deviation of the trend and working with the ministries, because the ministries care about what’s happening to their caseloads, on those types of metrics that we can then report out would give people a higher level of transparency.

S. Bond (Chair): You’re actively exploring how that might be done, and I think that, obviously, must be encouraging to the Auditor General.

My last question is about the Balanced Budget and Ministerial Accountability Act. Obviously, it currently requires ministerial holdbacks.

[3:00 p.m.]

Have any changes to that act…? Obviously we’d have to have it changed in the legislation, but at this point, is there any contemplation of looking at ministerial holdbacks differently?

D. Galbraith: Not that I know.

S. Bond (Chair): Thank you. Anyone else?

All right. Well, thank you very much. We can only imagine that public servants…. This is not their usual venue in terms of being in front of a camera. We do appreciate you being here today. All of the public servants who appear work very hard on behalf of British Columbians. Often, they’re put in a position of attempting to answer policy questions which really aren’t theirs to answer. We do appreciate you being here and the work that you’ve done.

I think that of all the reports we’ve looked at, this has probably been one where we have the least difficult questions to answer. Generally speaking, I think British Columbians can take heart in knowing that the budget process is seen as operating well.

With that, I believe that’s our last item of today’s agenda, unless anyone has any other business. All right. Then we will adjourn this meeting, noting that tomorrow we are reconvening at 9 a.m. We have three reports on tomorrow’s agenda, all of which are very substantive. So I’m encouraging you to do your preparation and get your questions ready in advance.

Again, thank you to the Auditor General and her team. I know that these meetings…. In particular, the Auditor General adjusted her schedule to be here to accommodate the majority. So I do note it. On behalf of the committee, thank you very much for making that effort. Thank you for another productive day.

With that, we will adjourn the meeting and reconvene tomorrow morning at 9 a.m. in this location.

The committee adjourned at 3:02 p.m.